Sheila McNulty Should US majors be rushing into shale gas?

In the past year, a growing number of foreign energy companies have bought into the US natural gas scene through joint venture deals with independents to gain access to what is turning out to be a huge new fuel source.

Analysts estimate that the independents have grown US supplies, using new technology and expertise, to 100 years worth of natural gas, up from about estimates of about 30, just three years ago. Yet it is interesting to note the US majors have been left out of this joint-venture activity, continuing to focus on the deep-water Gulf of Mexico and, mostly, overseas.

ConocoPhillips’ revelation in recent days that it is moving to take over the 50 per cent stake held by Petroleos de Venezuela, Venezuela’s state oil company, in a joint venture processing crude at a Texas refinery because PDVSA has defaulted on supply contracts underlines the value of the US gas play. Had PDVSA been American, this dispute would have been settled a long time ago. And the chances of the US nationalising assets is slim to none.

Conoco says that, under the terms of their joint-venture agreement,  PDVSA was to suply most of the crude processed by this joint venture. However it has not supplied crude oil since the beginning of the year. So Conoco has just notified PDVSA that it would exercise its rights under the terms of the joint venture agreement to acquire PDVSA’s interest in the joint venture.

PDVSA can turn over its interest or dispute the claim and both sides can go to court.

Indeed, that is likely to be the way things will go. For the companies have been in conflict with one another since Venezuela nationalised its oil sector and took control of Conoco’s assets there, forcing the company to report at $4.5bn charge in 2007. And it is not the only one having troubles with the government of Hugo Chavez. ExxonMobil also has been entrenched in a legal dispute with Venezuela since then.

And, of course, such disputes are not confined to Venezuela.  What this latest twist reminds us, though, is that foreign countries hold most of the world’s oil and, therefore, accessing those resources involve resource nationalism at its worst. Look around in Russia or Africa for examples.

But the US has a growing supply of natural gas with some fields big enough to engage the majors for many years to come. They do not have to deal with such contract disputes.

Foreigners have seen the value of the US gas play and moved in aggressively in recent months. BP, the UK oil giant, has led the push. But BG Group, StatoilHydro and Eni also have been first movers, paying the US independents, who are heavily entrenched in US natural gas, to not only share the spoils but teach them how best to access them by themselves.

The US majors seem so focused on negotiating with foreign governments to access resources abroad that they cannot see the value in their own backyards. Or can they? With natural gas prices now below $3, perhaps they are making the right decision. After all, how long can these little independents hold on? Perhaps they will be willing to take a lower price from ExxonMobil, Chevron and ConocoPhillips in a few more months.

Yet maybe not. If natural gas prices begin to recover, the US majors may well find themselves having missed a golden opportunity. Because it should not be long before Congress and the Obama Administration realise the US’  hopes of transforming the country into one run on renewables is not going to happen any time soon. And that is where many believe natural gas will come into play.

Natural gas is the least carbon intensive of the fossil fuels, but also plentiful, available in the US and already provides about 20 per cent of US energy. Its production can be is ramped up to meet increasing energy needs. While the estimates of 100 years worth of supply may, in the end, turn out to be inflated, there is no doubt US natural gas is the biggest contender to being a bridge fuel to renewables. Will US majors be in on the crossing?

Related links:

Shale gas scepticism, and shale gas enthusiasm (FT Energy Source, 03/09/09)
Natural gas, not so unstoppable after all? (FT Energy Source, 27/08/09)
Natural gas fighting difficult battle in Washington (FT Energy Source, 10/08/09)