Episode Transcript
[00:00:00] Speaker A: The world ultimately demands it. And when they don't have enough oil and gas and prices go high, you hear about it.
[00:00:06] Speaker B: You've got to do things in a responsible way, whether it be environmentally or low carbon.
[00:00:14] Speaker C: Welcome to the next Imperative, a podcast hosted by a. M. Energy leaders tackling key issues and trends in the industry.
[00:00:23] Speaker D: Welcome back to the next Imperative. I'm Jeff Angulo, your host and moderator. On this episode, we're going to kick off our integrated oil company series with a conversation about the macro environment in the oil and gas industry. Joining me for this conversation is Al Conright, managing director and one of the leaders of the energy team here at Alarism Arsal, and Jay Johnson, who's recently joined us as a senior advisor after a 40 plus year career at Chevron, culminating as in head of upstream.
[00:00:50] Speaker A: Al.
[00:00:51] Speaker D: Jay, welcome to the next Imperative.
[00:00:53] Speaker A: Thanks.
[00:00:53] Speaker D: Thank you for joining us. Well, let's jump into the conversation. Let's start talking about the energy industry and kind of supply demand macro environment. Maybe talk about oil first and then we can transition, talk about natural gas, because the factors are very different. Jay, do you want to start us?
[00:01:07] Speaker A: I think, you know, it's been a phenomenal couple of years because as you've watched the US industry remake itself and drive for ever increasing efficiency, we've seen the US retake the lead spot as a producer of oil, and certainly today that seems to be still holding true. And I think there's been so much innovation that have lowered the cost structure of the United States and particularly the unconventional plays, but also in some of the deepwater plays, that the US has been able to maintain an important role, fulfilling some of the gap that might otherwise have opened up between the supply and demand, just because of the amount of decline that you're going to see out of existing reservoirs over time.
[00:01:53] Speaker D: What do you think?
[00:01:54] Speaker B: Well, I've been looking for the demise of the supply in oil for years. People have said, oh, we got a cliff. Oil is going to drop off and it's going to be driven not by demand, but purely by supply. And one of the things Jay said that's so critical is technology, and innovation just reinvents the oil industry continually. And you look at what's happened with the shale, but before that, deep water, 3d, seismic. You go back in time and there's always a new breakthrough technology wise, because we got really creative people trying to solve really complex, difficult problems. So supply can meet demand and can likely meet demand for quite some time going forward.
[00:02:40] Speaker A: I was just going to say it's interesting because when they talk about how much is the supply, how much is in the world supply, and it really depends on at what price. And as prices rise, as things get tight, then it unlocks even more technology, more advanced methods of recovery, and as prices go down, then it allows the more efficient fields to just continue to operate. And so it really know, you see that dynamic all the time between the price and the availability of supply.
[00:03:10] Speaker D: What about on the natural gas side? Al, you want to start this one?
[00:03:13] Speaker B: Yeah.
If the US policymakers would get out of their own way, the US could supply so much natural gas to the rest of the world through lng and exporting it. And if you really are serious about decarbonizing, you could have replaced a lot of the coal that's being burnt not just in the US, but around the world by unleashing natural gas, it is a commodity. We're so fortunate in the US to have lots of oil and lots of natural gas. And again, it didn't just happen. It came through technology and innovation. But natural gas is an abundant supply. It will be a fuel. People call it a bridge fuel. I don't see it that way.
It's a fuel that we need for all sources to meet demand.
Natural gas.
The only issue with natural gas is at what price. And in the US, we've got so much of it that we can drive prices down fairly quickly until there's some export capacity to really take advantage of some of the global demand hubs, especially with the Russia and Ukraine, that gas needs to find its way to where the demand is. And that demands in Asia, that demands in India, that demands currently in great time. I think natural gas is going to be a wonderful industry in the years ahead, assuming we can get out of our own way.
