March 21 (Reuters) - Chevron Corp, after years of living in the shadow of Exxon Mobil Corp, has grown accustomed to having to punch above its weight, and it has now landed a notable blow against another big oil company.
Though it ranks fourth in oil and gas reserves among the world's non-government-controlled producers, the California major recently seized the number two spot from Royal Dutch Shell Plc in terms of stock market valuation.
Chevron's steady climb underlines the fact that the total reserves number matters less today than proportion of oil versus gas.
While average crude oil prices hit a record high in 2012, last year also saw U.S. natural gas prices plumb a 10-year low because of a glut of production from North American shale rock that has shaken up the global market for gas.
Proved reserves include estimated crude oil in the ground as well as natural gas converted into "barrels of oil equivalent" (boe) for easy comparison. Along with current levels of production and prevailing oil and gas prices, reserves are how accountants and analysts derive an oil company's book value.
Shell's end-2012 reserves are 54 percent natural gas, while the equivalent figure for Chevron is only 43 percent.
In addition, more than half of Shell's worldwide production is natural gas, whereas gas represented less than a third of Chevron's 2012 output.
Because of that, among other reasons, Chevron generated earnings from oil and gas production of $23.8 billion, compared with $22.2 billion in "upstream" earnings for Shell. Its "oily" resource base also helped it beat the other majors, including Exxon and BP Plc, in earnings per barrel.
"The key is Chevron's different production," said Jason Gammel, a London-based analyst at Macquarie. "Chevron generates just as much cash, and at the end of the day that's what matters."
Looking at the comparative reserves, Shell's ability to rapidly switch to more liquids production in response to prices is more constrained than that of the other companies.
George Kirkland, head of Chevron's upstream business, acknowledges his company is becoming more gas-focused over time, with huge projects starting up in Australia and Angola set to more than double its LNG production to 460,000 boe/day from 2017.
Kirkland predicts that in the future Chevron's actual output will be about 60 percent oil and 40 percent natural gas, but he noted that much of the LNG has already been sold for long-term contracts linked to oil prices.
"When you look at the revenue stream, it will still look very close to 80-20 oil, because so much of this gas coming on is sold with an oil linkage," Kirkland said in an interview last week. "I think we showed that last year."
So all gas is not the same, as Exxon has found out the hard way ever since its $30 billion purchase of XTO in 2010. The addition of XTO registered in a clear tick up in gas reserves that year for Exxon, despite the size of the Texas giant's portfolio.
Analysts cite Exxon's big bet on shale gas with XTO as part of a strategic direction that allowed its stock to underperform its smaller U.S. rival over the past half decade, with Chevron shares up 45 percent versus just 3 percent for Exxon.
"As Exxon Mobil suffers the fall-out from a decade of an excessively low oil price planning assumption, lack of exploration, and a huge bet on US natural gas, Chevron is clearly marching towards a position of the world's number 1 oil company," Deutsche Bank analyst Paul Sankey wrote last week.
A big risk for Chevron, Sankey added, is the amount of money it is having to fork out to compete with Exxon: Chevron's capital budget for 2013 is $36.7 billion, only $1.3 billion dollars short of Exxon's spending this year.
But the outlook for Chevron looks more promising, with annual production growth of between 4 percent and 5 percent expected between 2014 and 2017, Gammel said.
And Kirkland put investors' minds to rest last week when he explained that 98 percent of the projects delivering that growth are in design, construction or production.
Chevron shares hit a new record high of $120.98 on Thursday.
Reporting by Braden Reddall in San Francisco; Editing by Patricia Kranz and Chizu Nomiyama