Speaker 1:
This episode of EnergyCents is brought to you by S&P Global's financial and capital markets energy advisory group. Our team of experts provides the investment community with actionable insight and integrated thought leadership that identify the trends and trend makers of global energy markets. Solutions cover the full energy and natural resources sector from traditional fossil fuels to emerging clean tech ideas and supply chains, and are available via recurring reports, webinars, robust data sets and personal engagements with experts.

Hill Vaden:
[00:00:30] All right, welcome back to EnergyCents, an S&P Global podcast that considers topics that lie on the intersection of energy and financial markets. I'm Hill Vaden, here as usual, with Breanne Dougherty. Breanne, how are you?

Breanne Dougher...:
I'm great, Hill. How are you?

Hill Vaden:
I am doing well. We are recording today on the 3rd of December, so we just got back from Thanksgiving. How were your holidays?

Breanne Dougher...:
They were good. They were good, I guess. Everything's just [00:01:00] a little bit anticlimactic right now, because, at best you're eating dinner with one other person, as opposed to... Maybe in some cases, I guess, that means around the Thanksgiving table there were less fights because there were just less people. Is that maybe the bonus of all this, that families haven't been falling out in 2020, because they haven't seen each other? This might be the silver lining.

Hill Vaden:
Did you have a big bird?

Breanne Dougher...:
Well, no, not really. Here's what's funny, right? It was American Thanksgiving, [00:01:30] but I'm Canadian. So, to be honest, I don't really care. I'm an adopted American Thanksgiving person. It's whatever it should be. For me, it's just nice because it's an extended long weekend. Not that I don't care. It's important for everybody and it's always nice to have a holiday, but my true roots were celebrated back in October because that's when Canada has their Thanksgiving.

But, yeah, no, I had turkey and the whole trimmings... Oh, hold on a second, speaking of me being Canadian, I am going to bring this up. So, [00:02:00] we've talked about how we're pretty impressed that our listenership is, I guess, how you call it, our listenership has seemed to have increased over the last month or two, which we're taking as a very good sign that we're not horrible. And maybe people are finding either important information or just enjoy speaking... or hearing us speak. So, that either way is a win.

But so, I had somebody that has known me for a long time, but hadn't spoken to in awhile, reach out and say, "Oh, I listened [00:02:30] to your podcast and it's great." And I said, "Oh, great." He said a couple of things. One, "You're really living up to the Canadian stereotypes because you seem to talk about weather a lot." And two, "Your accent sounds more pronounced," and he's not sure whether or not it's because I'm holed up in my home all day by myself and maybe talking more to my family on phone, or if it just comes across more Canadian when it's recorded. But these have been the comments I have been from people that know me [00:03:00] is that I sound particularly Canadian and I talk about the weather too often.

Hill Vaden:
Well, maybe that's a good segue to bring in Tony Reinsch, who is a particular Canadian who is joining us today. Tony, how's the weather wherever you are?

Tony Reinsch:
Hey, Hill. Hi, Breanne. I don't detect any accent whatsoever. I'm not sure what you're talking about.

Breanne Dougher...:
Hill's got the accent. It's not me.

Tony Reinsch:
Right. And I'm on the West Coast of Canada and of course it's drizzly.

Hill Vaden:
[crosstalk 00:03:30].

Breanne Dougher...:
I was going to say, [00:03:30] it's probably gray. The first thing I was going to say is, "Is it gray out there on Vancouver Island?" Because that's typically the case.

Hill Vaden:
And were you able to take time over Thanksgiving? Did you celebrate Thanksgiving being in Canada, in November?

Tony Reinsch:
About a month ago. About a month ago.

Hill Vaden:
Okay.

Breanne Dougher...:
As it should be.

Hill Vaden:
What do Canadians do on the day after Thanksgiving? Do you participate in all of these American induced sales? Or out of spite, do you go curling or something?

Tony Reinsch:
Well, in point of fact, I went [00:04:00] curling, but [crosstalk 00:04:01]-

Breanne Dougher...:
Did you actually go curling?

