Financial Times: Beyond petroleum lies natural gas: “BP, Shell, Exxon Mobil, Total and ENI are leading a migration of capital from crude oil to natural gas through the development of massive liquefied natural gas (LNG) facilities.”: Wednesday 19 October 2005
By David Talbot
Published: October 19 2005
From Mr David Talbot.
Sir, Your editorial "Browne's big bets on Asian oil markets" (October 14) raises an interesting question: "What is an oil major for these days and what does it do that others cannot?" But you fail to address the most significant answer - beyond petroleum lies natural gas. Apparently below your radar screen lies one of the largest capital investment programmes the world has seen. BP, Shell, Exxon Mobil, Total and ENI are leading a migration of capital from crude oil to natural gas through the development of massive liquefied natural gas (LNG) facilities.
Global capital spending in LNG is likely to average $25bn for each of the next six years, delivering compound average production growth rates of 13 per cent. The US appetite for energy is not just limited to oil; in round terms, it uses one energy equivalent barrel of natural gas for every two barrels of crude. In 2004, BP was the leading producer of natural gas in the US delivering 1.1 Tcfe, or 4.9 per cent of national consumption. The nation's rail links are increasingly challenged to deliver adequate volumes of low sulphur coal from inland states, leading to greater demand for natural gas for power generation. Further, petrochemicals plants in the Gulf require massive quantities of natural gas feedstock at stable prices to ensure their economic well-being. It is precisely through dominance of conventional natural gas production that BP and other majors lie perfectly positioned to exploit the opportunities of scale inherent in the LNG business.
We question the implicit assumption that the high return on capital enjoyed by the majors is the result of inadequate capital reinvestment rates. My company recently completed a review of industry-wide capital spending and operating efficiencies of more than 400 worldwide oil companies. It showed the average cost of developing a new barrel of oil equivalent production in 2004 for the majors was between one-third and one-half of that spent by an independent company. The dominant legacy position of the majors in LNG should ensure they can continue highly efficient "brownfields" expansions while new entrants must suffer the inferior returns of early stage "greenfields" developments.
Perhaps the reign of the dinosaurs is under question, but those still capable of stretching for the richer fruit found higher up the tree may roam the plains for years to come.
David Talbot,
John S. Herold,
Norwalk, CT 06851, US
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