THE WALL STREET JOURNAL: Big Oil Firms Join Hunt For Natural Gas in U.S.: "The world's three largest energy companies -- Exxon Mobil Corp., BP PLC and Royal Dutch Shell PLC -- are stepping up their hunt for natural gas in a place they have largely ignored in recent years: the continental U.S.": Tuesday 29 Nov 2005

The world's three largest energy companies -- Exxon Mobil Corp., BP PLC and Royal Dutch Shell PLC -- are stepping up their hunt for natural gas in a place they have largely ignored in recent years: the continental U.S.

After years of selling off aging U.S. fields to focus on the global search for huge oil and gas deposits, the industry giants have been drawn back by high natural-gas prices, advances in extraction technology and increasing competition for resources abroad, often in politically risky parts of the world.

"This is an about-face," says Art Smith, chief executive of John S. Herold Inc., a Norwalk, Conn., energy research and consulting firm.

The turnabout is likely to boost crucial U.S. supplies of natural gas. Recent difficulties in ramping up domestic production of the fuel, which heats most American homes and generates much of the nation's electricity, have led to fears of shortages as early as this winter. But the big companies' plans are also expected to squeeze the smaller independent energy developers who have pioneered new gas-extraction methods and have thrived in the absence of competition from the majors.

Big Oil's new interest highlights significant changes in the U.S. onshore energy industry. Gone are the days when companies looked for big reservoirs of oil trapped underground in places like Texas' Permian Basin. In fact, the oil giants largely lost interest in the U.S. when these deposits began to be sucked dry. This time, they aren't looking for oil because they think any untapped pools would be too small to be worthwhile.

Instead, the majors are homing in on so-called unconventional gas fields, where gas is locked in giant swaths of coal, sandstone or shale. Using new technologies, companies can crack open these rocks and coax out large quantities of gas. Making the economics more compelling is the fact that, unlike oil, the large quantities of gas needed by the fuel-hungry North American market can't be transported from overseas. Already, the search for these new gas fields is fueling an energy boom throughout the Rocky Mountains.

Unconventional gas fields "can cover a large area and hold a tremendous amount of reserves," but the difficulty is finding the technology to get the gas out, says Trevor Rees-Jones, president and chief executive of Chief Oil & Gas LLC, a privately held Dallas company that produces gas in the Barnett Shale, a hot unconventional field outside Fort Worth, Texas.

Five years ago, the Barnett produced negligible volumes of gas. Today, new technologies -- like using high-pressure water to break open the rocks -- have turned it into one of the nation's largest gas producers. Still, only about 10% of the gas known to be locked in the shale can be extracted with existing methods. The industry expects the majors, with their deeper pockets, to figure out ways to wring out more.

If successful, the effort to get more gas out of previously unproductive formations could be tried elsewhere around the world and might yield much-needed energy supplies. Concern about the oil industry's ability to keep up with galloping global demand is mounting. Last month, U.S. Energy Secretary Samuel Bodman asked an advisory committee of industry executives to provide him with an outlook for global oil and gas supplies. His chief question was whether incremental oil and gas supply could be brought online at a reasonable price to meet future demand without jeopardizing economic growth.

In 2004, Exxon, BP and Shell, the industry's biggest companies in terms of market capitalization, spent $6.9 billion on U.S. production, according to John S. Herold, although costly Gulf of Mexico projects accounted for much of the total. The companies are expected to spend considerably more in 2005, as they move ahead with new projects and exploration costs rise.

In the past few months, BP and Exxon have committed to long-term development of U.S. fields they have held for years but haven't given much attention. Shell is taking a different tack, and is intent on acquiring new fields to establish larger U.S. natural-gas holdings.

While tapping these new gas reserves probably will require costly technology, the high price of natural gas in the U.S. makes the investment attractive. In New York, natural gas has been trading well above $10 per million British thermal units since late August, more than quadruple its price at the beginning of the decade. Prices are expected to stay high for years.

"The pricing outlook for North American natural gas is so favorable that these projects are very attractive," says Tom Ellacott, a senior analyst with Edinburgh, Scotland, energy consulting firm Wood Mackenzie.

In the late 1970s and early 1980s, the last time energy prices boomed and there were widespread fears of shortages, the big companies scrambled to develop giant fields in the deep waters of the Gulf of Mexico and Alaska. The new fields sparked a surge in production and technological innovations in the oil patch that ultimately helped drive down global energy prices. But they ushered in an era of megaprojects, which took years to execute and required billions of dollars in investments before production could begin.

The new crop of wells differs from the megaprojects of the past. Production from unconventional wells can begin months after the initial investment and continue for decades. Megaprojects, by contrast, can produce huge scores if they hit a large pocket of oil or gas, but they also can be quickly depleted.

In their latest U.S. push, the big oil companies are facing more competition than in the past. They are moving into regions already crowded with competitors and using techniques refined by independent energy producers. In recent years, companies such as Calgary-based EnCana Corp. have demonstrated the potential for strong returns and production growth from unconventional wells. Competition for rigs and specialized oilfield services "is already tough," says Shannon Nome, a J.P. Morgan oil analyst, but service companies will likely favor the majors, making it tough for independents to execute their drilling programs.

In the Barnett Shale field, independent operators already have a new neighbor: Royal Dutch Shell. The Anglo-Dutch company says it is "rediscovering" unconventional gas as a way to increase production. In August, it became the first major oil company to enter the Barnett field when it bought the rights to explore 25,000 acres. It also has another agreement with a privately held company to jointly explore in several more counties.

But Shell doesn't plan to stop there. Linda Hubner, the company's head of U.S. onshore exploration, says it is evaluating other ways to acquire more U.S. natural-gas production. "The growth in the onshore is coming from the unconventional plays, and there's a significant growth potential there," she says.

Ms. Hubner says Shell plans to use its large research operations to drill better wells more efficiently and capture more gas. Shell is so bullish on the economics of U.S. natural-gas production that it recently swapped an interest in the offshore Tahiti field, one of the most anticipated deep-water fields in the Gulf of Mexico, for natural-gas fields in South Texas.

BP plans to invest $15 billion over the next decade in U.S. exploration and development, including $2.2 billion announced last month to double production in the Wamsutter field in Wyoming. The latter investment includes $120 million for technology field trials to test out better ways to drill and operate wells in unconventional gas fields. "I think there's a bit of subsurface magic that the majors can bring to this," says Alan Hopwood, BP's vice president for North American natural gas.

Exxon Mobil is taking a different approach. Like BP, Exxon holds the drilling rights to a large number of acres in the Rockies that it isn't aggressively developing. In June, it finalized a deal with XTO Energy Inc. to allow the smaller company to drill gas wells on some of the land it holds in Colorado's Piceance Basin. In effect, Exxon outsourced the work required to develop the acres. XTO will do the drilling and split the revenue with Exxon. On the rest of its acres, Exxon plans to use proprietary technology to break open the sandstone. The company believes it can extract more than 35 trillion cubic feet of gas from its Piceance land -- more than one year's consumption in the U.S.

Last month, Exxon made a similar deal with Newfield Exploration Co. for 52,000 acres in South Texas.

A spokesman for Exxon declined to discuss specifics of the transactions.

Write to Russell Gold at russell.gold@wsj.com