From King Coal to King Gas

Javier Blas Financial Times Posted on Friday, December 9, 2011 1:08PM EST

Javier Blas is the FT's commodities editor

If the bible for energy policy wonks is the International Energy Agency’s annual World Energy Outlook, industry executives have ExxonMobil’s The Outlook for Energy.

The 2012 edition of Exxon’s long-term report, released on Thursday, offers an insight on one of the biggest talking points in Big Oil’s boardrooms: the golden age of natural gas. The increasing importance of natural gas is behind some of the tectonic shifts in the hydrocarbon industry, including Royal Dutch Shell’s efforts to brand itself as a gas rather than an oil company; Exxon’s acquisition of U.S. gas producer XTO Energy for $25-billion last year; and BHP Billiton's takeover in July of U.S.-based gas developer Petrohawk for $12-billion.

Exxon believes that over the next three decades natural gas will overtake thermal coal to become the world’s second most important source of energy, only behind oil. The company says on the closely watched report that while crude oil will remain the “most widely used fuel” until 2040, overall energy demand will be “reshaped by a continued shift” towards greener energy sources, particularly natural gas. The company goes as far as to predict that the energy market will start to wave goodbye to thermal coal.

The forecast is not only important to oil companies, which are investing billions of dollars in gas production, but also for some mining and trading companies such as Xstrata, Anglo American, Peabody Energy or Glencore, whose profitability is closely linked to thermal coal. It is also of interest to other trading houses, such as Mitsubishi and Mitsui, which have poured billions of dollars into gas projects in the Middle East and Russia.

“Less-carbon-intensive fuels, particularly natural gas, gain market share, while coal peaks and begins a decline for the first time in modern history,” the report states. In short, from King Coal to King Gas. The trend of the report fits with Exxon’s own investment priorities; but it will be wrong to disregard the Outlook for Energy report as part of the world’s largest energy company self promotion. The conclusions fit with the talk by many energy executives, who see a growing role for natural gas in years to come.

Yet, it would be wrong too to dismiss the importance of thermal coal. The commodity is still the main source of electricity worldwide. According to the U.S. Department of Energy, coal-fired power plants account for more than 80 per cent of the electricity generated in China and India. The trend is unlikely to change in the short-term as both countries continue to build new conventional coal-fired power plants. Because the life of the generators is about 40 years, the build-up will tie China and India to thermal coal, one of the most polluting forms of energy, for decades to come.

Indeed, Exxon believes that consumption of the commodity will continue to grow for the next 15 years, mostly to generate electricity. After that, however, it sees an inflection point. “The mix of fuels used to produce electricity will change dramatically, however, as nations shift away from coal in favour of lower-carbon sources such as natural gas.”

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