Big Oil Betting on Shale Gas
Oil companies keep placing their bets on shale-gas. They are not snubbing petroleum. They are, however, choosing to diversify and explore for a commodity that they once considered excess and just burned off.
It's an economical play. But it's also a move that recognizes the global pressures to curb carbon emissions and to invest in cleaner burning fuels. It is all coming at a time when Big Oil is reaping record profits from the sale of high-priced gasoline -- money that is getting reinvested into the exploration of shale-gas that is purported to be the next bonanza.
Exxon Mobil Corp. may exemplify the trend. After closing on XTO Energy in June 2010 for around $31 billion, it is now evaluating additional prospects. According to Bloomberg news, it is considering up to a dozen such purchases worldwide. Since its XTO acquisition, it has spent about $3 billion to collect shale-gas leases through the United States, which includes parts of Texas, the Southeast and Pennsylvania. That totals 10 trillion cubic feet.
"The economic returns are very good," says XTO President Jack Williams, in an interview with Bloomberg. "We're running economics on every individual well. We're making sure each well makes economic sense before we drill it. We're not drilling anything that's losing money."
He goes on to tell the news service that the company plans to dig 40,000 wells around the world and that it will double its gas production over the next decade. Williams also says that the company has deep pockets and has no desire to bring in any partners, noting that such a strategy would only dilute the potential earnings on a commodity that is priced relatively low.
Exxon Mobil's business strategy comes atop earlier estimates from the Potential Gas Committee that say that the country's natural gas reserves are 35 percent greater than they were a few years ago. Reserve levels now stand at more than 2,000 trillion cubic feet, it says, which is the most they have been in nearly a half century.
The increase is because of shale, which is a sedimentary rock that is less porous than sandstone where traditional natural gas is found. While explorers have always known that such formations are filled with gas, it has only been in recent years that retrieving those resources has been technologically feasible. With horizontal drilling, producers can move laterally beneath cities and neighborhoods to extract the product.
To produce gas from shale, tons of water, sand and chemicals must be pumped deep down into the wells to loosen it. And that has created concerns among many communities and environmental groups that say the process contaminates the groundwater. Nevertheless, many insist that natural gas is the cleanest burning fossil fuel but that its current appeal must remain temporary until green energy sources are primed.
ExxonMobil, in fact, has previously said in its annual energy outlook that it anticipates natural gas to grow faster over the next 20 years than either oil or coal.
"As the outlook shows, the world will still rely on oil and natural gas to meet much of its energy demand for years to come ...," says the American Petroleum Institute. "The outlook also underlines the growing importance of clean-burning natural gas. It notes that 'imposing higher costs for carbon emissions would impact energy prices and provide an incentive to switch' to natural gas and other less carbon-intensive fuels to meet electricity demand."
Chevron Corp. is pursuing a similar strategy. It completed the $3.2 billion purchase of Atlas Corp. in February so that it could get access to 9 trillion cubic feet of shale-gas in the Appalachian region. BP, Royal Dutch Shell and Statoil are all positioning themselves for what could become a "gold rush" and a heavy move into shale production in the United States. Shell, for example, bought last year most of East Resources for $4.7 billion in cash.
As for Chevron, Reuters is reporting that the company will not dive head first into the shale business and that its approach will be measured. After it consummated the Atlas deal, it scooped up in May 228,000 acres in the Marcellus region.
"You're not going to see Chevron -- I can't speak for others -- just shift the whole business into shale, and let other things go," Bobby Ryan, Chevron's vice president for global exploration, said at the Reuters Global Energy and Climate Summit in Houston.
The question now posed to energy analysts is whether other oil giants will start bidding on the smaller natural gas producers that might need more financial muscle. Big Oil has typically invested much of its resources harnessing overseas oil fields. Natural gas development, in this country, has pretty much been left to smaller enterprises.
An earlier MIT study says that, globally, as much as 160 years worth of natural gas reserves exist. But substantially increasing that production for power plant usage is likely to take a few decades. After 2050, though, the MIT report says natural gas could give way to green energy forms, which over time, will become more and more cost effective as developers and suppliers perfect their techniques.
"In a carbon-constrained world, natural gas will become a larger part of the energy mix," says Ernest Moniz, director of the MIT initiative. "But in the longer term, it will be necessary to shift to 'essentially zero-carbon' sources so we better not get mesmerized by gas either. We need to do the hard work of getting those alternative technologies ready to take over."
Today, shale-gas is the hot investment. Big Oil, which has had its hands tied here in this country, sees the commodity as a potentially rich vein that can add to its bottom lines over time.
EnergyBiz Insider has been named Honorable Mention for Best Online Column by Media Industry News, MIN. Ken Silverstein has also been named one of the Top Economics Journalists by Wall Street Economists.
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