Tony Reinsch:
Absolutely, Friday.

Breanne Dougher...:
Wonderful.

Tony Reinsch:
Actually, they're on the verge, I think, of shutting us down. I think [crosstalk 00:04:10].

Hill Vaden:
Oh no.

Tony Reinsch:
The COVID beast is going to close up our curling rinks for a few weeks, but we've been trying our best anyway.

Breanne Dougher...:
You got in one last game at least, that's good.

Hill Vaden:
Well, so Tony is a senior advisor of worldwide and plays and basins analysis here at S&P Global. And [00:04:30] one of the other things, I guess that happened over the Thanksgiving break, at least in the news cycle, is Exxon announced that it was concentrating a lot of its development on three kind of core upstream opportunities in Kiana, Brazil, and the Permian Basin in the U.S. Which is really what I think we wanted to talk about more broadly today, but around basin consolidation and to an extent operator consolidation. So, I guess first Tony on the back of that news, I [00:05:00] mean, can you help us to interpret the significance both to Exxon and to the larger Gulf Stream Marina?

Tony Reinsch:
Sure. I think, I mean, ExxonMobil's announcement, I guess it raises some eyebrows in terms of its severity. I mean, this is an enormous international oil player, in a lot of basins, in a lot of countries, to be narrowing their focus down to three, both speaks to the, obviously the size of the resource in those basins, [00:05:30] but really the amount of traction that basin focus is getting in oil and gas portfolios worldwide. I mean, we've seen this trend for quite a while. You know, people like to focus on exploration, that's sort of the front end of this whole process, and if you look back kind of the pre-2010 period, you're having 1,400, 1,600 new-field wildcat wells drilled on a basis. Since 2015, that number's [00:06:00] more like 600, 650, but as important, the drift of that exploration activity into mature basins, so where you have established infrastructure and you have established upstream operations, is actually accelerating.

So, less exploration, more of it focused on the mature basins, and the result is you're leaving more and more, let's say, frontier or emerging stage basins [00:06:30] starved for capital. And this is going to have some really significant implications on a worldwide basis, as we move through the next number of years. And again, it's not just ExxonMobil doing this. Well, you would be hard pressed to find an oil and gas company at this point, that isn't seriously considering basin and portfolio consolidation to try and enhance their cost-effectiveness, to try and get to [00:07:00] some point of scale economies where you can compete effectively in a lower oil price world. That's the path forward.

Breanne Dougher...:
So, which basins seemed like the natural winners in this, or where we're going to see that narrowing of focus? Some must be better positioned than others.

Tony Reinsch:
Sure. And that changes a bit. I mean, Guyana is a great example. It's a classic... the first successful deep water well was drilled there in 2015, five [00:07:30] years ago. And no infrastructure anywhere. I mean, it's a true frontier basin. ExxonMobil drilled Liza-1, and they brought production on stream in 2019. So, less than five years it took, and now you have this basin that's moving north... moving towards 11, 12 billion barrels of recoverable resource. It really came out of nowhere. I mean, you'll continue to have those stories, but who are going to be the winners through this consolidation [00:08:00] are the basins that sort of have continued to prove their ability to deliver up either new plays or more resource out of existing plays over a long period of time.

If you kind of look back to, and ask yourself, so how does an oil and gas company make money? I mean, the Holy Grail of our business is being in a basin that gives you repeatable, economically viable opportunities [00:08:30] for resource discovery and development. So, where are those? Well, I was looking today at our... we monitor, so the 10 top exploration successes in each year as we kind of roll through the year. So the December numbers are in now for 2020. Of the 10 top discoveries in terms of resource size worldwide, seven have been in either Guyana or the Alaska North Slope. Which, people go, "Alaska North [00:09:00] Slope?" I mean, I think people's tendency is to think, "Well, that's a basin everyone's kind of forgotten about, or it's been pretty sleepy for a while," but there was a classic case where the above ground changed, the competitor landscape change to allow different players to come in and rework this basin with new ideas, or maybe a little more focus, had it otherwise been the case.

