Shell & Big Oil's Exploration Challenge

* username: rupertbu

The oil business used to be simple. Find oil. Drill hole. Sell oil. Buy Stetson and private jet.

These days, you have to corral an army of engineers in the desert to build an enormous factory to transform natural gas into a liquid to be used like oil. The capital cost of Royal Dutch Shell's Pearl gas-to-liquids plant in Qatar is a cool $18 billion or more—10% of its market capitalization. Like Chevron's Gorgon liquefied-natural-gas project offshore Australia, it shows what big integrated oil companies are capable of.

But have they neglected bread-and-butter exploration for lower-risk, lower-return engineering projects? Certainly, investors are unimpressed. A decade ago, the international oil companies, or IOCs, accounted for 79% of energy-sector market capitalization and nearly all its net income. Today the figures are 53% and 62%, according to Sanford C. Bernstein. Shell trades at a discount of 13% and 36% respectively to the 2010 forward price-to-earnings multiples at Petroleo Brasileiro and BG Group. But their estimated five-year average output growth is 5% and 9% compared with Shell's 3%, around the IOC average.