• Big Oil bets on natural gas as the fuel of a low-carbon future
Big Oil bets on natural gas as the fuel of a low-carbon future
11 Oct, 2018, No Comment

Summary: Big oil companies are betting on natural gas as the fuel of the future — and working hard to ensure new projects deliver profits of the future.....


Royal Dutch Shell last week announced a liquefied natural gas project in Canada that will cost $US14 billion ($19.7bn) to build, while Exxon Mobil and partners are expected to approve a multi-billion-dollar LNG project in Mozambique in 2019. That is a similar timeline to Russia’s roughly $US20bn Arctic LNG-2 project, which is part-owned by France’s Total.


Natural gas projects historically have delivered lower returns than big oil projects, leading companies and shareholders to prioritise oil developments. That’s something the companies are working hard to change.


Still, According to consultancy Wood Mackenzie, the weighted average internal rate of return for liquefied natural gas projects currently in the pipeline is about 13 per cent. That compares with 20 per cent for deep water projects and 51 per cent for unconventional oil developments like shale.


“The problem for oil companies is that gas is much more difficult to make profitable,” said Eirik Waerness, chief economist at Norwegian oil company Equinor, formerly known as Statoil.


The case for gas also becomes even more difficult, at least in the short term, when oil prices are high, as they have been recently, though oil companies invest on a long-term horizon.


Yet big oil has little choice but to double down on gas. Companies have discovered fewer large new oil deposits than natural gas opportunities over the past decade. Nations around the world want to reduce pollution by burning cleaner fuels for transport and electricity. A new natural gas power plant emits around half the carbon dioxide emitted by a new coal or fuel-oil plant.



Rising global demand also makes a compelling case for natural gas investment. Oil consumption is expected to rise by just 0.5 per cent a year out to 2040, according to Wood Mackenzie.


Natural gas consumption, though, is expected to rise to 24 per cent of the world’s energy mix by 2040, from 22 per cent in 2016, according to the International Energy Agency. LNG’s share of that market is set to rise to almost 40 per cent in 2023, from around a third in 2017, the IEA forecast.



By 2025, both Shell and BP will be producing more gas than oil. French giant Total’s production is near 50-50 split. Exxon Mobil is also planning significant new investments in LNG.


“It’s all a balancing act,” said Brian Youngberg, senior energy analyst at brokerage Edward Jones. “At the end of the day, oil is the most profitable product they produce, but demand is going to slow so you need to start managing that transition.”


At the same time, oil companies are eyeing efforts to curb global warming that could make lower-carbon natural gas more competitive. Policies like a substantial price on carbon “moves the dial on gas”, Mr Waerness said. Oil companies are selling the strategic shift as a smart bet on a growing market.


“The good news is that the natural gas market will continue to grow, and this explains why we are aggressive, offensive and expanding,” Total chief executive Patrick Pouyanne told investors last month. “On the contrary, the oil market will stabilise and even decline.”


Investors have embraced the strategy, with some reservations. Big gas projects generate lower returns, but they are profitable and provide much more stable long-term cash flow than most oil developments — attractive characteristics for shareholders.


Yet the dash for gas highlights broader risks for the sector in an age of lower-carbon energy and an eventual shift away from fossil fuels altogether to more renewable energy.


“The pivot to gas the industry is engaging in will over time probably mean the industry is pursuing a dramatically smaller overall profit pool — unless gas pricing moves to energy equivalence with oil, which is unlikely,” said Nick Stansbury, head of commodities research at Legal & General Investment Management.


Investment in renewable energy for electricity generation is already outpacing fossil fuels globally, driven by falling costs of producing wind and solar power. More than half of power generating capacity added in recent years has been in renewable sources, according to the IEA.


“Longer term it’s the logical thing to be doing if you believe that the gas market has got more longevity and is going to continue growing,” Wood Mackenzie analyst Tom Ellacott said.


 

Sarah Kent & Sarah McFarlane theaustralian.com.au 10/10/2018

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