[00:04:44] Speaker A: I think one of the things that you mentioned that I look at is that natural gas is a perfect complement to the renewables, the growth in renewables today. And because the intermittency in some of the renewables, natural gas is an ideal fuel and an energy delivery system to be able to ramp up quickly when it's needed. Evenings when the wind's not blowing or too hard either way. And so gas plays a really critical role in stabilizing a lot of the world's energy supply, particularly with renewables taking a bigger and bigger percentage till grid scale storage really becomes economic on a wide scale. I think natural gas is going to play a really critical role in helping to stabilize energy supplies, because you need energy that is going to be there. It's got to be reliable, has to be secure and it has to be affordable. And you need all those things. And I think gas plays an important role in those areas.
[00:05:40] Speaker B: And even in this country, we get reminded of that every few years, whether it be wildfires in California where all of a sudden we can't meet demand because natural gas is not an abundant supply like it used to be, or in Texas where you have a deep freeze and all of a sudden a lot of your infrastructure gets frozen up. So I think it's a lesson that we continually have to relearn, unfortunately, but wonderful fuel, wonderful hydrocarbon for the world, and I suspect it's going to be here for a really long time.
[00:06:13] Speaker D: Great.
In the current environment, how do you see the roles of the independent operator and the IOCs evolving? And Jay, why don't you take the IOCs first and then Al, you can take the independents and share comments.
[00:06:28] Speaker A: I think the integrated oil companies or the international oil companies, depending on how you define the eye. One of the things we've had to learn and we bring to the table is a lot of discipline, and so we can do things repetitively and really drive efficiency.
I think there's also a lot of resource capability and a lot of capability around technology to help drive some of the advancements in technology. But certainly the IOCs don't have a corner on that market. And from my perspective, there's a lot to learn from many of the independents that are out there that are figuring out innovative ways to continue to develop fields and learning from each other is absolutely critical. So I see a nice synergy between them, actually. I think the discipline of being able to replicate and do things in a very efficient manner is combined with the rapid innovation that we've seen from many of the independent oil companies.
[00:07:26] Speaker B: Yeah, the IOCs have got a lot of advantages, including big balance sheets, and I think you underestimate the importance of big balance sheets until you really need a big balance sheet. And every few years you find out we need a big balance sheet, commodity prices collapsed or we realize these projects that we're into require a lot of capital and a lot of staying power. And so I actually think things like the clean energy is going to be a big company game. At the end of the day, it's going to require a lot of capital. And right now we have startups trying to incubate it, and that may be where a lot of the innovation comes from. But ultimately, at the end of the day, I think you'll see the IOCs become the major players in that space.
[00:08:16] Speaker D: As well, to implement it.
[00:08:17] Speaker B: To implement it. It's going to be capital intensive. And I think one of the things IOCs do really well is manage big projects and implement real complex, technically challenging initiatives around the world.
[00:08:35] Speaker D: Yeah. Thank you.
What are the challenges that you think IOCs are facing in today's environment?
[00:08:45] Speaker B: I'll take it. Think.
I don't want to pick on BP or shell, but the european investor base thinks about the world a little differently than the US investor base, which can challenge management's wisdom around where to invest capital and ultimately what kind of returns you can expect.
So I think one of the big challenges is how do you balance the need for additional sources of energy, whether it be wind, solar, hydrogen, whatever the case is nuclear, at some point, with the current returns you're going to get from the oil and gas sector. So I think that's one of the big challenges right now.
Yeah.
[00:09:30] Speaker A: I think understanding what your shareholders are truly looking for, and it's easy to say you want something and then is that really, in essence, what they want? And I think in most cases, companies are faced with the dilemma that it's not just one thing that shareholders want, they want a portfolio of performance. And what I mean by that is you need to be focused and attentive to the environmental demands and the climate change issues that are out there and producing ever cleaner energy. But at the same time, shareholders want returns. But you also want to be sustainable and generate the free cash flow necessary to meet the expectations around dividends, balance sheet health, and the ongoing investment programs for new infrastructure, new fields. So it's really a balance between resource replenishment, generating the returns, performance towards developing cleaner sources of energy production, and then also the cash flow that's needed. So I think those are some of the challenges the headwinds are. Most companies are facing a pretty tough regulatory environment. So the ability to build new infrastructure, pipelines, some of the things that can improve the efficiency, are often very difficult to get approved and implemented in many parts of the world.
