Speaker 1: Hello, and welcome to another episode of the Odd Lots Podcast.
Speaker 1: I'm Joe Wis and I'm Tracy Hallway. Tracy, you know,
Speaker 1: we recently talked with Goldman's top metal strategist, Nick Snowdon,
Speaker 1: and one of the things that really stuck out there
Speaker 1: are a lot of things we talked about copper scarcity,
Speaker 1: but what one of the things, among many interesting points,
Speaker 1: was the idea of, like there's been a talent shortage
Speaker 1: in this industry. Yeah, and you can kind of see why, right,
Speaker 1: I mean, first of all, um environmental concerns, and I
Speaker 1: imagine that, like particularly the younger generation might have some
Speaker 1: reservations about going into something like mining. And then secondly,
Speaker 1: it just wasn't a profitable industry for quite a long
Speaker 1: period of time, or at least I'm thinking specifically about
Speaker 1: shale oil in the US. But you had the big
Speaker 1: boom and sure people made a lot of money in that,
Speaker 1: but then you had the massive bust and it often
Speaker 1: feels like kind of an uncertain industry that swings between
Speaker 1: feast and famine all the time. Yeah. So imagine you're
Speaker 1: like thinking about your career and you're like pretty technical minded,
Speaker 1: you're pretty smart, you could do a lot of things.
Speaker 1: You're intelligence, and you're like face with like two options.
Speaker 1: It's like, Okay, do you want to like go to
Speaker 1: North Dakota or somewhere up in Canada and analyzed rock formations?
Speaker 1: Or do you want to live in California and work
Speaker 1: for Facebook and get lots of free lunches and free
Speaker 1: dry cleaning and maybe make millions of dollars. I don't know.
Speaker 1: It seems like kind of an easy choice from the
Speaker 1: perspective of a potential tailted person thinking about which direction
Speaker 1: they want to take their life in. Well. Also, I mean,
Speaker 1: Silicon Valley was very good at selling the idea of
Speaker 1: making the world a better place, yeah right, which I
Speaker 1: don't think is as impactful as it once is. That message,
Speaker 1: I don't think as many people believe it. But like,
Speaker 1: certainly for a while it was about come build a
Speaker 1: better future, um in tech versus come dig out of
Speaker 1: rock in northern Canada. Yeah, so come to Canada, dig
Speaker 1: out of rock, be cold all the time. Oh and
Speaker 1: by the way, you're contributing to the worsening of the
Speaker 1: planet through global warming. Oh and by the way, this
Speaker 1: industry has no future. These were like the messages I
Speaker 1: mean the message we can tell it's like you're gonna
Speaker 1: contribute to climate change by participating this industry. Also, the
Speaker 1: industry has no future because it's all gonna be you know,
Speaker 1: disappear because of electric cars or whatever. So all these
Speaker 1: things it's like or you know, do software make up fortune?
Speaker 1: It seems like you can see why people made one
Speaker 1: choice or not the other. Yeah, so we obviously have
Speaker 1: to dig into this no pun intended, but um, yeah,
Speaker 1: we're gonna dig into the talent shortage in energy and mining, right,
Speaker 1: and so there's all kinds of bottlenecks, you know. Now
Speaker 1: of course everything's flipped, and you know there's like, well,
Speaker 1: why can't we restart the minds? Why can't we get
Speaker 1: drilling again for energy? Uh, you know natural gas and oil.
Speaker 1: There is a pickup in activity, but it has not
Speaker 1: been as rebustes people expected. So what are the constraints
Speaker 1: on getting everything going again and getting dirty stuff out
Speaker 1: of the ground for whether it's gasoline or fuel or
Speaker 1: medals that we need for decarbonization and electricity. I'm very
Speaker 1: excited about our guests, Uh, someone who understands the space deeply.
Speaker 1: We're gonna be speaking to Peter to sack In. He
Speaker 1: is the managing director of ARC Financial, a private equity
Speaker 1: company that specifically focuses on energy, and he knows a
Speaker 1: lot about the nuts and bolts of this space and
Speaker 1: investing in this space. So, Peter, thank you so much
Speaker 1: for joining us. Well, it's my pleasure. I'm delighted to
Speaker 1: be on the program. So is that true they're sort
Speaker 1: of like the premise that we started out this conversation
Speaker 1: that they're really uh, the number of people wanting to
Speaker 1: make a career sort of like petroleum engineers or mining
Speaker 1: engineers has really tailed off over the last decade. Yes,
Speaker 1: that's true. Actually there's a double whammy. Also, what we're
Speaker 1: seeing and we're going to see more of, is that
Speaker 1: the older generation is set to retire and now with
Speaker 1: these higher commodity prices, they are going to cash in,
Speaker 1: so to speak, and be much more apt to exit
Speaker 1: the business. And with nobody coming into the business, it's
Speaker 1: going to make the problem more acute. So so the
Speaker 1: higher prices increase the need for talent. But what they
Speaker 1: do in the immediate term is a bunch of people like, oh,
Speaker 1: I can finally retire because my oil stocks are up,
Speaker 1: or by commodity whatever it is, by copper Stock, the
Speaker 1: company that I worked for. So the first order effect,
Speaker 1: even before it has the effect of bringing a new talent,
Speaker 1: is to accelerate the departure of the existing til Yeah,
Speaker 1: that's going to be a big problem. And the other
Speaker 1: part of losing the older generation is that resources exploration,
Speaker 1: certainly oil and gas, has a lot of tact knowledge.
