SHALE Magazine March/April 2022 by SHALE Oil & Gas Business Magazine

MARCH/APRIL 2022

DOING THINGS RIGHT AND DOING THE RIGHT THING RUSSIA’S ISOLATION LEAVES BEHIND STORMY SEAS FOR U.S. OPERATORS

COVER STORY

NICK DEIULIIS AND CNX RESOURCES ADVOCATING AND PRODUCING FOR AMERICA’S ENERGY FUTURE

ENERGY SECURITY? WHAT’S THAT?

O I L & G A S P L AY E R S

BUSINESS

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SHALE MAGAZINE  MAR/APR 2022

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SHALE MAGAZINE  MAR/APR 2022

MARCH/APRIL 2022

CONTENTS 22

SHALE UPDATE

Shale Play Short Takes

FEATURE

Economic Realities Completely Ignored

COVER STORY

If Biden’s plan to help supply natural gas to Europe is to succeed, natural gas coming from the Appalachian Basin, home to the giant Marcellus and Utica Shale formations, would play a big role in making it happen. Nick Deiuliis, the CEO of one of the basin’s biggest and most longlasting players, CNX Resources, says “the potential is massive.”

INDUSTRY

The Hydrogen Opportunity

POLICY FEATURE

POLICY

18 Case Study: A Unique Approach to Economically

50 It’s Your Policies, Mr. President,

Enhance Production and Remediate Damage from Existing Unconventional Wells

That Are Driving Energy Prices Up

52 Ukrainian Lessons for the Appalachians

PHOTO COURTESY OF CNX

INDUSTRY 40 Texas Stands Ready to Lead the US to a Global Crude Oil Supply Solution

42 Russia’s Isolation Leaves Behind Stormy Seas for U.S. Operators

44 Biden Makes a Deal For U.S. LNG to Europe That He

54 A Miscellany of Oil and Gas items

SOCIAL 62 SAPA Midstream Open Golf Tournament

Energy Security? What’s That?

BUSINESS

Doing Things Right and Doing the Right Thing

SOCIAL

State of Energy: Houston

Has Little Power to Fulfill

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VOLUME 9 ISSUE 2 • MARCH/APRIL 2022

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Providing energy for the world while staying committed to our values. Finding and producing the oil and natural gas the world needs is what we do. And our commitment to our SPIRIT Values—Safety, People, Integrity, Responsibility, Innovation and Teamwork— is how we do it. That includes caring about the environment and the communities where we live and work – now and into the future. © ConocoPhillips Company. 2017. All rights reserved.

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LETTER FROM THE CEO

WELCOME TO OUR LATEST ISSUE OF SHALE MAGAZINE. In the following pages, you will find a wealth of information, especially regarding the current state of events in Ukraine and its farreaching impacts. At SHALE, we strive to provide you, our readers, with insight from our experts and relate the content to the lives of each American. I would like to thank everyone who attended our State of Energy luncheon in Houston this April, as well as our fantastic panelists and keynote speaker. We had an incredible lineup of speakers, including our keynote speaker, Railroad Commission Chairman Wayne Christian. A distinguished panel, moderated by Port Corpus Christi Cheif External Affairs Officer, Omar Garcia, featured the CEO of Howard Energy, Mike Howard; Vice President of Argus Media, Bruce Fulin; and Senior Vice President of Liquid Pipelines for Enbridge, Phil Anderson. We had a great turnout and incredible discussions on the energy market in 2022. We are also very excited to officially grow our presence in Houston with the relocation of our headquarters and look forward to cultivating new and existing relationships in the energy sector.

KYM BOLADO

CEO/Editor-in-Chief kym@shalemag.com

SHALE MAGAZINE  MAR/APR 2022

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SHALE MAGAZINE  MAR/APR 2022

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SHALE UPDATE

SHALE PLAY SHORT TAKES By: David Blackmon

Bakken Shale – North Dakota/Montana Mid-cap independent producers Oasis Petroleum and Whiting Petroleum agreed to merge in early March, creating a ‘minimajor’ operator in the Bakken Basin. In a prepared statement, the companies said, "The combined company will have a premier Williston Basin position with top tier assets across approximately 972,000 net acres, combined production of 167,800 boe/d, significant scale and enhanced free cash flow generation to return capital to shareholders.”

Denver/Julesberg (DJ) Basin - Colorado

Less than a year after emerging from Chapter 11 bankruptcy, DJ Basin mini-major Civitas Resources reported strong earnings for Q4 2021. As reported by the Denver Business Journal, “The company reported $178.9 million in 2021 profit, or $4.82 per share, on $930.6 million in revenue from oil and gas sales of production that was averaging 153,900 barrels a day at year’s end. That’s four times more revenue than the core business had in 2020, a year in which oil prices dropped to historic lows after fuel demand collapsed in the Covid-19 pandemic’s early months.”

Permian Basin – Texas/New Mexico

Calls during March from the Biden administration for the domestic oil and gas industry to rapidly increase its oil and gas production volumes placed a spotlight squarely on the Permian Basin, which remains the driving force behind the U.S. shale business. While some producers responded by stating they had no intentions to dramatically increase their pace of drilling, both ExxonMobil and Chevron announced plans for significant production hikes during investor calls in early March. Overall, efforts to raise production in the Permian will be hampered by ongoing supply chain issues and limitations on the ability to find qualified workers.

SHALE MAGAZINE  MAR/APR 2022

Eagle Ford Shale – Texas

The rig count in the Eagle Ford Shale continues to recover as strong commodity prices improve the economics on a rising number of drilling prospects. The number of active rigs in the region surpassed 70 during late March, a level not seen in the area in more than two years.

Marcellus/Utica Shale – Pennsylvania/West Virginia/Ohio

As the Biden administration starts to distribute funds contained in last year’s infrastructure bill, state governments are finding out that money alone is not the solution to all problems. The state of Pennsylvania stands to receive more than $400 million in federal subsidies to help mount a project to plug orphaned oil and gas wells in the state. However, the Pittsburgh Press reported in March that regulators there are finding it near-impossible to staff the project internally or to find contractors who know how to do the work. It’s a chronic issue in the state that upstream companies have tried to communicate to regulators for years.

Haynesville/Bossier Play – Louisiana/East Texas SCOOP/STACK Play – Oklahoma

High commodity prices are reviving fortunes in the SCOOP/STACK play in 2022. S&P Global Platts reported that $100+ oil and $5+ natural gas are causing internal rates of return for projects to skyrocket. “In the liquids-rich STACK basin, half-cycle, post-tax IRRs jumped to about 57% in March. In the SCOOP, returns are now estimated around 51%, according to a recently published analysis from S&P Global.”

Big midstream player Williams agreed in March to acquire the Haynesvillebased assets of Trace Midstream for $950 million. In a press release, Williams said the transaction would raise its Haynesville-area gathering capacity from its current 1.8bcf per day to more than 4bcf per day. It also said that “The acquisition is expected to result in an investment at approximately six times 2023 EBITDA, with strong growth anticipated and minimal expansion capital required, thereby supporting Williams’ strong credit metrics.”

About the author: David Blackmon is the Editor of SHALE Oil & Gas Business Magazine. He previously spent 37 years in the oil and natural gas industry in a variety of roles — the last 22 years engaging in public policy issues at the state and national levels. Contact David Blackmon at editor@shalemag.com. SHALEMAG.COM

 FEATURE

Economic Realities Completely Ignored

have been surprised by the cavalier attitude I’ve seen about the rising price of gasoline and its impact on the average family or community in recent weeks and months, but I’ve been even more surprised by this attitude being parroted out by the media, the socalled cultural “elites,” and even people I know personally. It’s like they’ve all lost any sense of what it feels like to have a finite weekly or monthly income and a budget to live within, isn’t it? What a fortunate, but dangerous, position to be in — to be so comfortable financially that you no longer feel empathy for others who aren’t in the same place. It is maddening. Even more baffling are the talking points that seem to try to fit the rising price of gas into a couple of nice, tidy buckets, and try to convince us that it’s our duty as human beings to just suck it up and make the best of things. “If we aren’t going to import Russian oil, then prices are going to go up. Think of the people of Ukraine! It’s the humane thing to do, pay more for gas and use less!” “If you can’t afford to fill your pickup truck with gas, just go buy an electric car! You won’t have to worry about gas, and it’s so much better for the environment!” “Oil and gas companies are getting RICH off of these increased prices and we need to tax them more and further regulate their business!” “Let’s just give every family making 75K or less $400 per month to help offset the higher cost of gas!” Each of these talking points on their own is so stupid, they barely merit a response. Taken together, though, they illustrate an astonishing lack of serious

SHALE MAGAZINE  MAR/APR 2022

consideration or care for the lives of average Americans, and a jaw-dropping underestimation of their intelligence. Let’s just think about how a doubling of the price of gas could impact a small community like the one I live in: Rockport, Texas. Rockport is a lovely community on the Texas coast and a favorite vacation or second-home destination due to its plethora of fishing, birdwatching, restaurants, art, and beaches. But it’s also a working community of yearround commerce for its full-time residents and the surrounding area. It is experiencing a period of explosive growth following the recovery from Hurricane Harvey five years ago, as well as the current exodus to smaller communities as a result of covid restrictions and other policies in larger cities. Finding affordable housing in Rockport for the workers who staff its businesses is extremely difficult, if not impossible. So, many of these workers actually drive to and from Rockport daily from other communities in the area like Portland, Ingleside, Aransas Pass, etc. There may not be the traffic headaches of larger cities, but the cost of that transportation is definitely no small factor for employees or employers. We are starting to see the stress that the rising cost of gasoline is causing in the economic ecosystem. If a weekly gas fill-up was $40 a year and a half ago, it’s now $80 or more. For families on a tight budget, that is going to start to change consumption and behaviors pretty quickly. Less disposable income to spend on school field trips, community events, and eating out doesn’t just impact their family. It begins to impact other families and the

larger community, as well. If fewer people are eating out, the restaurants will need fewer employees. The employees who remain will make less money in tips and likely work fewer hours. Many may decide that the daily round-trip drive to Rockport from Aransas Pass costs too much to

make the job worthwhile. That becomes a vicious cycle for the restaurant as well as the employee. With fewer employees, service will likely suffer. As service suffers, business further decreases. Lather, rinse, repeat until the daily grind of the hospitality business can no longer support the family

SCHARFSINN86/STOCK.ADOBE.COM

By: Kelly Warren Moore

We are starting to see the stress that the rising cost of gasoline is causing in the economic ecosystem

who owns the business, much less those who work there. The rising cost of gasoline isn’t just a one-off budget item, either. It impacts everything else, because by definition the cost to deliver goods—be it equipment, groceries, or other necessities—increases and those costs

are passed on to the consumer as well. So, not only does that increased weekly cost of gas in the tank bust the budget, and disposable income decreases, the costs of every other necessity goes up, too. There can be no increase in wages expected because the employers are all

trying to make adjustments for all of their increased costs and changing behaviors as well. And when the inflation rate outstrips any increase in wages, people begin to feel like the deck is stacked against them, even with the most optimistic attitude. It’s not just the cost of delivery of goods, it’s also the goods themselves. When it costs a farmer 300% more to fertilize his wheat and corn than last year, and twice as much to pay for the fuel in their tractors, trucks and equipment, the cost to produce our basic staples goes up and the price of products made with wheat and corn go up as well. “Well, we all need to reduce our gluten intake, so just don’t eat bread. So what if flour goes up? We shouldn’t be eating it anyway.” Or, “I’m not a big fan of corn. Guess I just won’t buy corn anymore at the store.” Really? Corn feeds beef, pork, poultry and everything else. Increased costs equal increased prices. Ethanol is produced from corn as well. Most gas at the pump has an ethanol component, so increased corn prices impact us in far more ways than just the vegetable itself. And what about dog food? The price to feed and care for a pet will increase as well as ingredients become more scarce and more expensive. As all of these costs continue to spiral up and families are impacted more and more, economic activity will slow down or even stagnate. That creates a terrible situation. Tourists will think more carefully about jumping in the family SUV and heading to the coast for the weekend. They will more carefully consider expenses and maybe stay closer to home. Winter Texans will figure out a way to stay warm closer to home. Travel becomes a much bigger expense — not just for gasoline, but for lodging, food, and everything else. When that starts to happen, all of the problems discussed thus far increase exponentially and reverberate far beyond the city limits of any one town.

Rockport has shown its resiliency over and over through the years — from hurricanes to floods to increasing immigration to the economic disaster of the pandemic. If one factors in the higher costs of living and a very real probability of economic slowdown on the horizon, it’s not hard to imagine the malaise that is going to begin to set in after five-plus years of extreme cycles of feast and famine. People are doing their best just to get by, and it seems like all of the causes of the current uncertainty seem so arbitrary and unnecessary. This has the potential to create restlessness with the status quo and deeper divisions in a community. And while I am using Rockport as an example, the situation is not geographically unique. These issues and more will impact all of us, regardless of where we live. As I reflect on this and watch the news, I harken back to my economics and history classes and shake my head. It’s as if no one calling any of the shots right now has studied any of it. It would do all of us well to educate ourselves and do what we can to prepare for the coming difficult times ahead. Now is not the time to stick our heads in the sand and care only for ourselves. These conditions are going to impact all of us, and we should all remind ourselves that there are going to be a lot of our fellow citizens who do not have the same kind of rainy-day resources that we have built for ourselves, and we will need to be ready to help however we can. It’s been 50 years or more since this kind of economic environment was in the picture. We have been very fortunate to have experienced the relative ease that comes with a buoyant, expansive and healthy economy for most of our lives. We are not a country that is accustomed to dealing with or having less access to anything. That is about to happen, and we need to prepare ourselves and our families for it.

