October 16, 2023 • 45 mins
Herb Listen, EY Americas Energy Assurance Leader; Pat Jelinik Principle EY Oil and Gas Leader; and Bruce On Principle EY US-West energy Strategy and Transaction Leader join Kym Bolado this week In The Oil Patch.
Inside the Oil Patch. The Latest information on the Oil, Gas, and Natural Gas industry with your host, Kym Bolado. For more information visit https://shalemag.com/in-the-oil-patch-schedule/
Inside the Oil Patch. The Latest information on the Oil, Gas, and Natural Gas industry with your host, Kym Bolado. For more information visit https://shalemag.com/in-the-oil-patch-schedule/
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Episode Transcript
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(00:00):
Welcome to in the oil Patch,presented by Shale Magazine, broadcasting from the
oil Field Experts Studios. Oil FieldExperts where you get the right products right
now in the oil patches, wheretogether we explore topics that affect us all
in oil gas business and in yourcommunity. Every week, your host Kim
Balato will visit with the movers andshakers in this fast paced industry. You'll
(00:21):
hear from industry experts, elected officials, and many more right here on in
the oil Patch. And that's timefor me to welcome to my guest,
herb Listen, who is a partnerat EY America's Energy and Natural Resources Assurance
Leader. I'm also being joined byPat Jellinick, who is the principal and
EY America's Oil and Gas Leader,and Bruce On, who is the principal
(00:45):
and EY US and West Energy Strategyand Transaction Leader. Thank you, gentlemen
for joining me on in the oilPatch radio show. EY produced a report
titled US Oil and Gas Reserves Productionand ESG Benchmark. It was a study
and it's a compilation and analysis ofthe US oil and gas reserves and production
(01:07):
information reported by publicly traded companies tothe SEC and an analysis of certain publicly
traded ESG disclosures. This report wasa look back from twenty eighteen to twenty
twenty two of fifty of the largestcompanies based on a twenty twenty two end
of year US oil and gas reservesestimate, and out of this benchmark study,
(01:32):
which was extremely interesting, it reflectsa lot. But most importantly,
which we're going to drill down into, the companies represent approximately for forty two
percent of the US combined oil andgas production for twenty twenty two and serves,
according to your study, as abell weather for the industry trends.
(01:53):
And so I want to get intothat because looking at the report, it
was very detailed. I want tocompliment you guys on the report first and
foremost. It really is an easyread, but it really does discuss what
we're looking at in the future ofenergy, how it has evolved since post
COVID through COVID, and what they'relooking at. And I think, what
(02:15):
is a really difficult thing to understandrather it's an oil and gas production company
and or the general public, ishow does climate change ESG and making a
profit considering regulations, what does theindustry look like. And this report really
gave a great overview of what they'redealing with. And the report looks pretty
(02:35):
promising, So I want to getinto that in brief. We're going to
discuss in this report and drill down. Oil and gas will continue to play
an important role in the energy mix, but efficiency and discipline is one key.
We're going to cover that too.Companies are investing in their future will
expand capital budgets, but not atthe expense of the returns, and I'm
sure the shareholders want to hear that. And then I also want to drill
(02:59):
down in the report on the ESGreporting because that seems to be in flux
with regulations that might be coming downthe pike and how they're dealing with it.
So ESG reporting continues to expand andimprove, but is primarily driven by
a social license to operate. Solet's begin with the first part of the
report. In this summar Rain,I want to read just a brief beginning
(03:21):
part to help the listener understand howin depth this report is. So in
your report, it says for severalyears, investing in the US petroleum sector,
especially in the unconventional oil pass wasout of favor and that has been
very truthful in stripping away environmental pressuresand concerns about the intimate peak of oil
demand. There was a glaring realityfacing investors head on. US oil sector
(03:46):
investments are not providing adequate returns.And we remember that time because there's been
a lot of discussion about not wantingto invest in fossil fuel stocks, why
the return wasn't there, and oranti oil and gas sentiment. The report
goes on to say, leading companiesin the US sector respond to the challenge
(04:06):
with relentless focus on capital discipline anddurability cost takeout. This attention to the
bottom line and return to investors haspaid off, and it is evidence in
the annual EYUS Oil and Gas ReserveProduction and ESG Benchmark study. That's what
I want to talk about today.So let's begin first. Why don't we
(04:28):
start with in brief, the oiland gas will continue to play an important
role in the energy mix, butefficiency and discipline is the key. Let's
drill down into that. Tell mewhy that is important. What did the
study come out with that was reallyimportant and glaring? Good Ethick Kimmin,
thanks for having us. This ispat I think as you look at the
study, what you're starting to identifyis that as much as there's a great
(04:51):
sense of urgency around the themes ofenergy transition, at the end of the
day, it's it's scale and thatkind of the challenges for that transition.
And so as you look at theexisting need for economic and energy security with
the backdrop of all the geopolitics andall the regulations, you still need optionality
(05:13):
with those things. And what westarted to call out on these is you're
noticing that the unconventional producers have actuallybeen able to curb a lot of their
actual intensity in the operations themselves,and they're finding new creative ways to innovate
and better produce the wells that theyoperate. And then at the same time
too, they're actually getting a lotmore balance on the capital side in terms
(05:33):
of balancing how much they're taken tomarket versus the global marketplace, what is
the prices that they're willing to get, and then ultimately being much more strategic
on the operation side in terms ofjust number of rigs that they're bringing to
the field and the likes. SoI think that people are being a lot
more disciplined and they're realizing that they'reactually is domestic need that continues to grow
(05:55):
and that these assets allow for thebalance of those two intersections just because of
how how short cycle they are andhow much intermittency they can actually manage actively
in terms of carbon intensity. Howabout can we drill down just a little
bit more into that and in yourstudy it actually gives some numbers. So
in the study it says, butmore critically, it's for companies strategic focus
(06:18):
and reassuring their investors, which iswhat the investors want to know is that
they're improving an efficiency and capital discipline. And you all go into some numbers
here, Can we kind of gointo those numbers? Pat? Sure,
and I'm happy maybe to take usthrough that. Ken, this is herb
Okay. You know when you talkedthrough when you went through the introduction,
(06:40):
I appreciate your remarks. You know, we've been doing this study now for
over fifteen years, and so we'vegotten a really good perspective by just drilling
in on this publicly available information tohelp us with understanding some of these backdrops
and themes. And one of thethings that you're talking about is really kind
(07:01):
of centered around that the three themesthat you started with and kind of drilling
into that and so kind of whenyou get in, when you get into
the numbers, you know, whatwe found was that it was best to
go back and take our twenty twentytwo study results and compare that to twenty
fourteen because those years were sort ofcomparable in terms of oil prices on average,
(07:26):
and so when you look at oilprices on average, they're fairly similar
in twenty fourteen versus twenty fifteen.And then what we did is we drilled
in to see how the results ofoperations in twenty fourteen compared to twenty twenty
two as well. And what wefound was that obviously the higher commodity prices,
(07:49):
you know, certainly helped oil andgas companies in this environment, and
they were able to reach record revenuesof about three hundred and thirty two billion
based on our study. However,what's more important is that US oil and
gas independence more than triple their shareholderreturns, so from about nineteen billion in
(08:11):
twenty twenty one to fifty eight pointeight billion in twenty two. And to
that end, in our twenty twentyone Reserve and Production study, we actually
added a capital allocation component of thatwhere we wanted to see where is the
where is the excess cash flow orwhere's the cash flow going visa the capital
(08:35):
expenditures exploration and development expenditures in otherwords, or to shareholder returns via common
stock repurchases or dividends. And soone of the things that we found and
we can drill into that is thatthere was a significant amount of shareholder returns
this year, just proving out thatdiscipline. And so that's really, you
(08:58):
know, one of the key themesthat we saw that I and PS are
investing in the future with expanded capitalbudgets, but not at the expense of
the shareholder value. When you lookback and you look at twenty fourteen,
there was a lot of capital expendituresto go and acquire new acreage, to
go and drill a well to holdthe acreage, and there was inefficiencies involved
(09:22):
with doing that because you would haveto move a rig from lease to lease
to least to secure those acreages.But as Pat was saying, now,
with the scalability of the US onshore drilling, really when you already have
the acreage in place and you cando multiple wells on one pad, that
(09:45):
significantly has helped in terms of efficienciesaround drilling costs, completion costs, lifting
costs, and so one of thethings we saw in our study is that
even comparing twenty two to twenty fourteen, as we stayed in the the revenues
were up fifty three percent twenty twoto twenty fourteen, but the production costs
(10:05):
were only of nineteen percent. Wealso looked at the barrel, the production
cost per barrel of oil equivalent,which is a standard measure that's looked at
in the industry, and what wasa really interesting component of that was that
looking from twenty fourteen to twenty twentytwo, the production cost per boe went
(10:26):
from fifty seven dollars a barrel infourteen to about fifty dollars a barrel in
twenty two. Now, you thinkabout the inflation environment and the higher costs
that we're in between fourteen and today, but yet our cost per barrel in
our study are quite a bit lowerand you know, almost twenty percent,
right, And a lot of that'sbecause of the scalability, a lot of
(10:50):
it's because of the increased focus onoperational discipline, being manufacturing concepts and the
likes and so this is why whywe're calling out the theme here around the
capital discipline, but at the sametime being mindful of needing to provide the
(11:11):
shareholders a return, particularly after alot of the pushback from investors in twenty
twenty exactly, and in your reportit says you specifically call it out the
sector has learned harsh lessons of pastboom bus cycles to improve the resilience to
their core business by displaying significant capitaldiscipline and prioritizing shareholder returns. When we
(11:35):
return from break, I want toget back on this and then I want
to move on to the next partof the report. And I also want
to cover the whole ESG transition becausethat is very very much in play as
well. Let's take a quick break. You're listening to a new Old Patch
radio show. We'll be right back. Attention, small and medium sized business
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(11:58):
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(12:43):
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up the phone today and call twoten two four oh seven one eight eight
again two ten, two four ohseventy one eighty eight and we're back here
listening to in the Oil Patch Radioshow. My guest today is ey On
(13:05):
a report that they released recently,a study. It's titled US Oil and
Gas Reserve Production and ESG Benchmark Study. Gentlemen, your report, it was
very well done and I hope tobreak it down to our listeners. It
was very concise. It was goodand actually so insightful in the way of
timing with the announcement of Exonomobile andPioneer Natural Resources and what you guys called.
