by Aaron Levitt | March 16, 2012 7:30 am
Exxon Mobil’s (NYSE:XOM) purchase of XTO Energy back in 2010 made it one of the largest producers of natural gas in the country. Given that this major integrated oil firm predicts that overall energy demand will rise 30% by 2040 and that natural gas will replace coal as the second-most popular fuel by 2025, Exxon has increased its focus on developing natural gas over the last few years. Overall, natural gas has accounted for more than half of Exxon’s proven reserves since 2009.
Despite the fuel’s current low price, Exxon’s recently announced five-year, $185 billion capital spending plan helps underscore its natural gas ambitions. A total of 21 major projects will begin production by 2014, and the bulk of these will be in exploring various unconventional shale deposits around the globe. While such a huge bet on natural gas production may seem crazy, Exxon’s forward-thinking agenda led by CEO Rex Tillerson has served it well in the past.
With the world’s largest oil firm making such a calculated investment on a future filled with natural gas, it certainly begs the question: What are the other majors doing? And perhaps more important for an investor: Am I hitched to the right one?
It’s no secret that the world is witnessing a natural gas boom. New advances in drilling technology have given exploration and production (E&P) firms the ability to access gas trapped within various shale rock formations. Billions of dollars worth of new investment have flown into the sector, and the newly found abundant supplies have the International Energy Agency calling this the “Golden Age of Gas.”
While several other major integrated energy firms have been expanding into shale and natural gas assets at record paces, not all of them have embraced the fuel with same fervor as Exxon. For example, BP (NYSE:BP) has actually been selling valuable shale assets to help pay its mounting legal bills.
That could be a big mistake as the IEA estimates that gas use will rise more than 50% to 5.1 trillion cubic meters by 2035 as emerging markets such as China hike their demand. Avoiding the likes of BP and focusing on the majors with a strong natural gas and natural gas liquid (NGL) orientation could be the best way to play the world’s future energy demands.
So Exxon aside, what companies are making calculated strides into natural gas? Both Chevron (NYSE:CVX) and my favorite, Royal Dutch Shell (NYSE:RDS.A, RDS.B) make the cut.
Natural gas and NGL production is quickly becoming a priority at Chevron. The company’s natural gas-based operations now span significant holdings in unconventional locales such as Africa, Australia and Southeast Asia, as well as in North America. Overall, Chevron controls over 8 million acres of shale deposits and produces around 5 billion cubic feet of natural gas a day.
However, Chevron’s future lies within its exporting ambitions. It holds the largest natural gas resource position in Australia, and its liquefied natural gas (LNG) plants will be the key to unlocking those hydrocarbons. The firm’s massive Gorgon liquefaction plant will produce around 15 million metric tons of LNG per year and help produce significant cash flow for years to come.
Likewise, on Australia’s West Pilbara coast, Chevron has broken ground on a new 9 million metric-ton LNG facility. Already, the proposed Wheatstone project has signed 20-year LNG purchase agreements with Japanese utilities like ill-fated Tokyo Electric Power Co. (PINK:TKECF). These projects help reinforce Chevron’s position as a leading natural gas supplier to the Asia-Pacific region. Given the area’s growth prospects, being its No. 1 supplier of energy is certainly worth a good deal.
Similarly, Shell has taken a cue from Exxon and now has a long-term view on natural gas. It has plowed more than $30 billion into direct natural projects, and that fuel will overtake oil as its chief source of production by the end of the year. That expansion has mainly come from North America’s rich shale deposits. Shell currently owns and operates about 3.5 million acres worth of prime shale assets across producing regions such as the Marcellus. That’s roughly equal to 40 trillion cubic feet of natural gas reserves, or about 12% of the North America’s total.
Also like Chevron, Asia holds the key to Shell’s future success. Shell pioneered the technology to create liquefaction and spawned the LNG sector back in 1964. Today, it remains a leader in natural gas exports, with plants located in key Asian markets like Malaysia and Brunei. Not to mention Shell’s 25% stake in Chevron’s Gorgon project. These LNG facilities will undoubtedly also drive Shell’s future cash flows and earnings.
Not resting on its laurels either, Shell has begun to advance LNG technology as well. Its much-touted Prelude floating LNG facility will allow it access and export from ultra-deep waters off Australia’s coasts, and its new micro-LNG facilities could be a game-changer.
Given Exxon’s huge bullish bet on natural gas and its propensity for predicting the future, investors might want to position themselves accordingly. While many firms have gotten the shale bug, only Chevron and Royal Dutch Shell seem to match the Exxon’s zeal for the fuel. They represent a great way to play natural gas’s future dominance as a source of electricity generation across emerging Asia.
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