SHALEMAG.COM

 FEATURE

Case Study: A Unique Approach to Economically Enhance Production and Remediate Damage from Existing Unconventional Wells By: Michael Lantz

he oil and gas industry has faced significant volatility over the past few years, including the unprecedented destruction in demand from Covid-19, the rise in ESG driven investment, and increased geopolitical risk. In addition to formulating a profitable drilling strategy in such an environment, how can North American unconventional producers improve cash flow from base production using proven, economical strategies? Field data from turnkey patent-pending chemical processes from Kairos Energy Services applied without mechanical intervention in various shale basins have shown promise in quickly enhancing production and remediating damage through a low-cost, low-risk solution. Background Global hydrocarbon markets have changed drastically over the past decade, with more than 90,000 horizontal wells drilled in major U.S. unconventional oil and gas plays. Technological advancements and supply chain improvements resulted in longer laterals and larger completions at lower unit costs. Yet the rapid growth in drilling and production resulted in an investor capital loss of a half-trillion dollars between 2015 to 2019, according to Business Insider. The onset of the Covid-19 pandemic and subsequent crash in hydrocarbon demand only further extended investor losses. Current demand is approaching pre-pandemic levels, but Russia’s horrific attacks in Ukraine have resulted in a spike in commodity prices and injected significant uncertainty into the market. The North American shale industry is responding to calls for increased production with moderate rig count increase but the lack of investor capital, continued demand for disciplined growth, and ongoing inventory concerns will likely not result in the rapid production rates experienced in the past. KES is focused on improving and extending the life of unconventional base production. Combined with a disciplined drilling program, base production optimization can add appreciable hydrocarbon production and improve cash flow. Further, maximizing production from existing assets will enhance an operator’s overall environmental, social, and governance (ESG) profile. Turnkey Chemical Processes for Existing Unconventional Wells KES has developed a patent-pending chemical process that combines specialty chemistry and a diversion package that can be applied without mechanical intervention that typically requires two to three days of downtime. The chemistry package is customized to each application and is designed to improve hydrocarbon relative permeability, remove water block, increase fracture conductivity, and target specific damages.

SHALE MAGAZINE  MAR/APR 2022

The use of the engineered diversion package has shown the ability to distribute the injected fluids along one-to-two-mile laterals, preventing the bulk of the fluid from exiting the most conductive fracture clusters. The KES process addresses four broad well candidates: production enhancement, frac hit remediation, enhanced prefills, and specific damage remediation. The description and criteria for each candidate type is outlined in Table 1.

Table 1. Candidate types and selection criteria

Addressing the Child – Parent Interactions Challenge As the development of unconventional assets continue to mature, operators are forced to infill drill, risking potential interactions between the new well (child) and existing well (parent). The optimal spacing between wells, which prevents frac hits but does not leave behind an unstimulated reservoir, has been of intense interest in the industry. Nevertheless, frac hits are a common occurrence, and one analysis produced by Grant Miller estimates that, on average, 33% of frac hit results in negative production and reserve loss at the parent well. The Eagle Ford formation located in South Texas has a particularly poor track record where approximately 41% of frac hits result in negative effects, according to a report by G. Lindsay. An internal study of six Eagle Ford wells that experienced negative frac hits showed a loss of 9% cumulative oil and 32% cumulative gas six months post-frac hit. The sustained damages to parent wells are primarily attributed to the large influx of water into depleted pore spaces and fractures, resulting in increased capillary pressure and water saturation, inhibiting hydrocarbon production.

Figure 1

Figure 2

A candidate well in the oil window of the Eagle Ford took a frac hit in December 2019, resulting in a 75% reduction in EUR. KES conducted a thorough candidate evaluation assessing well integrity, remaining reserves, current reservoir pressure, and a laboratory evaluation to assess compatibility and perfor-

mance. A proprietary chemical package composed of a surfactant and nanoparticle blend, solvent, and synthetic acid was designed to address water block, organic deposition, and minor scale damage. A total of 10,000 bbl was injected over 10 stages with the diversion package being deployed between each stage

and the well was shut-in for 48 hours posttreatment. The treatment increased oil production by 60%, resulting in a 30% improvement in the barrel of oil equivalent (BOE) EUR and paying back in just under four months (Figure 1). This strategy can also be applied to protect parent wells from taking a frac hit. Known as a preload or frac protect, the typical method is bullheading water into the parent well to increase the pore pressure surrounding the existing fractures to reduce the risk of fracture growth from the child well. KES has executed multiple enhanced prefills in the Eagle Ford, which utilizes a unique volumetric design combined with the diversion package to improve fluid distribution, increase bottomhole pressure build, reduce the pressure falloff rate, and enhance production. Figure 2 shows the percent change in injectivity (rate/pressure) versus prefill volume for three enhanced prefills (orange dots) and typical bullheaded prefills (blue dots). The enhanced prefill approach built 137% more pressure per barrel injected than the typical bullhead prefills. Incremental production impacts are still being evaluated. Solving the Gummy Bear Mystery A recently fractured horizontal well in the Powder River Basin produced sporadically before a black gel-like substance blocked off the pump, reducing all productivity. It was determined the substance was the friction reducer which had been crosslinked by iron from the formation, also known colloquially as “gummy bears.” The operator had attempted multiple high concentration, low volume citric acid treatments to attempt to remediate the gummy bears with limited success (Figure 3). KES received a sample of the gummy bear and a total of 40 different chemical packages were run, focusing on economically dispersing the gummy bear, preventing iron precipitation, and utilizing a non-oxidizing friction reducer breaker to minimize any risk of re-crosslinking. In addition, a surfactant-nanoparticle product was qualified for its ability to help disperse the gummy bear and to improve hydrocarbon relative permeability. Traditionally highly concentrated citric acid has been injected for gummy bear remediation, but due to the high cost of citric, only small volumes can be justified. This formulation allows for the injection of highly diluted chemistry, allowing for larger volumes. The candidate well had a total perforated interval of 7,760’ and injected 4.2 MMlbs of proppant during the completion. A total of 2,700 bbl, targeting both the wellbore and propped fractures, were injected over eight stages with the biodegradable diverter being dropped between each stage. The well was

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returned to production and has been sustaining an oil production rate of 350 to 400 bopd over the past six months (Figure 3). Enhancing Your ESG Profile Fulfilling ESG standards is a strict maxim for any operator and the focus on sustainable practices has never been higher. Produc-

tion enhancement and other base production optimization techniques are inherently a lower carbon footprint operation than new drilling operations and should be an important part of the oil and gas industry’s ESG goals. These approaches will not completely replace new drilling but can provide significant incremental production at a low hydrocarbon unit cost

Figure 3

delivering significant value to shareholders. Finally, KES has dedicated significant resources to improving our chemistry’s ESG profile including use of and research into plant-based solvents, biologically based surfactants, and biodegradable diversion. As demonstrated in the Eagle Ford trials, the four applications from Kairos Energy Services offer the opportunity to significantly improve production and restore well strength economically and effectively while also meeting growing ESG standards. Since its first application in the Eagle Ford, the operators have commercially scaled the processes to additional wells. Trials are also in progress at the Bakken, Powder River, Denver-Julesberg Basins, and Woodford/Arkoma.

About the author: Michael Lantz is the cofounder of Kairos Energy Services and a V.P. of Technical Applications at Finoric, LLC. He has over 13 years of experience in maximizing hydrocarbon recovery from conventional and unconventional reservoirs. This includes the design and application of enhanced oil recovery technologies, stimulation fluids, oilfield chemistry, and remedial processes. He holds a BSc in Chemical Engineering from the Colorado School of Mines and a MSc in Energy Management from the University of Colorado. Michael can be contacted at mlantz@kairosenergyservices.com.

SHALE MAGAZINE  MAR/APR 2022

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SHALE MAGAZINE  MAR/APR 2022

SUNDRY PHOTOGRAPHY/STOCK.ADOBE.COM

cover story

NICK DEIULIIS AND CNX RESOURCES ADVOCATING AND PRODUCING FOR AMERICA’S ENERGY FUTURE By: David Blackmon

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ussia’s invasion of Ukraine and the ensuing global fallout from that war have reminded global leaders of the critical nature of maintaining energy security for every nation. It is generally accepted now that Russian President Vladimir Putin would not have sent his army into that much smaller European nation were it not for the massive geopolitical leverage he held over the European continent, thanks to its dependence on Russian oil and natural gas to keep the lights on and homes heated during the winter. Europe’s dependence on Russia and Putin for its own energy security was a voluntary decision. The continent is known to possess significant shale and conventional oil and gas resources of its own, but leaders there chose during the first decade of this century to virtue signal to the radical environmentalist movement by making hydraulic fracturing and drilling operations largely illegal. These leaders consciously surrendered their countries’ energy security as a result. Many in Europe are fond of saying that “fracking” was uncompetitive in these countries, claiming that was the reason why these decisions were made. While that statement is accurate to the extent that the cost of producing shale gas via hydraulic fracturing and horizontal drilling was higher than making your country dependent on cheap gas and oil pipelined in from Russia, that simplistic equation obviously did not factor in the real costs of the choice. That real cost has now materialized in force this year in Ukraine, with a horrific toll in death and destruction that will have global consequences for years to come. That equation also failed to factor in what the alternative might be should Putin and Russia ever decide to cut off that supply of cheap gas, as they have threatened to do in response to rising sanctions implemented by the U.S. and the rest of the free world. It’s important to remember that much of Europe was already experiencing an energy crisis before Putin’s invasion, one that began late last summer when the wind diminished across the continent, causing

SHALE MAGAZINE  MAR/APR 2022

the wind industry there to fail to meet its lofty promises. Germany, the United Kingdom and other European nations were forced to scramble to secure liquefied natural gas (LNG) imports from places like Qatar and the United States to prevent their people from freezing to death in the dark long before the advent of the war in Ukraine. Indeed, in early December 2021, reporters at Bloomberg were able to document as many as 49 LNG tankers headed from the United States to Europe on a single day as exporting countries worked overtime to feed the energy-hungry markets on that continent. It was the largest flotilla of American ships to approach Europe since the D-Day invasion on June 6, 1944. While “fracking” wasn’t competitive with the cheap Russian gas, its cost would pale in comparison to the prices Europe has paid over the last half-year for its LNG imports. Thus, the short-sighted decisions by European leaders to refuse to exploit their own mineral natural resources have come home to roost. This emergency situation has not ended; in the wake of Putin’s war, it has only grown more severe. In March, the German government announced that, after shunning the installation of new natural gas infrastructure for more than a decade, it would commission the building of not one but two LNG import facilities on its coast to better facilitate these imports. The European Union said it would also work to find ways to speed the permitting of new natural gas infrastructure and help member nations to secure supplies of additional imports. On Friday, March 25, President Joe Biden stood with European Commission (EC) head Ursula von der Leyen at a press conference where they announced an agreement that the U.S. LNG industry would dramatically increase its supplies of LNG to Europe in the coming years. It was later revealed that the president failed to consult with any of the major players in the LNG or oil and gas production business before making this commitment, and it was unclear what, if any, measures his administration would be willing to take to help ensure its success. One thing was certain, though: If this Biden plan to help supply natural gas to Europe is to succeed, natural gas coming from the Appalachian Basin, home to the giant Marcellus and Utica Shale formations, would play a big role in making it happen. Nick Deiuliis, the CEO of one of the basin’s biggest and most long-lasting players, CNX Resources, says “the potential is massive.”

“OUR JOB IS TO MANUFACTURE FREE CASH FLOW SAFELY.” “The potential is massive,” Nick Deiuliis told us in an interview in late March. “There is no reason why this area, with its clear advantages in costs and scale, along with its close proximity to LNG export facilities, can’t play a big role with respect to the global energy markets and geopolitics. It could be a massive hedge against, say, the Chinese

Communist Party or Vladimir Putin. That’s the potential.” A native of the Appalachian region, Deiuliis knows about potential. Growing up in Pittsburgh, he talks about having a job as a paperboy for the Pittsburgh Press newspaper in the 1970s and ‘80s, a time before the news media became incurably biased. Reading the paper helped him become educated as a kid, and that paid off when he became the valedictorian of his graduating class at Chartiers Valley High School. From there, it was onto Penn State University, where he pursued his degree in Chemical Engineering. Following his undergraduate years at Penn State, he obtained a job as an engineer with Consol Energy and has been with that organization and its successor companies for the last 30-plus years now. When Consol was split in 2005, Deiuliis became the President and CEO of CNX Gas Company, which later became CNX Resources. But the history of Consol Energy and CNX began long before 2005. In fact, the company has existed in one form or another for more than 155 years. It goes all the way back to the Abraham Lincoln administration, when it was founded as a coal-producing company centered in Western Pennsylvania. All coal seams

Today, the true root cause of what’s going on with energy globally is not Putin, and the true root cause is not even the Biden administration. The true root cause is frankly an environmentalism that has created an ideology where effectively the earth is going to supersede the human being

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produce methane gas as a by-product, one that was a menace to coal miners. For over a century, CNX’s main activity related to that methane was to find the most efficient way to remove it from the coal formation and either vent it into the atmosphere or, later on when regulations changed, flare it. “We got really good in the ‘70s and ‘80s at liberating methane from coal seams,” Deiuliis said, “to the point where towards the end of the ‘80s we said what if instead of venting the methane into the atmosphere or flaring it, why not collect it and process it? That’s really the genesis of how we got into the natural gas business.” The original means of collecting, processing and selling the methane was via the drilling of vertical wells and hitting the rock with a small-ish hydraulic fracturing job—or “fracking—to release both the gas and the water that held it in place via formation pressure. With the advent of the shale revolution, those vertical wells eventually morphed into horizontal ones, the frac jobs grew larger, and the company eventually also started drilling into first the Marcellus shale formation and later, the Utica shale. Today, it is one of the prominent natural gas producers in the Marcellus/Utica region, with the bulk of its assets still centered in Western Pennsylvania and West Virginia. In our interview, Deiuliis told me that “I’ve lived my entire life within a 5-mile radius of my birthplace,” and his company’s history reflects a similar story. The two seem almost made for one another. Interestingly, Deiuliis talks about his company, not in the energy-related metrics and terms one normally associates with the oil and gas industry but as a manufacturer instead. What is most interesting is the product he focuses on as the company’s main product. “We don’t consider ourselves to be an upstream or midstream or E&P company,” he told me, “we consider ourselves to be a free cash flow manufacturer. Our job is to manufacture free cash flow safely and efficiently, and then we want to be smart allocators of that capital. We want to make our bets with respect to how we’re investing that free cash flow in the right places and at the right time. Our true north is always going to be our long-term intrinsic value per share.” So, you won’t hear Deiuliis focusing on rig counts or wells drilled or production stats during his investor presentations — those are not the metrics he uses to measure performance. “We want to manufacture methodical free-flow cash generation, we want to de-risk the venture to the extent that we can do that, and then we want to allocate that free cash flow in the right place at the right time.” It’s been a tremendously successful model for CNX Resources. So successful that the company now operates 4,400 wells and has over 1 million acres of opportunity landholdings in the Appalachian Basin. From his vantage point, Deiuliis can see the tremendous potential for the region, the industry, and his company to be major contributors to enhanced energy security not just in the U.S. but globally. But also, from that vantage

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point, he can see the pitfalls and limiters that must change for that all to happen. Unlike most of his peers in the industry, Deiuliis is not only prepared to actively advocate for those needed changes, but he also sees doing so as his duty and responsibility.

