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Peak Shale

Leigh Goehring

Monday, March 13, 2023

Chris Keefer  0:00  

Welcome back to decouple. Today I'm joined by Lee gearing, who is a managing partner at gearing and Rosen swag and a returning guest here on the decouple podcast. Lee joined me last year for a great episode we called the energy poverty return on energy mal invested in that was based upon a natural resource market commentary, released I believe, in 2022, and had a great analysis of energy return on energy invested, diving way back into the past. And I've actually quoted it fairly frequently, because you guys spoke about the sweet spot we had from 2010 to 2020, when all four primary sources of energy via uranium, coal, oil gas dropped from peak to trough by 90%, and we had the cheapest interest rates in the world. So very influential. quarterly report, I recommend listeners sign up to it. But I just got a new one in the in the inbox recently. And it's what's called the end of abundant energy and talked about the need to revisit the old theory of peak oil. So Lee, I'm excited to have you back on to discuss this. Thanks for making the time for us. Oh,

Leigh Goehring  1:07  

thank you, Chris. Thanks for having me back on.

Chris Keefer  1:10  

Okay, at least. So I mean, let's, let's just jump into this. I mean, when I was in university, 20 years ago, feeling like a long time for me. Peak Oil was very much, you know, maybe not in the public eye, but certainly amongst folks, you know, looking at energy and thinking in broad strokes. It was on the agenda, and that's really disappeared. And I'm just getting these these slight signals in the signal to noise ratio, people are starting to chat about it again, you guys in this report have done a pretty thorough analysis of the shale sector. But perhaps we could we could start out by jumping back to that period in the early 2000s. And the context for some of that initial anxiety about peak oil at that time.

Leigh Goehring  1:58  

Okay, yeah. And I think we should step back even further, just give our listeners a little bit of a of a, an overview of what Peak Oil is the theory of peak oil at who King Hubbard was. You know, it King Hubbert, who is really considered the person who originated the theories about peak oil was a shell geologist, who did a lot of his his work back in the late 30s 40s, and 50s. And he was quite a controversial person, I, of course, never met him. But I've met a lot of people who didn't know him, and said he was it was quite a quite a cantankerous person. But but the thing is, is that he eventually came up with these series of theories that you could, you can use mathematics to model the production profile curves of individual oil fields and individual oil producing regions. And he believed that, that he would use these models that what you can do is you can not only project the production profile of that field or energy producing region going forward, determine when it was going to plateau, and then you can determine whether it was going to decline. And he, you know, he made a very famous presentation at the annual meeting of the American Petroleum Institute, back in 1956, where he was he was the keynote speaker, and he said, You know, there's the people in this room, I'm gonna make up quite a bold prediction here. And there's not going to be people that are going to believe me. But here we are. At the time, I believe oil production was about 7 million barrels a day, he said, You'll based upon my theories is that oil production is going to grow to almost 10 million barrels a day and peak in the early 1970s, and then begin to decline. And he actually made two predictions. He said, I'm gonna make two predictions. So one based upon 100 billion barrels of recoverable oil, the other on 200 billion barrels recoverable oil. And then he refined that back in the early 60s and said, Okay, let's use 200 billion barrel figure. And what that said is an oil production would peak a little over 10 million barrels a day in the early 1970s, which it did exactly. It of course, he became quite famous for that. And then people began to, to use his theories to try to extrapolate when total global oil supply could potentially peak than to climb. And those theories obviously didn't gain much traction in the 1980s 1990s, which were a period of very, very strong oil supply growth. And people just said, Okay, hubbardston discredited and then something began began to happen in the early 2000s. And you made reference to this Chris before, and all of a sudden his theories became, became quite well followed again. And what happened was that there was a very unusual and pronounced slowdown in non OPEC oil supply In fact, between 2003 all the way to about 2008, we had a period of close to five years where non OPEC oil supply basically didn't grow at all. And there were a couple real good reasons for that. We back back in the purity wrote a bunch of papers on this subject and I was profiled in Barron's in 19. I think it was January 7 2004, saying that we're going to see this very pronounced slowdown in non OPEC oil production which deep occurred. And a lot of that was because of various Hubbard's theories at work in various parts of the world. For example, the North Sea had plateaued and began to decline. Prudhoe Bay had plateaued peat plateau and began to decline. The Cantarell field in Mexico, which people don't pay much attention to. But it was the world's second biggest oil field, peaked in 2004 2005, and then began a very steep decline. And it was the Kleins in all these areas that basically prevented non OPEC oil supply from growing. Now, why is that so important? Well, I've said this forever. And I'm gonna say it again, today, because it's going to be a consequence of the various things we're going to talk about is that is that the biggest competitor to OPEC oil is non OPEC oil. And when the supply of non OPEC, non OPEC oil begins to slow, what happens? OPEC gets pricing power. And that exhibit explains almost perfectly what happened between 2003 and 2008. Were basically oil ran from the low, the high 20s, all the way up to about $145 a barrel. It was because of that slowdown in non OPEC oil supply that allowed OPEC to gain pricing power, which of course they did. And that was so Hubbard's theories were trying to back out, it became popular, and there's a lot of chatter that went back and forth. This is something that we really should understand a lot better. And then something else happened. And what that else happened was, was the unlocking of how you produce oil from the oil shales. And what we did is we basically use the technology that had been perfected in producing gas from the gas shells in the early 2000s, which started with the Barnett Shale, and then the Fayetteville shale and I'm going to bring those back up a little bit later, because they're very important. What what's happened to those fields, and how what's happened to the fields has applicability to the big shells today. But anyway, so it first week, we just realized we could produce oil in the Barnett I'm sorry, in the the Bakken field up in the Dakotas, we then discovered we could figure it out, we could get oil out of the eagle furred shales in South Texas. And then we discovered that we could we could unlock all the oil that was in the shales in the Permian Basin. And what happened was, is that all of a sudden US oil supply, which you know, I mentioned before peak to 10 million barrels a day in 1970 71, had reached it fallen almost to five and a half million barrels by 2008 2009, all of a sudden began to grow and began to grow very, very strongly.

