Are Chevron and Exxon Sending an Energy Message?

 |  Includes: ATLS, CVX, GAZ, OIL, UNG, XOM
by: Carlos X. Alexandre

Wednesday morning I came across two seemingly simple news stories that are somewhat at odds with each other.

MarketWatch: 11/9/2010 — Chinese demand is likely to drive the price of oil much higher in the coming years, the International Energy Agency said Tuesday in its 2010 World Energy Outlook. "The age of cheap oil is over," the agency said, according to a press briefing document on its website. In a Wall Street Journal interview, the chief economist of the IEA said he expects the price of oil to rise to about $110 a barrel in 2015 from about $88 now.

Reuters: 11/9/2010 — Shares in Atlas Energy Inc (NASDAQ: ATLS) jumped 36 percent to $43.03 in premarket trade after Chevron Corp (NYSE: CVX) said it will buy the U.S. natural gas producer for $4.3 billion.

Where the IEA is projecting Chinese demand to drive oil prices higher, Chevron is passing on the opportunity to expand its oil exploration portfolio and is buying a natural gas company at a high premium of 36% over the previous day’s closing price, while considering that natural gas is closer to the bottom of the price range — $4/mmBtu (million British thermal units). This is the second such move by a major oil company, and Exxon (NYSE: XOM) did the exact same thing in September of this year.

The Chinese oil consumption mantra fills the airwaves, and the country’s propensity to engage in international resource accumulation through partnerships in less developed countries, is quite visible. In addition, the implication lingers that China’s oil demand has a cumulative effect to U.S. consumption. Thus, under that new reality, oil prices reached for the sky in 2008, and natural gas followed. But the publicly available data from the U.S. Department of Energy doesn’t support the general assumption and raises some questions. I was intrigued when Exxon skipped the bidding on Iraqi oil fields recently, and chose to buy XTO instead, a natural gas company in Fort Worth, Texas. As a matter of fact, the data points to a shift in global energy usage which may be caused, among other factors, by advances in hybrid technologies.

The first chart depicts oil consumption in the U.S. and China, between 2000 and 2009, and you’ll quickly notice the divergence, while being mindful that the U.S. accounts for 22% of the World consumption, while China registers a smaller 9.8% share. In addition, between 2005 and 2009, the U.S. used 2 million barrels of oil less per day, while China was burning 1.5 million more, hardly making up for the reduction in U.S. consumption — and conspicuously the decline in the U.S. began before the housing/financial crisis.

click to enlarge

Click to enlarge
Source: U. S. Department of Energy

Natural gas joined the speculative race in 2008 and got a bid of over $13.50 per mmBtu, lower than the 2006 high of $16. Natural gas has declined from 2008 by 72%, while oil is down in the neighborhood of 46%, and that brings us to the next chart — World Oil vs. Natural Gas Consumption. Although the measures are in barrels of oil and billion cubic feet of natural gas, the trend is what stands out, with natural gas maintaining the growth trajectory intact, while oil consumption is declining. As a side note, oil prices are inversely correlated to the value of the dollar — oil rises when the dollar drops and vice versa — but the relationship does not account entirely for the valuation, especially at the extremes.

Source: U.S. Department of Energy. * Natural Gas data up to 2008Click to enlarge

Source: U.S. Department of Energy. * Natural Gas data up to 2008.

Finally the third chart – World Energy Consumption – plots the year-over-year percentage growth for oil, natural gas, coal, and biofuels, with USA oil consumption data adding a little perspective, since it accounts for almost ¼ of the market. Of the group, the only declining source of energy is oil, while biofuel has experienced exponential growth, although the use as of 2008 amounted to 1.3 million barrels per day, still a small share of total consumption by any measure.

Source: U.S. Department of Energy. Natural Gas, Coal, Biofuel data up to 2008. Biofuel data starts in 2000Click to enlarge

Source: U.S. Department of Energy. Natural Gas, Coal, Biofuel data up to 2008. Biofuel data starts in 2000.

Certainly, you have heard how ultra-deepwater drilling is the next frontier, especially with the news surrounding the BP disaster in the Gulf of Mexico. The technology does indeed exist to drill at increasingly bigger depths, but it also comes at a price. According to the Department of Energy, the break-even point for deepwater drilling is above $60 per barrel, leaving a narrow margin at current prices, and despite the advances in seismic data technology, drilling is still a shot in the dark.

The Department of Energy’s “Annual Energy Outlook 2010 with Projections to 2035” does highlight the fact that oil prices may be benefiting from a lack of natural gas infrastructure at the consumer level, but ends by stating that “A large disparity between crude oil and natural gas prices, as projected in the AEO2010 Reference and High Oil Price cases, will provide incentives for innovators and entrepreneurs to pursue opportunities that, in the longer term, could increase domestic or international markets for U.S. natural gas.” And isn’t opportunity what defines U.S. culture? It appears that the writing is on the wall.

The ramifications of a shift in energy resources will have a disruptive socio-economic impact on rogue nations dependent on oil revenue to advance their agendas, and at home, Louisiana and southern Texas, especially Houston, will provide the measuring stick by which one can judge the true impact of the shift. And the symptoms were already present, even before the oil spill.

With all due respect to the IEA, I’ll follow the money.

Disclosure: None