“ENERGY IS GEOPOLITICS.” “If we’re manufacturing methane today in West Virginia or Western PA at CNX, what I think of is which one of those methane molecules is going to stay within region, is going to provide affordable and reliable electricity for a small business owner, for the middle class, for the working poor in this region,” Deiuliis said. “Which molecule of methane is going to be transported to the southeastern portion of the United States to do the very same thing? Which methane molecule is going to end up being transported and put on an LNG tanker and is now going to protect Poland from Russia? Or Japan from China? Or which of those methane molecules is going to end up going to India or sub-Saharan Africa and help to pull the almost 2 billion people who live in this world without access to reliable, affordable electricity out of abject poverty? “That’s what we do as an industry,” he continued. “And the ability to advocate for that qualitatively and quantitatively as to why that cannot go away under the laws of science and under math, there’s a responsibility to do so. You’re here for a reason: You advocate for your industry and your company. You advocate based on logic and math and science, and then you stick to the methodical execution that strategically reflects what you feel is the best path to deliver for your shareholder and your employees and your communities.” It’s a responsibility he takes seriously. Two years ago, Deiuliis had no social media accounts — “I had no idea what to do with social media,” he says with a laugh. Today, he is all over Twitter and other social media platforms, advocating for his company and his industry. He has his own podcast. He has authored a book that is coming out soon. It is the complete opposite approach you see taken by most CEOs in the energy business. “I feel there’s an ethical duty, a leadership responsibility, there’s a social purpose of a business to accurately and rationally advocate for what you do on behalf of society and why what you do is not in the past. It’s not a bridge that’s going to go away; it’s the present, and it’s the future. Particularly when mistruths are used to vilify what you do,” he answered. “When you think about what’s behind that, the domestic energy industry doesn’t produce a widget of methane: What it does is provide quality of life.

“That’s what we do as an industry. It’s not that complicated.” One of the main topics Deiuliis spends time talking about is the influence of the ESG and climate alarm movements. He believes the “green” pretenses they promote have led to a set of perverse incentives and disastrous energyrelated outcomes in recent years. “I look at what’s going on in Europe with respect to geopolitics,” he said. “Because energy is geopolitics.” He believes it is no coincidence that Putin has done what he’s done in Ukraine at this moment in time and that the issue of Europe’s dependence on Russia for its oil and natural gas supplies is at the center of it. “It’s not a coincidence that all these things are happening at the same time,” he told us. “That creates leverage for [Putin] and for Russia.” He also points to the spectacle America sees every winter of LNG tankers from other nations—frequently from Russia—sailing into Boston Harbor to provide natural gas to the New England states. “Boston is another case in point for all of this. Boston has embraced so-called renewables and the zero-carbon economy to

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the point where Boston and Massachusetts, and New York won’t allow pipelines to be built from Pennsylvania to Boston City Gate. “It just defies logic that you would preclude a methane molecule from PA that is 400 miles away from Boston City Gate, and instead, you’re going to run into the arms of Russian LNG with a 4,000 mile supply chain. Think about what the carbon footprint of that is.” Deiuliis also points to last year’s grid collapse in Texas as being by and large a result of a counterproductive set of subsidies and incentives put in place by virtuesignaling policymakers redirecting billions of investment dollars away from ensuring grid stability and adequacy and into the building of wind farms in West Texas, hundreds of miles away from the market centers they need to serve. “You’ve got billions of dollars of taxpayer money that’s going towards multi-billion dollar corporations via subsidies,” he said, “and a lot of that subsidization is being paid for by tax abatements in West Texas for the poorest school districts you will find in the state. “How does that make any sense with respect to what’s sustainable?” He points to a similar set of bad incentives that led to the devolution of what had been a world-class power grid in California. “You’ve got a grid in California that was a premeditated evolution from best-in-class, firstworld to basically now third-world.”

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“I FIND THE DEBATE ABOUT INFRASTRUCTURE TO BE IRONIC.” Let’s go back to the subject of the U.S. supplying higher volumes of natural gas to Europe, which will become even more crucial should Putin decide to cut off Russian supplies to that continent’s energy-insecure countries. Again, Deiuliis believes the potential for achieving this goal is there. Certainly, there is no question the U.S. possesses enormous quantities of untapped natural gas resources. “When you look at the size of our reservoirs, what our cost structure is and the replicability of our major producing basins, and the technology itself, the potential is absolutely there for Europe to basically trade Russian natural gas for U.S. natural gas,” he said. “Right now, Europe gets 40% of its natural gas from Russia, so we’re not talking about a small number here.” But, while the resource definitely exists, the Biden administration has demonstrated since last January that it does not want the industry to be able to build the critical infrastructure necessary to facilitate the vast expansion of the domestic natural gas production and delivery systems that would be required to achieve the president’s ambitious goals. Indeed, it has become quite clear to the industry that using the permitting and regulatory processes at the Federal Energy Regulatory Commission (FERC), the Department of Energy and other federal agencies to slow and halt pipeline and other oil and gas infrastructure is a central element of the Biden energy and environment policy. This led Deiuliis to say that “the reality is that this cannot happen today. And the reason it can’t happen today is that you cannot get the pipeline infrastructure built, not because there is a lack of capital or because the technology doesn’t exist or because the basins lack needed inventory depth to feed the pipelines for decades to come – that all exists. But you can’t do it because, once again, the state, regional, national and global bureaucracies frankly will not allow it.” Deiuliis paused before continuing. “I find the debate about infrastructure to be ironic. It often seems as if half our government policy is designed to build infrastructure that nobody wants, that there really is no demand for in the real world: Like mass transit or EV charging stations, wind, solar, all this stuff. But then, the other half of the government, the afternoon of the day, is spent trying to drive regulation, policy, etc., to kill the other side of infrastructure that is in demand, that is needed and clamored for in the real economy and in the free market. That’s what we do. “When you look at 40% of European natural gas and what that equates to in terms of billions of cubic feet per month, that would come from the United States: Yes, we have the potential wherewithal to do that, but we do not have anything close to the infrastructure to be able to do

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Somebody like Vladimir Putin and the Chinese Communist Party understands all of this. They like these environmentalist groups in the West, and they provide help to them. And they see this geopolitical weakness that’s occurred in the West due to our energy dependence, and they figure that their leverage is high, so they strike

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that. And as I said, if we can’t get our policies situated in a way to where we can allow the modest investment needed to lay a pipe from Pennsylvania to Boston City Gate or to get a pipe from Appalachia to the Southeastern United States, how in the world are we going to get the order of magnitude greater volumes flowing from the U.S. to Europe? “It's a shame, but that’s the way things are, and we need to accept that. It’s why I say the duty and responsibility of this industry is to stand up and make the public aware of what the policymakers are doing and to show them the math of what this does to carbon footprint and CO2 emissions globally. We need to show what this does to people like Putin or the Chinese Communist Party and to show what it does to our own people with respect to the middle class, trade deficits, government spending deficits and everything else that goes with it.”

“TO ME, PUTIN IS A SYMPTOM.” Deiuliis points to the philosophy of environmentalism — which he frequently refers to as a de facto religion — as the root cause of this current situation in Europe and globally. “Today, the true root cause of what’s going on with energy globally is not Putin, and the true root cause is not even the Biden administration. The true root cause is frankly an environmentalism that has created an ideology where effectively the earth is going to supersede the human being,” he said. “They’ve created this ‘zero carbon’ mentality that has relied heavily on a false accounting of carbon footprints, and the math and physics went out the window. “So, you’ve got this religion that’s driving policies, and when you look at what happened in Europe, you can just go through it sequentially: • • • •

Europe shuttered its natural gas and oil fields; Europe willingly banned fracking; they retired coal and nuclear plants; and they embraced and relied on this costly and unreliable wind and solar energy.

“Those were the policies that the environmentalist religion enabled, but now the math and physics have to take hold. Because when it gets cold, or it gets hot, the lights must come on, the home heating has to work, the businesses and factories have to run, and something has to be the plug to make the math work. In the case of Europe, they plugged it with natural gas, specifically with Russian natural gas.” It was as a result of these conscious actions by virtue-signaling policymakers, Deiuliis notes, that “Europe had this energy portfolio that was far from optimal, from a geopolitical perspective, from a reliability perspective, from a cost perspective. Environmentalism, this ideology, was the root cause of that. It runs up the price and the cost of all forms of energy, including natural gas and oil; inflation starts raging because everything relies on energy in some way, shape or form, and then, when the cost of energy goes

SHALE MAGAZINE  MAR/APR 2022

up, guess who benefits? The Russians benefit because of the lopsided balance of trade, and it's not just oil and gas. They’re benefitting from nickel, grain, every commodity you can imagine. “Somebody like Vladimir Putin and the Chinese Communist Party understands all of this. They like these environmentalist groups in the West, and they provide help to them. And they see this geopolitical weakness that’s occurred in the West due to our energy dependence, and they figure that their leverage is high, so they strike.” Indeed, it is a well-documented fact that, since the early years of the 21st century, Russia has poured millions

“IT’S NOT AN ISSUE OF SAYING SOMETHING THAT JUST DIDN’T AGE WELL.” Of course, the environmentalist religion has been extremely successful in pressuring America’s own virtuesignaling policymakers to incorporate their views into public policy. Not surprisingly, the pace of that success has accelerated during the current administration and the Democratic congressional majorities that share the leftwing environmental views and receive much of their campaign funding from that segment of society. Not surprisingly, Deiuliis has strong and well-reasoned viewpoints on how that has all developed. “Historically, we’ve seen three major pinscher moves of attack on domestic energy from a regulatory and policy perspective: • One is implementing things that will slowly and incrementally increase the cost of producing something like natural gas or reduce the supply of it. It’s the one that’s been around for the longest time, and it’s also the one the industry has become the most adept at handling and adjusting to; • Second is this issue of infrastructure: The pipelines, facilities, etc. You see it now with housing developments that aren’t being allowed to be hooked up to natural gas; you see it in California with banning gasoline-powered landscape maintenance equipment — leaf blowers, lawnmowers and stuff like that. That is centered on not allowing the natural demand centers for oil and gas to develop. It’s trying to kill demand for it; • The third avenue of attack is the newest, and it’s what the SEC is aiming at. It’s a very methodical campaign to find a whole bunch of different ways and excuses to starve domestic energy of access to capital.

of dollars of support into the U.S. and European anti-fracking movement. It’s a fact that, unfortunately, goes largely unmentioned by the biased news media and entertainment industries, which have been far more focused on demonizing the industry, thus essentially supporting Putin’s goals. “To me, Putin is a symptom; he is a Frankenstein that has been created,” Deiuliis said. “Some of the policies and things like inflation and supply chain constraints, those are also symptoms. Root causes really go back to, if you do a really effective root cause analysis, it goes back to environmentalism and the policies that ensue from it.”

“You can see where this all goes,” he continued. “You can see it with SEC disclosure rules; you can see it with shareholder activism with the banks; we saw that in Europe with Credit Suisse, and I’m sure we’ll continue to see that with major banks in the U.S. that lend to domestic energy. You also see it with the Federal Reserve when it comes to things like a ‘climate stress test’ because the Federal Reserve has done such a great job predicting and controlling inflation that they can now predict future weather. “You can see it across all these different data points, but it’s all working towards the same thing, which is to deny access to capital for the domestic oil and gas industry so we can’t do what we do. Which is ironic considering that the biggest, loudest proponents of that avenue of attack, and the biggest, loudest proponents of not allowing infrastructure to be built

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are the same ones who are now clamoring for more oil production domestically and access to all this resource.” We asked Deiuliis what he makes of Energy Secretary Jennifer Granholm’s call in early March for the domestic industry to produce more oil, in light of all the myriad efforts by the Biden administration thus far to impede that from happening. Again, he found the Secretary’s remarks to be more than a little ironic. “This was not something Granholm said in, say, 2018, and it just hasn’t aged well; this comment came literally in March at CERAWeek with everything that’s going on in the world. And our Climate Czar, John Kerry, didn’t make his comments about hoping Putin wouldn’t forget about his climate commitments while conducting his war on Ukraine a couple of years prior to the invasion; he said that literally as the invasion was unfolding. “So, it’s not an issue of saying something that just didn’t age well in hindsight, which would be bad enough. What makes it incredulous from my perspective is that these comments are being made in a time when the world is literally falling apart, largely because of energy policies and climate change policies that have been driven by this ideology of environmentalism. The current administration has a massive credibility problem. It’s not political; it’s just straight-up credibility.” He went on to note that the administration’s statements do not match up with its actions. “We look at what’s being said on one side, but then we look at actions that this administration is directly responsible for on the other side, and you cannot sync them up,” he said. “You have to question the veracity of what’s being said. It is pretty apparent that our climate czar cares more about those that are opaque and far into the future than about nations that are invading and literally killing citizens of other nations. That’s a problem. We are sending emissaries to Venezuela, one of the most brutal dictatorships you’ll find on the planet, and we say that it’s not about oil. But common sense tells you otherwise.

