The new dash for gas - majors position to leverage a core competence
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Oil and gas companies need to adapt for the world’s future energy needs. The energy mix will undergo profound change over the next two or three decades driven by climate change policy, disruptive technology and consumer behaviour. Amidst the many uncertainties, gas is a dependable plank on which strategies can be built.
Gas has served its time in the shadows, long the poor cousin in most companies’ portfolios. Harder to monetise, gas continued to take a back seat in the early part of this century as the industry found plenty of oil to bring to market. If Gazprom is excluded, gas made up just 30% of oil companies’ production in 2005 based on the sixty companies in our Corporate Service.
The Majors are leading the way in a new ‘dash for gas’.
We forecast the share of gas in the peer group’s production will increase from 42% currently to over 50% by the end of the 2020s. ENI and BP will reach 60%, which is also Total’s 2035 target. There are three main themes behind the ‘dash for gas’.
First, growth potential. Gas demand will grow by 41% over the next two decades or 1.8% p.a. in our forecasts. Gas will overtake coal as the second most consumed energy source by 2030. The rise of gas consumption is a global phenomenon, with explosive volume growth in Asia Pacific (mainly China), North America (US industry and power) and the Middle East (weaning power off oil). Oil (0.4% p.a. growth to 2035) and coal (0.3% p.a.) suffer in comparison.
Second, available resource. Unconventional gas in North America and a shift towards the predominance of gas among the ‘giant’ category of conventional discoveries has changed the opportunity set in the last ten years. In oil, there are only three accessible plays globally that offer any material growth on a ten year view, absent new discoveries – US L48 (tight oil), Brazil (pre-salt) and Canada (oil sands). Companies without exposure to these, and tight oil in particular, have to forge a growth strategy elsewhere. Gas is part of the answer.
The key to success will be low cost resource.
US shale gas has advantages: a near infinite resource base, short investment cycle and much of it very low cost (and low price it has to be said). There’s also access to growing domestic demand through infrastructure, and potential for LNG exports. Gas discoveries elsewhere in the world that are close to market and infrastructure are also highly attractive, as BP is showing in both Egypt (including buying into the giant Zohr project) and Oman tight gas; as is Eni in Egypt.
Where there is no local market, commercialising big conventional gas projects via LNG is challenging. The LNG market is in oversupply, and we see little need for new projects until the middle of next decade. That said, there is long term opportunity for green field developments as demand grows, and to satisfy buyers’ desire for supply diversity. The immediate onus though is on operators to reduce costs to make new projects competitive.
The jockeying for position to fill the future need for new supply is evident in M&A activity.
ExxonMobil consolidating exposure to PNG LNG and buying into Mozambique Area 4, and BP’s acquisition of a stake in Tortue (Mauritania greenfield near shore FLNG) are among the biggest deals in recent months.
Third, portfolio balance. Commercialised gas, conventional or unconventional, LNG or domestic sales, brings stability to a portfolio that oil typically can’t. Gas projects can be scalable. Most are long life, may have low oil price sensitivity, and offer high visibility of cash flow which can underpin a dividend policy. Separately, gas will be the foil to a renewables strategy as the Majors build a low carbon portfolio tapping into power markets.
Many questions will be posed as the industry formulates plans to adapt to shifting patterns of energy. How committed should an upstream portfolio be to oil, if demand is set to decline? Should renewables be a core business and by when? Concrete answers may prove difficult in the near term.
That gas should be central to any upstream strategy is in little doubt. And unlike say renewables, it’s already a core competence for most oil and gas companies