(13:28):
You just hit the nail on thehead with one of the largest ones
and you're in your report you're sayingtwenty twenty four will continue. Is this
the biggest one that you guys seeor do you see bigger ones coming or
something similar? Because this was prettybig and I know we're not over the
hurdle yet because it still has tobe approved, but was this the big
one? I guess what I wantto try to establish is you said we're
going to see more of this,But are we going to see more of
(13:48):
this of smaller ones or this onewas the big one, or are we
going to see a lot more acquisitionsand much larger or large as this or
something similar. Thank you very muchfor the time today, and so this
is pagelainic with you. Why Ithink what we kind of highlighted last year
when you start to see and evena little bit before, but there's always
been an aggregation play in the industry. That's at the end of the day,
(14:11):
the advantage that on shore US hasis the variability to produce, so
it becomes kind of a core assetthat allows for a multi speed approach to
building out your production, which whichI think everybody values with all the potential
macroeconomic implications, the geopolitical concerns allhitting the oil and gas industry, and
production from abroad that is effectively controlledand constrained at times. So this helps
(14:33):
in terms of paint a picture thatyes, more people still value aggregation and
value these assets. In terms ofsize of what's out there, There's been
multiple everybody's gotten bigger, the peoplethat are still in the market continue to
build scale. So I do thinkwe're at that point now where more larger
assets are going to come into playand the larger producers are going to have
more options to play at that scale. But I do think that this is
(14:56):
US on shore continues to improve theirESG rankings, they continue to decarbonize their
operations, and they have you know, paths to monetize that that don't leave
them kind of obligated on a moment'snotice. But I mean, Bruce,
as you look at the M anda portfolio, what would you say,
Yeah, so thanks, So thisis Bruce Kim, I'd say that,
just adding on a little bit towhat Pat was describing there, we do
(15:20):
expect to see continued consolidation and thisshould actually help accelerate that. Even in
the high kind of commodity price environment, and you're seeing it can get done,
the evaluation gap can close and youcan still get to assigning. We
would expect that others of a similarkind of size might try to do,
(15:41):
you know, similar deals of asize that we're talking about with Pioneer and
Excellon. Although if you look atbalance sheets, you look at the ability
to transact at that level, there'snot a large, large universe of those
type of you know, players thatare out there. So when you asked
about what we see continued deals atthis level on this size, not quite
sure that we'll continue to see thatat that size, but we'll definitely see
(16:04):
movement happening in the market. We'realready seeing it. A lot of our
clients are already actively involved in habitactually involved in evaluating portfolio and evaluating opportunities
that are out there. So we'vecovered that. One of the core things
is that the oil and gas producerskind of learned their lesson on how to
(16:26):
make sure that they are disciplined intheir spending to be able to give a
return back to their shareholders. Butalso in this report, you know,
there's so much to consider companies whoare investing in their future. In the
brief, it talks about companies thatare investing in their future with expanded capital
budgets, but are at the expenseof the returns. I think they learned
that, and we covered that toa degree, but I want to give
(16:47):
you guys an opportunity because we didn'tcompletely cover it. Okay, so they've
got that down. But I guessthe question is, is it's safe to
invest in the oil patch again?And your report goes into that. So
let's jump into that, and thisis Bruce. I'll take that. I
guess the easy answer for us isyes, and I think our study proves
that out that it is safe toinvest in the oil patch again. You
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look at the things that herb wastalking about around capital efficiency, operational efficiency,
profitability, and then the really disciplinearound returning basically the best return they
can to the shareholders, and you'reseeing that even play out in today's market.
You look at the high commodity price, oil price in the heydays,
you would see drilling just completely goingcrazy, everybody trying to make as much
(17:33):
money as they could in the moment. But you look at the drilling rate
count, it's actually down compared tolast year. And you look at our
study, our study actually shows thatthese operators increase their reserves by spending less
dollars on kind of the preserver replacement costs. And so what that really
points us to us is that theyhave capital discipline, they have targets around
(17:56):
their capital spending, and they're ableto not only hit those targets, but
they're able to increase the reserves thatthey have on their books, and that
they're actually you know, in groundand kind of justifying with their capital spend.
And so when all those things kindof point to us, can that
it is safe that they're staying disciplinedand they will continue to look at the
(18:17):
capital efficiency to deploy the best returnback to the shareholders. You're right.
Let me read just a little bitof your report. The focus of the
industry even as of late twenty fourteenwas on growth and especially on exploration drilling
to prove up reserves to support thiscontinued growth story. To be certain the
sector does continue to further expand theresources base and shows that the top fifty
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companies added three point six billion boeto the US reserves last year with some
bolt coming through the drill bit explorationand extension drilling added some seven point five
billion boe while only adding five pointeight billion boe were produced, showing that
the sector continues to demonstrate organic growthand the capacity to maintain current record production
(19:02):
levels for the midterm. And you'llalso go into the focus is strategic focusing
on them. It's a really indepth, great report. I'm trying to
tease my listeners to say, goread the report and you'll understand this is
some really good information on showing howoperators have really focused on efficiency, on
discipline, they learned their lesson andyour report talks about the bust cycles and
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how they really managed to learn lessons. And I really like this report.
Let's go back, guys to thelast part on it. Not that the
report's over, but the last partof the ESG reporting. You know,
recently I had an executive from blackRock on the show and also interviewed Harold
Ham, and I know you guysare a little different type of company than
(19:51):
Harold Ham whose Exploration and black Rock, but they weren't coming across in two
different ways when we talk about ESG. There's a lot of confusion when we
talk about ESG. Some Harold Hamcame from point that he believed ESG would
go away. Black Rock. I'mnot going to say what they are doing
(20:11):
now. I don't even want toget into that, but they're from a
different standpoint. I'll leave it atthat. You guys are the analysis.
You've done an analysis. We knowESG isn't going away, but to say
that it's definitely changing and evolving.So let's start with your report, and
we're going to have to go tobreak So I know we're going to have
(20:32):
to cut in here somewhere. Butin your summary you just say ESG reporting
continues to expand and improve, butis primarily driven by a social license to
operate. Yeah, that's true,but shareholders now are understanding we're not going
to get as great of a returnif we focus on it in certain ways,
(20:52):
and where there's also discussion that theSEC is also looking at requirements.