Speaker 1: In other words, it takes years to really build up
Speaker 1: gut feel expertise, which is just as important as you know,
Speaker 1: raw numerical expertise. I have this image of like Bruce
Speaker 1: Willis and Armageddon teaching the youngsters how to mind properly, right,
Speaker 1: remember that? Yeah? Right? The asteroid Yeah yeah, yeah. I
Speaker 1: mean those are the sort of the Hollywood perceptions of
Speaker 1: the way things work. I mean, I have to say
Speaker 1: that the the industry is actually very technologically advanced, and
Speaker 1: that uh, you know, the loss of knowledge is much
Speaker 1: more than just sort of these perceptions of people going
Speaker 1: and digging holes in the ground. It's it's much more
Speaker 1: complicated than that, which exacerbates the problem because there's a
Speaker 1: lot of taskit knowledge that needs to be replaced. So
Speaker 1: when you mentioned an older generation, potentially entering retirement. It
Speaker 1: reminds me a lot of the pilot shortage that we
Speaker 1: saw and this idea that you know, we had a
Speaker 1: lot of pilots we're coming through the military primarily, and
Speaker 1: then after they completed their service that would go into
Speaker 1: commercial flying and then they entered retirement age and we
Speaker 1: don't have a lot of people to replace them. Where
Speaker 1: historically has energy talent come from, Well, energy talent comes
Speaker 1: from to places. First of all, there's the field, and
Speaker 1: that talent typically comes from hiring people and training them
Speaker 1: also out of technical schools, and there's a lot of
Speaker 1: training that goes on in terms of safety and how
Speaker 1: to operate equipment, and that can take many months certification UH.
Speaker 1: And then in the offices where a lot of the
Speaker 1: engineering is done and the and the and the geoscience
Speaker 1: is done, I mean those the talent pool there comes
Speaker 1: from universities, petroleum engineering courses, geophysics, geology, chemical engineering, you
Speaker 1: name it, petroleum engagineering. Yeah. So what has enrollment been
Speaker 1: like at these uh, at these at the university level
Speaker 1: for petroleum engineering and some of these related fields, Well,
Speaker 1: it's declining and in the handful of universities and the
Speaker 1: Western hemisphere, I'll call it in Europe, United States, Canada.
Speaker 1: Whereas there's a lot of expertise in the universities to
Speaker 1: train students, the enrollment is going down. In some instances
Speaker 1: the university are shutting programs down. And it's what you
Speaker 1: said earlier. I mean, the the emphasis for students and
Speaker 1: the desire for students with technical backgrounds is to go
Speaker 1: into Silicon valley type ventures and so on. It's not
Speaker 1: to go into the resource economy. So it's so it's problematic. Yeah,
Speaker 1: what was the sales pitch earlier? So you know, I
Speaker 1: guess the seventies, eighties, nineties, if someone was thinking about
Speaker 1: a career in resource management, what would they What would
Speaker 1: be the benefits of such a career. Well, the benefits
Speaker 1: certainly would be pay to start with, because historically and
Speaker 1: even now, these are very high paying jobs. Uh and
Speaker 1: even so it's difficult to attract paying people. But historically
Speaker 1: it's also been viewed as well, with the growth of
Speaker 1: the economy, you need more energy, energy dominated by falsil
Speaker 1: fuels over the course of the last couple of centuries. Therefore,
Speaker 1: you are contributing to the UH, the growth of society
Speaker 1: and energy needs in the economy, and so it's historically
Speaker 1: been the paradigm. But now that paradigm is broken, certainly
Speaker 1: in the Western world, it's broken, and that leads to
Speaker 1: the problems that we're going to see are already seeing
Speaker 1: in terms of the price of the commodity and the
Speaker 1: supply shortage. Can you uh, what schools have actually shut down?
Speaker 1: I went to University of Texas, so there was a
Speaker 1: geology program. They're pretty I think at the time there
Speaker 1: were a pretty decent number of people going into the
Speaker 1: patrolling industry. But where have we actually seen you said
Speaker 1: some schools have shut down, like just the Yeah. I
Speaker 1: can't speak for the American universities as much. I mean,
Speaker 1: there's certainly the Texas universities, including s m u H,
Speaker 1: some of the schools in Louisiana, you know, the Oklahoma
Speaker 1: does big. I mean, those are the states where that
Speaker 1: have a lot of the resources. Not surprisingly, that's where
Speaker 1: the schools are. Ditto here up in Canada where I'm located.
Speaker 1: University of Calgary, Canada is the fourth largest producer of
Speaker 1: oil and gas in the world now, and so we
Speaker 1: have the schools here in University of Alberta, University of Calgary.
Speaker 1: The enrollments are way down and some of the programs
Speaker 1: are likely to be shut so we are going to
Speaker 1: see a talent talent pool shortage. There's no question. Can
Speaker 1: you give us a little bit more color on how
Speaker 1: much enrollment is down or exactly what the extent of
Speaker 1: the talent shortage actually is and are there particular areas
Speaker 1: where it's more are acute versus you know, other types
Speaker 1: of energy jobs. Yeah, so the petroleum engineering department here.
Speaker 1: I had a conversation a couple of weeks ago with
Speaker 1: one of the faculty members and he indicated school are
Speaker 1: you referring to this University of Calgary? I mean, you know,
Speaker 1: typically probably see uh thirty students a year and graduating
Speaker 1: clause maybe more. I mean historically it would have been
Speaker 1: much more than that. I think they have enrollment for
Speaker 1: one student. You know, it's uh, you know, it's that
Speaker 1: kind of thing. Now that may pick up as we
Speaker 1: get it closer to the fall session, but the numbers
Speaker 1: are not looking positive in terms of replenishing the knowledge
Speaker 1: base one student. I introduced you as the managing director
Speaker 1: of ARC Financial, But can you just sort of give
Speaker 1: the summary of like you've seen these cycles come and
Speaker 1: go for a while, like what's your person, what's your
Speaker 1: sort of like general background and story. Having watched and
Speaker 1: been in bold within the extract of resources industries, Yeah, well,
Speaker 1: I started out as a geoscientist back in the eighties.
Speaker 1: I worked for one of the multinational oil companies. I
Speaker 1: worked in the field, I worked in the office, UH,
Speaker 1: and then I migrated to the world of finance, the
Speaker 1: world of technology, the world of energy technology, and so
Speaker 1: I sort of have a very holistic background in energy
Speaker 1: and energy technology, and in my career over the last
Speaker 1: twenty years, have financed everything from oil and gas to solar,
Speaker 1: to win to you name it. So, as I watched
Speaker 1: the boom and the bus cycles, there was always a
Speaker 1: repetitive theme on the oil and gas side, is that
Speaker 1: when the price of oil and gas went up, that
Speaker 1: was the signal, the siren goes off for the companies
Speaker 1: to go back and drill more and bring more supply on. Now,
Speaker 1: as we all know, they're over. Over the course of
Speaker 1: the last half dozen years, that signal has been broken. Right.
