Oil & Gas How to Evaluate Energy Investments
The Macro Environment and Bullish Outlook We're very bullish on oil and gas I mean we're very uh you believe that the prices have some room to run to the upside there's a lot of extraneous factors going on that we think support investing in this asset class and as we've been doing over the past couple years.
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we've been seeing a lot more people coming out with different oil and gas opportunities and they're not all created equal The Power Generation Reality I think we are moving towards an electric or a power driven economy but what most people don't think about is how do you generate power.
The majority of power in Kansas City comes from is generated by coal so the more you're plugging in your garage the more cold generation for power there is Oil and natural gas particularly natural gas on the power side you know the more electric cars are the more batteries there are it's going to take more natural gas to generate that power.
Green Energy Reality Check Green energy I mean we're all we're all rooting for green energy right yeah but there's there's really you know a reality check that's that's needed,
According to the eia by 2030 existing mines and projects
under construction we'll all be able to produce about half what's needed to satisfy demand for electric electric vehicle vehicle production 59 new lithium mines are needed 38 new cobalt mine 72 new nickel mines and it's it's worth noting that the lithium mines for instance it started between and the last well not a decade took an average of 16 years to develop,
Those mines all operate on diesel right very high excavators diesel trucks transporting diesel operated you know refineries and you know it takes it takes in a massive amount of fossil fuels to do that The Carbon-Based Economy,
If you look at all fuels today of all energy energy sources right now 83 percent are carpet 83 it's about a third or third coal natural gas and oil but as you pointed out if you want to move something a mass of something from one place to another only liquid petroleum can do that right right now that's ships airplanes you know correct um trains they're all running on on liquid petroleum products The only way to efficiently move Mass is through liquefied petroleum,
We've been trying to decarbonize really since the 1970s you know so 50 years and we've gotten 17 Green energy just is not ready to carry the load of what we have Supply, Demand, and ESG Global energy investment decreased by 55 percent in new new production generating new new fossil fuel production.
Global energy production is decreasing about five to seven percent per year because of depletion meaning you're pulling the oil out your production is dropping we need five million barrels a day of new production coming online every year just to maintain production,
Seven years of under investment is going to take seven years of over investment after seven years we will see production begin to increase but the problem is there's not a lot of marginal marginal uh production so as soon as we see demand our our views we're going to see we're going to see Energy prices rise,
You got a decreasing supply curve you got at least consistent if not growing demand and that usually only does one thing to do the market Shift from Value to Income Play In my career the investment strategy for oil and gas particularly for oil and gas entrepreneurs had been a value play
You have somewhere between a seven to ten percent just a natural Reservoir decline you know for most reservoirs you've got a depleting asset that needs to be um replaced with new drilling which is happily intensive and so it was always a value play We have had our industry go for more of a value play to much more of an income play and it's it's brought in a a discipline Capital has fled Pricing of oil fields to drop dramatically,
when you say it's gone from it's not priced on income it's not it's or it's not priced like a.com where hey we can got this great idea it's worth a billion dollars correct to now how much money can you produce cash for me next month that's what I'm gonna pay you on so prices of these producing assets have dropped precipitously correct and investors are on sale,
Geology and Drilling Technology It always does sort of start with the rock you know because you're producing oil or natural gas out of rock sediments and rock is obviously subsurface,
With oil and natural gas it's typically you're not storing it I mean you're you're the storage is in the ground and now you're trying to figure out just how much is down there will will it produce economically at given commodity prices at given expenses Vertical vs. Horizontal Drilling Vertical drilling,
you put a you just drill straight down and whatever happens happens you're you've got a Target you go down you're drilling vertically into it
A young completion engineer at the the in the Barnett Shale that worked for Mitchell oil and gas that broke the code on how to drill horizontally into a shale,
You're Drilling and then you're you're turning the pipe 90 degrees
into this Zone and then you then you're trying to figure out a way and you and you have to keep it straight because if you go if you undulate you're going to create p-traps to where you can't really produce past it
. With horizontal Welling Drilling we have one well one well can drain the same amount and you can imagine it it there's less there's less issues with operations and um you know there's probably less capital
Mechanical Risk and Fracking In any oil and gas investment...
this is mechanical risk and being able to complete the well in the right fashion to be able to get the oil and gas come out so while you might have geologically a well that hit if you don't complete it right you might have a uh well it might be a geologic well it might not be an economic
Fracking's been around since probably the 30s or 40s
After you drill you talk about permeability...
you send a little gun down there it perforates the steel casing
After you've perforated you'll go in at high pressure sometimes temperature and you will take water and some sand and you will push it out in those perforations to kind of create quote fractures so your pressure you pressurize the rock correct to get it to crack and it that will and you and you have sand and you have water and it's not so the sand goes into the cracks to kind of keep them open to keep the pro the prop the the fractures or the fissures open so that the oil and gas can and so it creates it increases permeability Environmental Considerations,
Most oil and gas companies spend a lot of time trying to protect aquifers they put a lot of casing in place they make sure that when they Frack there there's a typically a rock that will help from having the fracture go up into the awkward. Aquifers are not deep no they're like 300 feet they're really on the surface correct and where most of the drilling is going at is far far below and maybe even a mile below.