So while I know you guys can'treally get into speculation and you won't,
I just kind of want to getan understanding of what your report is reflecting
before and after, where is itgoing to go? Where's it at right
now? Let's take a quick break, and then when we come back from
break, I'll give you the opportunityto discuss that you're listening to in the
(21:14):
Old Patch Radio Show. We'll beright back, and we're back you're listening
to in the Oil Patch Radio Show. My guest today is Ey discussing a
report that they recently released titled USOil and Gas Reserve Production and ESG Benchmark
Study. Gentlemen, I got alittle wordy. I apologize pertaining to ESG,
(21:37):
but it's quite confusing and some ofthe guests I've pat on the show
in the past to come from completelydifferent areas of what they believe is happening
with ESG. You guys are anexpert in this study. You guys have
been studying it. What do youguys think? First of all, where
are we with ESG? And whereare we going to go with ESG?
And how is it going to affectthe oil and gas industry? Sure,
Kim, this is herb and I'llkind of kick it off and then probably
(21:59):
let Pat come in and just providesome commentary from the forward looking perspective,
just to get into some of thedetails. I think it's important to note
that of our studied companies, therewas fifty of them, right, eighty
eight percent of them are already publishinga sustainability or ESG report. Now.
That's up about six percentage points fromthe prior year, and I think that
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tells us that oil and gas companiesare focused on it, they're shareholders and
stakeholders are focused on it, andit's important enough for them to publish a
report. And that trend keeps tickingup every year. I think this was
the third year we did the ESGbenchmarking and a third year in a row
that that trend is increased. Inaddition to that, ninety percent of the
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companies that we studied reported at leastone scope of their emissions, and a
very significant number of them reported scopesone two and scopes one's two, one,
two and three. And so whatthat means is, while there's a
focus and stakeholders are asking for thisinformation, oil and gas companies are already
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tracking this information for the most part, and they're reporting it to the EPA.
Right, So, they're already focusedon this, and I think the
whole movement around ESG has has reallymade them think about what's what's really really
material to their stakeholders, measure it, monitor it, and manage it appropriately.
(23:36):
Because if you focus, particularly asan oil and gas company, on
your carbon footprint for Scope one andScope too, inevitably, what that will
bring with at many times is moreefficiency in your operations, and there's opportunities
to think about how you can operatemore efficiently and more effectively. There will
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be costs, Don't get me wrong. There are going to be increased costs
going forward, particularly if the epthe current EPA rules go forward as they're
currently drafted, that oil and gascompanies are going to have to consider and
bake in as they think about capitalallocation and resources going forward. But they
(24:17):
shouldn't be enough that they're going toprevent the continued growth that we've seen in
twenty twenty two. You mentioned alsokind of regulatory wise, the SEC does
have a proposal out. We donot know yet what that will look like
when it's when it's issued, andwhen it's final, but for the most
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part, many of these companies arealready following many of the reporting requirements the
SEC had for at least the emissionsreporting, although SEC is currently drafted will
require that information to be assured andmany companies aren't getting that assured now,
(25:00):
so that could be a big difference. But clearly the you know, whether
it's California, whether it's the InternationalEU, you know regulations, you know
ESG is not likely going away.The question is how do you take the
momentum and what is being required anduse that to tell your story and to
(25:21):
help you with managing and differentiating yourcompany and your stakeholders in the most efficient
way. And companies that I thinkyou know, that understand that and that
grasp that and move at it fromthat angle, I think are going to
be more successful at that balance.So I was going to say, and
as you look forward, I thinkit's it's been rather unfortunate because I think
(25:41):
the industry, that the truth ofthe industry is and its ambitions in this
space, I've probably been completely misconstruedif you look at most of the major
media outlets, because the reality isthe industry has been investing in controlling issues
like methane leaks and others for along time. They've been of it all
on their own because they actually areyou know, they all want to be
(26:04):
the optimized operator on these things.So they've brought together competitors to work together.
They've created collaboration. I think oneof the things the industry is now
trying to lean in and lead onis a what is truth? What is
transparency? What are the metrics thestandards that everybody can be held to so
that you can actually have a commonidentification of a carbon footprints across all forms
(26:26):
of scope. And I think theother thing that the industry you know,
continues to try to advocate for isthey should be held to manage what they
can actually manage. So as youlook at some of the pieces that they're
being asked to report on consumers useand all the other pieces that it'll be
interesting to see how that plays outover time. Because the industry is responding
(26:48):
to the consumer sentiment, they arebecoming more accurate in scope one and two.
They're finding ways to decarbonize and theywant the credit for that. And
even with some of the new regulationcoming out through the IRA and others,
when you look at some of thee merging forms of energy, hydrogen as
a good one, there effectively haveto be standards to differentiate some of these
products because people do want to competein the space producers will win. I
(27:11):
agree with you. We're going tocome back on this. Let's just take
a quick break. You're listening toan old Patch radio show. We'll be
right back, and we're back.You're listening to an old Pat radio show.
My guest today is why producing areport titled US Oil and Gas Reserves
(27:32):
Production and ESG Benchmark Study, Gentlema. Before the break, we were talking
about ESG the reporting rule making suggestedchanges that could happen at the Security Exchange
Commission, and I want to goback to that because I think that it's
not clear to me just how fairand balanced this ESG reporting will be,
(27:56):
since it almost appears as though theindustry's kind of or actually ESG as a
whole. Government is making it upas we go, not making it up
in the way making it up,but we're doing it as we go as
we learn best practices. But ourlisteners, a lot of them are independents,
and they don't seem to be asfavorable to this. Maybe their budgets
(28:17):
are not as big as these majoroperators. So my question is what does
the future hold when we look atESG for an independent versus a large Exxon
Mobile, what is it going tobe fair and balanced to them and their
size. So, Kim, Ican take a stab at that this is
(28:37):
heard, and I think that it'sfair. Our study focuses on the fifty
largest public public companies based on thereserves at the end of the year,
and so I think that if youwere to strip, if you were to
do a similar study across maybe justthe smaller or the private independent or large
(28:59):
private independent, you may not obviouslyget to the same information. But I
will tell you something anecdotally. Imean, certainly SEC rules would not apply
to a private company, and soprivate companies would not have to comply with
those rules. Depending on the statethat you operate in, there could be
some mandated reporting that's already there,an EPA reporting that's already there. But
(29:26):
I will tell you anecdotally, Iwas at an energy transition conference and this
whole topic of ESG was being discussed, particularly around GHG, greenhouse gas,
methane links reporting, et cetera.And there was a variety of different CEOs
in the room from a multitude ofdifferent companies, and there was one that
(29:47):
was a private independent. The CEOstood up and basically said, you know,
look, we do this and webelieve in this because we believe that
it makes us operate better, moreefficient, and it makes us more competitive
in the long run in terms of, you know, stamping out costs and
then being attractive for potential acquisition.You know, so you never know if
(30:11):
what you're you've got to look atyour stakeholders, you've got to look at
your strategy, what's your exit strategyif any, and then all that's got
to play into how much you reallylean into ESG. And I can certainly
understand there could be you know,certain companies in the independent space where you
look at your stakeholders and you lookat your strategy and you just need to
(30:33):
do the minimum to be compliant.Right, So I think it's going to
vary depending on what your stakeholders are, how much you're going to lean in,
what's your exit strategy, and soit can vary. And then where
you're what jurisdiction you're operating in,pat you might have some views there.
Yeah, I think that's that's allwell said Herb. And I do think
(30:56):
as you rightly flagged earlier. Thereare states already working through this, and
you look at California as the mostmost obvious example. But I do think
it's there's going to be a portionof this, especially on the scope point
in two side, that does becomecost to operate for a lot of the
producers, and I do think thatthe advantage maybe advantages their own word,
(31:18):
But I do think that some ofthe work being driven through bodies like the
API to try to build standards andto balance that perspective hopefully will at least
buffer some of that settlement and moreimportantly, drive an honest and honestly consistent
framework to assess this going forward.Because again, I do think one of
the things that we've observed and ifyou look, obviously every molecule is different
(31:40):
across the globe, but I dothink beyonshore US offers a pretty good story
compared to many other producing facilities fromthe most definitely yeah, well, I
mean there is a reason why theUS oil and gas producers are actually lowering
their admissions versus increasing them. Jumpon into a little bit more into the
(32:01):
study. On the oil reserve part, you show an increase an oil reserve
your study by seven percent in twentytwenty two, and from what I can
see from your graph, it seemsto continually grow. Give me a little
bit of insight into what the studywas reflecting when we talk about oil,
and then we're going to go intogas as well. Sure I can start
(32:22):
and then this is heard, andthen maybe Bruce can kind of add some
flavor. I mean, obviously,this year we saw something that hasn't been
done in recent years, right wherethis set of companies that we studied deliver
both strong shareholder returns, record shareholderreturns as well as organic reserve growth.
