Supermajors slow to enter generation sector

Ann de Rouffignac
OGJ Online

With trillions of cubic feet of natural gas under their control and demand for gas and power exploding, major oil companies have begun linking gas to electric power generation.

�The highest value for gas may be found in power generation. It [electricity] used to be the last option for gas. Now it may be the first,� says Gerald Keenan, energy strategy partner at PriceWaterhouseCoopers in Chicago.

Among the supermajors�ExxonMobil Corp., Royal/Dutch Shell Group, and BP Amoco PLC�Shell and BP Amoco have the most advanced strategies. BP Amoco recently estimated the global gas and power economy�at $1.3 trillion/yr�is nearly twice the size of the global oil economy.

In recognition of the growing importance of electricity to its overall business, BP Amoco recently raised gas and power to the same organizational level as exploration and production, refining and marketing, and chemicals.

It seems natural for the integrated major oil companies to participate in the entire chain of downstream gas which includes electricity, analysts say. The majors are used to taking a lower-value product like oil and turning it into differentiated higher-value products. With gas they can do the same thing, Keenan explains.

They can take natural gas and turn it into other differentiated products of electricity. Electricity can be differentiated by time, location, type (peak load or base load), and expanded to include ancillary services or activities related to transmission of power to the end user.

�If you think of a refinery as a series of plants, electricity is similar with a portfolio of generating plants in a single region,� says Keenan. �It is simply the same kind of downstream integration they are familiar with.�

Nonetheless, oil companies have not rushed to make power company acquisitions and, despite their obvious engineering and process expertise, their participation in building independent power plants has been tentative.

�They have such striking capability in their engineering, financial, and business acumen,� says Robert Beck, vice-president of the Lukens Consulting Group Inc. �But there is still not much activity in the area�just dribs and drabs in terms of electricity activity.�

Power plant development requires speed and flexibilitiy, says Beck.

�The fleet of foot like Calpine or AES are getting deals done,� says Beck. �The oil companies have a much more ponderous process that might be good for developing billion barrel oil fields but not in getting a power plant developed.�

Some observers say the majors are beginning to recognize they are leaving a massive chunk of the energy market to other companies. �It [the merging of gas and electricity] has caught their attention. If they don�t take advantage of that, they are nothing but producers with stranded gas someplace,� says Steve Smith, analyst with Dain Rauscher Wessels in Houston.

Other analysts suggest these companies are merely biding their time while electric deregulation unfolds.

�They can let competitors do the groundbreaking work for them and allow deregulation to develop,� says Chris Stavros, analyst with PaineWebber Inc. in New York. �When it looks like a place they need to get in, they will.�

Two giants, Royal Dutch/Shell and BP Amoco, are clearly taking steps to develop the linkage between gas and power. ExxonMobil is very cautious regarding electricity. But analysts say the biggest nonstate oil company in the world can just buy what it wants when it gets ready.

Royal Dutch/Shell
At this time, Shell has a dizzying array of separate business units concerning gas and power. Royal Dutch/Shell operates Coral and Shell Energy Services in the US, Shell Energy in Europe, Shell Gas Direct in the UK, and jointly owns InterGen with Bechtel.

But the big multinational is clearly in the midst of globalizing its business units and activities to bring focus and change to its gas and power businesses.

�Convergence in the market is reflected in the structure of Shell�s businesses. It is a natural development. It�s good for customers and it�s likely to continue,� said Linda Cook, CEO of Shell Gas & Power in a speech at the Global Gas Summit this spring.

The company is in discussions with Bechtel to increase its stake and control in InterGen. Sources say Shell wants to increase its support for marketing and trading of gas and power with physical assets through InterGen.

�Shell is in advanced discussions with Bechtel to expand the InterGen joint venture,� says Jimmy Fox, spokesman for Coral Energy, a Shell affiliate. �Discussions are ongoing to combine the international and national units of InterGen and add to that certain physical assets held by Coral.�

In terms of leveraging gas and power, Shell will become the preferred gas supplier and power marketer for the worldwide power generation belonging to InterGen, Fox says. InterGen operates or is constructing 5,190 Mw and has contracts or bid awards for more power plants totaling 7,170 Mw.

Sources surmise that, once Coral�s physical assets are transferred to InterGen, Coral�s trading and marketing operations may be consolidated into a larger marketing and trading business unit of the Shell Gas & Power Group. Shell has indicated to analysts that it plans to globalize its marketing and trading operations to benefit from its established worldwide brand name.

