The biggest energy deal in a decade is a $70 billion bet that the world is indeed entering the "Age of Gas."
- By Keith JohnsonKeith Johnson is Foreign Policy’s acting managing editor for news. He has been at FP since 2013, after spending 15 years covering terrorism, energy, airlines, politics, foreign affairs, and the economy for the Wall Street Journal. He has reported from Europe, the Middle East, Africa, and Asia and, contrary to rumors, has absolutely no plans to resume his bullfighting career.
The biggest energy-sector merger of the last decade, the $70 billion tie-up of Royal Dutch Shell and BG Group announced this week, promises to reshape the global market for natural gas, the key fuel for the world in decades to come.
The deal could also give countries from Tanzania to Brazil a second chance to revitalize their energy-fired dreams by bringing Shell’s deep pockets and technological savvy to challenging oil and gas projects.
The linkup, rumored for years, finally came together in the last few weeks as a sustained period of cheap oil and gas put pressure on major energy companies. Shell, a big player in both oil and natural gas, offered on Wednesday a handsome premium for the British energy firm, which specializes in selling natural gas to customers in more than a score of countries around the world.
Together, the new company would pump almost 4 million barrels of oil per day, making it one of the energy world’s behemoths. But more importantly, it would create by far the world’s largest corporate player in liquefied natural gas, or LNG, putting it in the driver’s seat to reshape a crucial sector at a time when gas is expected to power growing economies in Asia. Together, the companies would control by 2018 about 45 million tons of LNG per year. By comparison, Qatar, the country that dominates the LNG trade, exports about 77 million tons a year.
“You’re putting together two companies that have very good long-term positions, and who are just trying to get through this mess of a market right now,” said James Jensen, head of natural gas consultancy Jensen Associates.
The merged company’s dominance in LNG could be risky in the near term, but it’s a multibillion-dollar bet that the world’s energy future will increasingly turn to the clean-burning fuel that’s poised to edge out coal in years to come.
LNG prices, especially in Asia, have all but collapsed over the past year, thanks to the double whammy of excess supply and weak demand from wheezing economies. Many natural gas prices are also linked to the — for now, falling — price of oil. That gas glut is expected to last until the end of the decade.
But by acquiring BG with all of its existing LNG assets, Shell has essentially positioned itself to take advantage of the longer-term gas renaissance without having to build a bunch of new, pricey gas export terminals around the world.
“They’re in a great position to weather that storm, because it’s going to be a buyer’s market for a little while,” said Kenneth Medlock, senior director of Energy Studies at Rice University’s Baker Institute.
Going forward, the biggest impact from the new company could be to accelerate the shift in the gas industry from rigid, old-fashioned, long-term supply contracts to a more flexible spot market. Shell has traditionally dominated the long-term gas market, where it sells gas to customers at a set price for up to 20 years; BG is a titan in the so-called portfolio market, where it snaps up gas and ships it wherever it can make money. The shift toward a more responsive, flexible natural gas market began a few years ago but is likely to greatly accelerate under the tutelage of Shell and BG. That could in time start to make the natural gas market look more like the oil market.
“There’s been a pretty dramatic shift in that direction, and I think this deal is kind of a harbinger of things to come,” Medlock said.
Big Oil’s latest megamerger isn’t just about gas, of course. Oil companies around the world are struggling to lock up new reserves of black gold, often because the most promising fields are off-limits to international oil firms. By acquiring BG, Shell will — at a $70 billion stroke of the pen — increase its reserves of oil by 25 percent and its oil production by about 20 percent.
Much of that is concentrated in Brazil, a country that has spent the last decade trying to clamber aboard the oil-drilling bandwagon thanks to some promising offshore oil fields. But Brazil faces a host of challenges: corporate malfeasance and mismanagement at state oil firm Petrobras, as well as hefty doses of political interference in the industry. All that makes the extraordinary technical challenge of drilling thousands of feet below the seabed even tougher.
If Brazil can fix the political problems — and the country’s energy minister urged this week a smaller role for Petrobras, which would open the door for more involvement by richer and sharper international firms — then Shell’s deep pockets and deep-water expertise could help Brazil finally turn into a major-league producer. Brazil could be the single biggest chunk of the companies’ combined oil portfolio; jump-starting production there could push output from 50,000 barrels a day to 550,000 barrels a day by the end of the decade.
“That would be good for Brazil and it would be good for global oil markets, because the market will re-tighten,” Medlock said.
The deal may even hold a ray of light for another corner of the world that has struggled to turn energy promise into reality: East Africa. Mozambique and Tanzania both have tantalizing offshore gas potential, and both would like to become gas export hubs for the Asian market. So far, though, the lack of infrastructure, concerns over government corruption and transparency, and a dearth of skilled labor have hamstrung the region’s energy development. Shell tried to get into Mozambique in years past; BG is active in Tanzania. The merger would thus bring an ambitious, gas-focused global giant to an underserviced corner of the energy world.
“I suspect that Shell covets a position in East Africa,” Jensen said. “It’s potentially a very cheap, very good source of LNG supply.”
Photo credit: BEN STANSALL/AFP/Getty