I too had my shots in my youth: trying to ward off the evils of the night. Didn't work
Thought on gas price from G&R (thanks J).
Are they (at least partially) right? Good question!1
00:17:17
Yeah. Another area of research you've been looking atsignificantly is, is natural gas and really, which obviously we are, we aresort of what are the solutions to the energy transition and decarbonization,well, gas plays this key role in the interim. And then from your, our previousepisode, obviously nuclear in your belief plays a key role and we'll come ontothat. The, the question that you've been, I guess analyzing with natural gases,what happens, You know, where does all this natural gas come from that's gonnafeed all of these liquefaction plants on the Gulf Coast and the demand for LNGglobally and the shift in those pathways as a result of Russia's invasion ofUkraine. I'd love to get your take on sort of where do you see natural gasgoing in, in the, in the short and medium term and and and how indeed are wegoing to meet those supplies?
1
00:18:03
Is that even a question people are asking given the expectationsthat shale will go on forever?
2
00:18:08
No, it's really not a question that people are asking and andfrankly I think they really ought to be You know last year when Russia invadedthe Ukraine, the whole world, particularly Europe, but, but really the wholeworld woke up to, to what they're gonna do next and, and how on earth Europe isgonna look to displace 17 BCFA day of Russian gas. And the whole market reallytightened up to say the least. And so European gas prices You know, exploded tothe upside. I think they eventually hit a hundred dollars in MCF equivalent inprices into Asia as well. What Europe did last year was pretty shocking. Youknow they shut at its peak about 15% of the industrial capacity in Germany totry to save energy.
2
00:18:49
They burnt as much coal as they possibly could get their handson, which was a, a full abandonment of 20 years of energy and climate policy.And they were able to stockpile a lot of gas by doing those things. And then ofcourse what happened was that winter really never came in Europe. It was thewarmest winter on record in the last 45 years and here in the US as well. andwe also had a major fire and a big export terminal here. And so some gas backedup in this country since it was unable to be exported. So in a year you, youbrought inventories in what would've was expected to be a really, really toughspot last winter. You actually ended the winter with inventories above averagein both Europe and the United States.
2
00:19:33
And that just took the air outta the gas market. And So, we sawprices here in the US fall from 7, 8, 10 bucks all the way down to $2 at theirlows back in March. And now today they're still trading at three bucks. And inEurope gas is about 15 and in Asia it's about the same. So the US still hasthis, enjoys this natural gas price that is You know 70 plus percent below theworld price. And that's always something that we felt has been long-termunsustainable You know how on earth can you have such a deep disconnect for usgas prices compared to the rest of the world. And the answer of course is thatif you produce gas in the US you can't get that world price.
2
00:20:14
You can't access the world market because even though the US hasgone from being the world's largest LNG importer to the world's largest LNGexporter, we still produce more gas than we can export. And because of that wehave a disconnect. and what our contention has always been is that if you wereto bring on more LNG export capacity, then you had gas to feed it, thatdisconnect would close and it could close really, really quickly. And I thinkthat would be really shocking for us consumers and, and US investors as well.And so do we see that happening now? Well by the end of next year, in themiddle part of of 25, you're gonna bring on six BCFA day of new LNG exportcapacity. You have 12 BCFA day running now. So that'll be a 50% increase onthat.
2
00:20:56
So the question then becomes, well how much gas can you bringonline? You know, does anyone have any idea how much gas we have brought onlinein the last 12, 18 months or so? It's been basically zero You know theMarcellus has stopped growing and people think it's pipeline constraints, butwe don't believe that. We think it's geological depletion. The HaynesvilleHaynesville is seeing rig counts that are falling 'cause it's an expensivesource of gas and the Permian is suffering massive depletion problems. And wenow have four registered months of month on month production declines in thePermian Basin. Something we've never had outside of Covid or the Saudi You knowThanksgiving massacre of 2014 when they collapsed oil prices.
2
00:21:36
So So, we don't have a particularly robust growth supply that weexpect to see in the next two years and to get six Bs in the next two years, Imean that would be like the equivalent of going back to the, the frothiestyears of shale growth that we've had. And I think that it's just not in thecards. So here we have six Bs coming online, I don't know where we're gonna getit from. And if you open up even a little bit of export capacity, excess exportcapacity, you could potentially see a market that pins itself on global prices,less transportation and go from three to You know three to 10. I don't thinkanyone's prepared for that. And that's frankly probably the only market I seethat has that type of a dynamic in it right now.