And so what we found is thatwhen you look at again twenty fourteen versus
(32:49):
twenty twenty two, we found thatthere was a significant decline in the exploration
expenses that were used to develop futurereserves. Right. They went down from
nine twenty fourteen to two point threebillion in twenty twenty two. Despite those
capital expenditures going down by seven almostseven billion dollars year over year, extensions
(33:14):
and discoveries were significant. They addedto oil reserves approximately three point nine billion
barrels and to gas reserves, toyour point earlier, came about twenty one
point nine billion cubic feed or BCFof gas reserves. And as you mentioned
earlier, that's both of those figuresare in excess of the current year production
(33:37):
and because of that, that byitself needs to growth. And I will
also say part of the reason forthe reserve growth, right is just the
discipline in the production and the disciplinecapital expenditures, the discipline and the development
developing the wells and drilling. Butby its very nature, we are using
(34:00):
less capital. The industry is usingless capital seven billion dollars less capital to
add extensions and discoveries which are verysignificant and and larger than the current year
production. And so those were someof the key themes that we saw when
we looked at oil and gas reservesin terms of growth this year became this
(34:25):
is Bruce. Just to add onto what herb was saying. I think
it really highlights the industry's ability tofind operational efficiency even on the drilling and
completion side, not just on theoperational side. And what our study really
highlights is the ability for the oilcompanies to kind of do a little bit
(34:46):
more with less. That's kind ofthe way I think about it, and
you'll see that play out and you'reseeing it in there, and it's still
kind of the evolution. And lookoutside of the sector, it's not always
viewed as a very technologically advanced sector, but those that live it and are
(35:06):
in it, we understand how muchtechnology and innovation is being deployed in the
oil patch every day, and thoseadvancements are playing out on what you're seeing
in the ability to be efficient inyour drilling, in your completion, and
the ability for them to add morereserves. As Herb was explaining in our
reserve report, add more reserves whilespending less dollars. And I guess what
(35:29):
I want to know. We're goingto get ready for break, We're going
to come back, and I wantto drill down to this. In your
report, there's one area it saysin twenty twenty two, the studied companies
reported the highest production amount in thestudy period, eclipsing pre pandemic levels.
So in our last segment, Iwant to drill down into the significance of
(35:50):
that. I know we've talked aboutthey kind of learned the bust cycle,
but now that we've come out ofpandemic levels or you know, cod and
we know why the production fell offwhat are you guys seeing in the future.
Let's take a quick break. You'relistening to an old petradio show.
We'll be right back, and we'reback. You're listening to an old Pet
(36:15):
Trader show. My guest today iswhy a study that you guys titled US
Oil and Gas Reserves Production and ESGBenchmarking Study. Let's get on the topic
of So I want to finish outthe report. We talked a little bit
about gas production in your report.I'm sorry, we talked a little bit
about oil production and what your studyfound. Let's talk a little bit about
(36:37):
the gas part of the study.Tell me what your study reflects on the
gas side. Sure, Kim,this is herb I'll cover that. So
what our study showed for the companiesthat we looked at was that we started
off the year with around one hundredand eighty nine thousand BCF proof gas reserves
(37:00):
US We ended the year with aboutone hundred and ninety six billion of reserves.
And you know, always a bigfactor in looking at reserves year over
year is production, and we saweven in natural gaps, we saw significant
production this year compared to all theother years in the study. About fifteen
(37:20):
point eight billion bcf of production.But what caused the increase to the reserves
net net At the end of theday, it was just the significant amount
of ads that were added as aresult of the extensions and discoveries, which
you know are essentially going to bethe additional development likely a lot of the
(37:42):
development drilling. You know, theSEC does restrict how many years of future
production you can put in your provedreserves, and so you know, generally
speaking, you get another year thatyou get to add to your from you
approved under reserves that you get toadd each year, plus you get the
benefit of actually discovering more resources.And so really a big component of the
(38:08):
increase this year was around the extensionsand discoveries. Great report. I want
to close with, since you guysare experts in this field, tell me
we have been through a lot theenergy sector has pertaining to prior to COVID,
pre COVID and then now post COVID. I guess in closing the show,
(38:30):
what does EYC in the way,what did we go through, what
are the energy companies go through orthe energy sector as a whole and post
COVID and lessons learned, what arethe things that the energy companies need to
look out for or are on theirradar, maybe not even look out for
in a post COVID world when wetalk about energy, I think at the
(38:52):
end of the day, if youlook at some of the record years that
some of our clients have had,at the end of a lot of it
is driven by just come on price, right, so as some pivot investments,
and then as you have the geopoliticaldestabilization of Russia and now you see
the conflicts in the Middle East.The reality is it's a dynamic market and
so production creates value from capitalizing onthat market. And I think again us
(39:15):
on shore allows for variability to timethat market from a physical side of the
house. I think what COVID andthe downcycle helped to further refine for all
of our clients is that you needto be better at doing more with less
and how to maximize the capital.So you look at the innovations in terms
of just how they're working the well, you look at the collaborations with some
(39:36):
of their vendors, you look atsome of the new ways of creating even
contracting that The reality is it's anincredibly innovative sector and it's going to continue
to do so. I think theother piece that you're starting to see though,
is a lot more collaboration in basicplanning and interoperability with service companies,
with some of the midstream partners andthe likes. So you're seeing more and
more shared value opportunities and the discussionsand the relationships. We're seeing a lot
(40:00):
more. It's not just the consolidationplay of building adjacent with some of the
either organic or inorganic, but peoplereally are creating a lot more focus so
that they can build physical value justthrough scale. As opposed to what used
to be much of a land play, you're seeing a lot more of an
operations play, and so I thinkall those things painted a pretty compelling narrative
(40:22):
for more optimism on the patch.Bruce Bruce, Yeah, yeah, sure.
Just to add on, because thatreally summarized really really well the lessons
learned, and I would say theoverarching the lesson that is driving all that
is really just around shareholder return.They have found out that they need to
(40:43):
justify to shareholders why they're investing inthem, and so they're showing that capital
discipline to show the best return possibleto those shareholders and so you talked about
commodity prices. They do not necessarilycan't control that. So what can they
control? They can control their margin, control the profitability. They control their
capital allocation decisions, and just howdisciplined they are around when to drill,
(41:07):
how much to drill, how muchto produce, And you see that all
playing out, and you could seethem being very disciplined even in today's high
price environment and all the uncertainty that'sout there around pricing, and so I
think the lesson has been learned.We're seeing that and a lot of our
clients and our discussions with them aroundcapital allocation. I think we'll continue to
see the theme around consolidation because itjust helps them be more profitable. And
(41:30):
has Pad alluded to, you're notjust buying acreage, They're buying reserves.
They're buying proven reserve and that cango and be a creative to them immediately.
I think what your study showed tome was the lessons that they did
learn through the efficiency. I thinkwhat I want y'all to do is talk
to me about in your study,what I saw was that prices don't have
(41:52):
to be really that high anymore forthem to still make a profit, which
is the efficiency and now they're Sewan. Is there any going back? Is
there any putting the genie in thebottle with the shareholders anymore? And I
don't know. Maybe I'm trying tofigure out, Like we have two minutes
left and I don't can't. Ican't get into anything really meaty. But
I want to close with something profoundout of your report, because your report
was a really good report, butI don't quite know how to end it
(42:15):
in a way that kind of justshows they've learned their lessons and they're getting
really good at it, along withbeing careful with the environment as well.
I think they're catering to all themasters. So Bruce, we're winding down
the show this report. If thereis anything that we can close with the
(42:36):
show of what the report reflects,what is it that you see overall arching
out of the report of what theenergy industry of lessons learned. So,
Kim, it's a great question.What we're seeing. The overarching theme is
that oil operators have learned to walka fine line. And what I mean
by that is they're able to caterto all the different states and do it
(43:00):
in a delicate way. And managethat efficiently, whether it's shareholder returns,
whether it's the regulatory agencies and whatthey want to see, and whether it's
those that are actively looking at theoil and gas industry to help them solve
change and the energy transition. They'relooking at doing it all and doing it
(43:22):
efficiently through technology and giving a greatshareholder return. Gentlemen, this was a
great interview. Thank you so much. Your report is outstanding. I encourage
our listeners to go to EY andlook up this report. It's specifically titled
US Oil and Gas Resource Production andESG Benchmark Study. It'll also be attached
(43:42):
to our social media and SoundCloud,so you can go to the report and
click on it. Gentlemen, thankyou so much for being a guest on
a new old Patch radio show.Thank you so much. Thank you Kim.
