If natural gas is so cheap right now, limping along between $2.50 and $5.50 per thousand cubic feet, why did Exxon pay the equivalent of $41 billion for natural gas giant XTO Energy? There is a global glut of natural gas, which won’t be disappearing any time soon.
I can think of a couple reasons. The obvious one is that the market is low right now and, as China has demonstrated for months, it’s the time to buy.
The second is that there are fewer and fewer major oil finds out there right now and it’s time to diversify. Natural gas is the logical step, since gas, upstream (drilling etc) and downstream (refining etc), is much more similar to oil than, say, mining or green energy — even shale gas, which is a large chunk of XTO’s business.
XTO also has proven reserves — always a comfort — here in the US, where the rules of the road are somewhat clearer, if often more expensive. It’s always better to buy a sure thing, if you don’t want too many ugly surprises. You don’t have to face the ground shifting under your feet as it so often does in Iraq or Nigeria or Russia or Central Asia.
Exxon may also be betting that the US will be moving away from coal and towards natural gas to power our electric supply. It would be a new opportunity.
The acquisition of XTO is not the only such investment Exxon has made this year: it is part of a consortium developing oil in Iraq, it is developing the offshore Ghanaian Jubilee oil field with the Chinese.
Energy companies around the world — multinational corporations, state-owned companies, smaller independents, little wildcatters — are in the proverbial scramble to sew up territories anywhere in the world. It almost doesn’t matter the challenges in getting the stuff out. There seems to be an industry-wide belief that it’s now or never. As bigger companies look to buy sure things, exploration is left to the smaller independents companies (like Tullow Oil and Heritage in Uganda), and of course, China.
Increasingly this will matter, because the larger companies must, and mostly do, play by the rules of the road, no matter how close to the edge. Their leases today have far more environmental protections than in the past — they have to. The big companies are sometimes open to the idea of greater transparency. There is sometimes more involvement with local interests. The Western multinationals have inched towards being more willing to hire locals; many times, the Chinese use their own imported laborers and are openly not interested in transparency.
The problem with the smaller companies is that they often don’t or can’t offer the same levels of protection. Their margins are much smaller, their expertise less, their pockets shallower. They’re out there taking a chance. Environmental corners may be cut, local interests ignored, unsavory rulers supported. This means small poorer countries with little national expertise — the ones for whom an oil or gas strike would mean everything — are the most vulnerable.
(Of course, the big boys have done this too, but now less and less. It’s just not worth it. This week Shell began seeking buyers for 10 of its onshore oil assets in Nigeria, even with the possibility of more peace in the country. The Wall Street Journal quotes a Nigerian official saying they may be sold to the Chinese, but it is unclear if Shell is receiving Nigerian encouragement to divest.)
What began as a financial crisis in the energy sector this year has not been wasted: the seismic shifts in involvement by big companies and China have permanently altered the energy landscape forever.
