Interest in natural gas has risen in recent years, stimulated by environmental concerns, price volatility, and deregulation of natural gas markets, and major U.S. energy companies have made it an increasingly important investment focus. Since the mid-1980s, the "majors"--energy companies reporting to the Energy Information Administration's (EIA's) Financial Reporting System (FRS)--have shifted production toward natural gas. The share of natural gas in their combined oil and gas production in the United States reached 52 percent in 1999. The majors' natural gas production share in Canada and elsewhere outside the United States followed similar trends. This shift and the forces underlying it are explored in a newly released article from EIA, The Majors' Shift to Natural Gas.
The FRS companies are those that were U.S.-based publicly owned companies, or U.S.-based subsidiaries of publicly owned companies, that had at least 1 percent of either production or reserves of oil or gas in the United States or 1 percent of either refining capacity or petroleum product sales. Current FRS data extend through 1999, when the cohort included 32 major energy companies.
| FRS Companies' Oil and Gas Margins in U.S. Production (1999 Dollars per Barrel of Oil Equivalent) |
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| Notes: FRS = Financial Reporting System. See text for explanation. Natural gas is converted to barrels of oil equivalent at 1 thousand cubic feet = 0.178 barrels. Source: Energy Information Administration. |
Two key factors appear to underlie the majors' growth in natural gas production. One factor is Section 29 of the 1980 Windfall Profit Tax Act, which allows tax credits for domestic production of certain qualifying fuels, including gas derived from coal seams, tight sands, shale, and other sources. The credit, which applies to fuels from wells drilled between 1980 and 1992 and is scheduled to expire in 2002, averaged $1.02 per thousand cubic feet of gas during the 1990s and boosted the effective price received by over 50 percent. Nearly half of the FRS companies reported taking Section 29 credits, mostly from coalbed methane production.
However, the most important factor behind the majors' shift to natural gas appears to be gains in the profitability of natural gas production compared to the profitability of oil production. The article analyzes changes in profitability using crude oil and natural gas upstream margins (prices received less extraction and reserve replacement costs) as surrogates for direct data on income and assets associated with oil and natural gas. By this measure, the profitability of natural gas improved relative to that of crude oil during the 1990s (see figure). The natural gas margin generally rose during the early 1980s, exceeding the oil margin first in 1993 and in 4 of the following 6 years. The majors' shift in production toward natural gas, though lagging a bit in response, followed this trend.
Natural gas appears likely to remain an attractive investment for the FRS companies. The estimated margin for gas was at a record high in 2000 and is forecast to move even higher in 2001. These margins have stimulated much new exploration and development pursuant to greater production. The majors also seem likely to take a larger role in the supply of natural gas, through increased imports of both natural gas (especially from Canada) and liquefied natural gas.
The Majors' Shift to Natural Gas is available only on the EIA website.
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- Questions about the report's content should be directed to:
- Jon Rasmussen, Office of Energy Markets and End Use
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- Phone: (202) 586-1449
URL: http://www.eia.doe.gov/emeu/plugs/plmajors.html
File last modified: October 25, 2001