In the Oil Patches, where togetherwe explore topics that affect us all
in oil gas business and in yourcommunity. Every week, your host,
Kimbalatto will visit with the movers andshakers in this fast paced industry. You'll
(44:05):
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Welcome to in the oil Patch,presented by Shale Magazine, broadcasting from the
oil Field Experts Studios. Oil FieldExperts where you get the right products right
now in the oil patches, wheretogether we explore topics that affect us all
in oil gas business and in yourcommunity. Every week, your host Kim
Balato will visit with the movers andshakers in this fast paced industry. You'll
(00:21):
hear from industry experts, elected officials, and many more right here on in
the oil Patch. And that's timefor me to welcome to my guest,
herb Listen, who is a partnerat EY America's Energy and Natural Resources Assurance
Leader. I'm also being joined byPat Jellinick, who is the principal and
EY America's Oil and Gas Leader,and Bruce On, who is the principal
(00:45):
and EY US and West Energy Strategyand Transaction Leader. Thank you, gentlemen
for joining me on in the oilPatch radio show. EY produced a report
titled US Oil and Gas Reserves Productionand ESG Benchmark. It was a study
and it's a compilation and analysis ofthe US oil and gas reserves and production
(01:07):
information reported by publicly traded companies tothe SEC and an analysis of certain publicly
traded ESG disclosures. This report wasa look back from twenty eighteen to twenty
twenty two of fifty of the largestcompanies based on a twenty twenty two end
of year US oil and gas reservesestimate, and out of this benchmark study,
(01:32):
which was extremely interesting, it reflectsa lot. But most importantly,
which we're going to drill down into, the companies represent approximately for forty two
percent of the US combined oil andgas production for twenty twenty two and serves,
according to your study, as abell weather for the industry trends.
(01:53):
And so I want to get intothat because looking at the report, it
was very detailed. I want tocompliment you guys on the report first and
foremost. It really is an easyread, but it really does discuss what
we're looking at in the future ofenergy, how it has evolved since post
COVID through COVID, and what they'relooking at. And I think, what
(02:15):
is a really difficult thing to understandrather it's an oil and gas production company
and or the general public, ishow does climate change ESG and making a
profit considering regulations, what does theindustry look like. And this report really
gave a great overview of what they'redealing with. And the report looks pretty
(02:35):
promising, So I want to getinto that in brief. We're going to
discuss in this report and drill down. Oil and gas will continue to play
an important role in the energy mix, but efficiency and discipline is one key.
We're going to cover that too.Companies are investing in their future will
expand capital budgets, but not atthe expense of the returns, and I'm
sure the shareholders want to hear that. And then I also want to drill
(02:59):
down in the report on the ESGreporting because that seems to be in flux
with regulations that might be coming downthe pike and how they're dealing with it.
So ESG reporting continues to expand andimprove, but is primarily driven by
a social license to operate. Solet's begin with the first part of the
report. In this summar Rain,I want to read just a brief beginning
(03:21):
part to help the listener understand howin depth this report is. So in
your report, it says for severalyears, investing in the US petroleum sector,
especially in the unconventional oil pass wasout of favor and that has been
very truthful in stripping away environmental pressuresand concerns about the intimate peak of oil
demand. There was a glaring realityfacing investors head on. US oil sector
(03:46):
investments are not providing adequate returns.And we remember that time because there's been
a lot of discussion about not wantingto invest in fossil fuel stocks, why
the return wasn't there, and oranti oil and gas sentiment. The report
goes on to say, leading companiesin the US sector respond to the challenge
(04:06):
with relentless focus on capital discipline anddurability cost takeout. This attention to the
bottom line and return to investors haspaid off, and it is evidence in
the annual EYUS Oil and Gas ReserveProduction and ESG Benchmark study. That's what
I want to talk about today.So let's begin first. Why don't we
(04:28):
start with in brief, the oiland gas will continue to play an important
role in the energy mix, butefficiency and discipline is the key. Let's
drill down into that. Tell mewhy that is important. What did the
study come out with that was reallyimportant and glaring? Good Ethick Kimmin,
thanks for having us. This ispat I think as you look at the
study, what you're starting to identifyis that as much as there's a great
(04:51):
sense of urgency around the themes ofenergy transition, at the end of the
day, it's it's scale and thatkind of the challenges for that transition.
And so as you look at theexisting need for economic and energy security with
the backdrop of all the geopolitics andall the regulations, you still need optionality
(05:13):
with those things. And what westarted to call out on these is you're
noticing that the unconventional producers have actuallybeen able to curb a lot of their
actual intensity in the operations themselves,and they're finding new creative ways to innovate
and better produce the wells that theyoperate. And then at the same time
too, they're actually getting a lotmore balance on the capital side in terms
(05:33):
of balancing how much they're taken tomarket versus the global marketplace, what is
the prices that they're willing to get, and then ultimately being much more strategic
on the operation side in terms ofjust number of rigs that they're bringing to
the field and the likes. SoI think that people are being a lot
more disciplined and they're realizing that they'reactually is domestic need that continues to grow
(05:55):
and that these assets allow for thebalance of those two intersections just because of
how how short cycle they are andhow much intermittency they can actually manage actively
in terms of carbon intensity. Howabout can we drill down just a little
bit more into that and in yourstudy it actually gives some numbers. So
in the study it says, butmore critically, it's for companies strategic focus
(06:18):
and reassuring their investors, which iswhat the investors want to know is that
they're improving an efficiency and capital discipline. And you all go into some numbers
here, Can we kind of gointo those numbers? Pat? Sure,
and I'm happy maybe to take usthrough that. Ken, this is herb
Okay. You know when you talkedthrough when you went through the introduction,
(06:40):
I appreciate your remarks. You know, we've been doing this study now for
over fifteen years, and so we'vegotten a really good perspective by just drilling
in on this publicly available information tohelp us with understanding some of these backdrops
and themes. And one of thethings that you're talking about is really kind
(07:01):
of centered around that the three themesthat you started with and kind of drilling
into that and so kind of whenyou get in, when you get into
the numbers, you know, whatwe found was that it was best to
go back and take our twenty twentytwo study results and compare that to twenty
fourteen because those years were sort ofcomparable in terms of oil prices on average,
(07:26):
and so when you look at oilprices on average, they're fairly similar
in twenty fourteen versus twenty fifteen.And then what we did is we drilled
in to see how the results ofoperations in twenty fourteen compared to twenty twenty
two as well. And what wefound was that obviously the higher commodity prices,
(07:49):
you know, certainly helped oil andgas companies in this environment, and
they were able to reach record revenuesof about three hundred and thirty two billion
based on our study. However,what's more important is that US oil and
gas independence more than triple their shareholderreturns, so from about nineteen billion in
(08:11):
twenty twenty one to fifty eight pointeight billion in twenty two. And to
that end, in our twenty twentyone Reserve and Production study, we actually
added a capital allocation component of thatwhere we wanted to see where is the
where is the excess cash flow orwhere's the cash flow going visa the capital
(08:35):
expenditures exploration and development expenditures in otherwords, or to shareholder returns via common
stock repurchases or dividends. And soone of the things that we found and
we can drill into that is thatthere was a significant amount of shareholder returns
this year, just proving out thatdiscipline. And so that's really, you
(08:58):
know, one of the key themesthat we saw that I and PS are
investing in the future with expanded capitalbudgets, but not at the expense of
the shareholder value. When you lookback and you look at twenty fourteen,
there was a lot of capital expendituresto go and acquire new acreage, to
go and drill a well to holdthe acreage, and there was inefficiencies involved
(09:22):
with doing that because you would haveto move a rig from lease to lease
to least to secure those acreages.But as Pat was saying, now,
with the scalability of the US onshore drilling, really when you already have
the acreage in place and you cando multiple wells on one pad, that
(09:45):
significantly has helped in terms of efficienciesaround drilling costs, completion costs, lifting
costs, and so one of thethings we saw in our study is that
even comparing twenty two to twenty fourteen, as we stayed in the the revenues
were up fifty three percent twenty twoto twenty fourteen, but the production costs
(10:05):
were only of nineteen percent. Wealso looked at the barrel, the production
cost per barrel of oil equivalent,which is a standard measure that's looked at
in the industry, and what wasa really interesting component of that was that
looking from twenty fourteen to twenty twentytwo, the production cost per boe went
(10:26):
from fifty seven dollars a barrel infourteen to about fifty dollars a barrel in
twenty two. Now, you thinkabout the inflation environment and the higher costs
that we're in between fourteen and today, but yet our cost per barrel in
our study are quite a bit lowerand you know, almost twenty percent,
right, And a lot of that'sbecause of the scalability, a lot of
(10:50):
it's because of the increased focus onoperational discipline, being manufacturing concepts and the
likes and so this is why whywe're calling out the theme here around the
capital discipline, but at the sametime being mindful of needing to provide the
(11:11):
shareholders a return, particularly after alot of the pushback from investors in twenty
twenty exactly, and in your reportit says you specifically call it out the
sector has learned harsh lessons of pastboom bus cycles to improve the resilience to
their core business by displaying significant capitaldiscipline and prioritizing shareholder returns. When we
(11:35):
return from break, I want toget back on this and then I want
to move on to the next partof the report. And I also want
to cover the whole ESG transition becausethat is very very much in play as
well. Let's take a quick break. You're listening to a new Old Patch
radio show. We'll be right back. Attention, small and medium sized business
owners. Are you feeling overwhelmed withthe back office tasks like payroll, workers'
(11:58):
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(12:43):
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learn more. Shale is your onestop shop for growing your business. Pick
up the phone today and call twoten two four oh seven one eight eight
again two ten, two four ohseventy one eighty eight and we're back here
listening to in the Oil Patch Radioshow. My guest today is ey On
(13:05):
a report that they released recently,a study. It's titled US Oil and
Gas Reserve Production and ESG Benchmark Study. Gentlemen, your report, it was
very well done and I hope tobreak it down to our listeners. It
was very concise. It was goodand actually so insightful in the way of
timing with the announcement of Exonomobile andPioneer Natural Resources and what you guys called.
