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Majors' Shift to Natural Gas

September 1, 2001

Introduction and Summary

Interest in natural gas has increased steadily in the last decade or so. The clean-burning properties of natural gas compared to other fossil fuels together with increasing concerns about air quality have attracted environmental interests. The full deregulation of U.S. natural gas markets in the early 1990's and increased globalization of natural gas trade in recent years have attracted the interests of investors. Increased volatility of natural gas prices, including recent unprecedented price spikes, has raised concerns about this fuel in households and businesses alike.

Major U.S.-based energy producers have shown a growing interest in natural gas as well. For the purposes of this report, the "majors" are the companies that report to the Energy Information Administration's (EIA's) Financial Reporting System (FRS) . Natural gas has become an increasingly important target of investment for the majors. The clearest evidence of heightened interest is the shift in the composition of natural gas production relative to oil production. Figure 1 shows the share of natural gas in the majors' combined oil and natural gas production in the United States (natural gas measured in barrels of oil equivalent (BOE)). The shift to natural gas began in the mid- 1980's and continued on an upward trend thereafter. In 1999, natural gas accounted for 52 percent of the majors' U.S. oil and natural gas production. Prior to the mid-1980's, the natural gas share was on a steady downward trend. This path was surprisingly smooth in spite of the regulatory changes and turmoil affecting U.S. natural gas markets over the past 25 years.

The majors' shift to natural gas production has not been confined to the United States. Figure 2 shows that the natural gas share of the majors' production rose more sharply in Canada than in the United States over the last 15 years or so. Outside North America, the shift to natural gas paralleled the shift in the United States. All regions showed an increase in the share of natural gas in the majors' combined oil and natural gas production.

The focus of this report is on the United States. This report reviews some of the factors that underlie the majors' shift to natural gas in the United States. Key findings include:

  • Growth in the majors' U.S. natural gas reserve base came primarily from the companies' own exploration and development efforts. Mergers and acquisitions played a relatively small role.
  • The profit margin on the majors' U.S. natural gas production, as measured by the difference between prices received and the full costs of production, has generally increased relative to the profit margin on oil production, beginning in the early 1980's.
  • A decline in natural gas production costs relative to oil prices as well as a general rise in natural gas prices relative to oil prices were important in the growth of natural gas margins relative to oil margins.
  • The majors responded to the differential in profitability by shifting their U.S. upstream production toward natural gas.
  • In the 1990's, the availability of tax credits for non-conventional fuels production (mostly coalbed methane) under Section 29 of the Windfall Profit Tax Act appeared responsible for much of the growth in the majors' U.S. natural gas production.
  • A number of recent developments favor a larger role for the majors in U.S. natural gas supply in the future. These developments include the majors' future growth in Canadian natural gas production, prospects for coalbed methane production, the possibility of an Alaskan natural gas pipeline, and the majors' growing role in liquefied natural gas (LNG) trade.
  • EIA's short-term oil and natural gas price forecasts for 2001 and longer term forecasts of natural gas demand suggest a continued shift to natural gas.

    This analysis draws on data from the EIA's Financial Reporting System (FRS) and the EIA's annual U.S. Crude Oil, Natural Gas, and Natural Gas Liquids Reserves report. The FRS is an annual survey that collects, through Form EIA-28, financial and operating information from U.S.-based major energy producing companies. The selection criteria for a U.S.-based company to be designated as a major require ownership of 1 percent or more of U.S. production or reserves of oil or natural gas or 1 percent or more of U.S. refinery capacity or refined product sales. The list of companies reporting to the FRS is in Table A1 of the Appendix. The data are reported by lines of business, including U.S. and foreign oil and natural gas production. Expenditures for exploration, development, and production are reported separately for U.S. onshore and offshore and seven foreign regions as are reserves and production data.

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