But other major winners here, the U.S. deep water [00:09:30] Gulf of Mexico [inaudible 00:09:31], and soon we think to be joined by the Mexico side of that basin. You know, basins don't care about national borders. Because of, again, above ground challenges, there's just hasn't been the activity level on the Mexico side that we're now seeing. Now that their upstream is open to foreign engagement and involvement by the big IOCs and the internationalizing national oil companies.

So, we have that. [00:10:00] North Sea continues to produce surprises, although perhaps, maybe now, finally for a smaller set of companies, a tier two set of companies who will take that large basin scenario forward while Statoil, or sorry, Equinor now, continues to kind of grow out the Norwegian North Slope, North Sea component. And then you have the Middle East basins to the extent you can engage in them are continuing to be fruitful. West Siberia... [00:10:30] problem has many of the basins that we think will really come to dominate oil production over... if you look out 15 to 20 years, are really basins that are under the purview and operation of national oil companies.

So, the access of IOCs, international oil companies, EMP companies, as we know them, to these basins and to this resource, is going to be fettered. In some cases, there may be [00:11:00] a national oil company, like an in case of ADNOC and United Arab Emirates, that relies heavily on foreign companies to come in and develop their resource wealth. Saudi Arabia does not. Russia doesn't really. So, it's just going to depend on the jurisdiction, as to what kind of role these basins are going to have in the portfolios of companies like ExxonMobil or Shell or Chevron.

Hill Vaden:
Well, and I guess kind of piggybacking on that, Exxon chose to focus [00:11:30] on three basins that are oily, and a lot of the basins on your list were oily. There are some huge exploration successes in MSGBC, Mozambique, and the Eastern Med that are gassy. Do we expect to see more focus on oil at the expense of gas? Or are people going to do oil or gas, rather than oil and gas, I guess may be the way to ask it?

Tony Reinsch:
Sure. [00:12:00] I mean, even at $45 or $50 a barrel, the oil is a wealth, a greater wealth generation, and certainly it's much more fungible. So, you can produce it, put a floating production storage and offloading facility at your... if you're on the off-shore, at your field site, load up tankers and ship them off. If you make a major gas discovery, MSGBC is a great example, Hill. They have a very large now, [00:12:30] proven gas resource base, so that the future of the MSGBC is 100% about commercialization. So, who's going to build the LNG facilities? And how are they going to tuck into a global LNG market that already is looking a little bit over supplied, and as you say, has a lot of large-scale gas resource waiting to be developed and to get into that market? And then there will continue to be companies who are oil specialists and companies who are gas specialists, certainly [00:13:00] that's going to be the case. But the large-scale global natural gas sector is a harder game to play because of those commercialization options are so expensive. The amount of capital that you need to put into fixed LNG trains and all of the shipping and all the bits to move that gas around. It's just simpler on the side.

Breanne Dougher...:
If you're going to increase your focus on certain basins naturally... that [00:13:30] maybe some divestitures out of these portfolios, right? That they're going to streamline things, or who are they going to divest those assets to? I mean, where's the buyer in that, if everybody's sort of trying to narrow focus? Do we think that that's going to mean that other people are going to focus on what's getting divested from one portfolio? Divest from one portfolio, or is it just that there's just going to be a really oversupplied MNA market?

Tony Reinsch:
Well, we've had an oversupplied [00:14:00] MNA market for quite a number of years now, probably since 2015, you would say that-

Breanne Dougher...:
Fair enough.

Tony Reinsch:
... the disconnect in valuation has been really keeping assets from moving. But I think, Breanne, what you're going to find is that companies will grow and develop in smaller basin areas and absorb those assets that are made available, and they will become the basin leaders in the... maybe if you want to think of them as secondary or tertiary or to ExxonMobil [00:14:30] non-strategic. So, what's strategic to one company will be non-strategic to another, and that's how the portfolios will sort of manage themselves or how the assets will move amongst those portfolios. I think what you'll see increasingly is that again, back to the thesis, so that the Holy grail of upstream operations is repeatable investment opportunities in an area that you can grow to [00:15:00] reach scale economies, we're going to have more and more concentration. So, basins with fewer players, but much more material, which in some cases is going to create efficiency, in some cases, it's going to create potential situations of kind of intersection, maybe even animosity with regulators and governments and owners of the resource space, who may not agree with the... maybe the pace of development or the type of development that a company's pursuing.

