The other comparative advantage of a huge company like ExxonMobil is that it has enough capital to make the necessary infrastructure investments to enter the shale gas game in a major way. In 2010 it acquired XTO Energy Inc. (XTO) in a merger operation that aimed at combining both companies’ strengths in order to further discover growing natural gas potential in the US. In my view Exxon overpaid for XTO, but with time it should pay off because it’s part of a long-term strategic move to dollar cost average in effect of the purchase. The plan is to progressively weed out the weaker competitors, control domestic energy resources, and make it much harder for smaller independent companies to gain access to these resources on terms as attractive as were possible in the past. A classic bigger-fish-eats-smaller-fish situation. Giant corporations can bring unique technological acumen to complicated projects that always gives them an advantage in this type of environment that is very capital intensive to begin with. And no companies are better positioned in this regard than ExxonMobil and Chevron.
2). Chevron Corporation (NYSE: CVX)
Chevron doesn’t want to be left behind. The second-biggest E&P company is a new player in the shale gas business, but it is thinking big and expanding fast its shale gas acreage by purchasing land in Pennsylvania, Canada, and Eastern Europe. Chevron is now the largest leaseholder in Pennsylvania with more than 700,000 net acres of leases in the Marcellus Shale which alone provides 850 billion cubic feet of proven natural gas reserves, enough to supply 100% of US natural gas needs at the present level for about 7 months. Additional acreage in Michigan is currently being evaluated. Last December Chevron bought a 50% stake in the Kitimat export project in British Columbia and is now the only bidder in a tender for shale gas exploration rights in Lithuania. The company has also drilled two wells in Poland and is preparing for a third. This is important because Poland and the Baltic Region are believed to have the largest shale gas reserves in Europe along with the UK. As long as the EU doesn’t ban hydraulic fracking on ecological grounds (something that is under discussion but that only France and Bulgaria have done so far) there is a great future for big American energy corporations to use their technology know-how to their advantage in this area.
Everyone wants a piece of the action
In less than 5 years, 40,000 wells have been drilled in Texas, Pennsylvania, Oklahoma and North Dakota. Shale gas now represents 34% of America’s natural gas production. In 2005 it was less than 2%! There has never been any other energy source in history that increased its market share from essentially zero to more than 30% in only seven years. And that number is expected to grow to 60% in 2035, contributing $230 billion to the annual US gross domestic product and turning the US into the world’s largest gas producer.
The shale gas revolution could turn out to be a successful example of trickle-down economics by creating a lot of activity in the service industry. Drillers will need new softwares, lawyers, mining rights specialists and so forth. But most of all, it is about to give the US a major competitive advantage: cheap energy. To benefit from this lucky break, American companies are converting major parts of their coal-power plants into natural gas power plants. From Chicago to San Diego, US companies are now saving $400 million dollars every day on their electricity bills. That amounts to a 10% reduction of their production costs, a huge comparative advantage over Europe and Asia. According to the Boston Consulting Group in 2015 production costs differences between America and China could be virtually zero in many sectors! IT firms that make most of their sales revenues in the US will therefore be able to bring back 30% of their production into American soil before 2020. General Electric Company (NYSE:GE) has just brought back to Kentucky part of their Chinese production of water-heaters. And Caterpillar Inc. (NYSE:CAT) cancelled in 2012 the construction of a new factory in China to build it in Georgia instead.
It seems hydrofracking could give Uncle Sam his manufacturing revenge over China sooner than expected…
The article Is The Shale Gas Boom A Second Gold Rush? originally appeared on Fool.com and is written by Pierre De Vitton.
