You wouldn't think that any company, especially a company as savvy as Exxon Mobil (XOM, news, msgs), could overlook China.
But that may be exactly what Exxon Mobil did in formulating its plan to pin the company's growth on natural gas -- and in particular on liquefied natural gas, or LNG.
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Exxon Mobil
Projects such as Exxon Mobil's Qatargas Trains 4 and 5, RasGas and Al Khaleej Gas in Qatar, the South Hook LNG terminal in Wales and the Golden Pass LNG terminal in Texas, which made investment sense when it looked like China would import an additional 16 million tons of LNG annually in the coming decade, now face a scenario in which China would add only half as much to its annual imports.
What's changed since, say, March, when Exxon Mobil announced it would increase capital spending 4% in 2010, to almost $28 billion, in a big bet on natural gas? And since its purchase of U.S. natural-gas producer XTO Energy for $28 billion?
Here's what: China is going to put new natural-gas-releasing technologies to work faster than previously thought.
Until very recently, oil and gas industry analysts were predicting that Europe would be the next region to put these technologies to work. The U.S. gas shale boom began in the Barnett Shale formation of Texas and then spread east to Arkansas, Louisiana and, most recently, to the Marcellus Shale formation that underlies most of the Appalachian region. Companies that developed fracturing and drilling technologies to release the gas during that boom had been looking to Europe as the next frontier. The past three to five years have seen an explosion of mapping and exploration from France eastward into Austria.
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PetroChina
That's equal to roughly a fifth of China's current production of natural gas -- and more than enough to change the global economics of natural gas. (For context, U.S. natural gas production will be about 60 billion cubic feet a day this year.)
China puts gas pedal to the metal
How does rising production of unconventional gas in China change the game?First, it turns the opportunity for an LNG open-ended boom into a window of opportunity. During the next two or three years, China will need to import LNG in the quantities that energy companies investing in natural gas have projected. But as China's own supplies of gas from unconventional sources gradually come online, a gap will open between what energy companies had projected China would need and what China actually imports.
Second, growing production from unconventional sources in China won't just damp imports of LNG; they'll radically reduce China's need to import conventional natural gas through pipelines from central Asia and Siberia. Recent years have seen a barrelful of deals between China and natural-gas producers in Russia to build pipelines and secure supply. Those deals, like the investment in LNG, now come with a ceiling: By 2020, China still will import natural-gas by pipeline, but it won't need any new pipeline capacity after that date, according to Wood Mackenzie.
Third, China now meets a relatively small percentage of its energy needs -- about 4% -- from natural gas. (Coal accounts for 68% of primary energy use, oil for 19%.) That will change as domestic supply grows and as China's government continues its policy of reducing carbon emissions by shifting to natural gas and alternative energy sources such as wind and solar. A likely winner from this shift is CNPC Hong Kong, a subsidiary of PetroChina that looks likely to be the parent company's vehicle for increasing natural-gas distribution. Other names to check out include China Oil & Gas Group and China Resources Gas Group, as well as giant PetroChina.
Continued: 3 more game changers
