Natural gas companies produced a record 3.68 trillion cubic meters (~130 trillion cubic feet) of natural gas last year, according to BP's (NYSE: BP) Statistical Review of World Energy. That's an increase of 4% from the prior year -- almost double the 10-year average growth rate -- thanks to a big uptick in production from Russia, which contributed about a third of global growth. North America, however, was the largest gas-producing region, led by the U.S., which provided 20% of global supply, followed by Russia at 17.3% and Iran at 6.1%, while Canada and Qatar round out the top five at 4.8%.
Fueling the continued growth of the natural gas market is demand. Countries like China and the U.S. are replacing coal-fired power plants with cleaner-burning gas plants. Meanwhile, Japan -- due to the Fukushima disaster in 2011 -- and South Korea have shifted away from nuclear power to natural gas in recent years. On top of the shift toward gas in the power industry, the growing global economy continues to fuel demand for petrochemical products produced by natural gas. All these factors suggest that natural gas will remain an essential fuel in the future, which is why investors should take notice of the industry.
Image source: Getty Images.
Why invest in natural gas stocks?
This growing demand leads the International Energy Agency to forecast that the global natural gas market will expand 45% by 2040. That puts gas right up there with renewable energy and increased energy efficiency as one of the three main factors that will help the world meet its energy needs over the next two decades.
This fast-paced growth will require billions of dollars of annual investment to develop new sources of natural gas as well as the associated infrastructure to get it to market. In North America alone, the energy industry needs to invest more than $400 billion over the next 20 years just on natural gas–related infrastructure like pipelines and liquefied natural gas (LNG) export facilities, which supercool the gas to a liquid form so that it can be moved by ships across the sea.
These investments, especially on the LNG side to develop integrated solutions that link gas fields to export facilities, will be crucial to meeting global demand. At the same time, these projects have the potential to generate lucrative returns for investors in the companies developing them.
The biggest natural gas producers in the world
While the entire natural gas industry should benefit from rising gas demand in the coming years, the largest producers stand to be among the biggest beneficiaries of this growth. Here are the world's five largest gas producers:
Natural gas company
Production reported in 2017 annual report
Total for the year in trillion cubic feet (TCF)
506.9 billion cubic meters
Royal Dutch Shell
(NYSE: RDS-A) (NYSE: RDS-B)
1,839 barrels of oil equivalent per day
10,211 million cubic feet per day
3,423 billion cubic feet
7,744 million cubic feet per day
Data source: Gazprom, PetroChina, Royal Dutch Shell, ExxonMobil, and BP as well as the author's calculations.
Gazprom: The world's largest natural gas producer
Gazprom is Russia's largest natural gas producer at 68% of the country's total. That also made it the world's top gas producer, with the company contributing 12% of the global supply in 2017. In addition to being the largest current gas producer, Gazprom also holds the world's largest natural gas reserves -- which are known gas supplies in the ground -- at 17% of the total. Because of that, Gazprom should be able to produce large volumes of natural gas for years to come.
Gazprom is the biggest natural gas company in Russia
The bulk of the company's gas comes from the Yamal-Nenets Autonomous Area of Russia, which is in the north central part of the country near the Arctic. One of the company's largest projects is the Yamal Megaproject, which is a massive 32-field resource that will eventually produce 360 billion cubic meters of gas per year. The field holds a massive 2 trillion cubic meters of reserves, which gives Gazprom years of growth potential.
Gazprom also owns the world's largest natural gas pipeline transmission system at 172,100 kilometers (about 107,000 miles). That's nearly 50% larger than the gas pipeline system of Kinder Morgan, which is the largest in North America. While Gazprom sells more than half of its gas within the borders of Russia, it's also one of the largest gas exporters. Not only does the company export gas via pipeline to places like Europe, but it's Russia's largest producer and exporter of LNG.
Lots of gas but a very risky investment option
Given its vast gas reserves, massive transportation network, and backing of the Russian government, Gazprom will remain the dominant force in the natural gas industry for years to come. However, because it's majority owned by Russia, it's a risky stock for investors, especially given the currently strained relations between that country's government and the rest of the world.
Image source: Getty Images.