[00:10:53] Speaker B: The good news is, if you'd asked me this question ten years ago, I'd have said people are going to be a real challenge in the industry. And yet now we're attracting new talent coming out of colleges, and partly because we're not old plumbers, we're old mechanics on cars, we're using digital and innovation and AI and things like that that are compelling for people that want to be in our industry. So we've got a whole new generation, I think, about in our industry that we weren't counting on recently as five years ago, maybe so. Exciting times.
[00:11:27] Speaker D: That's great. Al, how would you advise iocs face the challenges that we're talking about today?
[00:11:33] Speaker B: Don't forget the fundamentals.
To me, the fundamentals and the fundamentals are we're running a business for the long term. Number one, we got to generate acceptable returns. In fact, I would argue industry leading returns should be your target. You've got to do things in a responsible way, whether that be environmentally or low carbon. And you've got to make sure you have a balance sheet and a shareholder program that is expected by the shareholders. And if we do those four things well and we don't get detracted by other noise, my advice is just stay the course. That doesn't mean you're not going to decarbonize. It doesn't mean you're not going to quit flaring. There's basic things that we as an industry know we need to do, and hopefully we're doing that today on a global scale.
[00:12:29] Speaker A: I think part of it, too, is to have the discipline. This stuff doesn't happen overnight. So it's having the discipline to be clear on the expectations, whether it's safety, environment, operational performance, operational efficiency, all those. And then just being able to relentlessly pursue those objectives consistently over time is a major challenge. Just because these organizations are so big. They work in complex environments around the world, different cultures, but keeping everybody focused and moving in a constant direction I think is a really important aspect. It can be a great strength, but it also takes a lot of focus.
[00:13:06] Speaker D: And discipline to keep it on the course. Yeah, good stuff.
We talked a little bit about energy transition and the pressures that that's creating.
How have you seen the evolution of energy transition through the IOC? And I say transition in my mind, it's energy additions, right? I mean, I can't think of a single source of energy that's actually gone away. But as we add to the new renewables, how is that transition impacting the IOCs? Are they thinking about it?
[00:13:35] Speaker A: Well, I think it's hard to say the IOCs as one homogeneous group because obviously different companies are taking different approaches to it. But I think you're right. The energy transition really isn't a transition. It's just adding additional forms of energy supply. And I think the world's going to need that. We're going to need every form of energy as the population continues to grow and people that have not had access to energy are going to continue to not just demand it, but deserve access to that energy. So the energy picture needs to grow in concert with some of the goals we talked about earlier. But I think the challenge for each company is to decide where do they have expertise, where do they have something to add, where do they have something that sets them apart and pursue those particular aspects, because you can't do everything, you can't be good at everything. And I think different companies have to select their areas of expertise, their areas of strength and competency and experience, and then really work to promote and develop those areas in particular.
[00:14:36] Speaker B: Yeah, I think the whole energy landscape is evolving every year, but I think a billion people lost sight of the fact 7 billion people want reasonably priced, secure, reliable energy.
And as we embarked, and I say we as a society embarked on the journey, we're still talking about phasing out oil and gas. Oil and gas should disappear. Good luck. Good luck telling that to the 8 billion people that want to live like the other billion live. So I hate to talk bureaucrats, but I think we've lost sight of what's achievable. We're burning more wood chips now than we've ever burnt in the world.
How can that be that we're burning more wood chips?
It's a source of fuel and it's a reliable source of fuel. So the world still is burning wood chips. And we'll still be burning coal, we'll still be burning, but we'll also have wind, we'll also have solar, we'll also have natural gas, we'll also have oil.
I just think the narrative almost took over common sense and now we're swinging back to something that's a little more common sense.
[00:15:53] Speaker A: I think maybe just to build on that, it's not so much maybe about absolutes. There won't be any more oil and gas, or there won't be any more nuclear, or there won't be any more of one thing or another. But it's really understanding the role that each form of energy needs to play and how, as a portfolio, the energy mix can meet the needs that people have while still working towards the goals. Eliminating fugitive methane emissions, improving the efficiency of not only consumption of energy, but production of energy. Those move us in the right direction, but they're not absolutes. It's going to be a constant effort to improve and then understanding the relative role, like we talked about at the beginning with the natural gas and oil and what role they play in the energy mix.