Speaker 1: It's because of the vilification of the industry, the climate
Speaker 1: change can arns, the divestment movement UH, and of oil narratives,
Speaker 1: all that kind of stuff. So and then of course, uh,
Speaker 1: the turnover of investors in many of the publicly traded
Speaker 1: Western oil and gas companies basically who want their money
Speaker 1: back in terms of dividends. So that means that there's
Speaker 1: not a lot of money going back into the ground,
Speaker 1: certainly not as much as use there used to be
Speaker 1: to give a supply side response to to meet the
Speaker 1: demand which is still there. And and and as we
Speaker 1: can see growing, everybody's back flying and going on vacations
Speaker 1: and driving, and so you know, it's a and then
Speaker 1: you lose your your upstream talent pool. And that just
Speaker 1: combined with the war in Europe with Ukraine and a boy,
Speaker 1: it's just sort of like the perfect storm two create
Speaker 1: an energy crisis the likes of which we have not
Speaker 1: seen since the nineteen seventies perfect storm. We hear that
Speaker 1: phrase so much on this podcast, but you know, for
Speaker 1: for eight different things. But okay, so I'm looking at
Speaker 1: the chart of Brent oil and it's currently above a barrel.
Speaker 1: So in olden times, olden times being you know, just
Speaker 1: ten years ago or so, you would expect shale driller
Speaker 1: of some sort to see that chart and go, oh,
Speaker 1: we're going to restart some of our old wells um
Speaker 1: and presumably they would have gotten that done fairly quickly
Speaker 1: given the incentive there from the price. When that happens. Now,
Speaker 1: when oil goes above one as it is, now, what's
Speaker 1: the hold up for restarting those drills? Like walk us
Speaker 1: through exactly all the points um in actually ramping up
Speaker 1: that production. Well, first of all, a little bit of perspective,
Speaker 1: add twenty barrel today. If you inflation adjust the price
Speaker 1: of oil and take it back historically all the way
Speaker 1: to the beginning of the lost entry, in other words,
Speaker 1: undred and twenty years ago, a d is is typically
Speaker 1: the high point on an inflation adjusted basis, like beyond one,
Speaker 1: all of a sudden you will get a demand response
Speaker 1: and people will start peeling back. The supply response typically
Speaker 1: starts around in earnest. Now, we didn't see that this
Speaker 1: time around. So last year when we certain that the
Speaker 1: price started to escalate through and the call went out, hey,
Speaker 1: you know, like the price is going up, we better
Speaker 1: get some more production going. Well, the publicly treated companies
Speaker 1: and the CEO has basically said, well, wait a minute,
Speaker 1: everybody told me to uh focus on profitability, not production growth,
Speaker 1: and give give the cash flow back to the shareholders.
Speaker 1: What are we doing here changing the tune right? And
Speaker 1: you know not And by the way, everybody's saying, it's
Speaker 1: the end of oil, so why should I go back
Speaker 1: and drill? So a's then you get into hundred. Oh
Speaker 1: that's interesting, and the rid count starts to go back
Speaker 1: up a little bit, but it's very muted relative to
Speaker 1: what it would have been historically. And so here we
Speaker 1: are today at one The allure of going back and
Speaker 1: bringing on production will be irresistible, but it's still I believe,
Speaker 1: not going to be the same level of drilling. And
Speaker 1: then there's all the field level constraints which we haven't
Speaker 1: talked about yet, the physical the physical equipment, and the
Speaker 1: people in the field. I mean, to this point, we've
Speaker 1: talked about university graduates and engineers who typically go work
Speaker 1: in the office. Now you've got to talk about the
Speaker 1: shortages in the field. So yeah, what are let's talk
Speaker 1: about those? So how many people like compare the sort
Speaker 1: of upswing cycle now, the ease of hiring, the number
Speaker 1: of people willing to do the work, How is that
Speaker 1: different than you know, previous cycles that you've seen the
Speaker 1: challenge of staffing the field. Yeah, so what we've seen, well,
Speaker 1: you have to wind back to late At that time,
Speaker 1: shale drilling was so prolific and the money was being
Speaker 1: given to the industry from Wall Street to drill. We
Speaker 1: created a supply glut. The Saudis said, we'll wait a minute. Uh,
Speaker 1: We're not going to give up our market share. So
Speaker 1: that started the price war. They flooded the market. The
Speaker 1: price of oil collapsed down to thirty bucks uh. And
Speaker 1: that started a prolonged period where prices were low. So
Speaker 1: the industry went into sort of a downturn. Prices recovered
Speaker 1: back to kind of like the fifty level, and and
Speaker 1: and stay there. Fifty is not compelling, fifties not compelling.
Speaker 1: And then layered on top of that, the end of
Speaker 1: oil narrative started. And so there's this whole negative paul
Speaker 1: around the industry. So in that context, it's been now
Speaker 1: seven years of negativity. And so the service companies that
Speaker 1: go out to the field with their people basically said, well,
Speaker 1: why would I build new equipment, why would I even
Speaker 1: maintain equipment. I'm just going to cannibalize parts off old
Speaker 1: equipment to keep the equipment of a smaller equipment fleet going.
Speaker 1: So here we are today with a shrunken field capacity
Speaker 1: and by the way, a lot of loss of knowledgeable
Speaker 1: people trained on how to operate this equipment that's being
Speaker 1: called back and saying, hey, go go drill again. We
Speaker 1: need it because we want to get off Russian oil. Well,
Speaker 1: wait a minute, Like, I can't just tool up and
Speaker 1: and hire a cruise overnight to do this, even if
Speaker 1: I wanted to. And then on top of that, you
Speaker 1: have the inflationary effects of things like steel and chemicals
Speaker 1: and raw parts, supply chain issues, and so even if
Speaker 1: you wanted to grow it meaningfully, it would be very difficult.
Speaker 1: Can you talk a little bit about this from a
Speaker 1: technical perspective? So, if I have a well that I
Speaker 1: haven't been using for a while because oil prices were
Speaker 1: so low, what does it actually take to restart it?