(13:28):
You just hit the nail on thehead with one of the largest ones
and you're in your report you're sayingtwenty twenty four will continue. Is this
the biggest one that you guys seeor do you see bigger ones coming or
something similar? Because this was prettybig and I know we're not over the
hurdle yet because it still has tobe approved, but was this the big
one? I guess what I wantto try to establish is you said we're
going to see more of this,But are we going to see more of
(13:48):
this of smaller ones or this onewas the big one, or are we
going to see a lot more acquisitionsand much larger or large as this or
something similar. Thank you very muchfor the time today, and so this
is pagelainic with you. Why Ithink what we kind of highlighted last year
when you start to see and evena little bit before, but there's always
been an aggregation play in the industry. That's at the end of the day,
(14:11):
the advantage that on shore US hasis the variability to produce, so
it becomes kind of a core assetthat allows for a multi speed approach to
building out your production, which whichI think everybody values with all the potential
macroeconomic implications, the geopolitical concerns allhitting the oil and gas industry, and
production from abroad that is effectively controlledand constrained at times. So this helps
(14:33):
in terms of paint a picture thatyes, more people still value aggregation and
value these assets. In terms ofsize of what's out there, There's been
multiple everybody's gotten bigger, the peoplethat are still in the market continue to
build scale. So I do thinkwe're at that point now where more larger
assets are going to come into playand the larger producers are going to have
more options to play at that scale. But I do think that this is
(14:56):
US on shore continues to improve theirESG rankings, they continue to decarbonize their
operations, and they have you know, paths to monetize that that don't leave
them kind of obligated on a moment'snotice. But I mean, Bruce,
as you look at the M anda portfolio, what would you say,
Yeah, so thanks, So thisis Bruce Kim, I'd say that,
just adding on a little bit towhat Pat was describing there, we do
(15:20):
expect to see continued consolidation and thisshould actually help accelerate that. Even in
the high kind of commodity price environment, and you're seeing it can get done,
the evaluation gap can close and youcan still get to assigning. We
would expect that others of a similarkind of size might try to do,
(15:41):
you know, similar deals of asize that we're talking about with Pioneer and
Excellon. Although if you look atbalance sheets, you look at the ability
to transact at that level, there'snot a large, large universe of those
type of you know, players thatare out there. So when you asked
about what we see continued deals atthis level on this size, not quite
sure that we'll continue to see thatat that size, but we'll definitely see
(16:04):
movement happening in the market. We'realready seeing it. A lot of our
clients are already actively involved in habitactually involved in evaluating portfolio and evaluating opportunities
that are out there. So we'vecovered that. One of the core things
is that the oil and gas producerskind of learned their lesson on how to
(16:26):
make sure that they are disciplined intheir spending to be able to give a
return back to their shareholders. Butalso in this report, you know,
there's so much to consider companies whoare investing in their future. In the
brief, it talks about companies thatare investing in their future with expanded capital
budgets, but are at the expenseof the returns. I think they learned
that, and we covered that toa degree, but I want to give
(16:47):
you guys an opportunity because we didn'tcompletely cover it. Okay, so they've
got that down. But I guessthe question is, is it's safe to
invest in the oil patch again?And your report goes into that. So
let's jump into that, and thisis Bruce. I'll take that. I
guess the easy answer for us isyes, and I think our study proves
that out that it is safe toinvest in the oil patch again. You
(17:08):
look at the things that herb wastalking about around capital efficiency, operational efficiency,
profitability, and then the really disciplinearound returning basically the best return they
can to the shareholders, and you'reseeing that even play out in today's market.
You look at the high commodity price, oil price in the heydays,
you would see drilling just completely goingcrazy, everybody trying to make as much
(17:33):
money as they could in the moment. But you look at the drilling rate
count, it's actually down compared tolast year. And you look at our
study, our study actually shows thatthese operators increase their reserves by spending less
dollars on kind of the preserver replacement costs. And so what that really
points us to us is that theyhave capital discipline, they have targets around
(17:56):
their capital spending, and they're ableto not only hit those targets, but
they're able to increase the reserves thatthey have on their books, and that
they're actually you know, in groundand kind of justifying with their capital spend.
And so when all those things kindof point to us, can that
it is safe that they're staying disciplinedand they will continue to look at the
(18:17):
capital efficiency to deploy the best returnback to the shareholders. You're right.
Let me read just a little bitof your report. The focus of the
industry even as of late twenty fourteenwas on growth and especially on exploration drilling
to prove up reserves to support thiscontinued growth story. To be certain the
sector does continue to further expand theresources base and shows that the top fifty
(18:38):
companies added three point six billion boeto the US reserves last year with some
bolt coming through the drill bit explorationand extension drilling added some seven point five
billion boe while only adding five pointeight billion boe were produced, showing that
the sector continues to demonstrate organic growthand the capacity to maintain current record production
(19:02):
levels for the midterm. And you'llalso go into the focus is strategic focusing
on them. It's a really indepth, great report. I'm trying to
tease my listeners to say, goread the report and you'll understand this is
some really good information on showing howoperators have really focused on efficiency, on
discipline, they learned their lesson andyour report talks about the bust cycles and
(19:25):
how they really managed to learn lessons. And I really like this report.
Let's go back, guys to thelast part on it. Not that the
report's over, but the last partof the ESG reporting. You know,
recently I had an executive from blackRock on the show and also interviewed Harold
Ham, and I know you guysare a little different type of company than
(19:51):
Harold Ham whose Exploration and black Rock, but they weren't coming across in two
different ways when we talk about ESG. There's a lot of confusion when we
talk about ESG. Some Harold Hamcame from point that he believed ESG would
go away. Black Rock. I'mnot going to say what they are doing
(20:11):
now. I don't even want toget into that, but they're from a
different standpoint. I'll leave it atthat. You guys are the analysis.
You've done an analysis. We knowESG isn't going away, but to say
that it's definitely changing and evolving.So let's start with your report, and
we're going to have to go tobreak So I know we're going to have
(20:32):
to cut in here somewhere. Butin your summary you just say ESG reporting
continues to expand and improve, butis primarily driven by a social license to
operate. Yeah, that's true,but shareholders now are understanding we're not going
to get as great of a returnif we focus on it in certain ways,
(20:52):
and where there's also discussion that theSEC is also looking at requirements.
So while I know you guys can'treally get into speculation and you won't,
I just kind of want to getan understanding of what your report is reflecting
before and after, where is itgoing to go? Where's it at right
now? Let's take a quick break, and then when we come back from
break, I'll give you the opportunityto discuss that you're listening to in the
(21:14):
Old Patch Radio Show. We'll beright back, and we're back you're listening
to in the Oil Patch Radio Show. My guest today is Ey discussing a
report that they recently released titled USOil and Gas Reserve Production and ESG Benchmark
Study. Gentlemen, I got alittle wordy. I apologize pertaining to ESG,
(21:37):
but it's quite confusing and some ofthe guests I've pat on the show
in the past to come from completelydifferent areas of what they believe is happening
with ESG. You guys are anexpert in this study. You guys have
been studying it. What do youguys think? First of all, where
are we with ESG? And whereare we going to go with ESG?
