Shell’s Bet on Gas Underscores Big Oil’s Push to Replace Coal

Shell-BG Deal Could Be Strategically Brilliant: Beesley

BP Plc coined the slogan “Beyond Petroleum.” The new industry mantra might be “Beyond Oil and Into Gas.” Oh, and while we’re at it, “Down With Coal.”

Consider Royal Dutch Shell Plc’s recent $70 billion acquisition of BG Group Plc -- clearly a huge bet that natural gas will prove to be its cash cow of the future.

The petroleum industry’s move toward gas is hardly new -- the hydraulic fracturing shale revolution is in its second decade, after all. Still, Shell’s move is an emphatic confirmation that some among the Big Oil family firmly believe gas will play a growing role in meeting the energy demand of emerging countries such as China and India that are trying to move away from dirtier coal.

“Gas will likely overtake coal as the world’s second fuel by the late 2020s,” said Jonathan Stern, head of the natural gas program at the Oxford Institute for Energy Studies.

Gas is emerging as a preferred fuel around the world because it’s cleaner to burn than coal and oil, prompting the International Energy Agency to say in 2011 that the world was entering into the “golden age of gas.” In a highly symbolic move, China announced last month it would convert the last of four major coal-fired power plants around Beijing to gas next year.

Last September, in a petroleum industry meeting timed to a United Nations session on global warming, some of the world’s leading producers got up to argue that gas gave them a huge advantage over coal in the climate-change battle, according to the website Responding to Climate Change.

“One of our most important contributions is producing natural gas and replacing coal in electricity production,” said Helge Lund, then chief executive officer of Statoil ASA, citing figures that switching from coal to gas could halve global emissions.

Fast Growing

Until recently, coal was the world’s fastest-growing major energy source, averaging a 5 percent annual rate. The Paris-based IEA forecast the rate would slow down to 1 percent from 2012 to 2020, and decelerate further to 0.3 percent in the 2020s as China and other emerging countries battle pollution.

Shell CEO Ben van Beurden said in February that “a shift from coal to natural gas” was needed to battle climate change. “When burnt for power, gas produces half the CO2 coal does,” he told an industry audience.

For Shell, this is the second gas-focused deal in so many years. In early 2014, it bought the liquefied natural gas business of Spain’s Repsol SA for $4.1 billion. The Anglo-Dutch group is not alone betting on gas: Chevron Corp., BP, Total SA and Exxon Mobil Corp. are spending heavily on the fuel.

Gas Focused

Trevor Sikorski, head of natural gas, coal and carbon for consultant Energy Aspects Ltd., said companies were “starting to recognize” a trend in emerging markets in favor of gas and against coal. “This deal potentially kicks off acquisitions of other gas-focused companies the size of BG or maybe smaller,” he said. Among the potential candidates, analysts are looking at Woodside Petroleum Ltd. and Santos Ltd. of Australia, U.S.-based Devon Energy Corp. and Noble Energy Inc., among others.

The bet on gas has been extremely profitable so far for Shell. The company reported underlying earnings of $10.4 billion in 2014 from gas, up 470 percent in five years.

But it has its risk, nonetheless. First, LNG prices have dropped about a quarter from the torrid levels reached after Japan bought large quantities of the fuel following the 2011 nuclear crisis of Fukushima. The price drop will hurt profits.

Coal Prices

At the same time, coal prices have fallen to levels not seen since the global financial crisis, providing cost-sensitive countries, including India, a strong reason to keep buying. BP CEO Bob Dudley last June warned that with coal prices falling, the commodity was “extending its competitive edge in power generation” over gas.

Second, the shift from coal into gas depends in a great part on climate change negotiations of uncertain outcome.

And third, analysts worry that energy companies would struggle to keep construction costs under control, jeopardizing the future of the LNG sector.

If Big Oil is successful in its push toward gas at the expense of coal, those most at risk will likely be global mining groups including Glencore Plc, Anglo American Plc and Rio Tinto Group with billions of dollars in coal deposits in South Africa, Australia and Colombia.

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