Speaker 1: I mean, assuming I can get the labor, what are
Speaker 1: the technical things that I need in order to get
Speaker 1: it going again. Well, it's not so much restarting old
Speaker 1: wells because wells you typically do not want, especially oil wells,
Speaker 1: you don't. You never want to shut them in because
Speaker 1: restarting them is is problematic. So a lot of wells
Speaker 1: the other get choked back. But if you want to
Speaker 1: grow production back to where it was before, you have
Speaker 1: to drill more new wells. And so that's where the
Speaker 1: problem lies is you need drilling rigs, you need hydraulic
Speaker 1: fracturing crews, you need all sorts of peripheral services to
Speaker 1: get these things going, and so the ability to bring
Speaker 1: on new wells, and then you also need service equipment,
Speaker 1: by the way, to wrap up the old wells. Again. Uh,
Speaker 1: it's it's said that you want to bring on the
Speaker 1: amount that we're forfeiting from sanctioning Russia. I mean, you're
Speaker 1: talking several million earls a day, which the Permian and
Speaker 1: feels like that and up here and kind of we
Speaker 1: can do, but you just can't turn this spigot on overnight.
Speaker 1: And then there's just this general reluctance by investors and
Speaker 1: others saying, well, I don't know if I believe all this,
Speaker 1: And by the way, you told me was the end
Speaker 1: of oil, so why would I put money into the ground.
Speaker 1: I'm sort of fascinated by something you said about like
Speaker 1: equipment either having been not preserved or preserved in a
Speaker 1: bad state, like what equipment, Where was it housed? You know,
Speaker 1: for these last seven years while the industry was sort
Speaker 1: of shrinking or downstairs? Where was it housed? And what
Speaker 1: you know? Now it's like, okay, we're back. And then
Speaker 1: they opened the warehouses. What is it like literally rusted?
Speaker 1: Like can you tell what type of equipment and what
Speaker 1: is actually well, I don't know if it's arrusted, I
Speaker 1: guess environment. Yeah, yeah, I get what you're saying. Yeah,
Speaker 1: So I mean the whole thing is is that when
Speaker 1: when prices fall and they still commodity prices, when they
Speaker 1: fall and they stay low, that's a signal to just contract. Right.
Speaker 1: So basically, the service companies, unfortunately, especially if the downturn
Speaker 1: is severe, which it was, have to shed people and
Speaker 1: they basically have to stop building new equipment. In fact,
Speaker 1: you have to contract your fleet. So they say, well,
Speaker 1: why would I keep say a hundred units active and
Speaker 1: maintained when my customers, the oil and gas companies, only
Speaker 1: want the equivalent of forty units. So basically you park
Speaker 1: everything in a yard and you keep the forty units going,
Speaker 1: But instead of buying a whole bunch of new spare parts,
Speaker 1: you just start cannibalizing the other parts of the for
Speaker 1: the existing are in action. You're cannibalizing the other sixty
Speaker 1: to keep them buying new spare parts because you don't
Speaker 1: like exactly new. But then when it's time to go
Speaker 1: access those other sixty, they're missing parts exactly. So that's
Speaker 1: what's been happening over the last seven years, is saying, well,
Speaker 1: why would I buy new stuff? I just keep things going.
Speaker 1: And it's so you know, this creates the situation now
Speaker 1: where he say, okay, I need a bunch of spare
Speaker 1: parts if I want to ramp up, and then he say, okay,
Speaker 1: now we've got supply chain issues. Now I've got people issues,
Speaker 1: and so the ability to ramp back up at the
Speaker 1: snap of your fingers is very difficult. So I remember
Speaker 1: back when oil prices were quite low, So I guess
Speaker 1: around one of the talking points in the industry was
Speaker 1: well why do people keep pumping at these prices? And
Speaker 1: we saw production be a lot um sticky, I suppose
Speaker 1: than than many people had expected, and so so a
Speaker 1: why do you think that happened? And then be one
Speaker 1: of the things that I remember people talking about around
Speaker 1: that time was standardization of parts for rigs and drills
Speaker 1: and things like that, and basically just a discussion that
Speaker 1: technological advancement and standardization meant that producing oil was a
Speaker 1: lot more efficient than it used to be, so you
Speaker 1: could pump more without necessarily spending tons of money. So
Speaker 1: is that, like, doesn't that also work the other way?
Speaker 1: You know, with high oil prices, shouldn't standardization help um
Speaker 1: keep some production up and hopefully increase it? Yeah? Okay,
Speaker 1: so I think it's actually brought up some really important points.
Speaker 1: But let's let's let's tackle the one. Why keep pumping
Speaker 1: if prices are low, as I said, because it's very,
Speaker 1: very costly for oil wells to to turn them off
Speaker 1: and then to bring them, so you you want to
Speaker 1: keep producing for as long as possible. Now, in two
Speaker 1: thousand fifteen, when the price went down, you know, we
Speaker 1: went down to for a while, but for the most part,
Speaker 1: over the course of the latter half of it was
Speaker 1: fifty bucks of barrel. So there's three kind of costs here.
Speaker 1: There's operating cost, which is the cost to keep pumping,
Speaker 1: and the oup costs are typically lower than that, and
Speaker 1: so it makes you make money just by pumping. But
Speaker 1: what happens is is that if you don't drill more
Speaker 1: into the same reservoirs, the production declines, and it's called
Speaker 1: a decline curve. In other words, today you're pumping a
Speaker 1: hunter barrels uh and typically some of these wells decline,
Speaker 1: maybe more a year. In the first year, it's even
Speaker 1: more so a year on you're only pumping let's just
Speaker 1: say seventy barrels for the sake of argument, and the
Speaker 1: next year it's only fifty barrels. So the basic operating
Speaker 1: costs keeps the oil flowing. Then you need the maintenance
Speaker 1: capital costs, which is drilling us to keep production level.