Chris Keefer  8:27  

And in your report, you liken this to you know, because we can use a lot of numbers here. But for the numerous out there as myself, you said I think it was equivalent of adding one or two Saudi Arabia's to global oil production.

Leigh Goehring  8:38  

It That's exactly right. You don't underestimate the impact of what the shales did to the world economy over the last 20 years. For example, between the the oil that's been produced in the oil shales and the liquids that were produced out of the gas shields, that that was almost 11 back, zero to 11 million barrels a day of oil slash NGL production. And that's the equivalent of discovering an entire new Saudi Arabia. And you know, what's interesting is that Saudi from the time oil was discovered in Saudi Arabia, just after World War Two to its peak in the in the mid 60s, there was a 40 year it was four years to go from zero to basically 10 million barrels a day. And we did that in 10 years. And so that was one that was one Saudi Saudi Arabia equivalent discovered. The second was what happened in the gas area is basically you know, we we, you know, between the the originally the Barnett then then the Haynesville episode, the Fayetteville and then the Marcellus. And then in the end, the Haynesville. We basically in a oil equivalent. Matt measurement, we discovered another Saudi Arabia just in the gas itself. So, between the gas and the oil, we, we, we found to Saudi Arabia's equivalents in the United States, that that's incredible. And it had the impact of that is really hard for most people to, to imagine, but it did produce this period of unbelievably cheap, abundant energy.

Chris Keefer  10:19  

Right, and we're gonna get into some discussions about the kind of value destruction that occurred in a second there. But, you know, something that we've been looking at recently, is the importance of heavy distillates, you know, in terms of running diesels in terms of heating oil, etc. And that's, you know, while the US has become so called, you know, energy dependent or, you know, independent or independent, in particularly in from the perspective of oil. Is it true to say that a lot of the shale oils that we've recovered have been light oils that produce a lower fraction of of heavy distillate like like diesels, etc?

Leigh Goehring  10:57  

Yeah, it overall that the problem with the shales in the US and how it impacts refining system is remember, you will over the last four years, the amount of light, sweet crude, which is your most desirable crude, and which for a variety of reasons, is that's been declining. And it's being replaced by less desirable Kreutz that is crude that are heavier and have more sulfur in them. And so the idea that over time, what the US has done, the US refining system has done is that they basically migrated their refining system over for being able to process light, sweet crews to be able to process heavy sour crews. And what happened was, is that with the shales that remember, the shales are all will put light, sweet, crude, very light, sweet crude. And all of a sudden, you had these Lightspeed crews are in abundance, you had a refining system that basically could run them through them, but run it through their system sub optimally wouldn't get the proper deals. And so the thing is, is that you were running the US refining system on a in a system that that basically was being run sub optimally for that time period. And you saw that in the huge differentials in the pricing that occurred between, for example, Brent pricing, which was more representative of world price, and the US price, which often traded you at some points in the early part of the 2000s decade, it almost a $20 discount to the world price. And that's because that's what you had to discounted through to put it through their filing system, you know, given the fact that it was a suboptimal input.