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“We’ve bent over backwards to try to appease Iran, and you know, you can feel that we’re going to get a ‘deal’ one way or another, and the more likely a deal looks to happen, the more concerned I become, not as an energy businessperson, but as an American citizen. That deal cannot be good for the world. So, why are we doing it? Well, I think we know why we’re doing it, despite the reasons why the administration claims we are doing it.” Obviously, it is, at least in part, about oil. He continued: “The administration publicly takes the Saudis to task for some of their troubling issues, including the murder of a journalist. But then, we turn around and suddenly want to meet with them, and they won’t take our phone calls. And we say it’s a scheduling issue and it’s not about oil. I wonder why that’s happened. Then, we see things like the nomination to the Federal Reserve of Ms. Bloom Raskin, and what her record has been with her views that carbon-based companies are going to be worthless: That’s a comment that certainly hasn’t aged well. “Then, with Russia, these ‘unprecedented’ sanctions: The one sanction we didn’t see with Russia was the key bank within Russia that does all the energy and commodity trading. There’s a reason we didn’t do that. We see all these actions, and then you hear the comment from the Energy Secretary, and a reasonable person has to wonder if that comment is sincere.”

EFFECTIVE ADVOCACY COMES IN MANY FORMS When it comes to advocacy, Deiuliis doesn’t consider himself a one-man show. He and his team have developed a diverse set of internal and external programs designed to get the message out and

What if we took a class of high school seniors and a few high school juniors, and we took them from these under-served rural school districts and these under-served urban school districts, and we brought them all together once a month for this Mentorship Academy inform the public about the industry’s benefits. Internally at CNX Resources, employees are encouraged to set their own advocacy goals. “One of the side benefits of my doing all of this is that it fires up the employee base, and some individuals decide they also want to go out and advocate. We have certainly seen that. Brian (Brian Aiello, CNX’s Vice President of External Relations and Human Resources) and I debate continually about how to go about encouraging it. For the introvert, that could be something as simple as talking to your next-door neighbor; for the extrovert, it could be to go out and make presentations. “We set what we call smart goals every year that are tangible and measurable, which is how we measure performance. I’ve got them, as does every other employee in the company. For employees who are comfortable with it, we’ve been aggressive in helping them find their voice on how to do the advocacy.” Externally, CNX has structured and funded a very innovative program of public education, attracting students both from central Pittsburgh and the rural areas surrounding the city to participate in what Deiuliis calls the Mentorship Academy. “While this was all going on and the world was unfolding like it is,” he began, “within the company we came up with the idea for what we call a Mentorship Academy. This goes back to the premise that those in the entrenched power and institutions in our region, there’s this constant drumbeat from a very early age, from parents to kids, that if you don’t go to college, you’re a failure.” With skyrocketing tuition and fees and the academia model of public education failing to produce an acceptable rate of return on student investments, Deiuliis and his team believed there must be a better way than just criticizing students and almost giving up on them if they don’t attend college. “We have this broken model, and yet there’s this view as a parent or as a student that you’re a failure if you don’t go to school. “Meanwhile, we’ve got this industry that is paying family-sustaining wages, and much of the work, especially at the entry-level, does not require a college degree: you just need a high school education. We came up with this idea that takes all those facts into account and takes this Western PA region into account. “Our office is kind of in the middle of suburbia, but within a halfhour drive to the north, I can show you the most urban of urban areas that you can find anywhere in America, and a half-hour drive to the south, I will show you the most rural of rural areas anywhere in

America. They both have great things going for them, and they both also have huge challenges. “What if we took a class of high school seniors and a few high school juniors, and we took them from these under-served rural school districts and these under-served urban school districts, and we brought them all together once a month for this Mentorship Academy? We were looking exclusively for kids that show up every day for school but who do not have an intention to go to college, and they want to stay in the region. “We show them all the different kinds of professions and careers — not just jobs, but real professions and careers — that you can embark upon in the private sector without a college degree. We provide them with hands-on experiences, let them try things out. Some are building trades-based, a lot are manufacturing trades-based. We took them to the petrochemical facility in Beaver County. We took them to meet operating engineers in the building trades; we talked to carpenters, steamfitters, ironworkers, and of course the energy industry. “It's been a really interesting program. The gulf of knowledge between the high school student in the region and what’s going on around them in the industries and the enterprises in this region is shocking. I think that advocacy can be the bridge for that. Now, these kids have a broader understanding of this, and now the leaders in those communities start to take notice of the benefits as well. You can see this cross-pollination, this linking and understanding sort of dawning on a whole bunch of people within the region.” Advocacy comes in many forms, and in today’s world, effective advocacy is more crucial than ever for America’s oil and natural gas industry. Among the current set of industry leaders, no advocate has proven himself more effective than Nick Deiuliis.

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The Hydrogen Opportunity By: Alex Chapman, President, Ridge Creek Global

SHALE MAGAZINE  MAR/APR 2022

around the world. Global demand is growing for both fuel cells and electrolyzers, with China leading the way. The demand for electrolyzers capable of producing green hydrogen quadrupled in 2022 in China. Demand has been strong in the rest of East Asia as they look to produce more energy from domestic renewable energy. In the United States, Air Products announced a $4.5 billion blue hydrogen project that will be operational in 2026. Europe is engaged in a number of multibillion-dollar projects to combine wind and solar with electrolyzers for green hydrogen. This trend is not showing any sign of slowing, but, on the contrary, it is speeding up. In India, Reliance Industries is looking to invest $75 billion into green and blue hydrogen supply chains. The movement to hydrogen will be a boon to the oil and gas industry for decades to come. Natural Gas To understand the benefits of the hydrogen economy to the oil and gas industry, the significance of natural gas to the hydrogen process must be discussed. The increase in interest and investment in the hydrogen economy is only possible because of the existing supply and demand of hydrogen, which is derived from natural gas (grey hydrogen). Currently, hydrogen produced from natural gas is substantially cheaper than hydrogen produced from renewable energy (green hydrogen). The cost of hydrogen from natural gas is around $1.50 per kg. Even if carbon capture technology is included, the cost of hydrogen from natural gas is around $2.50 per kg (blue hydrogen). The cost of that same hydrogen from renewable energy using electrolyzers is currently $5.00 per kg (green

hydrogen). That cost differential derives from the reality that an electrolyzer uses electricity to split water molecules into hydrogen and oxygen. That process currently is very expensive because of intense electricity needs and limited scale for that industry. Approaching scale will be accomplished over time, so hydrogen from natural gas will continue to be a key player in the hydrogen economy for years. This is especially true in the United States, which has an abundance of low-cost natural gas available as feedstock for hydrogen. Even with a large amount of investment in green hydrogen production using electrolyzers running on renewable energy, it will be years before we reach cost parity. The cost of scaling up the technology will take tens of billions of dollars of investments; not only that but a continued decline in clean energy costs is needed as well. The path forward for both of these technologies is not entirely certain. Even if cost parity is achieved, it will take decades to get the volume to such a level as to displace hydrogen from natural gas. Finally, the path forward will be different depending on the amount of clean energy and freshwater that is available in different regions. In areas near the equator with freshwater, such as India, the path for green hydrogen makes more sense. But in areas with less clean energy potential and low-cost natural gas, it will likely be decades before blue hydrogen is challenged by green hydrogen. This makes hydrogen from natural gas combined with carbon capture and sequestration a beneficiary of the transition to a lower-carbon future and the hydrogen economy. Oil Field Service Companies The need for oil and natural gas

will not necessarily diminish as we decarbonize; instead, the usage may change. Blue hydrogen requires putting carbon back into the ground. Oil field service companies have spent decades streamlining the process of pumping oil out of the ground; this expertise will be needed to reverse the process and pump carbon into the ground. Oilfield service companies will likely get a major boost from the usage of blue hydrogen. Much of the technology for sequestering the carbon already exists. From the prospecting of geology to see if it would be a good candidate for sequestration, to helping maintain the integrity of an injecting well, to the actual pumping of CO2 into the ground, all are opportunities for companies that specialize in this technology. This opportunity will also benefit offshore players as well since some of the best candidates for industrial-scale carbon sequestration are offshore oil fields. The biggest impediment currently is cost. Carbon capture is still very expensive, but if a carbon capture tax credit of some kind is created, it could hasten the day that carbon capture is viable. The timing of when it will be economical is uncertain, but that day is getting closer. In the future, oil field service companies will not only be able to make money getting oil and natural gas out of the ground but also make money pumping CO2 back into the ground. Oil The hydrogen economy offers opportunities for oil as well. This statement may come as a surprise to many since the hydrogen economy and decarbonization tend to indicate an end to oil. But in reality, oil is benefitted in many ways.

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he hydrogen economy has been a discussion in academia and with researchers for decades. The most substantial effort to bring it to reality occurred during high oil prices in the early 2000s, yet as with every previous effort, it ended with unprofitable projects and disappointed investors. As the climate change agenda has been pushed to the forefront, we are once again seeing a major movement towards bringing the hydrogen economy vision into reality. Governments around the world are spending massive amounts on infrastructure, and companies are raising record amounts of money to monetize this potential opportunity. What makes this effort so different? What indicates that this time the hydrogen economy may be viable? Sustainability in the opportunity is the answer. The opportunity is a compelling combination: The substantial reduction in the cost structure for the hydrogen economy and hydrogen industrial applications as a means of carbon-free energy storage. Hydrogen is the key to addressing a major challenge of a low carbon future; long-term energy storage and transmission. Unlike batteries, hydrogen can be transported in bulk, can be shipped on tankers, railcars or pipelines, and can be stored as a liquid, as a gas, or as ammonia. The industry most experienced with the challenges of hydrogen is the oil and gas industry, making them a key player in the hydrogen economy and the movement toward a lower-carbon future. The movement toward a hydrogen economy is global. Large-scale projects for both blue and green hydrogen are being developed

This transition will take decades. Building out both a blue and green hydrogen ecosystem is an absolutely massive task that will involve countless countries and companies and hundreds of billions of dollars. That means it will be a somewhat slow process. In the meantime, oil will still be required to keep the economy running. A future benefit will come from a rising amount of CO2 available from carbon capture for enhanced oil recovery. This will result from capturing major sources of CO2 from the industry that will need to be sequestered underground. The other opportunity for oil is that the hydrogen part of the oil molecule has a lot of value even in a world that would be carbon neutral. The opportunity will be how to separate the hydrogen from the carbon in an economical way. Currently, this is an expensive and uneconomic process even without using carbon capture and sequestration. But that does not mean an opportunity does not exist. Testing has been done using fire-flooding in oil fields that have shown hydrogen as a byproduct of these activities. Some testing of a membrane that allows hydrogen but not CO2 to pass through is also being done. If that could be created, it would be a game-changer for hydrogen production and the longevity of an oil field. If this or a similar process is able to separate the hydrogen in-situ, it could extend the economic life of an oil field for decades. Midstream The advantage of the hydrogen industry to the oil and gas industry is how it has a potentially positive effect on each sector of the industry. The hydrogen industry could be a boon for the midstream

sector. The most obvious reason is that hydrogen is easily moved through pipelines. Currently, the U.S. only has about 1,600 miles of dedicated hydrogen pipelines, and they are heavily concentrated in the Gulf Coast region. But research by the Department of Energy has shown that some oil and gas pipelines would be able to manage hydrogen at levels of up to 30% with limited modification. Another area of opportunity will be hydrogen storage. Decarbonization will require hydrogen storage, meaning any future in hydrogen is dependent on storage capacity. Hydrogen from clean energy is the only viable way to store intermittent and seasonal energy such as wind and solar. Electrolyzers creating green hydrogen will need huge underground storage facilities to store hydrogen for winter heating and power in colder climates. As coal declines, which usually has large amounts of stored onsite energy, the only real way to make up for that declining stockpile in a decarbonizing world is using hydrogen. Midstream companies are the firms that have expertise in using underground storage facilities for natural gas, giving them an opportunity to move into the hydrogen economy. While the speed of the transition to a volume of hydrogen that will require modification is uncertain, the world is moving in that direction. Downstream Hydrogen vehicles, unlike battery electric vehicles, will not be possible to charge at home. The risks are too great to dispense a flammable gaseous fuel in a garage or outside one’s house. This makes a fuel network for fleet operations an ideal use of the downstream resources that

currently exist in fuel distribution companies. While passenger vehicles are currently dominated by EVs when it comes to zeroemission vehicles, the only viable way for heavy-duty trucks and large vehicles will be hydrogen. Hydrogen is different from gasoline or diesel, but the best way to use hydrogen for transportation will involve the need for fueling stations. Already the technology exists for storing hydrogen for transportation and for fueling. That technology has been most developed by Plug Power with its network of hydrogen dispensers for the fuel cell forklifts that it sells. There are also a number of other major players, such as Shell, which have experience in the passenger vehicle fuel sales for hydrogen. As more heavy-duty applications are required to decarbonize, downstream applications will continue to grow and benefit the oil and gas industries. LNG A major challenge for the hydrogen economy is how to move it between international markets. Just like natural gas, the location between the cheapest production and major areas of consumption can be substantial. That will require large tankers to transport the hydrogen. To maximize the transportation potential, the hydrogen will have to be liquified. Liquid hydrogen is also being considered a likely way to deliver hydrogen to fueling stations. Delivering liquid hydrogen is the main way existing hydrogen dispensers for mobile applications around the country are refueled. The reason that this already exists is that similar

technology has been developed for LNG transportation and distribution for mobile applications. Both LNG and Hydrogen have to be chilled to extremely low temperatures. The technology for LNG is very mature and is done on a massive scale. This technology is incredibly complementary to hydrogen, and while some differences exist, hydrogen has benefited from the research. It is likely that hydrogen will follow in the footsteps of LNG as a major way to transport hydrogen both internationally and through certain over-the-road applications. This will benefit many LNG companies who already have products that, with some modification, will be used and are used to handle hydrogen. The Future The world is pushing toward a decarbonized future. That future will certainly see a change in how we store and distribute energy. A key part of that mix will be hydrogen from all sources. That is a major benefit for the oil and gas industry. The expertise and knowledge of almost every part of the oil and gas industry will be needed to take advantage of the opportunity hydrogen presents. While clean energy is often treated as a threat to the oil and gas industries, hydrogen has the opportunity to benefit the industry. The only way to store clean energy long-term or to transport it over far distances will be from hydrogen. The oil and gas industry will be an important player in the energy transition, and if the correct investment is made, it will be a major beneficiary of this transition.

