Shell's announcement that it is in talks to buy Arrow Energy, an Australian coal-seam gas producer, demonstrates the strong interest big oil companies have in cheap, long-lived gas reserves. The announcement comes after ExxonMobil agreed to buy North American shale-gas pioneer XTO Energy for $31 billion, and competitors like BP and France's Total have rushed to join the shale-gas boom.  Watch for more such deals as shale and other "unconventional" gas plays land in the hands of the majors, said Howard Newman, chairman of Pine Brook Road Partners, at a Yale energy conference Friday. Newman's worth listening to. A former Warburg Pincus vice chairman, he's a guy who's made more than a little money over the years investing in new oil and gas plays that later catch the attention of the oil giants. For the first time since cheap Middle East oil invaded Western markets, Newman says, a vast new source of energy is arriving at prices well below the prevailing cost of finding, developing and delivering natural gas. That's the reverse of the normal pattern, where oil companies push into ever-more expensive territory to find new supplies.  The average cost of producing natural gas in North America is around $6 per thousand cubic feet, assuming a 10% return on capital, Newman said. The new shale-gas reserves are coming in at $4/mcf with returns of 10% to 12%. That's going to spur two developments, Newman said: Producers are going to lock in long-term contracts to supply the gas at those attractive rates of return. And big oil companies are going to lock up the suppliers by acquiring them.  There are larger implications that investors and policy makers must wrestle with, Newman added. The cheap gas will be a boon for electricity customers if utilities avail themselves of it, and it could spur a renaissance of the North American chemicals industry. But it might be terrible for the renewables industry. "Now renewables aren't twice the price of this stuff, but 4x the price," he said.  Policymakers will have to decide how to deal with this invasion of cheap gas. They could layer charges on coal -- which is still cheaper than gas, even at $3 -- to encourage utilities to shift from coal to gas instead of from renewables to gas. Ultimately they need to decide what to do with this unexpected gas dividend. "Do you want $4 gas or $6 gas?" Newman asked. The fate of solar, wind and who knows what other technologies could hang in the balance.
Cheap, unconventional natural gas sources are drawing the attention of big oil companies. Solar and wind energy may not be able to compete.