Energy report: Abundant gas

Wow. For a day without a lot of market movement there was so much that seemed to be happening. Things like the Dow Jones closing above 10,500 for the first time since October of 2008. Or what about the fact that oil closed lower for nine straight sessions; the first time that has happened in eight years. But all of that seemed to be secondary to the news that Exxon Mobil made a big leap into a major unconventional gas play by purchasing XTO Energy INC. in a stock deal totaling $31 billion dollars in cash and the assumption of $10 billion is debt giving the company what they say is the largest unconventional portfolio in the industry.

What is unconventional gas? Well it can mean many things such as “deep natural gas” which are gas deposits that are very deep underground. Or coal bed methane. But the type of gas that Exxon Mobil is really interested in is XTO Energy exposure to shale deposit gas.

Shale is a very soft rock that can contain natural gas. It's usually when two thick, black shale deposits 'sandwich' a thinner area of shale. This gas used to be very expensive to extract but because of new drilling techniques such as using directional drilling and a process called fracking this gas is adding to the countries proven natural gas reserves. XTO has a lot of these acres and the expertise to take advantage of these supplies.

This is an amazing development because just a few years ago we were fearful that the North American continent had hit peak natural gas production. We were told by Fed Chairman Alan Greenspan in 2003 that our inability to meet future natural gas demand was a major threat to the U.S. economy. We were told that short supplies of natural gas could contribute to erosion in the economy and the important role that liquefied natural gas, in particular, could play in American energy imports. That role now has been taken over by unconventional gas such as shale. That's why Exxon Mobil is making such a big bet on natural gas. It believes that natural gas is going to be a major fuel in North America’s future.

With new technologies bringing abundant supply and the cost of production going down, it means that we will have natural gas being the fastest growing alternative fuels choice. This brings to mind the criticism that Exxon shareholders such as Neva Rockefeller and other members of the Rockefeller family made about Rex Tillerson and his lack of investment in alternative fuels. At the time Neva said that, "In today’s rapidly changing energy environment, we are urging ExxonMobil to get back to its strong historical roots in order to better position itself for the future of its industry. ExxonMobil needs to reconnect with the forward-looking and entrepreneurial vision of my great-grandfather. Kerosene was the ‘alternative energy’ of its day when he realized that it could replace whale oil. Part of John D. Rockefeller’s genius was in recognizing, early on, the need and opportunity for a transition to a better, cheaper and cleaner fuel. And as he noted: ‘If you want to succeed, you should strike out on new paths, rather than travel the worn paths of accepted success.’ We recognize and appreciate that ExxonMobil’s management has been extremely skilled at managing the oil and natural gas business. However, the truth is that ExxonMobil is profiting in the short term from investments and decisions made many years ago, and by focusing on a narrow path that ignores the rapidly shifting energy landscape around the world, including developing nations."

Of course now it looks like Neva was wrong as new technologies on gas production makes gas the most promising fuel of the future. It is a proven fuel and will have a much better return in the fuels then solar, wind, geo-thermal or most other alternative fuels you may want to mention.

This is not Exxon’s first venture in gas but perhaps the most well timed. One loyal Energy Report Reader wanted you to know that Exxon was actually one of the first in the game in the “Barnett Shale” back in 2004-05. He said they had two old pipelines that had been abandoned (run by Magnolia back in the 1960’s) that they leased and drilled on. All the acreage they leased and drilled on was sold to Chesapeake about 1.5 years ago. Dow Jones says that this deal is much better than the move Conoco’s ill fated gas play. Dow Jones reports that in December 2005, ConocoPhillips (COP) agreed to purchase U.S. natural-gas producer Burlington Resources for about $36 billion, accruing significant debt at a time when gas prices were at all-time highs. Then-Exxon chief executive Lee Raymond mocked the deal, saying that buying at the top of the cycle was bad timing, and he was right. When energy prices collapsed in recent years, Conoco Philips ended up writing off billions related to that purchase, and now seeks to shed $10 billion in assets in an effort to shore up its finances

Dow says that Exxon's acquisition could turn out differently than Conoco's, in part because the timing is better. Raymond's successor, Rex Tillerson, made his move when the natural gas market is recovering from a recent bottom that rattled producers and punctured their valuations. Even after the premium added by the deal announcement, XTO shares traded 32% lower than their $70.2 peak in June 2008.

This obviously opens the door for more deals on gas. Companies like Chesapeake, Devon, and EOG Resources Inc. (EOG) and EnCana Corp. (ECA) are being talked about in the press. Overnight Dow Jones reported that Carrizo Oil & Gas Inc. (CRZO) agreed to sell a portion of its stake in a Texas shale project to Sumitomo Corp. (8053.TO, SSUMY) for $15.7 million to pay down debt. Gas is our future and the future is now.

Dow Jones reported that the Organization of Petroleum Exporting Countries (OPEC) said it has revised up its 2010 world oil demand forecast by a further 70,000 barrels a day on stronger-than-anticipated global economic growth, particularly from countries such as India and China. The 12-nation producer group said in its monthly oil market report that, "2009 was one of the worst years for world oil demand but 2010 should see world oil demand increase by 0.8 million barrels a day following an upward revision of around 70,000 barrels a day from the last assessment." Non-Organization for Economic Co-operation and Development countries will account for all of the increase because of the slow recovery in household consumption within OECD countries, such as the U.S., and the fragile health of the banking sector which still appears to need government support. OPEC said it sees the world economy growing 2.9% in 2010 following this year's contraction of 1.1% with most of the growth witnessed in developing Asian nations. "While the OECD is expected to now grow at 1.3% in 2010, the bulk of growth next year will be contributed by non-OECD with China and India expected to growth 8.5% and 6.5% respectively," it said. Non-OPEC oil supply is forecast to grow by 500,000 barrels a day in 2009 to 50.96 million barrels a day following an upward revision of 100,000 barrels a day from November's assessment.

Phil Flynn is senior energy analyst for PFGBest Research and a Fox Business Network contributor. He can be reached at (800) 935-6487 or at pflynn@pfgbest.com.

About the Author
Phil Flynn

Senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. He is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets. His precise and timely forecasts have come to be in great demand by industry and media worldwide and his impressive career goes back almost three decades, gaining attention with his market calls and energetic personality as writer of The Energy Report. You can contact Phil by phone at (888) 264-5665 or by email at pflynn@pricegroup.com. Learn even more on our website at www.pricegroup.com.

 

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