About the author: Alex Chapman is the President of Ridge Creek Global, a boutique investment firm that invests in the energy transition. He has over a decade of experience in the investment industry. He envisioned and leads the portfolio team managing the Carbon Neutral 2050 Equity Investment Strategy. The strategy aims to gain long-term capital appreciation from investing in a rapidly expanding carbon-neutral energy ecosystem with a pragmatic investment focus on any and all pathways to a carbon-neutral world. Investments include companies related to wind, solar, battery, EV, hydrogen, fuel cell and CCUS technology. He received his Finance degree from the University of Richmond.

SHALEMAG.COM

INDUSTRY

Texas Stands Ready to Lead the US to a Global Crude Oil Supply Solution By: Karr Ingham

SHALE MAGAZINE  MAR/APR 2022

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ussia’s attack on Ukraine has roiled energy markets, pU.S.hing crude oil prices upward from already high levels. And no wonder, as RU.S.sia is one of the world’s top producers and exporters of crude oil and petroleum products. RU.S.sia has consistently been the second largest single-country producer of crude oil in recent years, providing over 13% of the world’s crude oil supply. The U.S. leads the way, supplying fully 15% of the world’s crude oil in 2019, 14.8% in 2020, and 14.5% in 2021. Production from Saudi Arabia is a close third, comprising 12-13% of global production. Incredibly, Texas would be fourth on that list, providing over 6% of global crude oil production, outproducing Canada, and all OPEC countries other than Saudi Arabia. Texas produces over 43% of the total United States crude oil, a number that is likely to increase in 2022. And yet more incredibly, the Permian Basin of Texas and New Mexico, were it a country, would be fourth on that list with Texas in fifth place. In early 2022, the Permian Basin is producing nearly 6.5% of the world’s crude oil and comprises 45% of U.S. total crude oil production. Because Russia is a much smaller economy than the U.S., it does not need nearly all the crude oil and petroleum products it produces, and thus. is a major exporter. The potential threat to these production and export volumes because of the action they have taken in Ukraine is what is causing prices to increase this week. On the day of the invasion, crude oil prices spiked upward by over $8 per barrel during the day but then rapidly retreated to preinvasion levels. Crude oil prices are set globally, so any significant shrinking of the global pool of crude oil would naturally cause prices to rise. And that is why West Texas Intermediate crude oil, the U.S. pricing benchmark, has increased by roughly the same amount and percentage as the international Brent pricing benchmark, even though WTI is presently about $3/bbl lower than Brent. The global nature of crude oil pricing is

also why the U.S. benchmark WTI price has risen even though imports of RU.S.sian crude oil into the United States are relatively small and declining in recent months. Imports (and exports), consumption, and production are often measured in terms of simply raw crude oil, and all petroleum liquids and products, which includes raw crude oil. In terms of just crude oil, for the last 20 years or so Russian crude oil has accounted for only about 1.4% of all net crude oil imports into the United States. That number bounced around

a bit but didn’t change appreciably until 2021 when the numbers began to increase. By August 2021, Russian crude oil imports had increased to 5% of U.S. net crude oil imports. Since then, however, the volumes have declined, falling to as low as 90,000 barrels per day in December 2021, only about 1.4% of total U.S. net crude oil imports. By contrast, crude oil imports into the U.S. from Canada, our most prolific and reliable external supplier of crude oil, accounted for over 60% of total net U.S. crude oil imports in 2020 and 2021, and the numbers have been steadily increasing over the last 20 years. Add U.S. production and we were very close to North American energy independence before COVID and opposition to U.S. production came along. What has been steadily declining over the last 20 years is imports from all OPEC countries. As recently as 2008 crude oil imports from OPEC comprised over 55% of all U.S. net crude oil imports (it was a whopping 85% in the 1970s). That number began to fall sharply with the dramatic expansion of U.S. domestically produced crude oil and averaged 13% in 2021. The biggest game changer for U.S. and global crude oil markets was the explosion of U.S. domestic production led by Texas. From 2008 until late 2019 when crude oil production peaked in advance of COVID, U.S. crude oil production expanded by about 2.5 times, or over 150% from about 5 million barrels per day to just under 13 million barrels per day. At the same time, Texas production more than quintupled, from about 1 million barrels per day to 5.4 million barrels per day in early 2020. Permian Basin crude oil production increased nearly six-fold during the same time. U.S., Texas, and Permian production all dropped sharply because of COVID in 2020. Permian Basin production has now fully recovered and is presently producing a jaw-dropping 5.2 million barrels per day and climbing in early 2022. Texas statewide production is just now surpassing 5 million bpd and is on track to recover its COVID-related production losses and enter into record territory sometime in the second half of 2022. U.S. production is not expected to reach pre-pandemic levels at any point in 2022. This means Permian production (most of which is in Texas) is growing faster than Texas production, which in turn is growing faster than U.S. production. That makes Texas and the Permian “ground zero” for near-term additions to global supply. Simply put, crude oil prices would be much higher than they are today absent the fantastic U.S. supply growth over the last 12 years; however, prices would be significantly lower

Russia has consistently been the second largest single-country producer of crude oil in recent years, providing over 13% of the world’s crude oil supply than they are if we were producing at record pre-pandemic levels. At present, the U.S. is about 1.3 million barrels per day short of that pinnacle. Given restrictions on oil and gas production on federal property and blue state hostility toward the industry in several producing states, Texas, which has neither of these problems, is uniquely poised to deliver much-needed supply growth to meet U.S. needs and quell the jitters in global crude oil markets. How will petroleum energy markets ultimately be affected by Russia’s actions? No one knows. Will OPEC respond to higher prices and open the taps or not? There has been zero indication this will occur, and these outcomes are outside our control. The U.S. can and should take this opportunity to come to the rescue of our citizens and our global neighbors by raising production rapidly and pushing prices downward. Supply growth has always been the solution to high prices in the past and will be again. President Biden and Congress need to get out of the way and let the Texas and U.S. oil and gas industry get to work and once again perform the market miracles as it has time and time again in the past. *Note – the production data referenced in the article above is crude oil only, not all petroleum liquids and products

About the author: Karr Ingham is a petroleum economist and Executive Vice President of the Texas Alliance of Energy Producers.

SHALEMAG.COM

INDUSTRY

Russia’s Isolation Leaves Behind Stormy Seas for U.S. Operators

fter more than a month of fighting, Russia’s invasion of Ukraine has devolved into a grinding war of attrition replete with indiscriminate attacks on Ukrainian civilians, cities and infrastructure. The U.S., Canada, Western European allies and others have responded with increasingly severe sanctions that have isolated Russia and decimated its economy. Russia’s energy sector, which is one of the top three oil producers and the second-largest gas producer in the world, has not escaped unscathed. Calls are mounting — from Elon Musk to U.S. Energy Secretary Jennifer Granholm — for U.S. producers to man the helm and increase production, but as the saying goes: “Easier said than done.” The International Energy Agency said in its March oil market report that up to 3 MMbbl/d of Russian production could be shut in from April as sanctions bite and buyers shun exports. At the same time, hundreds of companies have announced plans to suspend their Russian operations or exit the country entirely, including major energy firms such as BP, ExxonMobil, Shell and Equinor. The U.S. has also banned Russian energy imports, while the U.K. plans to phase out imports by the end of the year and the EU is beginning to implement plans to reduce its own reliance on Russian oil and gas. Oil prices responded accordingly as the global supply-demand balance has tightened, with WTI and Brent reaching intraday highs of $129.44/bbl and $139.60/bbl on March 8, respectively. The same day, the WTI front-month contract settled at $123.70, the bench-

SHALE MAGAZINE  MAR/APR 2022

mark’s highest settlement since August 2008. Prices have since fallen but as of March 28, WTI was still trading above $100, a level that was last seen in 2014. Volatility in oil markets is also at historic highs, with open interest volumes for WTI reaching multi-year lows in March. The U.S. announced on March 31 that it would release up to 180 MMbbl from the Strategic Petroleum Reserve over a period of six months beginning in May.

IEA member countries later agreed to release a total of 60 MMbbl from their own strategic reserves. The SPR release is the largest ever for the U.S. and will help put downward pressure on oil and gasoline prices. While this temporary measure will not in itself solve structural supply shortfalls, it appears to be timed to bridge the gap until U.S. production growth ramps up. In its latest PetroLogic report, Enverus Intelligence Research

(EIR), a part of Enverus, said that if its full sanctions scenario for Russian liquids is realized Brent could average $160 this year, implying a likely WTI average in the $150s. For comparison, the highest WTI settlement ever was $145.29 on July 3, 2008. EIR is currently projecting global demand growth of 1.5 MMbbl/d this year, already half of earlier forecasts. A $160 Brent scenario could reduce global demand by 3 MMbbl/d and lead to flat YOY demand growth compared to 2021. On the supply side, European imports of Russia’s Urals benchmark fell by about 1.5 MMbbl/d in March, and progress on negotiations with Iran on returning to the 2015 nuclear deal is unclear. OPEC+ has also stuck to its plan to ease production cuts by a nominal 400 Mbbl/d per month, and the group has struggled recently to raise production to meet the higher quotas. The U.S. oil and gas sector can step in to fill the void Russia left in global energy markets—at least partially — but doing so will require navigating numerous risks both old and new. Since 2019, U.S. operators have largely shifted from a growthfocused strategy to one of capital discipline and return on investment. In a March 17 research report, EIR said public shale producers went from reinvesting nearly 100% of operating cash flow in 2019 to 45% in 2021. That ratio is expected to fall even further this year at current strip prices. The significant free cash flow generated by this shift in strategy has been used to strengthen balance sheets, pay dividends and buy back shares. Shifting back to a higher growth model will likely be a tough decision

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By: Matthew Keillor

for operators, particularly those with less high-quality inventory who could run the risk of producing more costly barrels for a market that no longer needs them if the winds suddenly change. A finalized deal with Iran; sanction waivers for Venezuelan oil; Saudi Arabia and the UAE — who hold most of OPEC’s spare capacity — changing their tune; or even a sudden end to the war that leaves Russia with an opening to come in from the cold could all significantly alter the global supply-demand balance. Still, EIR estimates that U.S. oil production could increase by 1 MMbbl/d exit to exit in both 2022 and 2023 with only modest drilling increases. In the high case, exitto-exit growth could reach 1.6-1.7 MMbbl/d in both years if investors greenlight growth, bottlenecks are addressed and government incentives protect against longterm downside. This upside case would also bring a higher cost structure and commitment to longer-term service contracts for operators. Among public operators, there are several Permian-focused producers who hold large inventories of high-quality drilling locations and can add significant CAPEX without accelerating any degradation in well performance, EIR said. Others hold more mid-tier inventory with $40-60 WTI breakevens that will transition from low to high value if oil prices above $75 WTI are sustained. However, because of the normal spud-to-sales cycle, any material changes today in operator plans will begin adding production in Q4 at the earliest and more likely not until 2023. In the 1 MMbbl/d growth scenario, EIR forecasts that the majority of growth will come from Delaware, Midland and Eagle Ford basins. Further upside could come from less-economic plays such as the SCOOP/STACK and non-Eagle Ford Western Gulf by bringing forward long-dated inventory life. The active rig count would need to increase by roughly 20% from current levels by mid2023, bringing it in line with levels last seen in the latter half of 2019.