Speaker 1: So what happens is when you're go into a downturn,
Speaker 1: depending upon your cost structure of an individual company, you
Speaker 1: have typically pull back on your maintenance cost and you
Speaker 1: might decline your production. But if you're in growth mode
Speaker 1: and you want there's the call because prices are high,
Speaker 1: then you start drilling new wells to not only offset
Speaker 1: your declines but to grow. So for the past seven
Speaker 1: years it's largely been a off costs plus maintenance costs
Speaker 1: to keep production level. The big event was the pandemic. Okay,
Speaker 1: when the pandemic, you know, we saw zero dollars for
Speaker 1: a few days we saw prolonged prede. That's when they
Speaker 1: said no maintenance costs, no growth, no nothing, and American
Speaker 1: production fell by at least a couple million barrels a day,
Speaker 1: and we haven't really recovered. Actually, yeah, I realize we
Speaker 1: haven't really discussed like what happened in those months of
Speaker 1: the acute early months of the pandemic. You know, of
Speaker 1: course there's the infamous like briefly like w T I
Speaker 1: at least on a computer screen, traded at negative forty
Speaker 1: barrel I think at one point. But obviously it seems
Speaker 1: like something snapped there. So you had this degradation of
Speaker 1: the industry from through and then something like broke there.
Speaker 1: It sounds like that really changed the trajectory so that
Speaker 1: the energy players were just not going to go back
Speaker 1: to the old way of sort of well losing a
Speaker 1: lot of money. But what was it? Can you talk
Speaker 1: a little bit about more like that? How transformative and
Speaker 1: significant those few months in Yeah, it was huge because
Speaker 1: you know, the event really weakened the industry and created
Speaker 1: the contraction and the capacity and the cannibalizing and spare
Speaker 1: parts and so on. But you know, many companies still
Speaker 1: hung on but when you get to twenty a barrel
Speaker 1: and you know, momentarily zero and all of a sudden,
Speaker 1: all the pipes are backing up because no, there's no
Speaker 1: demand and there's a global immobility with lockdowns and nobody's
Speaker 1: using this stuff momentarily, then you create cash flow crisis
Speaker 1: for service companies and producers, and those that were on
Speaker 1: the verge of bankruptcy went bankrupt. And certainly there was
Speaker 1: more layoffs, and so you lose more talent and more
Speaker 1: tacit knowledge, and and and so the pandemic really was problematic.
Speaker 1: And that was at the same time, again that was
Speaker 1: a layered on top of that the whole end of
Speaker 1: an oil narrative like okay, electric vehicles are taking over
Speaker 1: the world and so on and so forth, we don't
Speaker 1: need this stuff anymore, and zoom is going to help us, uh,
Speaker 1: you know, overcome our commuting and blah blah blah. And
Speaker 1: so it really weakened the industry further. And then all
Speaker 1: of a sudden, of course, the demand comes back, comes
Speaker 1: roaring back, and the supply side is hampered, especially the
Speaker 1: Western oil and gas industry, which has been under intense
Speaker 1: pressure UH to decarbonized cut its production, so on and
Speaker 1: so forth, and so here we are, so talk to
Speaker 1: us a little bit more also about the financing aspect
Speaker 1: of it UM. And this is something that we hear
Speaker 1: from energy producers in particular, this idea that well, for
Speaker 1: them credit, you know, for the rest of the world,
Speaker 1: credit has been an ample supply for the past few years.
Speaker 1: But for anything that's considered a polluting industry or a
Speaker 1: non E s G compliant industry, it's much more difficult.
Speaker 1: So how how real has that been for the industry.
Speaker 1: It's been very real. I mean there's two major sources
Speaker 1: of financing, like in any company, it's equity and debt.
Speaker 1: So historically, certainly, when the price of the commodity goes
Speaker 1: up at any players from Wall Street come in and
Speaker 1: and say here go drill, go produce more. Uh, And
Speaker 1: you produce more of the cash flows are strong, so
Speaker 1: you're able to borrow more. But the combination of seven
Speaker 1: years of low prices and not making any money already
Speaker 1: investors were saying, well, you know, give me a call
Speaker 1: when you make money. And then on top of that,
Speaker 1: the divestment movement and end of oil narrative E s
Speaker 1: G and many financial institutions pension plans for example, saying no,
Speaker 1: we're we're not allowed to invest in these companies and anymore,
Speaker 1: and banks coming out and joining things like the Net
Speaker 1: Zero Banking Alliance, which basically says no more fossil fuel
Speaker 1: debt investing. And so now we're in a situation where
Speaker 1: the oil and gas companies are making a lot of
Speaker 1: cash flow, right, they can finance themselves and they can
Speaker 1: even drill themselves. But the investors who stuck with the
Speaker 1: companies are basically saying, well, you know, I stuck it
Speaker 1: out with you, give me my money back and a
Speaker 1: divid end and buy back shares and so on, and
Speaker 1: so again we're in a situation where the ability to
Speaker 1: make decisions to put money back into the ground to
Speaker 1: grow production is very encumbered. Yeah. So in theory, okay,
Speaker 1: So the the shareholders of these companies who are sitting
Speaker 1: on years and years of cash for losses, they're like, no,
Speaker 1: don't indvise. So the idea is they don't want UH
Speaker 1: to invest because they wanted to get repaid after years
Speaker 1: of losses, and then there isn't some pool of other
Speaker 1: money and that would be more the sort of E. S. G.
Speaker 1: Defined broadly, but that would be more of the E
Speaker 1: s G impaired financing because all different kinds of industries,
Speaker 1: it sounds like a are all different sorts of players
Speaker 1: basically made a formal decision to get out of the game. Yeah. Well,
Speaker 1: so what's happening is is that there's what I call
Speaker 1: the alt finance universe that's starting to emerge. So the
Speaker 1: alt finance universe are financial provide uh what do you
Speaker 1: call it? Equity providers, debt providers that are not overly
Speaker 1: concerned about E s G. And they say, find sure,
Speaker 1: we'll give you the money, maybe at a higher price. Uh.
Speaker 1: So they come in and they start financing these companies.
Speaker 1: At the moment, though, I'll reiterate at a barrel and
Speaker 1: even a hundred bucks of barrel. Oil and gas companies
Speaker 1: are actually vigorously paying debt down. They don't need they
Speaker 1: don't need any money, and they are issuing special dividends
Speaker 1: and so on. But the issue is going to come
Speaker 1: when the price of oil falls back to say eighty
Speaker 1: dollars and we think it's all okay, but really it's not.
