Big Oil is the villain of many a morality tale about price-gouging, monopolies or climate change denial. But the famed international companies today produce collectively barely a tenth of global oil. Their fame, influence and future growth may come in an old, yet new role – Big Gas.
The western majors have been through several reversals of strategy over the past couple of decades. They include the Americans – ExxonMobil and Chevron, the UK’s BP and Shell, TotalEnergies of France, and ENI of Italy. Norway’s Equinor, although majority state-owned, is in a similar class. Mega-mergers, expensive growth, cost cuts, energy transition and U-turns to their core business have all been in and out of fashion.
But the theme is consistent: the shift to gas. In energy-equivalent, BP’s output in 2005 was two-thirds oil; today it produces slightly more gas than oil.
Apart from oil-heavy ExxonMobil and TotalEnergies, the others are nearly equally balanced. Chevron, whose production in 2005 was 70 per cent oil, is now down to 55 per cent. Shell, the world’s largest non-state gas trader, was always strong in gas, and, by buying BG in 2015 and Singapore’s Pavilion Energy last month, it has advanced further.
Companies have been liquidating their oil reserves. Although most have made major acquisitions, only ExxonMobil produces more oil now than 20 years ago. They have cut capital spending, and will probably slash it further after recent oil price falls. Major new gas projects, meanwhile, will continue to tilt them further towards the “blue fuel”.
Why this shift? Gas is much lower-carbon and generally cleaner than oil. It has better demand prospects: while the oil outlook is clouded by the rise of electric vehicles, gas can generate electricity to replace coal and complement renewables, and is an essential input for industry.
Its disadvantages are almost advantages for the international oil companies. Its price is generally lower than that of oil: barely a third of that in the US, but actually near-parity today in East Asia. And this is offset by more generous contractual terms from many governments. Production is not restricted by Opec+ policies.
Unlike oil, it is hard to transport around the world, but this guarantees a role for the large companies able to manage the expensive and complicated business of liquefied natural gas (LNG). Shell plans to grow its LNG sales from 4 per cent to 5 per cent annually to 2030, it said in March’s quarterly update.
The western majors have been squeezed out of many oil heartlands but retain a position in gas. And undeveloped gas resources are abundant, particularly around Africa, where the challenge is not finding them, but devising a viable commercial plan.
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Gas prices in North America have been so low for so long that multinational corporations have tended to neglect it. This has allowed the rise of dedicated mega-US shale gas companies. Expand Energy, formed by the merger of Chesapeake and Southwestern in October, produces about as much gas as BP, and more than TotalEnergies, Equinor or ENI.
EQT, which operates mostly in the Appalachian Basin of the eastern US, is not far behind. And Aussie specialist Woodside’s output is already two-thirds gas; its latest $17.5 billion investment in Louisiana could make it a bigger LNG player than ExxonMobil, Chevron or BP. Especially if US gas prices revive, any of these could become an acquisition target for the majors.
It is not only the western international companies who have noticed the allure of gas. QatarEnergy, of course, based on its holding of the world’s single-largest gasfield, has been dominant in the fuel since the early 2000s, and will grow even further as it near-doubles LNG output by 2030.
Saudi Aramco, while keeping oil capacity steady, wants to grow its gas output 60 per cent by 2030 on the 2021 level, to replace oil consumption at home. It has bought into LNG projects and purchase contracts in Australia and the US. Last May, Adnoc also took a position in NextDecade’s LNG project in Texas, and compatriot Mubadala last month entered US gas production and a planned LNG plant in Louisiana.
Less noticed, but perhaps even more significant, is the change in the Chinese state-owned companies. The largest, PetroChina and Sinopec, have also joined the ranks of Big Gas: both have about an equal split of output. PetroChina produces much more gas than any western rival and talks of becoming a majority gas company. This supports Beijing’s goals to clean up its polluted air, cut carbon dioxide emissions, and improve domestic energy security.
There are a couple of anomalies. TotalEnergies is thought of as energy-transition focused. Unlike BP and Shell, it has stuck to its guns, with a sizeable and growing renewable portfolio. It is the second-biggest LNG marketer among the majors, after Shell. But its output is 62 per cent oil, and, with the acquisition of Denmark’s Maersk in 2017, it has actually got oilier than it was in 2016.
US behemoth ExxonMobil also stands out. It has gone from 61 per cent oil in 2005 to 68 per cent last year, because of its expansion in the US’s Permian Basin, and its success in the booming offshore oil sector of Guyana. Yet even the Houston firm has big LNG on the way, in the US, Qatar and Mozambique.
So, barring a few idiosyncratic cases, the direction of most big oil companies, state or private, is clear: shrinking or steady oil, growing gas. This brings its own risks. Despite a relatively rosy demand outlook, gas still has to be cheap enough to win market share from coal in Asia, and to compete against booming renewables everywhere.
The expansion of LNG from Qatar, the US and elsewhere will surely lead to significantly lower prices later this decade. Some of the big, high-cost bets on projects elsewhere may struggle.
Gas faces a complex geopolitical landscape, marked by increasing barriers of sanctions and tariffs. More competition for the best international assets means buyers – from the Gulf, China or elsewhere – need to be smart about evaluating and executing deals.
But by the 2030s, we may finally be able to retire the tired term “Big Oil”. Gas will drive the corporate success of most of the western majors and their peers. Their challenge is to make Big Gas as profitable, cleaner and more popular than their older incarnation.