The U.S., Canada, Western European allies and others have responded with increasingly severe sanctions that have isolated Russia and decimated its economy While drillers have plenty of spare rig capacity to meet this need, many of these rigs are coldstacked and will likely require multi-year contracts to bring back. Fracture capacity would also need to increase by 20% this year and 15% in 2023, which would require bringing all coldstacked equipment back online plus adding another 20%-30% to the fleet’s capacity. Besides convincing investors who are finally seeing returns, operators will have to contend with higher costs to increase production. During Q4 earnings calls, operators forecast 5-20% increases in per-foot drilling and completion costs, with smaller operators skewing towards the higher end. Incremental growth from low-graded acreage will likely entail further cost increases. Operators will need to make additional 10- to 15-year volume commitments, EIR said, to develop the needed gas gathering, processing and transmission capacity required to accommodate additional oil production growth. This will be particularly important in the Permian, where existing infrastructure is already heavily utilized, or companies will run the risk of increased flaring at a time when ESG metrics have become increasingly important to investors. Oilfield services companies are grappling with an acute labor shortage and attracting qualified personnel will likely come at a significantly higher cost. In the latest Enverus day rate survey, nearly a third of survey participants

expressed uncertainty about future work volumes because of ongoing challenges in finding rig personnel. About 80% of respondents reported continued increases in daily operating costs, which they are attempting to offset by increasing their list of vendors and suppliers and by charging higher day rates. Prices for oil country tubular goods and downhole consumables, which typically lag iron ore and steel, are also projected to increase in cost. Russia and Ukraine produced 10-20% of OTCG goods imported into the U.S. last year, and prices for iron and steel have risen more than 10% since the invasion began. Fracture sand is also in short supply, with many mines shuttering following the 2018 overbuild and 2020 drilling collapse, EIR said, and the remaining mines are running near capacity. The 2024-2025 WTI strip will be an important consideration for operators’ 2022-2023 capital commitments even if wells earn attractive returns by the end of 2023. EIR expects that operators will need to see 2024-2025 prices over $80/bbl, compared to current strip prices of $70-$75, to justify long-term GP&T and OFS commitments in acreage with half-cycle breakevens ranging

$50-$60. Growth in these areas would be necessary to meet EIR’s upside case of 1.6-1.7 MMbbl/d of production growth. Gas-weighted operators will face similar headwinds. During the Q4 earnings cycle, the gas group guided toward an average 17% increase in capital spending and production growth of 4% this year, EIR said in its March near-term gas market outlook. However, EIR projects Henry Hub prices will continue ranging $4.50$6.00/MMBtu through next winter because of low inventory levels, limited elasticity in power generation and strong demand for U.S. LNG exports. As part of the EU’s plans to reduce dependence on Russian energy, it is aiming to reduce demand for gas imports from the country by two-thirds this year. The U.S. has promised to supply an additional 15 Bcm (530 Bcf) of LNG to Western Europe in 2022. However, existing LNG plants in the U.S. are already operating near capacity, so the gas would have to come from exports that would have gone elsewhere and would still account for only about 10% of what Russia supplied to Europe last year. Russia’s invasion of Ukraine and the subsequent isolation of one of the world’s largest producers and exporters of oil and gas may accelerate a fundamental reshuffling of global energy markets, particularly for a European continent that was already pivoting towards lowcarbon energy. U.S. producers have the capacity to navigate these troubled waters and find safe harbor on the other side. However, as they have learned since the early days of the pandemic, danger lurks just below the surface.

About the author: Matthew Keillor has worked at Enverus since 2019. As part of the publications team, he covers U.S. oil and gas commodity markets; upstream and M&A activity outside of the U.S.; and renewable energy news globally.

SHALEMAG.COM

INDUSTRY

Biden Makes a Deal For U.S. LNG to Europe That He Has Little Power to Fulfill

nless you’ve already done the smart thing and retired to the wilderness of your choice, you’ve probably heard the news that the European Union struck a deal with the United States to considerably boost its intake of American LNG. Considerably in this case means an additional 15 billion cubic meters this year, to grow to 50 billion cubic meters annually by 2030. Just for context, Gazprom’s exports to Germany last year hit a record high of 59 billion cubic meters. The EU has committed to securing the demand for these billions of cubic meters of American LNG. The stipulation might seem surprising given the EU’s recent history of doing everything in its power to discourage fossil fuel consumption but it reflects a reality in which try as hard as Brussels might, business and households need readily available energy. It is in the “readily available” department that the deal with Washington raises some questions. As David Blackmon put it in a recent post, the deal surprised the U.S. LNG industry because LNG producers were, apparently, never consulted on it. In other words, President Biden made a promise without checking with those in charge of its potential fulfillment. The questions David posed included: “Does he plan to order his regulators to streamline permitting processes? Does he plan to somehow order banks and ESG investor groups to stop denying capital to

SHALE MAGAZINE  MAR/APR 2022

companies in the industry, capital needed to fund their $10 billion LNG export facilities?” Perhaps the president does indeed plan to make it easier for LNG producers to get the necessary permits. This is, after all, within his power. As for the second question, the answer would be trickier. Just because Europe is short on gas and about to become shorter once Russia shuts off the tap unless it is paid in rubles, doesn’t mean that the environmentalist lobby has taken a nap. On the contrary, the reaction to the U.S/EU deal has been swift. “There is no way to ramp up U.S. LNG (Liquified Natural Gas) exports and deliver on the imperative climate commitments that the U.S. and the EU have pledged,” said the president of Earthjustice, Abigail Dillen, following the news. “It will take years and cost billions to build out new LNG infrastructure that will lock in expensive fossil dependence and dangerous pollution for decades

to come. Investing in new LNG is not a near-term fix for getting off Russian gas in Europe. It is a diversion of time and resources away from the urgent project of scaling clean energy in the last years we have left to triage in a climate emergency.” I took the liberty of italicising the beginning of the second quote because it is telling of the state in which the EU and the U.S. are making decisions likely to affect the long-term energy security of, in this case, Europe. It is also telling of how important it is to take time to consider the implications of a certain decision before you go ahead and make it. The United States has abundant natural gas resources. Based on these resources alone, it could probably supply Europe with gas for decades to come. Sadly, it’s not only about resources. As Earthjustice’s president noted in the above quote, infrastructure is also necessary and it does not come cheap. Neither does it come quickly.

The EU has committed to securing the demand for these billions of cubic meters of American LNG

So, on the supply side, we have U.S. LNG producers caught by surprise — no doubt pleasant — by the White House’s decision to boost trans-Atlantic demand for their product. Specific deals are yet to be inked, by the way, but we have something of a framework agreement. What we don’t have is enough export capacity, yet. And it will take years to build it. Now, there’s two ways U.S. LNG producers could go about it. They could either reduce shipments to their Asian clients to satisfy urgent European demand, giving up market share in the biggest LNG growth market, or they could supply limited amounts of LNG to Europe until such time as infrastructure allows them to supply more. It looks like an easy decision to make and is very similar to the decision that Middle Eastern oil producers have made with regard to their stance on Europe’s oil supply. As Reuters’ John Kemp explained it in a recent column, “Breaking long-term contracts and giving up Asia’s lucrative growth markets to supply refiners in declining Europe, possibly only for a few months or years, would make little strategic sense [for Middle Eastern oil producers].” Europe’s plans for gas are the same as its plans for oil: it wants them out of the EU’s life as soon as possible. Why, then, would U.S. producers invest in new infrastructure just for European customers if ten years from now Brussels slaps some new sort of emission standard that makes

ALEXYZ3D/STOCK.ADOBE.COM

By: Irina Slav

U.S. LNG prohibitively expensive? And why do this when there’s the whole of Asia, thirsty for all the gas it can get its hands on? While U.S. LNG producers no doubt mull the pros and cons of a European LNG offensive/rescue mission, on this side of the Atlantic government planners are looking for floating storage and regasification units (FSRU). I know it sounds like a bad joke, but yes, the EU first agreed the additional volumes of LNG and is only now starting to look for ways to get them to consumers. The Financial Times (FT) recently wrote about it. Germany, Italy, and the Netherlands are in a race to secure FSRUs for their planned LNG imports because building permanent import and regasification terminals takes too much time and, I expect, money, and the EU is eager to cut Russian gas imports by two-thirds within the next nine months. “Europe is screaming for FSRUs to get energy in, whatever it costs,” the FT quoted the managing director of one of the very few companies that own such units, Norwegian BW LNG, as saying. Germany is in talks for three such vessels, which will provide it with regasification capacity of some 27 billion cubic meters annually. This is quite a respectable if a little stretchy amount, given that, as the FT itself notes, a single FRSU typically has an annual ca-

pacity of 5 billion cubic meters. It also notes that although quicker to deploy than import terminals, FRSUs still take several years to install and put into operation. This alone is enough to conclude that the whole “two-thirds less Russian gas by end of 2022” might well be a fantasy. To be fair, Haram Sivam, former Investment Lead on LNG-related projects at the International Finance Corporation, tells me that not all FSRUs were created equal. “There are no typical FSRUs as most are bespoke solutions. But most modern FSRU terminals can store and regasify around 4 million tonnes to 5 million tonnes of LNG annually. To go from tonnes to cubic meters you have to divide the tonnes by 44%. “So most modern FSRUs are capable of annual storage capacity of around 9 to 11 million cubic meters of LNG. I think there is at least one FSRU that is around 12 million cubic meters of LNG per annum, if not a bit larger. Note that supply vessels and delivery frequency can also limit LNG throughput of an FSRU.” But that’s not all because in addition to the limited fleet of FRSUs and the time it takes to put them into operation (the fastest appears to be 11 months, according to Sivam), there are also the already notorious supply chain breakages that have got a growing number of experts from

various industries talking about the end of globalisation. There are only five available FRSUs in the world today, according to Golar LNG, another FRSU owner. Another three could be released from their contracts this year, Karl Fredrik Staubo also told the FT. However — and I’m afraid this is too funny to not laugh at it — FRSUs are sensitive vessels and cannot operate in cold waters, which are the only available waters in northern Europe. A way around this challenge, to quote Sivam, is converting a vessel already operating in these waters into one that can be used as an FRSU. Based on the locations of Europe’s LNG import terminals, the only northern, so to speak, terminal that suggests LNG tanker movement in colder waters is the one in the Netherlands. To top it all off, charter rates for these vessels are naturally soaring, with the annual rate now at $40-60 million, according to Rystad Energy, and likely to continue up as “a bidding war” unfolds for these vessels. To sum up, the EU committed

to maintain demand for at least 50 billion cubic meter of gas in the form of LNG annually despite its green transition plans and despite the fact it lacks the import infrastructure to bring this gas to end consumers. Granted, if the EU somehow manages to reduce intake of Russian gas without plunging its economies into severe recession, maintaining this demand will be easy. The supply that would theoretically replace Russian pipeline flows would remain an issue until Qatar boosts its production capacity, planned for the end of 2025. And that new boosted capacity will be 110 million tonnes annually, or about 250 billion cubic meters for all gas consumers. There is a lot to be said about making decisions on the fly, especially when they concern hundreds of millions of people already frustrated after two years of pandemic restrictions and rising inflation. For the purposes of this article, I’ll only mention one of these many things. Life is going to get a lot more expensive.

About the author: Irina Slav has been writing about energy, with a focus on the oil and gas industry, since 2006. Her articles have appeared in Oilprice, Fortune, Insider, and Time magazine, among others.

SHALEMAG.COM

SHALE MAGAZINE  MAR/APR 2022

SHALEMAG.COM

POLICY

ENERGY SECURITY? WHAT’S THAT? By: David Blackmon

SHALE MAGAZINE  MAR/APR 2022

decide whether or not fracking and drilling Germany’s own resources, thus providing Germany with a higher level of energy security, would in hindsight be “competitive” with the cost of becoming a Russian vassal state where energy is concerned? In Poland on March 25, President Biden stood at a press conference with European Commission leader Ursula von der Leyen and committed America’s liquified natural gas (LNG) industry to quadruple its exports

to Europe over the next 8 years. Indeed, during its energy crisis over the winter, Europe relied heavily on LNG imports from the U.S. and Qatar to keep the lights on and homes heated. But the cost of that LNG was often 10 times higher than the price those countries pay for the natural gas coming in from Russia. Would fracking and drilling for Germany’s own resources be price competitive with $30 per mcf LNG? You bet it would.

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n reading through this issue of SHALE Magazine, you will notice a heavy focus on events surrounding Russia’s war on Ukraine. That was not our plan for this issue when the year began, but everyone has a plan and they tend to fall apart as soon as the first punch is thrown, as Mike Tyson would say. Vladimir Putin threw that first punch in early March, sending a large portion of his country’s army into a neighboring country in pursuit of annexing territory and settling some very old grudges. He was motivated largely by the belief that his country’s energy dominance over Europe would provide him the geopolitical leverage he would need to sustain his war until it reached a successful conclusion. The consequences to the world — including the United States — have been several and severe, and all have had the effect of highlighting the crucial importance of building and maintaining a nation’s energy security. We should all remember that Europe’s countries willingly allowed themselves to become client states of Russia where energy is concerned by effectively making hydraulic fracturing and drilling for their own oil and natural gas resources illegal during the first decade of this century. I was lectured by a European oil trader when I pointed that out during a recent panel discussion, who told me that “fracking was not competitive in Europe” during that time. Well, certainly, fracking and drilling in Germany in, say, 2005 was not price-competitive with contracting to bring cheap natural gas from Russia into that country when viewed on an isolated monetary basis, without considering other factors. Factors like, for instance, Vladimir Putin deciding he could forcibly annex big chunks of Ukraine 17 years later, safe in the knowledge that Germany and the rest of Europe would help him finance his war because they could not cut off those Russian oil and gas imports without destroying their own economies and throwing the world into an economic depression. How do we measure the cost of this action, and all the human lives that have been taken and destroyed, and

So, we see the short-sighted decisions made by European leaders from 10 and 15 and 20 years ago now coming back to haunt the continent, as they provide a madman in the Kremlin the confidence to mount a tragic war on a neighboring country. What is the value of a nation’s energy security? As Tom Pyle, Karr Ingham and others point out

in this issue, America could be about to find out the hard way unless the Biden administration wakes up to reality and decides to change course. The “Green New Deal” policies that Biden and this Democratdominated Congress have pursued for the last 15 months basically represent a carbon copy of the sad and tragic road traveled by Euro-

pean governments since 2001. The president continued with another move designed to diminish U.S. energy security on March 31. On March 31, Biden announced a plan to remove 180 million barrels from the SPR over the following 180 days. That’s 30% of the 635 or so million barrels that remain in the Reserve after his previous removal of 50 million barrels began last November. In the wake of the first Arab Oil Embargo in 1973, the federal government, in its infinite wisdom, realized that having a massive reserve of crude oil to be able to tap in times of national emergency might be a good idea. President Richard Nixon and the Democratdominated Congress at the time thus showed they understood the strategic value of maintaining America’s energy security. There is no doubt that $4.20 gasoline prices are not pleasant, but do they really represent a national emergency? Please. What high gas prices represent to Biden and his fellow Democrats is a political problem they are desperate to somehow mitigate. They understand that the party in power will be blamed for the price of gasoline at the polls come November by voters who are angry that the low gas prices Donald Trump handed to them have been intentionally surrendered by his successor in office. That’s the motivation for this move, and nothing more. It is as if this ship of fools in D.C. have learned nothing from Russia’s war on Ukraine. Putin would have never attacked Ukraine were it not for the geopolitical leverage he held over the European continent, thanks to its conscious decision to become client states of Russia where oil and natural gas are concerned. He knew that these subservient

nations would help fund his war because they would not be able to do without his energy exports or find adequate replacements for them in short order. Every action the Biden presidency has taken related to energy has been designed to move the U.S. down the same sorry energy road that Europe has trod in this century. Diminishing the SPR by another 30% only takes us further down the road to energy subservience. Back to Biden’s committing the U.S. LNG industry to quadruple deliveries to Europe in just eight years. In the days following that announcement, I spoke with an array of contacts in that industry, all of whom told me their companies had absolutely no idea the president was about to make that deal. The administration did not reach out to a single major player in the domestic LNG industry to see if their companies would be able to fulfill such a deal. It also quickly became obvious after the announcement that the Biden administration has no intention of doing anything to help facilitate the meeting of that goal. In fact, it’s obvious they plan to redouble their efforts to deny permits and capital the industry needs to achieve the major infrastructure expansion that would be required to do so. What does that tell us? It tells us that Biden’s deal with the EC was just a virtue signal designed to convince the ignorant among us he was doing something to help Europe solve its own energy security crisis. Nothing more. We know where this all ends. We’re seeing it play out in real-time in Ukraine right now, today. Yet, it is as if the Democrats in Washington see none of it, or if they do, they simply don’t care.