Royal Dutch Shell: A bold bet to remain the world's second-largest gas producer
Royal Dutch Shell became the world's second-largest gas producer in 2016 after spending $70 billion to buy BG Group, which boosted Shell's natural gas production rate by 25% while also adding a large-scale LNG business and vast gas reserves. Shell produces natural gas from several countries, with its largest supplies coming from Norway, Malaysia, Australia, the U.S., and Canada. Australia is its biggest source of gas at more than 600 BCF in 2017, which is more than double the output of its other top regions.
Shell is one of the world's largest LNG producers
While Shell produces a significant amount of gas that flows through pipelines to end users, it's one of the dominant forces in the global LNG market. Last year, the company manufactured 33.2 million metric tons of LNG, -- good for 12% of the worldwide market -- which was 7% higher than the previous year due to a contribution from assets acquired along with BG Group as well as the strong performance of its legacy facilities. One of the company's major sources of LNG is the Chevron-operated Gorgon facility in Australia, which it also co-owns with ExxonMobil. The $54 billion facility came online in early 2016 and, despite some ups and downs, was a meaningful growth driver for Shell last year.
Shell has several other LNG export facilities under development that will help it boost gas output going forward. One of the largest is LNG Canada, which is a 40 billion Canadian dollar ($30.4 billion) development that Shell could green light later this year. That project would allow the company and other producers to increase production from the Montney and Duvernay shale plays in Western Canada.
In addition to shipping LNG produced at its liquefaction terminals, Shell is also involved in facilitating the trade of LNG on the global market. It buys LNG volumes produced by third parties at fixed prices, which it then sells at either oil-linked or spot-market (which is the going market rate) prices. Those LNG trading activities boosted Shell's LNG sales volume to 66 million metric tons in 2017, which was 16% higher than the previous year. Shell's LNG sales volumes should continue increasing in the future, since the company has a contract to buy all the LNG produced at Kinder Morgan's Elba Liquefaction plant near Savanah, Georgia, which will start up over the next year.
LNG makes Shell a compelling investment option
With a vast supply of natural gas reserves, an integrated business to move this gas to market centers, and a large pipeline of expansion projects, Royal Dutch Shell is emerging as a dominant force in the rapidly growing LNG market.
ExxonMobil: The oil giant produces a lot of gas
While most investors think of Exxon as an oil giant, it's also one of the largest natural gas producers in the world. Like Shell, Exxon produces gas all across the globe, with the U.S. and Asia its two largest supply regions. Exxon is currently the second-largest natural gas producer in the U.S. behind EQT Corp, which moved past the oil and gas giant last year when it acquired Rice Energy.
Exxon is a leader in the U.S. gas market
In addition to being one of the top gas producers in the U.S., Exxon, through its XTO Energy subsidiary, is the nation's largest holder of gas reserves. Overall, it boasts 150 TCF of gas reserves across North America, highlighted by its large acreage position in the Piceance Basin in northwestern Colorado. However, the bulk of XTO's current production comes from Texas, where it owns wells in places like the Permian Basin and Barnett Shale. In addition to that, the company is also a large-scale operator in the Marcellus and Utica Shale plays in the Appalachia region.
Meanwhile, Exxon has an extensive portfolio of LNG assets across the world. Some of the highlights include its stake in Chevron's Gorgon facility in Australia, a joint venture with Qatar Petroleum to develop the North Field -- which is the largest gas field in the world -- and the PNG LNG Project in Papua New Guinea, which produced 8.3 million metric tons of LNG last year. Exxon also has several LNG facilities under development, led by its world-class gas resource in Mozambique.
Don't overlook the gas potential at this oil giant
While oil will continue to be what drives ExxonMobil in the future, especially since its current expansion plans focus on developing its oil resources in the Permian Basin and offshore Guyana, the energy giant will remain a major gas producer in the coming years thanks to its vast LNG and U.S. resources.
Image source: Getty Images.
PetroChina: Fueling one of the world's biggest energy-consuming economies
PetroChina is the publicly traded arm of the state-owned China National Petroleum Corporation. The company is the country's biggest natural gas producer -- with a 70% market share -- and second-largest oil producer. Overall, 92.1% of its gas output and 83.8% of its oil production comes from its home country, which makes it a crucial supplier of China's energy needs. That's worth noting, since the country is currently the second-largest oil consumer and third-largest gas market.