[00:16:36] Speaker D: To your point earlier, gas is a great substitute for renewable electricity. Oil is not. And equally, gas can be a difficult substitute for oil for transportation.
[00:16:47] Speaker A: Natural gas can be a great source of hydrogen. As hydrogen becomes a fuel of the future and becomes a part of the energy mix. As long as you have carbon capture and storage, then the carbon that's emitted from stripping natural gas can be a great source of carbon, of hydrogen, while capturing the carbon. So there's ways that these systems can work together to achieve the ultimate goals.
[00:17:12] Speaker D: Great.
How have you seen the different IOCs try and balance the need to generate free cash flow and at the same time invest for the future? Is it different regionally, the european IOCs versus us Asia? What are you seeing?
[00:17:28] Speaker A: From my perspective, there were some corrections when we went through the last big downturn in 2020 kind of time frame, and you saw many of the Europeans that had very high dividend loads and were supporting a lot of pension funds and things like that were forced to pull back on their dividends and bring their dividend payouts and their capital investments into better balance, particularly to preserve balance sheets and weather the storm. And so I think from time to time that may continue to happen, but it's really finding that balance, I think, between resource replenishment, the generation of free cash flow, and the investment for the returns that the shareholders are looking for is kind of the balance each company has to play based on their particular mix of shareholders and the expectations that they have.
[00:18:15] Speaker B: And I'll approach from an independent perspective, too. Jeff, it wasn't that long ago where we invested far more than 100% of our cash flow for years and years and years, and guess what? We destroyed value in the shale plays in the US, as an example. And it was only after the last correction did we get really serious about the fact that we needed to generate returns and have a distribution model and have a balance sheet that was sustainable. So a lot of the things that the IOCs have always had, the independents now have looked at and need. Our business is no different than a Chevron or a shell or an Exxon. We need to be sustainable. We need to do things the right way. We need to have dividends, we need to have share buybacks, and, oh, guess what? We need to have a good debt structure that works for us. So I think what you've seen is, thankfully, we've seen the independents move to a much more sustainable business model. That doesn't mean they're all going to be around, because we've seen a lot of consolidation. I suspect we'll still see a lot of consolidation, but at least the consolidation is being done for the right reasons.
I think the independents have really followed the lead of the IOCs. The IOCs have been in that position for a very long time, especially the US ones.
[00:19:39] Speaker D: What would you recommend iocs in terms of investment strategies? Given the regulatory environments that are getting more and more onerous and other factors that we've talked about today impacting the industry, how would you advise them to be thinking for the next five years?
[00:19:53] Speaker B: That's an easy one.
I think the, I think we've come through an environment where we reduce size of portfolios and focus on coring up around the world. And you think about West Texas or the old permian basin, you think about powder river basin, you think about spots in Africa and other places, the med. So there's been a coring up of where we have some strength as an industry or as a company.
And the question is what follows that?
How long can that last? And with technology, I think it can last. We keep reinventing. The permian basin was dead when I came to Texas 30 years ago. It was never going to get reinvented. 30 years later we're at maximum production. So I'm not a naysayer that the current assets we have won't be producing in the next 30 years. I think they will be. But the real question around investment is how far should we push beyond our core set of assets? And that's why you're seeing a little bit of exploration come back into the portfolio.
But that's going to largely be focused on natural gas, not oil. But I do think you'll see exploration make a bit of a comeback in the world we're living in today.
[00:21:18] Speaker A: Yeah, I agree. I think exploration plays a role, particularly when commodity prices are high because it can be very expensive to buy resources and reserves from others. But when you're in a low commodity price environment, then you tend to see that mergers and acquisitions, I think, come to the fore because it's more efficient, more economic to just bring those additional resources in and then run them and produce them efficiently. When you do a merger, you don't really add to the total resource base like you do operation. But I think from a strategy standpoint it's recognizing there are competing interests.