Speaker 1: It's a very precarious situation because you know the root
Speaker 1: issue of still the need for fossil fuels, oil and
Speaker 1: gas for several decades, in my opinion, is not going away.
Speaker 1: So just to play devil's advocate on that question, I mean,
Speaker 1: a lot of people in the E s G would
Speaker 1: presumably say, well, this is exactly the kind of dynamic
Speaker 1: that we do want. Okay, so not we don't necessarily
Speaker 1: want oil at a barrel, but we want people to
Speaker 1: go into other industries. We want to choke off funding
Speaker 1: for dirtier industries in order to encourage newer types of energy,
Speaker 1: cleaner types of energy. What would be your response to
Speaker 1: that message, Well, I have the benefit of financing all
Speaker 1: types of energy and have seen how transitions work. In fact,
Speaker 1: even written books on energy transition before energy transition was
Speaker 1: even a buzzword. Uh. So you know, the thing is
Speaker 1: is that it's not a good idea to prematurely abandoned
Speaker 1: this industry. Because the price goes up to a hundred
Speaker 1: twenty bucks gasoline goes to five dollars a barrel. Uh,
Speaker 1: it's like a massive carbon tax. Uh let's say the
Speaker 1: equivalent from going from fifty dollars a barrel to barrel.
Speaker 1: That's like imposing a two ton carbon tax and the
Speaker 1: people right, which is huge, and it disenfranchises obviously the
Speaker 1: lower income strata of society and creates all sorts of
Speaker 1: social issues and polarization. So yeah, it's one way to
Speaker 1: think about, you know, forcing people to switch off of
Speaker 1: oil and gas into alternatives, except the alternatives are not
Speaker 1: available easily. It costs people money which they don't have
Speaker 1: now to say, buy a new vehicle electric vehicle, or
Speaker 1: replace their heat their furnace with a heat pump, or
Speaker 1: are conditioning or whatever, and and so we'll just create
Speaker 1: this really distorted economy that speaks to a very sorderly
Speaker 1: transition that has potentially a lot of civil uh unrest
Speaker 1: and problems. So you're somewhat beautiful and this is right
Speaker 1: because you're invested in the transition. So he but well,
Speaker 1: I guess sort of a one and a half part
Speaker 1: question is like you're invest in the transition, what new tech?
Speaker 1: I guess it sounds like this is a really bad
Speaker 1: way to accelerate it in your view, But what is
Speaker 1: like what do you see as like the problem? You know,
Speaker 1: what is the orderly transition? Look like the order of
Speaker 1: the transition is that you know, I'm very still bullish
Speaker 1: on renewables. I mean the cost curves coming down and
Speaker 1: the adoption rates. Personally, I drive, I've been driving an
Speaker 1: electric vehicle for five and a half years, so I'm
Speaker 1: a fan of electric vehicles, however, and I'm also a
Speaker 1: social what do you call color commentator and energy and
Speaker 1: I can tell you, like, the transition does not occur overnight.
Speaker 1: I mean this is if you look at historical transitions,
Speaker 1: they take decades and to think that, you know, it's
Speaker 1: almost a lot of hubris to think that we could
Speaker 1: get off this stuff in a matter of a few
Speaker 1: years and make us which is being disproven right right now.
Speaker 1: And you know it's going to be disproven doubly because
Speaker 1: they said, what we have right now is the equivalent
Speaker 1: of a two carbon tax, and all it's doing is
Speaker 1: creating um a lot of animosity and society is what
Speaker 1: I can see, and disenfranchising the lower income strata. So
Speaker 1: if this is my new favorite question to ask people,
Speaker 1: but if you could wave a magic wand and change
Speaker 1: one thing about the way the current world works or
Speaker 1: the way policy is formed or whatever, in order to
Speaker 1: help some of the problems, help alleviate some of the
Speaker 1: problems we've been discussing what would it be, Well, I
Speaker 1: mean it's it's probably not one one, But I'll just
Speaker 1: say one thing that we should be doing is focusing
Speaker 1: back on the core objective, which is to reduce emissions. Okay,
Speaker 1: So reducing emissions is not the same as shutting down
Speaker 1: and thinking the oil and gas industry is dead. Okay,
Speaker 1: the put putting an industry out of business is a
Speaker 1: lot harder than reducing emissions in my opinion. Okay, And
Speaker 1: you can go deep into the subject, but this, to
Speaker 1: me is the core issue that and the and the
Speaker 1: core mistakes that's been made to this point is that
Speaker 1: the only way to decarbonize quickly is to shut down
Speaker 1: the oil and gas industry and call it dead and buried,
Speaker 1: which is what we've been doing over the last half
Speaker 1: dozen years and has resulted in the situation that we're
Speaker 1: in right now. You know, we need to get people
Speaker 1: back into the industry that is innovating now fairly vigorously
Speaker 1: in terms of how to reduce their upstream emissions and
Speaker 1: with carbon capture and other technologies that are yet to
Speaker 1: come to the fore, so we can reduce emissions dramatically
Speaker 1: and we can have a transition to electrification in all
Speaker 1: sorts of things that will help us decarbonized going forward
Speaker 1: and create clean and prosperous energy. But you know, we
Speaker 1: have to do it smoothly, because if we don't do
Speaker 1: it smoothly, you're going to create all sorts of social
Speaker 1: tensions which we're seeing get manifested. And that's just obstructionist
Speaker 1: in terms of getting it. It's friction in terms of
Speaker 1: getting to the end goal. What about is there anything
Speaker 1: in the short to medium term, either in the US
Speaker 1: or Canada policy wise, that could just simply accelerate the
Speaker 1: production of oil right now? Because that's a big thing
Speaker 1: just getting in the US right Like supposedly Biden wakes
Speaker 1: up every day and he isn't he in the staff
Speaker 1: look at the price of gastly and every day. Supposedly
Speaker 1: that's what I read a report that said that is
Speaker 1: the other policies that could meaningfully accelerate I mean, as
Speaker 1: you mentioned, you know, you can look at the ridcounts
Speaker 1: they are going up. Other policies that in the sort
Speaker 1: of short to medium term could accelerate both production and
Speaker 1: refine such that the price has come down. Yeah, well,
Speaker 1: I don't think actually it's as much policy. Um. Now,
Speaker 1: Canada is a little bit different than the US, but
Speaker 1: maybe not too far different. I think the industry and
Speaker 1: the shareholders of the industry are really exhausted by the
Speaker 1: vilification and the negative rhetoric, and so actually having leaders
Speaker 1: right at the top say that our domestic industry is
Speaker 1: among the best in the world and is plays a
Speaker 1: valuable role not only in terms of the carbonization, but
Speaker 1: plays a valuable role in energy security and energy affordability globally.