3
00:22:18
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1
00:22:52
So just a a an easy question first or an easier question than atough one. Obviously at the moment the news is full of of You know Chevron,Exxon all acquiring and most of the You know the, the transition in, in shale,particularly in Texas has been from small independents to then the big guyscoming in and You know the, the story there is more You know efficiency and soforth and and so on. Obviously nothing like You know high prices solve highprices. Do you think with eight bucks these companies can access new resources?I mean how fundamental I mean, do you think the Permian, for example, isdepleting and can technology and more money solve that and find new areas or,or is this in your view something that's geologically absolute so to speak?
2
00:23:38
Well, look, I don't think anything's absolute and I think if yougot a big rally in prices, You know, would you be able to put more to work andwould you be able to potentially get some more production for a period of time?I think the answer is You know probably however, I i I tell people, and thismight be a little bit silly, but You know, imagine an oil field and imaginethat you produce it completely unconstrained or gas field. There's no shortageof capital, there's no shortage of services, and then all of a sudden pricesfall. Well, what are you gonna do? You're gonna stop drilling and production'sgonna fall. And then what happens if you prices rebound? Well, you'll startdrilling and production will come back. So obviously production at a basin isreally dependent on price. Now imagine another basin where prices, You know amagical country prices are always fixed at exactly the same amount.
2
00:24:21
They everyone can generate a nice return. Well, the companiesare gonna go and they're gonna drill and production's gonna ramp up. And thenYou know if they drill all the good areas available, production's gonna startto fall and they'll drill the second tier and production will keep falling. Andthen I said to you, okay, well we'll double the price. What's it gonna do tovolumes? Well, it's not gonna do anything because the field's depleted. Soobviously depletion plays a role and I, and I think there's like this weirdkind of dichotomy where You know it's a false decision that people are asked tomake where they say, well, won't price save us or won't technology save us? Andthe answer is that price is really important to determining the production profileof a curve and geology's really important.
2
00:25:02
And as the analyst, you have to ask yourself, what side of thecurve are you on? Are you on the side of the pendulum here where price mattersmore or where geology matters more? So consider, for instance, like theHaynesville back in 2010, You know the Haynesville declined by about 40% andthat was driven by price. And how do we know it was driven by price? Wellproduction then rebounded and made a much bigger high today than we were at theold peak You know a decade ago. So obviously it was mostly economic and pricerelated, it wasn't geological related at all. And the other reason we know thatis that when production rolled over back then you had only produced about 25,20 6% of the total recoverable gas in that field.
2
00:25:46
And so that would be a very unusual time for a field or a basinto roll over. Now you're at 50% though, or 48%, 49%. That's much, much, muchmore traditionally associated with the type of depletion at which point thefield then rolls over. And so now the question is, You know as you start to getsome mild declines here and as rigs are put down and stop drilling in thehayesville, if you got a spike in price and you put drills back to work, wouldyou see the same type of recovery that you saw a decade ago? And I think theanswer to that is no. So You know, I don't wanna dismiss what technology can doand I don't want to dismiss what what price can do.
2
00:26:28
But when you stop drilling your best tier one areas and youstart moving rigs into tier two that have half the productivity, you're nevergonna be able to get that same strong production growth that you had earlier inthe field when you had lots of really good wells left to drill.
1
00:26:46
The second question would be, what's the political risk here? Soif if actually we saw that substantial rise up in natural gas prices in the usdo you think that whatever administration's going to be in power at that point?And I I reckon they'd have different approaches to some extent. Would they bewilling to turn off the liquefaction plants in an effort to support domesticeconomy?
2
00:27:07
I do think that's a real risk and and obviously You know, youhave to see what the environment's like at the time. But yeah, I I wouldsuspect that if you had a tripling or a quadrupling of US gas price,particularly if it happens suddenly, particularly if it happened in a, in anelection year, I could easily see the US banning or limiting exports of gas totry to favor the domestic market. I mean, first of all, we've seen lots ofcountries do that over the years in different parts of the world. Notably Youknow when their domestic demand tends to grow at the same time as their fieldskind of plateau. We've seen countries like Egypt, Indonesia, many, manycountries favor their domestic markets and we've seen the US do it You knowafter the oil embargoes in the 1970s, there was a ban on exporting Crude oilfrom the US that was eventually repealed in 2015.
2
00:27:56
So You know, I think that, that you definitely will, what doesthat do for gas prices here and gas equities I mean? I think that there's abig, big rally between now and then, but I think that is something that youhave to watch out for and something that you have to monitor very closely.