Continuing to produce oil and gas we've talked about is going to be important and I think the world ultimately demands it. And when they don't have enough oil and gas and prices go high, you hear about it that energy is fundamentally critical, but at the same time it's not about just growing for growth's sake. I think if you think about it in terms of growing value, growing value for shareholders, then it makes a lot more sense. And so to your point, it's about thinking about how does your company fit in the energy picture. What things, again, can you excel at and be better than others in the industry to generate those superior returns, our prices, you take the price generally for whatever commodity you're producing. So that means you have to be efficient in how you produce and more efficient than the next guy, both in finding new resource and in producing what you have. And that's ultimately where the technology comes to bear and just the management and leadership practices within a company that allow them to work with a minimum of bureaucracy and maximum effect. When we tried to get too aggressive at getting every last bit of capital, efficiency and things, I think it led us to become too complex. Go after projects that were too difficult to execute, and we ultimately didn't deliver on even basic expectations. Keeping things simple, keeping things focused, understanding what you're trying to achieve, and then being very thoughtful about what areas you're going to play in for a given company. In the energy mix, I think, is how you start putting that strategy together and have it be sustainable and viable.
[00:23:34] Speaker B: I've had a lot of clients over 30 years, Jeff, and I think every one of them were top quartile.
If you ask them how they were doing relative to their peers, we're top quartile.
I guarantee you at least there's more discipline now of looking at benchmark data and truly understand whether you're top quartile or not. And it's one of the things that Albert has helped our clients through, is putting a mirror know. You may think you're top quartile. Let us show you where you actually fit. It's not to make them feel bad, it's to say what's the possibility, right? I mean, if you believe the data, then how far could you bring your company forward and accelerate cash flow? And it's a powerful way of thinking about the business.
As I said, the majors have been doing that for some time, but the independents are really jumping on it now.
[00:24:24] Speaker A: I think your last point is so important. It's not about looking at benchmark data to feel bad. I actually used to tell business units, if you're fourth quartile, you should feel thrilled about that, because you're doing this well now. And we've just identified an area where you potentially could do a lot better. Others have proven it's possible. So let's look at what is possible. If we moved up higher on performance in this area, what could it do? For us. And so getting out of that mindset that the quartiles are a negative thing if you're not in the top quartile to these represent areas of opportunity and really help focus your attention and your efforts into what's possible. It's a complete game changer in terms of how you use that information and data.
[00:25:09] Speaker D: Absolutely.
You both mentioned exploration. And in my mind the last 1015 years, exploration, at least in the US, has kind of been outsourced to the shales. And it was less about going and finding new things and more about small companies building up positions and then selling it off.
How has exploration changed over the last 15 years? Is it as successful as it used to be? Is there opportunity for improvements there?
[00:25:34] Speaker B: I think it's been in pockets successful. We've seen real success in the Gulf of Mexico. We've seen a lot of success in Australia. We saw success 1520 years ago in West Africa. So it's been pockets of success. But I think we went through a period where we just overinvested the asset base, could not sustain the amount of money we were putting on. So I think we naturally went through a period of reducing our capital exposure to expiration. And again, I think that was a healthy thing. But I think in the last couple of years we're now looking at it saying, well, spending that little bit of our cash flow and exploration likely isn't the right answer. So it's causing all the great geoscientists we have in our industry to rethink what does success look like and where can we be successful. And as I said, it may be more natural gas than oil going forward, but I do think exploration is going to play a role in replacing our hydrocarbons.
[00:26:35] Speaker A: I think so too. I think exploration, you're right in how you characterize it. It's easy to be extremely inefficient in exploration and put too much capital into it.
There's a tendency to want to chase the biggest new fines and fields and they're hard to come by. There hasn't been many new plays outside of the unconventional I'm talking about mainly conventional now around the world in the last ten or 15 years, you can count them on one hand kind of thing. But that doesn't mean there's not a lot of value in exploration. Even places like the deepwater Gulf of Mexico that we've been at for a long, long time. Focusing the exploration so that that exploration can find smaller accumulations and tie those into existing infrastructure, for example, can be really value adding as opposed to a brand new greenfield somewhere that starts up. So I think the thinking about exploration has changed a lot. And finding new resource that can be tied into existing infrastructure is really an opportunity that's often overlooked. It's not quite as glamorous as finding that new, huge oil field, but in terms of adding value can be one of the best things companies can do.