PetroChina is the leading gas company in China
PetroChina produces natural gas from several fields in the northern part of its home country as well as others in the southwest. The Changqing Oil and Gas Region in the north central part of the country is the company's largest gas producer at 33.3% of the total in 2017. The Tarim Oil and Gas Region, which is in the northwest part of the country, is the second-largest gas producer at 24.3%. Finally, the Chuanyu gas region supplies 19.7% of its gas, while all others, including its overseas investments, contribute 22.7% of its production.
The company has made several notable investments to expand outside of China in recent years. In 2012, it paid CA$2.2 billion ($1.7 billion) for a 49.9% stake in Encana's Duvernay gas field and also bought a 20% stake in Royal Dutch Shell's shale-gas assets in the country. In addition to that, PetroChina bought stakes in gas-related assets in Australia as it works to lock up resources so that it can meet China's growing demand.
PetroChina is also China's largest natural gas transportation company, operating nearly 32,000 miles of gas pipelines in the country, which represent the bulk of its pipeline network. The company operates three major West-East Gas Pipelines that move gas from production fields in the country to demand centers as well as several other pipeline systems.
China is both a risk and a reward
While PetroChina is one of the biggest gas suppliers to one of the largest and fastest-growing gas markets, it's a higher-risk investment option since the Chinese government controls the company. However, with the company currently on track to boost its natural gas output up to 120 billion cubic meters by 2020 -- which represents 7.4% annual growth -- it's an interesting stock to watch given China's rapidly growing gas demand.
BP: Growing into a gas giant
BP, like Exxon and Shell, is a diversified global oil and gas company. However, while its oil business tends to garner more attention, the company has quietly become a leader in the natural gas space. Currently, the company produces the bulk of its gas from three regions: South America, the U.S., and Russia.
BP is bulking up its gas business
South America is BP's biggest source of gas at 2.3 BCF/D per day in 2017, which includes its share of output from noncontrolled entities. The bulk of that came from Trinidad and Tobago -- where it accounts for half of the country's production -- and Argentina, where it owns an equity stake in a joint venture with China's CNOOC.
The U.S. is BP's next-largest gas-producing region at 1.7 BCF/D. While the company gets some gas from the deepwater Gulf of Mexico and Alaska, the bulk of its output comes from the lower 48 states, though the company only operates in five of them: Colorado, New Mexico, Oklahoma, Wyoming, and Texas. That production base will get a near-term boost, because the company is acquiring the bulk of BHP Billiton's U.S. onshore assets, including its position in the gas-rich Haynesville shale as well as land in the oilier Permian Basin and Eagle Ford Shale.
Finally, BP gets 1.3 BCF/D of its gas production from its 19.75% stake in Rosneft, which is a state-owned oil and gas company in Russia, where it's one of the largest gas producers. While the bulk of Rosneft's gas output is from its home country, the company also produces gas in Canada, Egypt, Venezuela, and Vietnam. BP's relationship with Rosneft has become increasingly important, especially after it signed a strategic cooperation agreement with the company last year to develop natural gas projects in Russia and elsewhere.
A gas-powered future
BP's acquisition of shale gas assets in the U.S. and its deal with Rosneft position the company to increase gas as a percentage of its production in the coming years, which is one of the company's strategic pillars. In the company's current view, it sees gas accounting for about 60% of its output by the middle of the next decade, up from around 50% in 2017. That gas-fueled growth makes BP an interesting natural gas stock for investors to consider.
One of the best ways to invest in natural gas
With natural gas demand expected to continue growing at a fast pace in the coming years, energy companies need to significantly boost their output of the cleaner-burning fuel to meet market demand. However, because they can't ship that gas by tanker as they do with oil, the industry needs to also invest in LNG infrastructure. While there's currently an LNG building boom underway, it might not be enough to meet the world's needs.
That's why investors should focus their attention on companies with a large and growing portfolio of LNG projects like Royal Dutch Shell, which is becoming a global leader in the field thanks to its acquisition of BG group. That focus on LNG could be just the fuel this energy giant needs to outperform other gas-producing companies in the decades ahead.
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