It's going to be a little bit more volatility [00:15:30] in that regard and the basins that have... that will continue to have the sort of rich mix of large, medium, and even smaller upstream players, are going to be those mature basins, like the North Sea, like the Gulf of Mexico, Alaska North Slope, Western Canada Sedimentary Basin for that matter, where there's room for a lot of players to be involved. And the larger companies continue to invest because they've built up that scale.

Hill Vaden:
[crosstalk 00:16:00].

Tony Reinsch:
[00:16:00] In the Gulf of Mexico, the ExxonMobil and Bps, Occidental/Anadarkos, they have the infrastructure, so they'll... and Shell, they'll continue to work those basins because that's... Your discoveries may be smaller, but your probability of success is higher. And when it's becoming more and more a matter of generating returns, as opposed to growth, those variables become the drivers.

Hill Vaden:
So, if we look at the [00:16:30] three that Exxon focused on, and I know we don't want to focus the entire conversation on Exxon, but you've got kind of three very different focus areas, right? You've got the Permian, which is a big basin supporting a lot of activity from those as large as Chevron and Exxon and those a small as, [inaudible 00:16:49]. You've got Guyana, which is a bit of a company maker, right? There's not enough there for... [00:17:00] to support somebody in the way that the Permian or the North Sea is. You got Brazil, that's... I guess I would put it in kind of a class by it by itself and maybe closer to Guam or North Sea.

Where do we expect to see the most, I guess, out-performance or the most success for these companies? Is it better to be in the company maker? [inaudible 00:17:22] the better to be in a highly competitive environment where you can learn from those around you? Or is it better to be in a big basin [00:17:30] that's just throwing off cash? Or do you want the portfolio approach that Exxon kind of announced, where they've got exposure to all three and they can turn on and off as they need?

Tony Reinsch:
Sure. Well, again, it'll vary by company size, but if you're thinking about the six or seven largest players, I mean, they are portfolio players. They have a bit of everything. You take the cashflow from one basin, you invest it in the development of your emerging basin, and you take a small, but not immaterial amount of the overall [00:18:00] free cashflow being generated. And you continue to probe where the next Guyana might be. You know, is it the SEAL Basin, off-shore Brazil, where ExxonMobil's taken a big portfolio position in a play that may end up being somewhat like Guyana? I mean, that's sort of the bet.

For a lot of companies, Brazil, because of the overwhelming dominant presence of Petrobras, the national oil company, is not a place that naturally attracts them. [00:18:30] They're not big enough to play, they can't get material there. Not every company is comfortable to be a minority interest player. Gulf of Mexico is the exact opposite. If you have the expertise, you can... there's readily available opportunities through bid rounds and other asset churn, to position yourself and grow.

Guyana is in that middle ground, and you're very right, Hill. We used to talk about this North Sea test where, what does [00:19:00] it take to be a world-class basin? You want enough resource to attract breadth of companies, large, medium, and small. You want repeatable investment opportunities and you want a basin that's able to both absorb the capital, so that assumes a certain amount of above ground infrastructure and institutional capacity in place, but also can manage kind of two, two and a half million barrel a day production levels.

Guyana is in that middle ground. It may not end [00:19:30] up being that big, but there has been a flurry of positioning activity by Total and Qatar Petroleum and Repsol and companies coming in after the initial [Stabroek 00:19:44] discoveries, even Shell coming back in after sort of leaving in 2014, pursuing other options in their portfolio, coming back into that base, and now trying to position, seeing that it's not just a one block wonder, but there's a large play here that [00:20:00] can be developed. No one's quite sure how big that play is going to be, but... So, a basin like that will attract players. Will attract the breadth of players and is it large enough to become a Gulf of Mexico or a North Sea? That would be a bit of a stretch, just given the amount of square acreage that you have to deal with that's available to work, but...