[00:27:46] Speaker B: I do think has brought back the dream, though. Yeah. I think we'd all thank Exxon and Hess for bringing back the dream that it's not as if that hasn't been there for thousands of years and we had some smart people figure it out and can drill some great wells and bring them online quickly. So the whole development scheme has changed a lot from exploration to ten or 15 years of development to expiration to three years of cash flow. It's a totally different model.
[00:28:16] Speaker A: Yeah.
[00:28:17] Speaker B: So I think as long as that's the model going forward and I don't see any way it's not going to be again, that brings more emphasis back to exploration and doing things smart.
[00:28:31] Speaker D: How are you seeing the ISCs address the challenges of human capital? Acquiring people, retaining people.
You made a point earlier, Al, that you're seeing a new class coming in from universities that are excited about some of the complex technology we're deploying. What are we seeing? Because for years people have been talking about brain drain and what do you guys see?
[00:28:51] Speaker B: Well, I think, like every industry, productivity keeps moving up. So I'd be lying if I said we didn't have still a bell curve on our age population.
We still have a lot of people that in the next five to seven years are going to retire from industry. But at the same time, we're applying technology and innovation to the way we do things every day. And some of the things that the majors or the IOCs are doing around AI, it blows me away to even think about where we've come from in the last five years. So I think, yes. Will we have fewer people in industry? Likely. But the ones that are going to be in it are going to really be focused on technology. And I think that's an exciting industry. We're an exciting industry to attract. I think that's what we're starting to see now. Data scientists, data engineers and things like that enter our space and we need them. We need them badly.
[00:29:51] Speaker A: It was interesting because we talk a lot about the people coming in today want different things and what are they looking for in a company? And I actually think the people coming into work today and joining our companies are very similar to the ones, the same expectations we had. You want to feel like you work for a company that's a beneficial contributor to the world around you and that they do noble things. Providing energy is certainly in that range. They want to know that the work that they do is going to make a difference, and they can actually make a contribution and feel good about the contribution they make. And they want to learn and develop new skills and new expertise. And I think if we think about it in those terms, there is so much opportunity right along the lines you just talked about, whether it's technology and working around the world and the different cultures that we work in, the opportunity to develop people. It's something that I think the more senior people in the company can't lose sight on because they create the environment that makes it conducive for the next generation to be successful and to thrive. And that's something that's important to keep in front of us. So I think there's people out there, plenty of people out there, but it's all about making sure that we create an environment where they can be successful. And I think they want many of the same things that we wanted when we started our careers.
[00:31:11] Speaker B: You're right. That excitement that you just talked about, the key points that was there 40 something years ago when I started the industry and when you started the industry, that's why we came into this industry in the first place.
[00:31:24] Speaker D: Good that we've maintained it.
[00:31:25] Speaker B: Yeah.
Jay just said something really critical, though, or alluded to it. And that is we've got to get the best out of our people and to go to micromanage to make decisions for them, to not give them the coaching and the latitude to be successful is just a shame. We're doing not only employees a disservice, we're doing management a disservice. And the company and the shareholders, ultimately the shareholders. So I think what Jay hit on is there going to be a huge focus going forward. How do we get the optimum performance out of our employee base? And none of us have the answer to that. But I think in aggregate, we can come up with a much better solution. Much better answer.
[00:32:13] Speaker D: Alan Jay, thank you very much for your valuable insights and your time to our audience. Thank you for watching. We hope you found this discussion as valuable as we did. We have an exciting series coming up on integrated oil companies. Stay tuned for episodes on production management, on transformation, and on capital efficiency.
And m.
Thank you.
[00:32:37] Speaker C: Thank you for listening. Make sure to subscribe to the next imperative so you never miss a new episode. Also, visit our website, alvarez and Marsal.com to learn more and to connect with us.
