Energy

Liam Denning is a Bloomberg Gadfly columnist covering energy, mining and commodities. He previously was the editor of the Wall Street Journal's "Heard on the Street" column. Before that, he wrote for the Financial Times' Lex column. He has also worked as an investment banker and consultant.

Natural gas: It's the new oil. Except not really.

Natural gas has become an ever-more-important part of the oil majors' business over the years. As my colleagues at Bloomberg News reported on Tuesday, the industry's discoveries of gas have outstripped those of oil in each of the past four years.

Big Oil -- taken here to mean Exxon Mobil, Chevron, Royal Dutch Shell, BP and Total -- has been getting less oily for a while. In 2001, their aggregate oil output was almost 10.1 million barrels a day, according to data compiled by Bloomberg -- more than Saudi Arabia's at that time. By 2015, it had dropped by more than 1.5 million barrels a day, or almost 16 percent, losing ground to both national oil companies -- including Saudi Aramco -- and independent E&P companies, especially those pioneering shale development.

Biggish Oil
The share of global oil supply from the 5 big majors has slipped below 9%
Source: Bloomberg, International Energy Agency

One of the reasons investors have cooled toward the majors is that, despite spending well north of $1 trillion, their output in 2015 was actually lower than it was 15 years ago. But it would be even worse without gas, where the companies have managed to grow a bit. Oil's share of production and reserves has dropped from 63 percent and 58 percent, respectively, to 58 percent and 53 percent, Bloomberg data show.

What Comes Naturally
Big Oil's gas output has helped offset some of the big decline in oil production
Source: Bloomberg

That uptick in gas production in 2010 wasn't all good, though. Two thirds of it can be explained by Exxon buying shale gas producer XTO Energy for about $35 billion, a deal agreed to when U.S. gas prices were much higher.

Those Were the Days
U.S. natural gas prices have fallen by almost two-thirds since Exxon's acquisition of XTO was announced
Source: Bloomberg

While natural gas a has a lot going for it in terms of its lower carbon content compared to oil and, especially, coal, that doesn't necessarily mean great profits. The shale boom that Exxon bought into has also cratered the price through excess supply. This has been echoed globally as a glut of liquefied natural gas, commissioned when prices were high, has hit the market even as LNG prices have tumbled along with oil.

Gas markets should re-balance eventually. But beware: Folks have been calling for a recovery in gas prices for years on the basis that surely -- surely -- production couldn't keep going up at these low prices. And yet it has.

And gas is just a fundamentally different market compared to oil. Even if it recovers, being Big Gas won't necessarily be as profitable a proposition as it was to be Big Oil. The lack of a gas OPEC has made it easier to access reserves. But it also meant that the premium enjoyed in oil prices when OPEC was still functioning never existed in gas the same way. In today's oil market, the majors are suffering as OPEC has gone from choking back supply to flooding the market. In gas, this is the normal way of things.

As I wrote here, the new energy order epitomized by the Saudi Aramco IPO is exposing the weaknesses of Big Oil's existing business model. Similarly, as the industry's weighting toward gas increases, it will force change. In a research paper published earlier this month for Chatham House, Professor Paul Stevens summed up why:

The culture of gas companies is very different from that of oil companies. In an oil company, the strategy and underlying culture is driven by the geosciences being used to discover crude oil, with a market for the resultant oil taken as a given. By contrast, gas is concerned with securing markets and customers, which is outside the expertise of much of the senior management.

Produce a barrel of oil and there is a global, liquid market to take it off your hands. Gas, because it is so hard to store and transport, has always relied more on long-term contracts, often with rigid conditions and arcane, secret pricing formulas that differ by region. Shale and LNG are breaking down those barriers, but gas remains a very different beast.

The majors would argue, of course, that they have lots of experience in producing and marketing gas and LNG. But in this environment of lower-for-longer pricing, the importance of extracting every last cent of value from every molecule of gas is only going to increase. On that front, three obvious areas where the majors can bring some value to the table are in logistics, trading and engineering.

Logistics means connecting pockets of gas supply with demand, in the same way a grain merchant connects farmers with the hungry masses. Shell's $64 billion acquisition of BG Group last year is the most striking push in this direction, strengthening the company's ability to shift LNG cargoes around the world. Savvy trading, a close cousin of logistics, can also help to eke out a little extra margin on gas sales. That business, already prominent at BP, could see further expansion. As for engineering, turning gas into higher-value products offers another potential earner, which should play to the strengths of the oil majors' chemicals operations.

Who knows? At some point down the line, we could see Big Oil forging deeper links with utilities or commodity merchants to secure skills or access to markets, although that is likely a ways off. The point is that Big Gas offers one way of dealing with the challenge to the majors' old model, but not a route back to it.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Liam Denning in San Francisco at ldenning1@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net