Speaker 1: Just to say that, just just just to say the
Speaker 1: industry is important, I think would make a lot of
Speaker 1: people be much more inclined to be part of the
Speaker 1: solution and maybe even encourage people to come back to
Speaker 1: work in the industry. You know, there's nothing you almost
Speaker 1: need like a rally cry and say you know, this
Speaker 1: is important to us that we have a smooth transition
Speaker 1: with safe, secure, cheap clean energy. You know, in your view,
Speaker 1: we're nowhere closed towards this sort of end of carbon
Speaker 1: of fossil fuels, oil and gases. What is like the
Speaker 1: transition look like when you like, when you think about
Speaker 1: this and you say it is a decade to cage
Speaker 1: one decade, what is what does it look like when's
Speaker 1: peak energy production, peak energy demand? What's the sort of
Speaker 1: ideal transition looked like from your perspective. Yeah, so let's
Speaker 1: focus it on the word transition. Well, first of all,
Speaker 1: I think the peak oil demand is probably around that's
Speaker 1: that's my estimates based on numbers and things. But let's
Speaker 1: think about transition. I mean transitions save from DVD players
Speaker 1: to streaming. You know, basically, you the demand for DVD
Speaker 1: players and DVDs goes down and the demand for streaming
Speaker 1: goes up. You know, what we're seeing in energy is
Speaker 1: that we have oil and gas and actually, unfortunately even
Speaker 1: coal continuing to rise at the same time as renewables
Speaker 1: are rising and electric vehicles are rising. It's more of
Speaker 1: a diversification of our energy system rather than our transition
Speaker 1: that's occurring. And then there's a big difference. And so
Speaker 1: let's let's bring that to cars, which is really important.
Speaker 1: You know, there's all these headlines and metrics measuring the
Speaker 1: sales of electric vehicles, and I think that's great. As
Speaker 1: I said, I've driven one for five and a half years.
Speaker 1: I love it. But the real metric in terms of
Speaker 1: decarbonization and transition is well, how many cars are we
Speaker 1: taking off the road that are combustion vehicles Because the
Speaker 1: reality is is that when somebody sells their combustion vehicle
Speaker 1: to buy an electric vehicle, that combustion vehicle goes to
Speaker 1: somebody else, and then when that person is done with it,
Speaker 1: it typically goes to a developing country and it gets
Speaker 1: driven for another twenty years. So yeah, because I mean,
Speaker 1: if you think about vehicles today, I mean, they'll go
Speaker 1: to three miles easy, right, because they're built robotically. The
Speaker 1: quality is a lot better than the cars we even
Speaker 1: produced ten years ago. And and so you know, the
Speaker 1: real metric for a transition is how fast are we
Speaker 1: not using legacy paradigms for energy versus just focusing on
Speaker 1: on the growth curve of new energy systems. We have
Speaker 1: to figure out how to retire the old stuff. And
Speaker 1: this is one of the big issues with oil and gas.
Speaker 1: Oil in particular and petroleum uses that oil demand is
Speaker 1: not likely to go down because population continues to grow
Speaker 1: in in developing economies. Uh, people are buying more and
Speaker 1: more vehicles still, and you know they're they're not necessarily
Speaker 1: buying electric vehicles, are buying somebody's used combustion vehicle that
Speaker 1: just gets shifted in container ships around the planet, and
Speaker 1: so it's a you know that the real transition, as
Speaker 1: I said, where you get the decline of the fossil
Speaker 1: fuel systems and the growth of the the new clean
Speaker 1: energy systems in earnest I don't I don't really expect
Speaker 1: that to happen until So that means between now and then,
Speaker 1: we've got this massive gap that's deteriorating in terms of
Speaker 1: the incumbent system. Well, Peter Church second, really great perspective.
Speaker 1: You know, we've been sort of talking about some of
Speaker 1: these topics very generally in terms of the financing and
Speaker 1: the constraints, but it's great to get this sort of
Speaker 1: like very clear ideas and like how they were thinking
Speaker 1: through these things with the constraints and plus the machinery.
Speaker 1: So I really appreciate you coming out online. That was
Speaker 1: very very educational. Well, my pleasure, thanks for having me,
Speaker 1: Thanks so much, Peter. Yeah, that was really interesting, Tracy.
Speaker 1: That example of just thinking through Okay, you have a
Speaker 1: hundred pieces of equipment, you only use forty, but then
Speaker 1: you cannibalize the other sixty to maintain the existing forty
Speaker 1: and then at the end, you do not have a
Speaker 1: hundred anymore because you didn't buy anything new. I think
Speaker 1: it was actually one of the clearest sort of big
Speaker 1: examples of I guess, like history sist or supply side degradation,
Speaker 1: what happens when you have a protracted slumping in they
Speaker 1: in an industry totally. And then I guess the um
Speaker 1: extending that to the labor side, that anecdote of one
Speaker 1: person enrolled versus classes that used to be you know,
Speaker 1: thirty or more are that's kind of stunning to me.
Speaker 1: But I guess, you know, to Peter's point, what would
Speaker 1: you expect when for years and years and years people
Speaker 1: have been like, oh, this is a terrible industry, you're
Speaker 1: ruining the planet. Who in their right mind would want
Speaker 1: to go into that? No, it doesn't seem like you know, okay, yes,
Speaker 1: I'm sure in many cases they were very very well
Speaker 1: paying jobs still even during the downturn years, but very
Speaker 1: little about that career over the last ten years would
Speaker 1: have seemed to be particularly appealing for a lot of people.
