Maybe the name doesn't say it all.

Photographer: Andrey Rudakov?Bloomberg

Stop Calling Shell an Oil Company

Justin Fox is a Bloomberg View columnist. He was the editorial director of Harvard Business Review and wrote for Time, Fortune and American Banker. He is the author of “The Myth of the Rational Market.”
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Can we stop calling Royal Dutch Shell an oil company, or even an oil and gas company? The majority of its proved reserves have long been in natural gas, not oil. If its $70 billion acquisition of the company formerly known as British Gas (BG Group) goes through, the reserves breakdown will be 8.9 billion barrel-of-oil equivalents of natural gas to 7.8 billion barrels of oil (that includes synthetic crude, bitumen and natural gas liquids). It’s a gas and oil company!

Of the “oil majors,” Shell and Total are the only two with their reserves mainly in natural gas, although all of them -- especially ExxonMobil! -- have a lot of gas reserves to go with their oil.

For quite a while now, people have been proclaiming that natural gas is the fuel of the future, at least the immediate future. Gas burns cleaner, and releases less carbon into the atmosphere, than either coal or oil. It also is found in more places than oil, with the Middle East holding a smaller share of proved reserves. If we need something to help us transition to the happy era where we’re no longer so dependent on fossil fuels, natural gas -- the least objectionable of the fossil fuels --seems like the obvious candidate. In the developed countries natural gas has already supplanted coal as the No. 2 fuel source and is gaining on oil. In the rest of the world coal is in first place and natural gas third, so there's lots of potential there.

What has long held natural gas back is the difficulty of getting it to where it’s needed. You can’t just pour gas into a tanker or a railroad car; transporting it requires either sturdy pipelines or chilling it to 260 degrees below zero Fahrenheit (-162 Celsius) and then pouring it into a very special tanker. This process of liquefying natural gas was developed more than a century ago, and the exporting of LNG was pioneered in the late 1950s and early 1960s by the UK Gas Council, a precursor to BG Group. After a growth spurt during the oil crisis of the 1970s and early 1980s, though, the LNG business developed slowly for the next two decades. Finally, when oil prices started to rise sharply after 2000, LNG began to take off again -- and Shell established itself as the leading player. Adding BG solidifies that lead. This is from the investor presentation Shell gave today:

Source: Royal Dutch Shell

MTPA stands for million tonnes per annum, and a million tonnes of LNG is equal to 8.97 million barrel-of-oil equivalents. Supposedly.

The big question for LNG is whether low oil prices will again stunt its growth. LNG pricing is weird -- most export prices are linked to the oil price, but some aren’t -- so it seems pretty hard to say what exactly the impact will be. Japan and Korea are the biggest LNG importers, and India and China are seen as the big growth prospects as they try to shift away from coal as a power source. Big new gas projects in Australia, western Canada and eastern Russia, as well as discoveries off the coast of East Africa and the start of LNG exports from the U.S. (the world’s biggest gas producer) promise ample supplies for these markets, but also downward pressure on prices.

Shell's big bet is that, whatever happens with prices, natural gas will be the global energy commodity that matters most in the years to come. If its executives are right, maybe in a decade or two people will just call it a gas company.

  1. I followed Shell’s practice of converting natural gas to oil at the ratio of 5,800 cubic feet per barrel. Some other companies, including BG, convert at 6,000 cubic feet to the barrel. I do not know who is right here, but I figure Shell is the acquirer so their method rules.

  2. This is all according to the BP Statistical Review of World Energy 2014.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Justin Fox at justinfox@bloomberg.net

To contact the editor on this story:
James Greiff at jgreiff@bloomberg.net