SHALEMAG.COM

POLICY

It’s Your Policies, Mr. President, That Are Driving Energy Prices Up

nergy prices have been rising for over a year and in recent weeks, they’ve been skyrocketing both at home and abroad. The causes of this impending energy cost crisis are multitudinous, but they are all rooted in the same problem: command and control energy and fiscal policies put in place by lawmakers that think they know best. From policies like wind and solar mandates and subsidies that push us away from tried and true technologies, to more extreme proposals like net-zero and all-electric mandates for cars, many of the policies being proposed and implemented both in this administration and globally are causing the very problems that those same global leaders responsible for the problem purport to be perplexed by. The Biden administration is front and center in this push away from affordable and reliable domestic natural gas and oil production. In this administration, we’ve seen the revoking of pipeline permits and pausing the issuance of new oil and gas leases on federal lands, all as the President calls for increased production and accuses companies of withholding production capacity out of greed. Energy prices are rising globally, but some of the sharpest increases can be seen in European countries that are much further along the same policy trajectory as this administration has placed us on. These price increases should come as no surprise. For months

SHALE MAGAZINE  MAR/APR 2022

they have been steadily rising. But rather than enact well-constructed policy to cope with the challenge, lawmakers chose to double down on anti-market energy strategies that simply don’t work. Now that the price crisis is well underway, legislators across the country are resorting to quick-fix policies that serve only to further distort markets and create the perception that they are actually concerned, even though they know that higher energy prices are a fixture, not a bug, in their Green New Deal agenda. Both Maryland and Georgia have temporarily ceased collection of their state gas taxes. In Maryland this has spurred other D.C. area residents to cross over into Maryland to make their gas purchases, distorting the market. New Jersey and Connecticut are also among the states considering suspending the tax. Meanwhile, California is weighing a more extreme solution, a $400 per car gas tax rebate capped at $800 per household. Predictable and consistent policy is key to minimizing the market distorting effects of various forms of taxation. But when we wait to respond to an issue until it has become a crisis, clear and measured decisions are far more difficult to make. This was true for the policy responses to energy issues at the beginning of the pandemic, and it’s true now. Government meddling created this problem, and further government meddling is serving only to exacerbate it. There are so many factors playing into the rise in energy costs,

but a major one, especially in Europe, is an overreliance on wind power, which underperformed this summer and winter along with decades of underinvestment in natural gas and oil. Consequently, European Union countries now depend on Russia for 40 percent of their natural gas (and 34 percent for oil), which clearly poses a threat to their security. Now that countries like Germany have shown support to the Ukrainian

cause, they must find replacements for the bulk of the Russian gas capacity that they had been relying upon. Germany’s grid has some of the highest wind penetration in the world, but when a period of calm coincides with other supply shortfalls like those caused by the war in Ukraine, their options are limited. This March, just shy of 19 percent of Germany’s electricity came from wind. In March of 2021,

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By: Thomas J. Pyle

that figure was nearly 26 percent, and in 2020 nearly 33 percent. This kind of variability does not lend itself to grid stability. All of this was driven by government policy, not market forces. It turns out that the existential threat related to energy is being overly dependent on another nation for a commodity that is essential for electricity, heating, and even for food production. This overreliance comes with consequences, which are being seen now in the form of rapidly

Energy is an input into nearly every good that we consume, and increasing energy costs are both partially a result of inflation and a driver of it

rising prices, and may eventually lead to an even worse scenario — energy shortages. A pragmatic energy policy would prioritize reliability and affordability instead of relying so heavily on unreliable renewables and imports from a strategic enemy. Let’s turn our attention back to the United States. In the wake of the 2020 election, President Biden made it clear that he intended to be an enthusiastic advocate against domestic natural gas and oil production. The cancellation of the Keystone pipeline, the de facto lease suspension, the weaponization of financial regulators, the proposed tax increases on methane, market-distorting tax credits for unreliable energy sources, the recent FERC pipeline policy statements — and many more — are part of an effort to purposefully create an environment in which it is difficult to invest in domestic natural gas and oil. All of these policies have a chilling effect on production and new investment. You can’t disincentivize the production of energy at every turn and simultaneously expect for more of it to be produced. The repetition of the propaganda about the utility of alternative sources of energy, the possibility of net-zero greenhouse gas emissions, and the inevitability of an “energy transition” have led directly to higher energy prices for Americans. Those involved in finding and producing the fuels that currently power the world are rightly concerned that our government might be serious about creating an electricity system entirely dependent on wind and solar power or outlawing gasoline or diesel-powered cars and trucks. How can anyone blame them when that is all they hear from the leadership in Congress and the White House? Consequently, these businesses have underinvested in natural gas and oil over the last several years. In 2014, the world spent about $490 billion finding and producing oil and natural gas. In 2021, it was less than half that number at just $220 billion. This is simply common sense. Our elected leaders can’t disincentivize and demonize oil and natural gas production and simultaneously want more of it. Despite high prices, growing demand, and shrinking supplies, energy companies are disinclined to rush to produce more oil. Why? Because they are listening to policymakers and are concluding that such investments and such actions — which in most cases require years to pay off — are simply too risky in the current political and social environment. Therefore, it should come as no surprise that the cost of gasoline, natural gas, and food are all soaring.

The Biden administration has been attempting to have it both ways by continuing to put forth its costly and unproductive energy agenda while also posturing as though it is concerned with lowering energy prices. But in reality, Democrats in Congress are more preoccupied with putting forth legislation to block oil companies from receiving “windfall profits”, a.k.a. selling something that Americans are buying, instead of focusing on removing barriers to production. Energy is an input into nearly every good that we consume, and increasing energy costs are both partially a result of inflation and a driver of it. When energy is more expensive, then everything else becomes more expensive as well. As people continue to return to their pre-pandemic activities, energy consumption is on the rise and will likely continue to be. Although not a main driver of the rise in costs, this is one more factor that feeds into the overall rise in prices that we have seen and will continue to see. All of this is happening alongside rapid inflation made worse by fiscally irresponsible stimulus programs and other massive government spending that has occurred in the U.S. over the last few years. Printing money is not and should never be a solution to our problems. These rising energy prices are a result of mistakes, misaligned goals, and bad policy choices by politicians, bureaucrats, and even leaders of some of the institutions that provide financing for oil and natural gas projects. Although they have already shown that they’re unlikely to do so, the Biden administration should act quickly to remove the artificial barriers to production that it has erected, and should avoid passing new spending legislation which would only serve to raise deficits and stoke inflation further. America’s oil and natural gas industry can solve this problem. All they need is for politicians and woke capitalists to stop standing in the way.

About the author: Thomas J. Pyle is the president of the Institute for Energy Research (IER), an energy think tank and the American Energy Alliance (AEA), a not-for-profit that engages in grassroots public policy advocacy and debate concerning energy and environmental policies at both the state and national level. He served as head of transition for energy under President Donald J. Trump.

SHALEMAG.COM

POLICY

Ukrainian Lessons for the Appalachians By: Thomas Shepstone

SHALE MAGAZINE  MAR/APR 2022

justice system — a system where nothing gets decided except by the trapping and smothering effects of our deadly legal web. And, that’s hardly all. We lost the Atlantic Coast Pipeline, the Northeast Supply Enhancement (NESE) Pipeline and KinderMorgan’s proposed alternative to the Constitution Pipeline. The Northern Access Pipeline is still languishing in the Federal justice swamp, despite every bit of the law being on its side. It’s the corrupt American way today, where non-profit tax-exempt foundations manipulate the system on behalf of socialist utopians and corporatist green energy rent-seekers using enviro groups as their useful idiots. We just saw it yet again with the halting of New Fortress Energy’s plans to convey Marcellus Shale natural gas to LNG in Bradford County, Pennsylvania for shipment by either rail or truck to a port in New Jersey. It has been fought in both states by the same useful idiots operating under disingenuous names such as Delaware Riverkeeper, PennFuture and Clean Air Council, all paid for by tax-exempt foundations such as the Heinz Endowments, which is run by the step-children of former Secretary of State and current Climate Czar John Kerry. It is a huge mess, to say the least. We have humongous quantities of natural gas in the Appalachian Basin and cannot get it out fast enough, but that’s what we need to do as a nation if we’re serious about Ukraine, protecting

Europe and confronting Russian aggression. Is the Biden Administration serious about these matters? If so, there are several lessons to be taken from the what’s now happening in Ukraine, lessons for all of us and especially with regard to the Appalachians where our nation’s largest natural gas resource exists without adequate means to get its natural gas to market and to those LNG ports. Talk is cheap — we need action and here’s some of what could be done: • Drop the Green New Deal, which is America’s version of the failed German Energiewende that made Vlad imagine he had Europe by the horns and could do whatever he wished in Ukraine. Don’t just pare it back. Drop the whole thing and end the subsidies — all of them. Ukraine has provided all the proof needed that solar and wind are not adequate solutions and are, in fact, dangerous due to their unreliability. • Replace it with a program to once again pursue world energy dominance, employing whatever resources or combination thereof that will deliver reliability and low-cost energy while still cleaning the air, shale being the most obvious. • Direct FERC, through a combination of administration and legislative pressure, to get back to approving pipelines expeditiously and fighting back against obstructionist environmental lawsuits by enforcing

The Biden Administration has done nada to make it easier to get plentiful Appalachian gas from the Marcellus and Utica Shale plays to the ports

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ven poor Joe Biden has seen the light on LNG as the only way to get Europe off dependence on Russian gas. What he hasn’t grasped, though, is the fact we can’t get the LNG to places such Germany without pipelines and ports. Indeed, the Biden Administration has done nada to make it easier to get plentiful Appalachian gas from the Marcellus and Utica Shale plays to the ports. He’s turned FERC into some 2022 version of the Gong Show, plays footsie with every fossil fuel fighter out there, and is stacking the courts with deal killers who want to reinvent America. Yet, Biden has staked his political prospects on pushing back on Russia and shoving the big bear into the paw of the even bigger Giant Panda. But, motives and all the geopolitical implications aside, there is only one way to beat Russia, save Ukraine and protect Europe. It is to starve the beast, of course. That means one of two things: developing more energy sources in Europe that actually deliver energy when it is needed or shipping the stuff from the good ol’ USA. Only one of those options is workable right now and that is to get them our LNG as fast as possible. We have the resources. We are building Jones Act ships now that can deliver gas to Europe and even Boston, which, contrary to the Bostonians of Sam Adams’ day, want to be more like Europeans anyway. The problem is this: Federal Energy Regulatory Commission (FERC) is more interested in being faddish with respect to the climate than ensuring our energy security than that of Europe. Pipelines are ever harder to construct. The Constitution Pipeline was so far behind financially and with its schedule that it gave up the ghost immediately after winning at the Supreme Court. The PennEast followed the same path. Two massively important pipelines for moving gas around were killed by the ridiculous delays now inherent in our thoroughly unjust Federal

Supreme Court decisions that came too late in the process to save the Constitution and PennEast Pipelines. • Reform the tax-exemption system that has allowed wealthy elitists to play politics with fracking, pipeline projects, and oil and gas in general through the vehicle of private foundations such as the Heinz Endowments. These entities are prohibited from lobbying but do it anyway by simply funding all sorts of radical groups who then file obstructionist lawsuits, the sort of lawsuits that just killed the Bradford County LNG facility and multiple pipelines. End the obstruction by cutting off the money supply! • Let freedom ring again in this country as we say we want for Ukraine. Our private capitalist system of oil and gas produces incredible amounts of natural gas to convert to LNG for shipment overseas to save Europe. This can push Putin back on his feet if we just allow it to happen. • We need to add and improve our existing LNG ports as critical energy infrastructure.

We need to designate these ports, as well as the pipelines and railways serving them, as national security priorities that must override the politically-inspired opposition of governors such as Phil Murphy, the former Goldman Sachs executive, who would rather push the ESG, “Build Back Better” and “Great Reset” agenda of the globalist ruling class than take care of the Garden State’s energy needs.

