Breaking up is hard to do
A progressive idea for oil and natural gas
By Kelly Gerry
I grew up in Alberta, Canada. As in Texas, we were all about oil & gas. A term. A marriage as firm as the ground below our feet, where oil and gas formed. Producers would tell you how much of “this” they made and how much of “that” they made. “‘This and that.” Oil & gas. Inseparable. I don’t believe that should be the case anymore, at least in North America.
It may sound revolutionary, but that shouldn’t surprise us. The relationship between oil & gas has been evolving for a century, perhaps it is now set up for a revolution. In the beginning of the North American oil boom, gas was considered a useless byproduct; producers burned it off. From there, gas evolved to become a recovery aid that could pressurize oil formations. But what we really wanted still was oil. A commodity we put in tanks and easily ship down the road to make the world’s favorite end product – gasoline. Gas was the submissive partner to the mighty ‘blood of industry’ – oil.
A new gas culture develops
But there was so much gas. As the 1970s came, and the culture of the developed world began to consider things such as the finite nature of natural resources and the impact extracting those resources has on the earth, the producers’ focus changed. Burning gas no longer made sense in a world that was starting to become more sensitive to the environment. With this challenge came an opportunity: Gas was cheap and abundant. When you burned it – it was clean and hot. It was a building block for manufacturing. And, although the environmental movement was just beginning, burning gas produces less carbon dioxide and sulfur. This would become very important in its future.
Communities that were close to sources of gas benefited by the development of distribution networks. Those residential, commercial, and industrial users liked it. A lot. It was better. Gas got a little R-E-S-P-E-C-T.
Things didn’t change drastically. Oil remained the world’s most strategic commodity, enjoying a risk-based pricing model that separated it from gas. Those focused on the oil business still didn’t see gas as a competitive commodity. But the challenges that gas overcame made it strong. That strength attracted innovative thinking and capital efficiency. And then, events took place that would lead to the true emergence of gas and would begin to stress its relationship with oil. What happened?
1. The shale gas revolution. It allowed us to produce gas in abundance, in areas closer to end-markets, and even in areas where we didn’t think it was recoverable.
2. Gas removed coal’s competitive edge. The distant cousin and figurative black sheep of the family — coal — couldn’t compete and wasn’t appreciated, allowing natural gas to have a huge demand forecast and access to capital. Gas had a new partner — power — and it has a big need.
3. Gas was going places. LNG and conventional transmission and distribution systems expanded in all directions, supported by significant capital investment — even under stringent regulation. Gas has gone global. It’s abundant and available in areas it previously wasn’t.
4. Climate change and public outcry became a critical issue. The call to reduce carbon emissions (Gas was the clear winner for on-call supply.) became a rallying cry for the general public. Governments are listening. Gas wins in this environment as a relatively clean and reliable source of energy.
5. Oil & gas companies have become energy companies. The move to a more agnostic view of supply has made oil, gas, wind and other forms of energy comparable commodities that are viewed with different characteristics and advantages. The way it should be.
These elements are not exhaustive but have supported gas becoming the clear winner and the standard for base load, providing a secure and clean energy source for most of the developed world.
I am not suggesting that there is no need for close association. Oil & gas (and other energy sources) will be linked for a long time to come. However, they need to stand apart. Why?
1. Oil is bad for gas. This really is the main issue. The public outcry against oil is very real, becoming less partisan, and brings significant consequences, particularly from a public demand and regulatory perspective. The gas industry hurts itself by not distancing itself from oil.
2. Oil has a strong position in the transportation sector. That is a huge market. Gas has a strong and growing position in the power, heating and manufacturing sectors. Transportation may emerge but not yet. In other words, oil & gas live in the same house, but sleep in different bedrooms.
3. Oil’s relevance is significant but is either peaking or on the decline. This is especially true in the developed world. How fast the transportation sector moves to noncarbon based energy drivers is uncertain, but the industry is rapidly evolving. Natural gas has a stable current position and is emerging as the core source of reliable energy for years to come.
4. The continued association with oil has prevented other partnerships. Namely, oil’s corporate dominance has prevented the gas sector from partnering with other industries that are on the rise in the new energy economy. That is changing, but needs to do so more rapidly. The emerging partnership with the renewables sector blends beautifully with gas in maximizing effectiveness and efficiency while minimizing environmental impact.
This isn’t to say that oil is bad and gas is good. Or that oil doesn’t have a place in the energy mix. Of course it does. But the world is rapidly changing and the ties that have bound the two together have broken down. Gas needs to move out for its own good.
Capital Alliance Corporation is a Dallas-based investment banking firm with an extensive international reach and a 40-year history of providing trustworthy advice to private company shareholders who want to sell their businesses. Our team has deep operational and M&A experience across many sectors, including energy.