"I am curious about the Natural Gas market, both in North America and Europe. As Eoin mentioned, Sasol just made an important North American purchase. However, this is only the latest of what has seemed like an endless progression of oil companies (especially majors) purchasing Natural Gas properties, especially the Shale properties, either as an addition to their reserves or because they were without any significant NG assets. Exxon Mobil's purchase of XTO comes to mind. With Natural Gas being in such abundance and the current spot price being so low (especially compared to conventional oil) what are the implications of these acquisitions. To the uninformed outsider, it would seem as if the energy sector believes Natural Gas is going to be a major contributor of future energy needs.

"There has been talk of how Natural Gas is the one sure thing that the U.S. can export in abundance. Yet, as they say, low prices are the best cure for low prices which would argue that production would be cut dramatically in the future. That concept does not seem to mesh with the numerous acquisitions of shale gas plays. The other part of this equation is that if you agree that economic forces eventually always cause a reversion to the mean, then either the price of oil needs to fall greatly or the price of NG needs to rise. I realize the situation in Europe is quite different, and I admit to being quite naive about the oil industry in general, but I cannot help but wonder why there is so much activity while the commodity (NG) is priced so low, and is there a message here that might make one speculate on pure Natural Gas companies. Or could this mean that oil majors are beginning to cover themselves for the future of energy and admitting that they do not have great confidence in how long their oil reserves (those that are reasonable to extract) will last."

Eoin Treacy's view Thank you for this interesting question which raises a number of important points. Resource nationalisation has become an important concern for major oil companies. With oil prices well above the 20-year average, national oil companies are prepared to develop supply on their own without having to partner with a foreign oil company. Brazil's development of the Tupi field is one such example. Competition, particularly from China and lately India, has also been a factor in how large companies have sought to increase their reserves. To what extent large companies continue to have trouble accessing new discoveries in future is uncertain because they have begun to leverage significant technological prowess in accessing unconventional reserves of both oil and gas. BP's recent Russian deal exemplifies the ability of major's to leverage their technological ability to gain market share.

The expansion of the global natural gas market has prompted major companies to diversify not least because they have privileged access to US domestic unconventional reserves. As of last year, 49% of Exxon Mobil's production came from natural gas. (Also see Comment of the Day on February 17th 2010). Shale oil is an increasingly attractive potential supply source and also represents reserve growth potential for major oil companies.


The overall cost of production from unconventional natural gas wells is competitive and in some cases cheaper than conventional drilling. The USA and Canada have so far been the only countries to bring major unconventional gas to market. This has created an arbitrage between US and European gas and led to talk of US exports. It could still be a few years before the first major European unconventional gas supply is brought online and much of the pricing structure is still on long-term contracts which makes it a favourable destination for LNG cargoes.

The oil/natural gas ratio has been trending higher since December 2008 as natural gas prices failed to keep pace with oil prices. The ratio spiked higher recently, spurred by declining Libyan supply due to unrest and speculation that political agitation will spread to the rest of the Middle East. In the short-term, a pull back in the oil price could result in the ratio pulling back.

At some point in the future, demand for natural gas will expand enough to put upward pressure on prices. Increased demand for natural gas could also help to moderate demand growth for oil. However, this is probably more of a medium to long-term likelihood than a short-term prospect.