Between a Russian bear and an unaffordable electric bill is no place to be in today’s world but Europe is there. So is Joe Biden, who gave the Nord Stream a green light while killing the Keystone XL. Appalachian LNG can come to the rescue if he wakes up and realizes he has no choice but to recognize the truth about energy and who should deliver it. Let’s hope he does!

The likelihood of the Biden Administration doing any of this is, of course, remote. Yet, it must surely be done if we are to have any hope of getting back our own energy independence and rescuing Europe yet again from its appeasement strategies. The appeasement of green party types has come at an enormous price for European states such as Germany and the UK. They have seen their electric prices balloon beyond imagination and have been forced to buy Russian gas — lots of it — even as they go to war with Russia via sanctions. Now, Russia has turned the screws even tighter by demanding to be paid in Rubles.

About the author: Tom Shepstone is the owner of Shepstone Management Company Inc., a planning and research consulting firm located in northeastern Pennsylvania. He has advised many counties in both New York state and Pennsylvania, as well as other states, on economic development strategies, especially as they relate to rural and agricultural areas. He is also the publisher of NaturalGasNOW.org, a blog focused on the same objective.

SHALEMAG.COM

POLICY

A MISCELLANY OF OIL AND GAS ITEMS By: David Porter

SHALE MAGAZINE  MAR/APR 2022

political status rather than strengthen it, is crazy. Even if you believe that renewables should replace fossil fuels in the long run, it’s insane to force that replacement before the infrastructure is ready. If you, like me, are one of the millions of Texans who lost power and water in the February 2021 storm just stop and imagine what could have happened to the grid if half the cars in the country were electric vehicles. Let us close this column with a brief discussion of windfall profits. In both Europe and the U.S., leftwing politicians (including Senator Elizabeth Warren, former Democrat Presidential candidate) are starting to call for windfall profits tax on oil companies because of the high prices and exorbitant profits caused by the

Russian-Ukrainian war. Are their profits exorbitant? I would argue no! Energy has been the worstperforming sector in the S&P 500 over the last twelve years through December 31, 2021. This year so far has been better for the oil companies but they are still only making up lost ground. The S&P of course is a measure of the larger publicly traded companies. Small independent oil and gas producers, a group that I work with consistently, are primarily working to get back to the financial condition they were in before taking the financial hit caused by the Covid price crash in March and April of 2020. If you want to blame the primary culprit for increasing prices, let’s talk about inflation.

About the author: David Porter has served as a Railroad Commissioner (2011–17) and Chairman (2015–16), as well as Vice Chairman of the Interstate Oil and Gas Compact Commission (2016). Prior to service on the Commission, Porter spent 30 years in Midland, Texas, as a CPA working with oil and gas producers, service companies and royalty owners. Since leaving the Commission, Porter works as a consultant for oil and gas companies. He also serves as Chairman of the 98th Meridian Foundation, a nonprofit concerned with water, energy and land issues.

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n this issue, we are going to do a miscellany of a few short items relating to the oil and gas industry. First of all, let’s do something we don’t do very often — let’s praise the Texas Legislature for passing SB 13. SB 13 has two major parts. A state agency or political subdivision with a qualifying contract of $100,000 or more is prohibited from signing that contract unless the contract contains written verification from the contracted company that it does not and will not during the terms of the contract boycott energy companies. The second major part of the bill provides for the Comptroller (Glenn Hegar) to maintain a list of all financial companies that boycott energy companies. The bill provides that the permanent school fund and each statewide retirement system divest from those listed companies and establishes certain reporting requirements for the permanent school fund and the state retirement systems. The bill also authorizes the attorney general to use action to enforce the prohibitions. This bill was passed on May 28, 2021, as the Senate adopted the Conference Committee Report by a 28 to 3 vote and the House adopted the Conference Committee Report by a 121 to 26 vote. The law went into effect on September 1, 2021. Comptroller Hegar has started the process of enforcing the provisions of this bill. I want to applaud him and encourage him to vigorously carry on. This bill was much needed. When you look at how important the oil and gas industry is to the state of Texas, as well as the importance to the economy of the entire country, you begin to understand how much damage the war on fossil fuels will do to this country if not stopped. This bill is a good first step to stop the damage. The Russian economy is in large part dependent on oil and gas sales. It should not come as a surprise to anyone that Russia has tried and is still trying to use its position as a major supplier of energy to Europe to strengthen its geopolitical position. About a decade ago, I pointed out that Russia (through Gazprom and other entities) was trying to suppress U.S. gas production to have more market share and higher prices for Russian natural gas. Russia was doing this through a disinformation campaign to provide public relations points, studies and funding to the “anti-fracking” groups active in Europe and the United States. The current administration’s thought process on lowering American oil and gas production by canceling the Keystone pipeline, canceling offshore drilling and reducing drilling on federal lands would weaken Russia’s geo-

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BUSINESS

Doing Things Right and Doing the Right Thing By: Alok Kulkarni

n finance, a “black swan” is an unpredictable event with severe consequences for investors. Black swans have occurred throughout modern history but rarely has the world experienced a double black swan, such as the impact of the Covid-19 crisis and the imbalance between oil supply and demand. In this market, we have observed oil prices dropping more than 300%, finishing the day below $0 for the first time in the history of the U.S. benchmark West Texas Intermediate. We have learned from past downturns that exploration and production (E&P) companies and oilfield services and equipment (OFSE) companies are most at risk of downturn commodity prices. Compounding the risk, OFSE companies are further affected by the intrinsic volatility and bullwhip effect of their customers’ dynamic buying behaviors. With oil prices now stabilized around $60-$70 a barrel, many large E&P companies, seeking high levels of free cash flow, are re-shuffling their portfolios to lower breakeven prices. To achieve these high margins, E&P companies are working to better understand their value chain and trying to stitch together an ecosystem of expertise and integration, which helps them to create models that balance risks and rewards. OFSE companies have responded by integrating value chain and bundled offerings to lower customer costs. We are now seeing value-driven offerings in the form of operational, technical, and commercial integration in workflows and integrated multi-business line contracts that push the ownership on OFSEs to bring a performance-driven mindset. These new service models are intended to drive business process efficiencies by collaborating with customers at the start of a project to optimize workflow procedures. OFSEs have historically been a solution-driven industry. These companies grow by developing proprietary technologies and process know-how that can be applied across particular projects and which then become an industry norm and way of operating. The repeated use of these technologies and/or processes allows them to achieve economies of scale on both technology development and integration. Now, with operators wanting a one-stop-shop for their entire well construction and production processes, large service companies are able to offer lump-sum services for all operations at the well site by expanding their existing workflow and filling gaps in their portfolio through mergers and acquisitions. Vertical integration is achieved by combining drilling, measurements, fluids, cementing and logging services in a single well construction and production process within one company, as opposed to a traditional process in which each step is handled by separate, unique providers. In the latter model, services and equipment are outsourced to many providers who each specialize in one or a few customized areas. The theory behind vertical integration posits that instead of paying several companies to handle activities directly related to your business production, a single company could extend its coverage and produce (or serve) more activities. In other words, you stop outsourcing and take everything in-house, expanding your service lines as necessary. Traditional, discrete services in the current environment In past decades, especially in deepwater environments, the OFSEs’ offering was based on discrete services and equipment capabilities. Opera-

SHALE MAGAZINE  MAR/APR 2022

tors exercised their choice of vendor by evaluating technology, expertise, and, most importantly, price. While this gave the operators leverage, it also meant having to manage multiple suppliers and drive synergies. This simultaneously increased costs and contributed to a loss of focus on efficiency and innovation in business processes and workflow. For a time, higher oil prices papered over these cracks, but in the current environment, they have re-surfaced as deeper and wider problems. A typical example is in non-drilling times on a typical deepwater well, such as those required for pipe connections, tripping in, pressure testing, etc. These activities may have contributed to 70% of the well construction activity, yet this is not the typical area of optimization that operators and OFSEs were focused on. But with recent oil price pressures, both operators and OFSEs are looking at ways to reduce the cycle time for a well through full integration and data-driven decisions.

Figure1: Focus on efficiency and optimization in US Gulf of Mexico per well

Today’s operators are increasingly challenged by the depletion of conventional low-cost reserves, confronting frontier oil and gas (O&G) projects, and development choices during tertiary recovery. As projects grow more complex and costly, operators need more technical and operations capability. They are responsible for selecting and integrating technologies and also optimizing and operating the project in its entirety. In order to do this, operators must put in place stringent qualification and validation criteria for all the discrete services and products. Core business models focused on output-based models have resulted in a gross imbalance of value, which means that operators benefitted when an efficient well was drilled, but OFSEs benefitted by inefficiency. In other words, more time on the job means higher fees for the OFSEs. Along with the value conflict of interest, there is also a big difference in the scale of risk for an operator vs. a service provider. An operator drives its value by undertaking a risk-reward approach that shows its

willingness to put in large amounts of capital to safeguard these risks. The service company drives value by promising greater value through its investment in technical research and delivering on agreed criteria in the contract, albeit without a performance incentive. Integration and value creation Learning from other industries such as healthcare, airlines, ecommerce, and tech, OFSEs are now getting more involved in value creation by bundling their offerings. This strategy helps them to have better control over the upstream value chain and to also move away from commoditizing their technology. With the bundling of offers from service companies, operators are able to reduce their spending through cost discounts and performance synergies. On the other side, service companies by expanding their footprint (revenue) on well construction and production drive new synergies across technology, the operating envelope, and commercial models. This mutual value creation is a classic example of growing the pie rather than splitting it up. The end-to-end integration of various services is achieved through the following steps:

Figure 2: Cost and integration relationship U.S. Gulf of Mexico

1. Aligned commercial model: The process of integration starts very early to negotiate an outcome-based incentive rather than one based on output. This model drives alignment and partnership between operators and OFSEs by linking their financial goals. Both parties now have an incentive to innovate, drive efficiency, and reduce cost. The OFSE provider has to plan and contribute its resources to deliver the customer’s desired outcome and thus has skin in the game to share the risk. 2. Integrated approach to risk management: As the saying goes, “Corporations make money by taking risks and lose money by not effectively managing risk.” A typical approach to risk management assessment on discrete services is performed in isolation and considered more of a planning exercise rather than analyzing it for the lifecycle of a project. Furthermore, this approach does not consider the impact of change, and the risks change introduces in other parts of the operations. An integrated approach to risk management brings a holistic approach throughout the lifecycle of the project. This process unites all the stakeholders from the operator and the OFSE company in performing a detailed risk identification exercise that involves all the subject matter experts. With a common repository created for the entire well construction process, these risks and their mitigation plan are referred to throughout the execution cycle, aiding significantly in real-time data-driven decision making. 3. Integrating technology and business processes to reduce cost: During the heydays of the O&G industry, OFSEs prioritized the use of technology for outcome efficiency, and this drove capital efficiency and growth. Because the technologies were focused on improving opera-

tions and facilitating growth while oil prices were high, costs were not the most important consideration. Conversely, in the current environment, the need to lower costs have taken precedence. An example of this is the use of drilling automation, with value propositions for existing technologies tied directly to cost reduction. The improvement of connectivity and high-speed internet, even at frontier locations, has allowed for the automation of many tasks, which can then be moved away from the wellsite. Business process improvement has now been offered to the customers as part of their technology portfolio to lower the operators’ cost. These processes include lean methodologies applied to the well construction and project management processes, data analytics to optimize operations, and others. Digital innovation is further transforming this landscape through end-to-end integration. For example, increasing analytical capabilities to identify subsurface uncertainties facilitates faster, data-driven decision-making that has enabled OFSEs to generate significant value. In O&G, the pre-pandemic and post-pandemic worlds are going to be completely different. OFSEs are using this opportunity to change the current paradigm. Integration, in combination with digital transformation, will provide a solution going forward that will enable the next cycle of growth, although integrated offerings have brought a major shift in the way OFSEs and operators are conducting business. This has some intrinsic benefits which will help to differentiate them from their competition: • Culture Change: An aligned operating and commercial model have a significant cultural impact on both organizations, as they are now working organically together in a partnership, rather than in the former customer-vendor relationship. This has helped OFSEs to improve their customer experience and ease of doing business. The culture of collaborating for solutions (replacing the “it’s not our problem” singular view) is slowly beginning from both sides of the organization. A lesson on changing human behavior can be learned once contributing factors (incentives) are tweaked. • Talent Attraction: Integrating operations with new digital technologies have enabled the OFSE industry to once again be attractive to new talent. Digital automation and multi-skilling are making OFSE companies the employer destination of choice for top talent in areas such as digital, technology and commercial. To operate successfully in the current environment, integrating operations with technical and commercial aspects will be critical. A number of oil and gas companies have already set net-zero-emissions targets, and to empower this transition, operators and OFSEs will have to work together by integrating their value chain: first, to build a resilient and sustainable core hydrocarbon business, and second, to develop a new operating model that will succeed in low-carbon environment. About the author: Alok Kulkarni is an Integration Project Manager at one of the world’s largest oilfield services companies. Based in Houston, Texas, he has been awarded for his expertise in building and executing value-based performance models that improve productivity and reduce costs by optimizing synergies, to create efficiencies across multiple business lines in the oil and gas industry. Mr. Kulkarni has significant international experience in engineering, operations, data analytics, well construction, risk management, exploration, deepwater market, and production, finance, and management. He received his M.B.A from Rice University and earned a degree in Engineering in Industrial Electronics from Mumbai University.

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SHALE Magazine March/April 2022

Articles inside

Biden Makes a Deal For U.S. LNG to Europe That He

Russia’s Isolation Leaves Behind Stormy Seas for U.S. Operators

Ukrainian Lessons for the Appalachians

Texas Stands Ready to Lead the US to a Global Crude Oil Supply Solution

It’s Your Policies, Mr. President That Are Driving Energy Prices Up