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Global Gas Set To Wreak Havoc For The Energy Majors

Commodities / Natural Gas Feb 23, 2012 - 06:28 AM GMT

By: Andrew_McKillop


Best Financial Markets Analysis ArticleUS energy sector corporations are set to report a major slide in profits - probably the biggest fall since the financial meltdown of 2008-09. This time it wasnt a crash into deep economic recession that cut their earnings, but producing too much gas. The single word "fracking" explains all, as the drilling technique known as fracking implodes US natural gas prices and a frenetic bidding war for shale gas leases and other gas assets locks in producers, even the biggest energy majors into a no-win low price future. Spilling out from the gas subsector, the gas supply bulge's impacts across the energy space are only just compensated by high and firm oil prices. When or if oil prices faltered, the financial situation for the energy majors will not be comfortable.

The USA's largest gas producers, Exxon and Chesapeake Energy Corp. will see their net incomes in 2012 slide about 8 percent and 10 percent on 2011, according to industry analysts. US gas prices at around $2.65 per million BTU need only to be compared with gas pipeline import prices for European buyers, January average, of $11.45 per million BTU to understand why the pain for global energy corporations is not evenly spread. At present, LNG contract prices outside the US especially for Asian buyers are holding even higher than Europe's expensive pipeline gas, for many contracts - but this in no way is like diamonds and forever.

The US gas price peak of more than $15.70 in late 2005 is now history, and global major energy players are finding that abundant gas is bad for earnings. The year average WTI oil price of 2005, about $53 is also a page from history.

Unchanged or slightly growing global oil demand, led by transportation fuels, and very unsure outlooks for oil supply have driven up crude prices 33 percent since 2009, but in the US the domestic gas glut is pinching earnings for producers, even as it pushes the U.S. toward gas-energy independence. By about 2030, perhaps, the US will we gas-independent but with so many unknowns the likely outcome remains rocket science.

US gas producers like Chesapeake and ConocoPhillips, which amassed shale and conventional gas production assets before the full impact of fracking on supply growth and gas prices was apparent, are logically those which will see their equity prices most attacked. Wider spread impacts in the energy space are likely or certain, due to fracking having opened up vast areas for gas development on a scale that’s practically overwhelming. To be sure, the will it/wont it for shale oil is the big question.

Oil output from US fields including shale rock fields is at a nine-year high, but the supply growth for oil and gas remains heavily focused on and concentrated in gas, according to US Energy Department figures. The problem is shale gas output has driven the gas price down so far that economic hardship for producers, especially those who bought leases and made acquisitions in 2006 and 2007, is likely overwhelming.  Conversely, shale oil output in real barrels-per-day terms is so small even if growing, that it is unreaonable ti imagine the US can lever oil supply sufficiency with shale oil.

The outlook is ironic: decline in growth rates for US shale gas output is now an easy short range bet, driving a slow but sure ramp in Henry Hub gas prices from their current insane lows. In the oil and gas patch and related oilfield services, the natural strategic response has been and is to seek oil plays, and produce oil, to compensate the skinny earnings on gas. Unfortunately US domestic oil production, dominated by stripper wells, deep offshore oil and increasing shale oil output from very low levels is high cost. Keeping production up or growing needs high prices. If oil prices now also stganate or decline, the outlook isnt good for heavily levered energy majors engaged on a gas asset, and shale oil asset buying spree.

For some, like BP's CEO Robert Dudley, the US is set to become "largely" energy self-sufficient by 2030, but this bet is difficult and long and Dudley will be gone an awful long time before his reading of the tealeaves can be checked against reality. What will happen in the near term is easier to forecast - gas production and drilling curtailments, at least in the US, propelling more and further action in the oil patch as long as WTI prices stay high despite likely narrowing Brent premium.

Another problem is this: horizontal drilling techniques and advances in hydraulic fracturing, or fracking, first brought into real widespread use in north Texas in the 1990s, have enabled energy producers to unleash oil and gas from source rocks like shale. The message is out that this should also apply and will work in many regions outside the US. The costs of it are another subject - which was also where we came in, with the gas feast.

To be sure, more cheap shale gas outside the US, and some expensive shale oil outside the US is not good news for Big Energy. The BP line is that significant growth in U.S. gas supply, and some growth for US shale oil and condensate oil supply - while US energy demand stagnates or shrinks - means that import dependence can shrink. This forgets to add a key fact: the outcome also depends on the price of non-US oil, when we focus the oil market and pricing outlook.

The biggest of them all, Exxon has been buying its way into shale and other so-called unconventional gas and oil capability, notably through its $34.9 billion purchase of XTO Energy in June 2010, which was Exxon’s largest transaction since buying Mobil in 1999. The same is happening outside the US, with Shell especially set on the big ticket gas assets buying trail, rapidly moving both of these old-time Seven Sister oil corporations towards the status of gas dominant energy corporations.

The gas shift is especially marked for Shell. Its $1.6 billion bid for Cove Energy's east African assets ignites a race to develop Indian Ocean natural-gas fields off Mozambique that may hold more than Norway’s entire reserves. For $1.6 billion Shell would get 8.5 percent of the block where Anadarko Petroleum has found 30 trillion cubic feet of gas. Italy’s Eni has discovered even more in a neighboring area, and underlines how European energy majors are shifting to gas. Shell's shift away from oil is also strong for Exxon: in 2011, Exxon's energy output was 49 percent gas, up from 38 percent in 2006.

Poised to go even further, perhaps, the gas race is revealing itself a risky strategy: shifting away from oil to gas at a time of sure and certain gas glut and falling prices - except in Europe and Asia both for special, not permanent reasons - means we have an outlook for the US of more gas than we can use, and not enough oil, in a global context of a massive gas bubble and not enough oil !

Outside the US, increasing gas supply at lower unit prices will be helped by the emerging LNG glut, and again outside the U.S. this ramping up of gas supply can have a much bigger potential impact on national and regional oil demand, than inside the US.

This a likely new longer-term trend, measurable in years not months. It will tend to lever down Eurasian oil prices at a bad time for the energy majors, OPEC and NOPEC. Speeding the energy demand shift away from oil will be through pure brute economics, and this can rather accelerate the decline of global oil output - not raise it. How the energy majors and the producer country NOCs play this game will be every analyst's new thing with major energy patch equity price changes in view.

By Andrew McKillop


Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

© 2012 Copyright Andrew McKillop - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

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