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Vanand Meliksetian

Vanand Meliksetian

Vanand Meliksetian is an energy and utilities consultant who has worked with several major international energy companies. He has an LL.M. from VU Amsterdam University…

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Big Oil’s LNG Obsession

Since the early days of the oil and gas industry, a group of Western companies has dominated the industry. These companies have been named ‘Big Oil’ due to the size of their global footprint. Despite their technological superiority and significant access to capital, these organizations are now facing difficulties in maintaining market share and profitability. Changing requirements concerning fuel types as well as an increasing focus on environmental impacts have transformed the global energy market. Inevitably, these companies have been forced to change their strategy to remain relevant to customers.

Big Oil is refocusing its business model to accommodate a world where the share of natural gas in the energy mix is growing by the day. LNG has been the main driver of growth in the natural gas sector as it has provided flexibility to customers and global price competition. While some companies, such as Royal Dutch Shell, have been increasing their activities in the LNG business for years, others like Exxon are only just starting to catch up. The change in focus comes at the cost of the raison d’être of these organizations: oil.

In the past decades, the growing importance of oil in the economies of resource-rich nations led to the establishment of National Oil Companies, or NOCs, that could challenge Big Oil. Forty years ago, Big Oil had access to 85 percent of global reserves. Today, that amount has decreased to 14 percent. Less access also leads to a lower replacement ratio. NOCs such as Saudi Aramco have been able to replace the expertise of international firms in many areas of the world concerning conventional production. Related: Oil Could Jump To $95 This Winter

The success of Big Oil in the past was based on three factors: extended experience, greater investor muscle, and advanced technology. Nowadays, most NOCs are able to receive the same financial support from international lenders while enjoying government support which makes bankruptcy less likely. Furthermore, drilling technology for conventional fields has become less high-tech and more widespread these days, available to even the most basic NOC.

Despite the fact that demand for oil is still growing, increasing by 1.6 percent or 1.5 million barrels per day in 2017, the share of oil in the global energy mix is decreasing. Natural gas is the only fossil fuel that will see a growth of its share of the global energy mix in the foreseeable future. Therefore, the most logical next step for Big Oil is natural gas.

Environmentalism is another important development that has fuelled demand for natural gas. Due to the intermittent nature of renewable energy technology, an alternative source is required to generate power when nature does not cooperate. The high energy density of natural gas, abundance globally, and low level of emission of hazardous gasses have led to increased demand.

Royal Dutch Shell has invested significantly in LNG with its takeover of British Gas in 2016. The acquisition of BG for more than $50 billion provided the Dutch company with a head start during a period when prices were low. Shell’s capacity in the LNG industry is nearly double compared to its nearest competitor. The company’s value currently is $53 billion less than Exxon’s, the largest oil and gas company in the world. Before the deal, the difference was more than $150 billion.

Furthermore, Big Oil’s participation in LNG projects around the globe is highly sought after due to the complex nature of the required technology. Liquefication and regasification of natural gas is a capital and knowledge-intensive process which not many companies possess. Big Oil’s ability to attract talent from across the industry, achieve innovative solutions to reduce costs and achieve goals, puts these companies in a unique position. The inability of NOCs to replace and mimic the required technology further strengthens Big Oil’s position. Related: Can We Expect An Oil Price Spike In November?

Besides complex technology, LNG projects tend to be costly endeavors requiring high upfront costs. Construction of gasification facilities can take years during which debt is pilling. The recent development of artic LNG in Russia is an example of a technologically difficult and expensive project. The $27 billion Yamal peninsula projects was almost abandoned due to Western sanctions, but Chinese financial support and Total’s expertise saved the project.

The change in focus can also be seen in the ratio of oil and gas in the business of Big Oil. BP is undergoing a major gas expansion. By 2020 the firm intends to produce 60 percent gas and 40 percent oil, the opposite of its current production mix. Shell maintains a fleet of 90 LNG carriers, which is around 20 percent of the global LNG shipping fleet. Exxon is increasing its investments in natural gas and Chevron operates several large LNG facilities around the globe.

The transformation of companies is inevitable as demand for energy changes. Companies that were quick to respond are reaping the benefits, with Shell being a prime example. Others are now following suit in an industry that is sure to have a bright future.

By Vanand Meliksetian for Oilprice.com

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  • Ronald C Wagner on September 05 2018 said:
    Great article. Natural gas should be the first choice for most energy needs.

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