�Most certainly Shell will not only restructure InterGen but probably rename it as well,� suggests Keenan of PriceWaterhouseCoopers. �If they are going to put a lot of money into something, they want to be in charge.�

Supermajors are accustomed to being in charge and don�t particularly relish the role of captive ownership, he says. Shell is moving aggressively to develop the entire value chain. The company is developing its retail sales of power and gas through Shell Energy Services.

Building on the success of a 23% market share in the newly deregulated retail gas market in Atlanta, Shell has leapfrogged ahead of the other major oil companies in retail sales of natural gas. Now, it is poised to go head to head in the retail electricity market as it opens across the country, challenging companies such as Enron Corp.

�That success [in Atlanta] combined with the strength of the brand has led us to actively consider pursuing expanded retail penetration in other US markets�for both gas and power,� Cook said.

BP Amoco
With the ink barely dry on the merger between the major oil companies British Petroleum PLC and Amoco Corp., BP Amoco created its gas and power business �stream� last fall, putting it on the same organizational footing as its traditional endeavors of exploration and production, refining and marketing, and chemicals.

With 44 tcf of gas, BP Amoco's emphasis on gas and power is understandable. The entire gas value chain was recognized by BP Amoco executives as rapidly catching up with oil in terms of business priorities. They indicate the best way to leverage that gas is to expand into power.

The company says it intends to participate in the electricity market across the board from generation to wholesale marketing and trading and even retail sales and energy services. Richard Flury, CEO of the newly formed gas and power business, laid out the strategy for his division in a speech last fall in Calgary. The company will create market and technology solutions for its upstream stranded gas and beef up its role as a major energy marketer downstream.

�It is our vision to grow this earnings stream from gas and power rapidly,� said Flury.

BP Amoco�s strategy for gas and power involves trading around physical capacity in mature markets and bringing gas into an area or country in emerging markets to supply power plants. While the company is clearly making strides towards building its downstream gas and power business, owning independent power plants is not a huge priority of the company�s overall growth plan yet.

�While I wouldn�t put �big� as an adjective here, I would say that power is an integral part of the gas and power business and important to us for the future,� says Neil Chapman, spokesman. �To maximize the value of upstream gas, we need to develop the downstream power business.�

On the generation side, the company announced an investment in an integrated LNG and power plant facility in northern Spain with three other equity partners in late June (OGJ Online, June 23, 2000). The company is also participating in a 450 Mw plant in northern England and a 500 Mw plant with partner General Electric Co. in Wales.

BP Amoco has just begun participating in the retail market through an 18.5% stake it purchased in May in GreenMountain.com, an internet based retailer of renewable or �clean� electricity (OGJ Online, May 3, 2000). Chapman says the company will eventually increase its stake to 25%.

BP Amoco has a significant investment in BP Solarex, a developer and manufacturer of solar electric technology. The investment in GreenMountain will help BP Amoco link its renewable fuels business to the retail market. Industry observers speculate BP Amoco will eventually seek control of that company as electricity retail markets open up across the US.

The company's gas and power group is also marketing and trading natural gas and power in the UK and most recently gas in Spain. After a long decline in North America, BP Amoco is rebuilding its trading and marketing business there, says Chapman. BP Amoco also plans to use its energy services company BP Energy in the UK as a model to build an energy services business in the US.

Of the so-called supermajors, ExxonMobil is �talking the least and moving the slowest,� says Smith. �They happened onto an investment in China decades ago that has been fabulously successful.�

ExxonMobil owns a 60% stake in 6,283 Mw of capacity that provides power for China Light & Power Co.�s customers in Hong Kong.

While the former Exxon Corp. was the first major oil company to enter the electric power business in a big way, it hasn�t moved much beyond those initial interests in China. Most analysts say ExxonMobil is not interested yet in the electricity business, but there are hints that there may be small changes in the offing.

�We do pursue independent projects and have some project prospects in a whole host of regions around the world,� says Debra Sauermann, power and finance staff advisor. �They are designed to complement our basic businesses, including coal.�

Sauerman notes that some of these projects are independent, stand-alone power plants and not related to cogeneration plants that serve internal needs of the company�s refineries. With 5,400 Mw of power, ExxonMobil leads the list of oil companies owning the most megawatts. But with the exception of the China assets, the balance of the power is produced mostly by Exxon�s cogeneration facilities.

The company is hinting that it�s beginning to take a few more steps in the power business.

�We are actively engaged with ExxonMobil�s upstream development and gas marketing organizations to develop proposals to commercialize gas resources through power generation,� says Sauermann.

According to Sauerman, ExxonMobil has power project prospects in several countries where the company doesn�t have existing refinery operations, suggesting the power plants, if developed, will be stand-alone electricity facilities. Marketing and trading of gas and power is left to its stake in Duke Energy Corp.'s trading operations, acquired through the purchase of Mobil Corp.

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