And how is it going to affectthe oil and gas industry? Sure,
Kim, this is herb and I'llkind of kick it off and then probably
(21:59):
let Pat come in and just providesome commentary from the forward looking perspective,
just to get into some of thedetails. I think it's important to note
that of our studied companies, therewas fifty of them, right, eighty
eight percent of them are already publishinga sustainability or ESG report. Now.
That's up about six percentage points fromthe prior year, and I think that
(22:26):
tells us that oil and gas companiesare focused on it, they're shareholders and
stakeholders are focused on it, andit's important enough for them to publish a
report. And that trend keeps tickingup every year. I think this was
the third year we did the ESGbenchmarking and a third year in a row
that that trend is increased. Inaddition to that, ninety percent of the
(22:49):
companies that we studied reported at leastone scope of their emissions, and a
very significant number of them reported scopesone two and scopes one's two, one,
two and three. And so whatthat means is, while there's a
focus and stakeholders are asking for thisinformation, oil and gas companies are already
(23:14):
tracking this information for the most part, and they're reporting it to the EPA.
Right, So, they're already focusedon this, and I think the
whole movement around ESG has has reallymade them think about what's what's really really
material to their stakeholders, measure it, monitor it, and manage it appropriately.
(23:36):
Because if you focus, particularly asan oil and gas company, on
your carbon footprint for Scope one andScope too, inevitably, what that will
bring with at many times is moreefficiency in your operations, and there's opportunities
to think about how you can operatemore efficiently and more effectively. There will
(23:56):
be costs, Don't get me wrong. There are going to be increased costs
going forward, particularly if the epthe current EPA rules go forward as they're
currently drafted, that oil and gascompanies are going to have to consider and
bake in as they think about capitalallocation and resources going forward. But they
(24:17):
shouldn't be enough that they're going toprevent the continued growth that we've seen in
twenty twenty two. You mentioned alsokind of regulatory wise, the SEC does
have a proposal out. We donot know yet what that will look like
when it's when it's issued, andwhen it's final, but for the most
(24:37):
part, many of these companies arealready following many of the reporting requirements the
SEC had for at least the emissionsreporting, although SEC is currently drafted will
require that information to be assured andmany companies aren't getting that assured now,
(25:00):
so that could be a big difference. But clearly the you know, whether
it's California, whether it's the InternationalEU, you know regulations, you know
ESG is not likely going away.The question is how do you take the
momentum and what is being required anduse that to tell your story and to
(25:21):
help you with managing and differentiating yourcompany and your stakeholders in the most efficient
way. And companies that I thinkyou know, that understand that and that
grasp that and move at it fromthat angle, I think are going to
be more successful at that balance.So I was going to say, and
as you look forward, I thinkit's it's been rather unfortunate because I think
(25:41):
the industry, that the truth ofthe industry is and its ambitions in this
space, I've probably been completely misconstruedif you look at most of the major
media outlets, because the reality isthe industry has been investing in controlling issues
like methane leaks and others for along time. They've been of it all
on their own because they actually areyou know, they all want to be
(26:04):
the optimized operator on these things.So they've brought together competitors to work together.
They've created collaboration. I think oneof the things the industry is now
trying to lean in and lead onis a what is truth? What is
transparency? What are the metrics thestandards that everybody can be held to so
that you can actually have a commonidentification of a carbon footprints across all forms
(26:26):
of scope. And I think theother thing that the industry you know,
continues to try to advocate for isthey should be held to manage what they
can actually manage. So as youlook at some of the pieces that they're
being asked to report on consumers useand all the other pieces that it'll be
interesting to see how that plays outover time. Because the industry is responding
(26:48):
to the consumer sentiment, they arebecoming more accurate in scope one and two.
They're finding ways to decarbonize and theywant the credit for that. And
even with some of the new regulationcoming out through the IRA and others,
when you look at some of thee merging forms of energy, hydrogen as
a good one, there effectively haveto be standards to differentiate some of these
products because people do want to competein the space producers will win. I
(27:11):
agree with you. We're going tocome back on this. Let's just take
a quick break. You're listening toan old Patch radio show. We'll be
right back, and we're back.You're listening to an old Pat radio show.
My guest today is why producing areport titled US Oil and Gas Reserves
(27:32):
Production and ESG Benchmark Study, Gentlema. Before the break, we were talking
about ESG the reporting rule making suggestedchanges that could happen at the Security Exchange
Commission, and I want to goback to that because I think that it's
not clear to me just how fairand balanced this ESG reporting will be,
(27:56):
since it almost appears as though theindustry's kind of or actually ESG as a
whole. Government is making it upas we go, not making it up
in the way making it up,but we're doing it as we go as
we learn best practices. But ourlisteners, a lot of them are independents,
and they don't seem to be asfavorable to this. Maybe their budgets
(28:17):
are not as big as these majoroperators. So my question is what does
the future hold when we look atESG for an independent versus a large Exxon
Mobile, what is it going tobe fair and balanced to them and their
size. So, Kim, Ican take a stab at that this is
(28:37):
heard, and I think that it'sfair. Our study focuses on the fifty
largest public public companies based on thereserves at the end of the year,
and so I think that if youwere to strip, if you were to
do a similar study across maybe justthe smaller or the private independent or large
(28:59):
private independent, you may not obviouslyget to the same information. But I
will tell you something anecdotally. Imean, certainly SEC rules would not apply
to a private company, and soprivate companies would not have to comply with
those rules. Depending on the statethat you operate in, there could be
some mandated reporting that's already there,an EPA reporting that's already there. But
(29:26):
I will tell you anecdotally, Iwas at an energy transition conference and this
whole topic of ESG was being discussed, particularly around GHG, greenhouse gas,
methane links reporting, et cetera.And there was a variety of different CEOs
in the room from a multitude ofdifferent companies, and there was one that
(29:47):
was a private independent. The CEOstood up and basically said, you know,
look, we do this and webelieve in this because we believe that
it makes us operate better, moreefficient, and it makes us more competitive
in the long run in terms of, you know, stamping out costs and
then being attractive for potential acquisition.You know, so you never know if
(30:11):
what you're you've got to look atyour stakeholders, you've got to look at
your strategy, what's your exit strategyif any, and then all that's got
to play into how much you reallylean into ESG. And I can certainly
understand there could be you know,certain companies in the independent space where you
look at your stakeholders and you lookat your strategy and you just need to
(30:33):
do the minimum to be compliant.Right, So I think it's going to
vary depending on what your stakeholders are, how much you're going to lean in,
what's your exit strategy, and soit can vary. And then where
you're what jurisdiction you're operating in,pat you might have some views there.
Yeah, I think that's that's allwell said Herb. And I do think
(30:56):
as you rightly flagged earlier. Thereare states already working through this, and
you look at California as the mostmost obvious example. But I do think
it's there's going to be a portionof this, especially on the scope point
in two side, that does becomecost to operate for a lot of the
producers, and I do think thatthe advantage maybe advantages their own word,
(31:18):
But I do think that some ofthe work being driven through bodies like the
API to try to build standards andto balance that perspective hopefully will at least
buffer some of that settlement and moreimportantly, drive an honest and honestly consistent
framework to assess this going forward.Because again, I do think one of
the things that we've observed and ifyou look, obviously every molecule is different
(31:40):
across the globe, but I dothink beyonshore US offers a pretty good story
compared to many other producing facilities fromthe most definitely yeah, well, I
mean there is a reason why theUS oil and gas producers are actually lowering
their admissions versus increasing them. Jumpon into a little bit more into the
(32:01):
study. On the oil reserve part, you show an increase an oil reserve
your study by seven percent in twentytwenty two, and from what I can
see from your graph, it seemsto continually grow. Give me a little
bit of insight into what the studywas reflecting when we talk about oil,
and then we're going to go intogas as well. Sure I can start
(32:22):
and then this is heard, andthen maybe Bruce can kind of add some
flavor. I mean, obviously,this year we saw something that hasn't been
done in recent years, right wherethis set of companies that we studied deliver
both strong shareholder returns, record shareholderreturns as well as organic reserve growth.
