If you see energy demand in Asia continuing to grow robustly and expect many of the big opportunities for private-sector energy companies to be in the gas business then it would be a good idea to buy a company like ... Unocal – strong in Asia and gas, with good upstream technology to boot.
If you also believe, as most analysts do, oil and gas prices are going to move higher over the long term, or at least not weaken significantly, then you are unlikely to expect energy assets to become much cheaper. Goldman Sachs reckons spikes of up to $105 a barrel are possible in the next few years. In fact, the $18bn price, which includes net debt, ChevronTexaco has agreed with Unocal for its friendly takeover could end up looking like a bargain, especially when 75% of the payment is being made in ChevronTexaco stock.
If, however, you cannot make up your mind about oil prices and you do not want to disappoint your shareholders by buying expensive-looking energy assets instead of lavishing more money on them through share buy-back schemes and special dividends, then $18bn for Unocal probably looks a bit steep. Wait for commodity prices and equity valuations to fall, then swoop for, say, BG Group – one of a shrinking band of independent, medium-sized firms with an attractive portfolio of assets. The risk, however, is that you will miss out.
The fact is that growth prospects for big oil companies through the drillbit are increasingly rare. The largest oil companies have little choice but to buy other oil companies if they want to grow. BP's production-growth statistics, for example, have taken on a healthy sheen only because of the company's TNK acquisition in Russia (which, as has been well documented, carries its own risks).
ChevronTexaco seems to have adopted the view that progress in the energy industry depends on long-term thinking, not on adherence to rigid, short-term financial parameters. In February, David O'Reilly, the company's chief executive, told Cambridge Energy Research Associates' conference in Houston that the energy industry is at a "strategic inflection point, a unique place in our history". He predicted that the era of cheap oil and gas is ending, as supply struggles to keep up with burgeoning demand. Asia – especially China, but also India – has done much to reshape the market, he noted. Significantly, in the statement announcing the merger, O'Reilly claimed that while the merger's immediate benefits are "tangible", its "longer-term value is even more compelling".
The price is right
ChevronTexaco is not alone in adopting this approach: Occidental, for example, paid what seemed like a high price for upstream acreage in Libya earlier this year. But this was not, as some observers suggested, because it got its sums wrong. Its high bids make economic sense in the context of its own long-term expectations for energy prices and the value it puts on the need to get its hands on the best assets available before someone else does.
This approach could herald a revival of energy sector M&A activity, which has gone quiet since Conoco and Phillips merged in 2002.
In Houston, O'Reilly highlighted another problem for consumers generally and private-sector oil firms in particular – that the era of easy access to energy is over. Inevitably, the crude-oil business will see national oil companies (NOCs) growing in influence very quickly in the next few years because of their vastly superior reserves and because, as their financial resources grow and technical abilities improve, they need international oil companies (IOCs) less and less.
However, the same cannot be said of the gas business. The very high capital requirements, sophisticated technology and market access required to launch large gas projects means IOCs remain more dominant in this area. Qatar Petroleum is no slouch as an energy company, but has opted to bring in big Western firms to develop its gas industry as quickly as possible.
Before they merged in 2001, neither Chevron nor Texaco was regarded as a heavyweight in the global natural gas business. But, combined, they have made a stronger gas combination. The Unocal purchase, while unlikely to be trouble-free (ChevronTexaco has the difficult problem of absorbing controversial Burmese assets), is a logical extension of that process, consolidating the firm's position in the market area where big energy companies will see the bulk of their growth. ChevronTexaco says the acquisition will increase the share of gas in the group's portfolio by 5 percentage points to about a third of the oil-equivalent total.
In 2003, ChevronTexaco set its Global Gas unit to pull together the disparate elements of its two constituent companies' gas businesses and has been assiduously building its gas operations ever since. Through its joint venture with South Africa's Sasol, it is at the forefront of gas-to-liquids (GTL) development. Sasol Chevron's 34,000 barrels a day (b/d) Oryx scheme in Qatar is due to start up next year, while Chevron Nigeria is the majority shareholder in Nigeria's Escravos GTL, where the engineering, procurement and construction contract has just been awarded.
While beefing up the firm's presence in the Gulf of Mexico and the Caspian, the merger will be most significant in Asia-Pacific, where most demand growth is expected. ChevronTexaco's Asia strategy is anchored on Australia's 40 trillion cf Gorgon field, which will form the basis of a liquefied natural gas (LNG) project, its share in the North West Shelf Venture and stakes in the Jansz and Io gas discoveries. Unocal, meanwhile, markets gas through Indonesia's Bontang LNG.
ChevronTexaco has also established a strong position in the Middle East and the Atlantic basin. It plans to supply its Port Pelican LNG import terminal in the US from plants in Nigeria and Angola. The latter has, after years of delay, shown signs of moving forward recently.
Few analysts see much downside for gas prices. That is changing the perception of the attractiveness of gas-sector opportunities. With oil prices around $50/b, GTL schemes, for example, look far more lucrative than they did a couple of years ago. As a result, GTL developments will accelerate. Projects will, of course, be tapping into a huge, established market. At around 27m b/d, global middle distillates consumption far exceeds the size of the LNG market, at around 2.9m boe/d, points out Syntroleum. In three years, it says, GTL projects have been announced with combined capacity equal to a third of the LNG market, which took 30 years to develop.
Companies such as ChevronTexaco that have positioned themselves early to capitalise on the blossoming global gas industry will be at an advantage. As John Gass, president of ChevronTexaco Global Gas, said at March's Gastech conference, in Bilbao: "If the 20th century was the age of oil, then the 21st century certainly will be the age of natural gas."
It may sound grandiose, but it is true – gas is plentiful, less damaging to the environment than oil and IOCs have better access to it than they do for oil. That is why paying for gas-rich assets will ultimately be worth it. Maybe Eni and CNOOC, both linked with buying Unocal, will play harder next time.