Hill Vaden:
Is it big enough to [00:20:30] generate the cash to feed enough big players?

Tony Reinsch:
Well, a few. And again, it depends how prolific the basin ends up being outside of that core Stabroek Block. And one of the great advantages for ExxonMobil is how truly enormous that single block is. So, this isn't like the Gulf of Mexico with poster stamp size licenses that you... that come up for bid on a regular basis. These are enormous [00:21:00] frontier blocks. And, they've had a ton of running room and they continue to have a ton of running room, but even ExxonMobil is positioning itself further along the play into Suriname to see exactly how big this thing is. And Total has made a huge bet with Apache that there's room and resource enough for them to become material, as well as ExxonMobil, and has since [CNOOC 00:21:28] and the other players who were there.

[00:21:30] But it's probably going to end up being in that middle range. What it is going to do, is already clear, is generate a wall of free cashflow for these companies five years down the road, when they start reaching, when the development process really starts moving into large production numbers, three, four hundred thousand barrels a day. And, and then accelerating from there, that resource then you use to, presumably, find your next opportunity [00:22:00] for growth.

Breanne Dougher...:
Yeah, and maybe use that cashflow to fund your diversification, in other forms of energy, right? I guess, is probably going to be a primary aspect of that. And I think that's interesting as, let's be honest, the on-shore has gotten so much attention this year because... Well, it's had a lot of attention, I guess, in the last several years, but particularly this year with the downturn, we talk a lot about OPEC and we talk a lot about the U.S. on-shore because [inaudible 00:22:28], obviously, that were very much [00:22:30] at play, or OPEC plus I should say, they were very much a play through 2020. But the potential for some of these big basins in the cashflow generation that they present for these big portfolios is hugely important.

You, and I'm not bringing this up just because I'm Canadian, but you mentioned the WCSB.

Tony Reinsch:
You're obligated to bring it up.

Breanne Dougher...:
I'm obligated to bring it up. You mentioned the WCSB. So, I'm going to guess you meant, or maybe correct me if I'm wrong, did you mean oil sands specifically? How do we see [00:23:00] oil sands fitting into this? I mean, it's clearly got a lot of challenges, a lot of investors, it's become a very challenging basing from investment profile for a lot of individuals, who've definitely backed away from it. Do you have anything that you say about how it's sort of fitting into the future?

Tony Reinsch:
Well, the Western Canadian Sedimentary Basin, so that's Alberta, Saskatchewan, Manitoba, it really is becoming a tale of two industries. So, you have an active sector pursuing [00:23:30] conventional lightened, heavy crudes, and to a lesser extent, unconventionals, as in the basins further south, primarily comprised of small players. I mean, Canada's had this churn of two geologists and a banker or take a section and work that up and turn themselves into a little company and do that for five years, then sell off and they do it again. It's pretty unique in the global oil [00:24:00] and gas sector, what happens in Canada.

But then, you have the second story, which are the oil sands developments. Both the mined, and the sort of in-situ steam assisted gravity drainage, SAGD developments, which are phased, staged, one piece pays for the next. On the oil sand side, you've seen companies consolidating. So, there's now three or four large material players, and what they're able to do then, is extract the scale economies and extract [00:24:30] the cost reductions that have allowed the oil sands to remain viable, even at prices down in the thirties and forties.

And we had a big contraction, a big reduction, in Canadian oil production in general, when the differentials got so wide and our... basically our net backs became negative from oil sands operations in Canada, and that was... it was artificial, it was deliberate reduction to try and support those price differentials. Those are coming back, and those volumes are coming back. The expectation is you're going to continue [00:25:00] to see growth out of the oil sands, not from the mined side. And in fact, we may well have seen on our last major mined oil sands development, but from the in-situ, or below ground in place development, where the majority of the oil sands bitumen resource resides.