And so what we found is thatwhen you look at again twenty fourteen versus
(32:49):
twenty twenty two, we found thatthere was a significant decline in the exploration
expenses that were used to develop futurereserves. Right. They went down from
nine twenty fourteen to two point threebillion in twenty twenty two. Despite those
capital expenditures going down by seven almostseven billion dollars year over year, extensions
(33:14):
and discoveries were significant. They addedto oil reserves approximately three point nine billion
barrels and to gas reserves, toyour point earlier, came about twenty one
point nine billion cubic feed or BCFof gas reserves. And as you mentioned
earlier, that's both of those figuresare in excess of the current year production
(33:37):
and because of that, that byitself needs to growth. And I will
also say part of the reason forthe reserve growth, right is just the
discipline in the production and the disciplinecapital expenditures, the discipline and the development
developing the wells and drilling. Butby its very nature, we are using
(34:00):
less capital. The industry is usingless capital seven billion dollars less capital to
add extensions and discoveries which are verysignificant and and larger than the current year
production. And so those were someof the key themes that we saw when
we looked at oil and gas reservesin terms of growth this year became this
(34:25):
is Bruce. Just to add onto what herb was saying. I think
it really highlights the industry's ability tofind operational efficiency even on the drilling and
completion side, not just on theoperational side. And what our study really
highlights is the ability for the oilcompanies to kind of do a little bit
(34:46):
more with less. That's kind ofthe way I think about it, and
you'll see that play out and you'reseeing it in there, and it's still
kind of the evolution. And lookoutside of the sector, it's not always
viewed as a very technologically advanced sector, but those that live it and are
(35:06):
in it, we understand how muchtechnology and innovation is being deployed in the
oil patch every day, and thoseadvancements are playing out on what you're seeing
in the ability to be efficient inyour drilling, in your completion, and
the ability for them to add morereserves. As Herb was explaining in our
reserve report, add more reserves whilespending less dollars. And I guess what
(35:29):
I want to know. We're goingto get ready for break, We're going
to come back, and I wantto drill down to this. In your
report, there's one area it saysin twenty twenty two, the studied companies
reported the highest production amount in thestudy period, eclipsing pre pandemic levels.
So in our last segment, Iwant to drill down into the significance of
(35:50):
that. I know we've talked aboutthey kind of learned the bust cycle,
but now that we've come out ofpandemic levels or you know, cod and
we know why the production fell offwhat are you guys seeing in the future.
Let's take a quick break. You'relistening to an old petradio show.
We'll be right back, and we'reback. You're listening to an old Pet
(36:15):
Trader show. My guest today iswhy a study that you guys titled US
Oil and Gas Reserves Production and ESGBenchmarking Study. Let's get on the topic
of So I want to finish outthe report. We talked a little bit
about gas production in your report.I'm sorry, we talked a little bit
about oil production and what your studyfound. Let's talk a little bit about
(36:37):
the gas part of the study.Tell me what your study reflects on the
gas side. Sure, Kim,this is herb I'll cover that. So
what our study showed for the companiesthat we looked at was that we started
off the year with around one hundredand eighty nine thousand BCF proof gas reserves
(37:00):
US We ended the year with aboutone hundred and ninety six billion of reserves.
And you know, always a bigfactor in looking at reserves year over
year is production, and we saweven in natural gaps, we saw significant
production this year compared to all theother years in the study. About fifteen
(37:20):
point eight billion bcf of production.But what caused the increase to the reserves
net net At the end of theday, it was just the significant amount
of ads that were added as aresult of the extensions and discoveries, which
you know are essentially going to bethe additional development likely a lot of the
(37:42):
development drilling. You know, theSEC does restrict how many years of future
production you can put in your provedreserves, and so you know, generally
speaking, you get another year thatyou get to add to your from you
approved under reserves that you get toadd each year, plus you get the
benefit of actually discovering more resources.And so really a big component of the
(38:08):
increase this year was around the extensionsand discoveries. Great report. I want
to close with, since you guysare experts in this field, tell me
we have been through a lot theenergy sector has pertaining to prior to COVID,
pre COVID and then now post COVID. I guess in closing the show,
(38:30):
what does EYC in the way,what did we go through, what
are the energy companies go through orthe energy sector as a whole and post
COVID and lessons learned, what arethe things that the energy companies need to
look out for or are on theirradar, maybe not even look out for
in a post COVID world when wetalk about energy, I think at the
(38:52):
end of the day, if youlook at some of the record years that
some of our clients have had,at the end of a lot of it
is driven by just come on price, right, so as some pivot investments,
and then as you have the geopoliticaldestabilization of Russia and now you see
the conflicts in the Middle East.The reality is it's a dynamic market and
so production creates value from capitalizing onthat market. And I think again us
(39:15):
on shore allows for variability to timethat market from a physical side of the
house. I think what COVID andthe downcycle helped to further refine for all
of our clients is that you needto be better at doing more with less
and how to maximize the capital.So you look at the innovations in terms
of just how they're working the well, you look at the collaborations with some
(39:36):
of their vendors, you look atsome of the new ways of creating even
contracting that The reality is it's anincredibly innovative sector and it's going to continue
to do so. I think theother piece that you're starting to see though,
is a lot more collaboration in basicplanning and interoperability with service companies,
with some of the midstream partners andthe likes. So you're seeing more and
more shared value opportunities and the discussionsand the relationships. We're seeing a lot
(40:00):
more. It's not just the consolidationplay of building adjacent with some of the
either organic or inorganic, but peoplereally are creating a lot more focus so
that they can build physical value justthrough scale. As opposed to what used
to be much of a land play, you're seeing a lot more of an
operations play, and so I thinkall those things painted a pretty compelling narrative
(40:22):
for more optimism on the patch.Bruce Bruce, Yeah, yeah, sure.
Just to add on, because thatreally summarized really really well the lessons
learned, and I would say theoverarching the lesson that is driving all that
is really just around shareholder return.They have found out that they need to
(40:43):
justify to shareholders why they're investing inthem, and so they're showing that capital
discipline to show the best return possibleto those shareholders and so you talked about
commodity prices. They do not necessarilycan't control that. So what can they
control? They can control their margin, control the profitability. They control their
capital allocation decisions, and just howdisciplined they are around when to drill,
(41:07):
how much to drill, how muchto produce, And you see that all
playing out, and you could seethem being very disciplined even in today's high
price environment and all the uncertainty that'sout there around pricing, and so I
think the lesson has been learned.We're seeing that and a lot of our
clients and our discussions with them aroundcapital allocation. I think we'll continue to
see the theme around consolidation because itjust helps them be more profitable. And
(41:30):
has Pad alluded to, you're notjust buying acreage, They're buying reserves.
They're buying proven reserve and that cango and be a creative to them immediately.
I think what your study showed tome was the lessons that they did
learn through the efficiency. I thinkwhat I want y'all to do is talk
to me about in your study,what I saw was that prices don't have
(41:52):
to be really that high anymore forthem to still make a profit, which
is the efficiency and now they're Sewan. Is there any going back? Is
there any putting the genie in thebottle with the shareholders anymore? And I
don't know. Maybe I'm trying tofigure out, Like we have two minutes
left and I don't can't. Ican't get into anything really meaty. But
I want to close with something profoundout of your report, because your report
was a really good report, butI don't quite know how to end it
(42:15):
in a way that kind of justshows they've learned their lessons and they're getting
really good at it, along withbeing careful with the environment as well.
I think they're catering to all themasters. So Bruce, we're winding down
the show this report. If thereis anything that we can close with the
(42:36):
show of what the report reflects,what is it that you see overall arching
out of the report of what theenergy industry of lessons learned. So,
Kim, it's a great question.What we're seeing. The overarching theme is
that oil operators have learned to walka fine line. And what I mean
by that is they're able to caterto all the different states and do it
(43:00):
in a delicate way. And managethat efficiently, whether it's shareholder returns,
whether it's the regulatory agencies and whatthey want to see, and whether it's
those that are actively looking at theoil and gas industry to help them solve
change and the energy transition. They'relooking at doing it all and doing it
(43:22):
efficiently through technology and giving a greatshareholder return. Gentlemen, this was a
great interview. Thank you so much. Your report is outstanding. I encourage
our listeners to go to EY andlook up this report. It's specifically titled
US Oil and Gas Resource Production andESG Benchmark Study. It'll also be attached
(43:42):
to our social media and SoundCloud,so you can go to the report and
click on it. Gentlemen, thankyou so much for being a guest on
a new old Patch radio show.Thank you so much. Thank you Kim.
In the Oil Patches, where togetherwe explore topics that affect us all
in oil gas business and in yourcommunity. Every week, your host,
Kimbalatto will visit with the movers andshakers in this fast paced industry. You'll
(44:05):
hear from industry experts, elected officials, and many more right here on in
the oil patch. In the oiland Gas industries. You don't just need
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