From Oil to Natural Gas

Don’t look now, but Big Oil is rapidly transforming itself into Big Nat Gas. Royal Dutch Shell expects more than half its output to be gas by 2012. Seven of eight projects Exxon Mobil completed last year were gas projects. ConocoPhillips has bought an Australian gas firm, and Chevron is aggressively pursuing a liquefied natural gas project down under.

“There are several things at work here,” explains Chris Mayer. “One is that new oil deposits, like pitchers who can hit, are becoming harder to find. They are also costlier. The Kashagan oil field, which was supposed to be a great find in the Caspian Sea, is seven years behind schedule and billions of dollars over budget.

“Another factor at work is that 90% of the world’s oil reserves are in the hands of national oil companies. They are off-limits for the likes of Exxon and others.”

In contrast, natural gas deposits are not only more plentiful, they’re getting cheaper to develop. “The cost to build an offshore LNG terminal,” says Chris, “is about half of what it was only two years ago.” On top of that, the world’s use of natural gas is growing at a faster rate than oil. And it has the lower-carbon thing going for it.

“However, I don’t expect the price of natural gas to rise in a big way anytime soon. There is simply too much of it.”

That won’t last forever. “Longer term, the current low nat gas price is not sustainable, as most of the industry seems to lose money at these prices. As old contracts (made when natural gas prices were higher) roll off, these producers will start to shut down production.” That means less supply, and then higher prices.

You can well imagine pure-play natural gas stocks can be an investing minefield. But readers of Chris’ premium advisory Mayer’s Special Situations have navigated it successfully: They collected a 107% gain in 2008, and they’re up 111% on a nat gas play bought just over a year ago -- even as the price of gas has gone nowhere.