Shale gas assets offer acquirers rich reserves, stable production
Chevron's announcement last month that it is acquiring Atlas Energy, a large acreage holder in Pennsylvania's gas-rich Marcellus shale play for $4.3 billion, is another sign that the long-term outlook for natural gas is positive. Although several billion dollars isn't a huge investment by the standards of a company the size of Chevron, oil majors don't make a move of this type until they have thoroughly measured the risk against the reward potential and concluded that the upside outweighs any possible negative consequences.
In late 2009, ExxonMobil struck a $41 billion deal to acquire XTO Energy, one of the largest US shale gas developers and a producer in half a dozen or so US shale plays. It is widely held that Exxon decided that the best way to develop expertise in these emerging plays was to acquire one of the leading players.
So why are the majors acquiring independent natural gas producers when gas prices seem chronically depressed? Let's examine, starting with the current year.
Crude oil prices have held at around $80/bbl or more for several months, while natural gas prices remain low due to higher-than-expected production and modest demand. Some refer to this as a "glut" – simple supply-and-demand economics. Currently, gas storage is filling up for the winter months, but unless the US has an unusually cold winter in the Midwest and East Coast, gas usage will remain anemic, keeping prices low.
Short term, the outlook remains rather gloomy for North American gas producers, many of whom prefer to drill wells in wet gas areas to take advantage of better prices for NGLs. Others are acquiring assets in oil-producing areas, both conventional and unconventional. In the midst of these poor conditions for natural gas development, the majors and global companies like CNOOC, Total, Statoil, Eni, and others are acquiring gas reserves and producing assets, acquiring companies with these reserves, and partnering with them, in part to develop expertise that the smaller independents acquired over years of learning how to extract gas and oil efficiently and economically.
What do these larger companies know and why are they moving into unconventional gas plays in North America, Europe, and elsewhere?
Robert Gillon, director of energy company research at IHS, thinks he knows. He says these types of assets have been missing from the larger companies' portfolios and they offer stability and reduced risk.
"Large projects such as Gorgon or those in the deepwater Gulf of Mexico are great, but the incremental production is lumpy," says Gillon. By acquiring Atlas, Chevron smoothes its production profile and obtains access to significant proved reserves and resource potential, he adds.
Deutsche Bank believes current low prices could actually be beneficial for natural gas producers. In a report released Nov. 17, the bank says that lower natural gas prices have already helped raise the proportion of US electricity generated from the fuel from 20% to 23% in the past two years. As coal costs rise, the percentage of natural gas in power generation could rise to 35% by 2030, says the report.
Natural gas as a fuel for power generation is good from an environmental perspective as well. With Republicans taking control of the US House of Representatives in January, it appears unlikely that Congress will pass broad measures on renewable energy and climate change. But progress on emissions can still be made because natural gas is a much cleaner-burning fuel than coal, releasing about half as much greenhouse gases as coal.
IHS and Deutsche Bank aren't the only groups with a positive outlook for natural gas. Wood Mackenzie, the Scotland-based energy research firm, says that global upstream spending will return close to peak levels achieved before the economic recession by 2011.
"This is primarily due to the restoration of confidence and an impressive renewal of activity in unconventional resources, particularly shale gas," says Wood Mac.
In a report released in early November, Ernst & Young notes that, "International and national oil companies are beginning to invest heavily in unconventional gas. With gas prices depressed, investors are looking for gas plays with high liquid content, such as the Eagle Ford, Bakken, and Granite Wash."
As uncertainty clouds energy development plans in the Gulf of Mexico and some projects are delayed or abandoned, it appears at least some of the investment capital is shifting onshore to unconventional gas and oil plays. Improved economics for extraction and better economies of scale by the larger companies will make it easier for low-priced natural gas to continue to displace coal as a source for generating power. Except for the coal industry, that is good news for all of us.
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