And of course the model there that works so well is you do produce these facilities in 10,000 to 15,000 barrel a day increments, but you can do 10 or 15 of them on a lease, and they just [00:25:30] keep paying for each other. Once you have them going, then again, you're generating the free cashflow necessary to either take on the next stage or support developments elsewhere in your portfolio. So, there's a momentum behind the oil sands that's unlikely to be curbed, certainly in the near to medium term, by either issues of finance and financial capability or issues of climate change and energy transition.

Hill Vaden:
Well, [00:26:00] when we look at, I guess, issues of climate change and issues of energy transition, the oil sector has been, until I guess, month of November, from an investor standpoint, largely out of favor. I mean, and a lot of what we've described today, talks of the cashflow and returns ability of some of these world-class basins for some of these operators that have exposure to it. But it sounds like there's both the concentration in the basins that you want to be in and a concentration of the operators [00:26:30] that have exposure to those basins. From an investor standpoint, is that what we're looking at? That over the next few years, as returns get tougher, as ESG concerns and investor concerns or climate concerns weigh on the sector, that you really got to understand what the details of the portfolio and where these giant growth engines are? That it becomes a world of have and have nots?

Tony Reinsch:
I mean, [00:27:00] the part of this equation we haven't discussed up to this point is, if you go from 250 active basins down to maybe 130 now, down to 50 or 60, over the next, say 10 years, what happens to the other basis?

Hill Vaden:
Right.

Tony Reinsch:
And this is the challenge, if you will, facing a large number of national oil companies who are... have been challenged or chartered by their [00:27:30] governments to be the stewards of their resource. But that doesn't necessarily make them developers of resource. Particularly in the off-shore and deep water, but also in the on-shore, governments have counted on foreign investment and foreign investors to bring that capital and that expertise to bear, to develop their resource.

Well, if the companies aren't forthcoming and the capitalism forthcoming, what happens to the resource [00:28:00] that has been discovered, but lies undeveloped? And that is going to be a harsh reality for a lot of countries who may be relying on and have made it clear, "We're relying on these resources to finance our transition. We can't simply have our hydrocarbon sector die. We have nothing to replace it, to make the investments necessary, to move us off hydrocarbons on to renewables and through this energy transition process."

So, [00:28:30] there's a non untold, if you will, or maybe more accurately, unrecognized story, that's going to play out on the sidelines of this. And it's going to be very difficult for a lot of smaller energy producers and maybe geographic jurisdictions that are out of favor. But, whether it's a combination of above ground issues that prevent a resource development or argue against it, or whether it's a matter of simply a resource base that's not large enough to [00:29:00] attract the attention of those who are increasingly focusing on those 50 or 60 core basins that are going to spin off enough resource to meet our needs as we move through this transition.

Breanne Dougher...:
Well, yeah. My last question was actually going to be something that you just responded to. So, you've left any sort of lost for words here, Tony. Because I was actually going to ask, what's the trick that we're missing? What's that unrecognized trend that's going [00:29:30] to come through this? And you basically laid it out right there, is that there's going to be a lot of [inaudible 00:29:37] basins, or people kind of left behind in this, and what happens at that point. So, I want to thank you for the discussion today, because you clearly brought up what I think are some of the most interesting dynamics for things that aren't really making their way to the spotlight in the newsfeed these days when we talk about oil and gas around the world. So, thank you very much for joining us. We really [00:30:00] appreciate it. And I'm sure we will have you back. We tend to revisit our guests because sometimes we can then see if you were right or wrong on certain topics, which is always particularly exciting. We try not to concentrate on whether or not Hill and I were right or wrong of course. We tend to try to focus more on whether or not the guests themselves were. But thank you very much and we really appreciate it. And I hope you enjoy the rest of your day.

Tony Reinsch:
Thank you very much. Been a pleasure. See you Breanne.

Breanne Dougher...:
Bye.

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Speaker 5:
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