Speaker 1: And then it's sort of like kind of mind blowing
Speaker 1: to think, uh, you know, the first order effect of
Speaker 1: a of a surgeon energy stocks is that you probably
Speaker 1: have a lot of people who worked for Exxon or
Speaker 1: whoever else they like, finally, my portfolio stocks is high
Speaker 1: enough that I can retire. So even before you have
Speaker 1: the positive price signal of of putting people into the market,
Speaker 1: you finally get people who could cash out and retire.
Speaker 1: The two other things that struck me was one just
Speaker 1: the idea that maybe if people were a little bit
Speaker 1: nicer to the industry. And again, like so much of it,
Speaker 1: it sounds like messaging, and it is, but I think
Speaker 1: that matters to people, right, Like, no one wants to
Speaker 1: feel like they're coming into a job and they're not.
Speaker 1: It's weird making it different. Yeah, I know, I know
Speaker 1: it's weird. But on the other hand, and that's true.
Speaker 1: But something else has I've thought about. It's like Trump
Speaker 1: was like really nice, like rhetorically to the industry, and
Speaker 1: that was the years when like they lost hundreds of
Speaker 1: billions of you know how many hundreds of billions of
Speaker 1: dollars in the industry Louise from through so yeah, but
Speaker 1: I mean they were still producing, right, that's the difference.
Speaker 1: I know. It's so it's so weird, it's like, oh,
Speaker 1: we're nice and we're like going bankrupt and now we
Speaker 1: have a president doesn't you know, doesn't quite say as
Speaker 1: nice things, at least at the UYS about the industry,
Speaker 1: but they're all making a fortune. It is sort of
Speaker 1: this weird I don't know well. And the other thing
Speaker 1: that I thought was interesting was this notion of you know,
Speaker 1: when he was talking about peak oil, which is a
Speaker 1: something that I haven't heard about for a long time
Speaker 1: because it kind of died during that era, which again
Speaker 1: tells you, you know, how extreme the sentiment kind of
Speaker 1: swings here. But when he was talking about the energy transition,
Speaker 1: we're not actually replacing all these combustible engines with new
Speaker 1: electric vehicles, were just moving them to a different place.
Speaker 1: So if the pool of the global population that needs
Speaker 1: a car continues to grow, then you can have a
Speaker 1: situation in which maybe you know, in the US and
Speaker 1: Norway and some of these other places have booming e
Speaker 1: V demand of course China as well, but then still
Speaker 1: like all of these used combustion vehicle don't actually leave
Speaker 1: the road and go to poorer countries, and the fact
Speaker 1: that you know, cars are made pretty well these days,
Speaker 1: I was sort of that they might live another twenty years,
Speaker 1: even after the second owner in the US sells it
Speaker 1: to someone an emerging market. Well, I mean, even like
Speaker 1: Landrovers from the nineties are really desirable. No, no, I
Speaker 1: had a really bad experience with the used land Rover.
Speaker 1: Never buy used land Rover. I think he would feel
Speaker 1: differently if you were living in like tens of years. No, no, no, no, no,
Speaker 1: I would not on any I would never wish anyone,
Speaker 1: even the most desperate person for a car, to buy
Speaker 1: an old land Room. Okay, they're great. I love them
Speaker 1: visually and aesthetically, but I would never, no matter how
Speaker 1: hard up you are, never buy an old land Rover. Okay, well,
Speaker 1: I feel like we're gonna have to talk about that
Speaker 1: that that website Bring a Trailer. It's so cool because
Speaker 1: they have all these like old classic cars, but it's
Speaker 1: called like bring a Trailer because it's it's old classic
Speaker 1: car auctions. But like these really like land Rovers, or
Speaker 1: these like BMWs and Mercedes that are like from the
Speaker 1: eighties and nineties that are like so cool and retro looking,
Speaker 1: but you just know, like it's there's not gonna work.
Speaker 1: You're you're gonna drive yourself crazy. But okay, but here's
Speaker 1: my point before I clearly touched a nerve by mentioning
Speaker 1: land Rover. But you know, like a lot of the
Speaker 1: newer cars, people don't have the expertise needed to fix
Speaker 1: them if something goes wrong because they're computer. Trust me,
Speaker 1: you don't have the expertise. I know this because we
Speaker 1: had so we had a land Rover that we got
Speaker 1: used in our family and the problem was not that
Speaker 1: like actually no one hit the expertise like it was like,
Speaker 1: oh we had to find someone Manueilson. No, don't do it. Never,
Speaker 1: it doesn't matter how cool they look. Don't buy What
Speaker 1: if I okay, what if instead of like Rover, I
Speaker 1: say land Cruiser. Would that be better like a Toyota
Speaker 1: land Cruiser. Toyota probably a little bitter Okay, okay, okay.
Speaker 1: My point is there are different reasons why you might
Speaker 1: want an older vehicle. And so to Peter's point, the
Speaker 1: assumption that we're just all going to switch to electric
Speaker 1: vehicles that might be unrealistic. The broad point, you just
Speaker 1: picked a category that I have. Okay, Look, if anyone,
Speaker 1: if anyone wants to get a reaction out of Joe
Speaker 1: on Twitter, just tweet like pictures of land Rovers out
Speaker 1: of it. I guess that's the way they look. Still
Speaker 1: drive on. Tell him you're thinking of buying one? All right,
Speaker 1: don't buy. I don't give it financial advice, but don't
Speaker 1: buy a nineties land. Okay, shall we leave it there.
Speaker 1: Let's leave it there. This has been another episode of
Speaker 1: the All Thoughts Podcast. I'm Tracy Alloway. You can follow
Speaker 1: me on Twitter at Tracy Alloway. And I'm Joe Eisenthal.
Speaker 1: You can follow me on Twitter at the Stalwart. Follow
Speaker 1: our guests on Twitter Peter Church sack In and he's
Speaker 1: at Peter Second. Follow our producer Carmen Rodriguez at Carmen Erman.
Speaker 1: Follow the Bloomberg head of podcast, Francesca Levi at Francesco Today,
Speaker 1: and check out all of our podcasts at Bloomberg under
Speaker 1: the handle and podcasts. Thanks for listening to