Chris Keefer  12:38  

Right, right. You know, I was paying attention to a fella named Art, Behrman. And he was looking at, you know, crude oil production. And noticing that, you know, 40% of what we historically would have called crude oil nowadays is no longer based on crude oil. For you know, I think about 30% or natural gas liquids. They're also counting things like ethanol is in there. And he was suggesting that this points towards the fact that, you know, we may, you know, already have reached that peak oil point, do you do you think that holds water? Oh, no,

Leigh Goehring  13:09  

I definitely do. And I'll give you I'll show you. Some of the statistics are talking about some of this distance. The point that out is that if you look at just a conventional oil on a global basis, and say, let's look at the non OPEC world, is that conventional oil production in the non OPEC world peaked all the way back in 2006. And today, we're producing about 2 million barrels a day less of conventional crude oil in the non OPEC paroled non OPEC world that we were doing in 2006 total world production in total world conventional oil production looks like it peaked in 2016. And now we're down almost 5 million barrels a day versus that 2016 Peak. Now, however, global oil production has grown by 10 to 12 million barrels, or it's almost 10 million barrels between the early part of last decade. And so where did that oil supply growth come from? It came from three only three sources. The majority of that close to 80% of it came from from the US shales which and the US liquids from the liquids from the shale gas shale gases. The The other big component, which people don't talk too much about you just mentioned, ethanol is biofuels in the sense that your other than the shale oil production over the last decade decade, the second largest global growth item in various oil balances is biofuels. And we could talk about the ethical quandary that surrounds that should be growing crops to produce. So soccer moms us can drive around in two ton SUVs, and that's a whole different issue. And then the third source source of oil Have some oil supply growth over that time period since the early 2000s is company oil sands up in Canada, but that's an unconventional oil sands source of oil as well. So your only source of growth in global oil supply over the last 12 years has come from unconventional sources, not conventional oil it's come from it's come from the shales here in the United States. It's come from the oil sands of Canada. And it's come from biofuels. So Mr. Bourbon is definitely right about that. And what's so interesting about that, as you if you want to talk about Hubbard's peak, is you could make the case that we have gone over Hubbard's peak, as far as conventional oil supply.

Chris Keefer  15:41  

You weren't confined in a conversation to conventional? Well, maybe this is a good leap off point, just to very briefly talk about what what the shale revolution is in terms of fracking technology, and we don't have to go into a lot of detail here. But I think, you know, one of the important elements to it is that we're we're tapping the source rock. So how is fracking different than, you know, conventional gas extraction? And what are the limitations in terms of you know, is this the source rock is this the end of the end,

Leigh Goehring  16:11  

is this I mean, you can say that this is the end of the end, unless you want to get into the whole concept of a mutagenic gas and things like that, which is, you know, that's a whole nother subject. And that's, that's something we can't, we can't prove today exists or not. But but the thing is, is that, you know, obviously, since the day that crude oil began to be part of the global economy, which was after Colonel Drake discovered in 1952, or whatever, in the oil, City, Pennsylvania, all the most, all the oil that's been produced has been conventional. And what we're that conventional oil comes from, is that that conventional oil comes from organic matter that has been deposed, sometimes as much as several 100 million years ago, and into the Earth's, the surface of the earth. Over time, all that organic matter has been covered over then pushed down into the Earth's, into the crust, where it reaches a point where the temperatures and pressures gets so great that the organic matters. Now it's now it's turned itself into shale, that the organic matter in that shale begins to crack under the the high temperatures and the high pressures. And the end, the molecules, whether it be methane, or actual oil molecules begin to migrate out of that shale, that source rock and begin to migrate up into the higher levels of the crust, and then they would get trapped. And it would get trapped in what they call usually an anticline, or structure of underground mountain that had to have a seal on the top. So that so that when the hydrocarbons got into that trap, they didn't further migrate to the surface. And then, and then, of course, you know, they were sitting there just waiting to be discovered which they were in the last 150 years. And that what I just described is, is the by which where 95 99% of the oil has come from. Now, the question was, we all know that those are shales, those source rocks that that were were beneath all these conventional oil fields. We knew what they were there. We knew that that was the source of the oil, but we just didn't know how to get that oil out. And the reason is, is that is that interdimensional oil, the rock, which is usually say the sandstone when you think the old sand that's on a beach that's been compressed, has a lot of permeability, that is there's ability for those hydrocarbon molecules to flow within that rock. And however, in shale, the permeability in shale is zero. And so the question is, even though there's hydrocarbon that shield trapped in there, how do you get it out? And so that's was what the beauty of hydro fracking allowed to happen is that what you did is you drilled a well, and what was interesting, most of the shales are, you know, they're not they're not columns are not big, in thick, they're relatively narrow. So in order to expose a wellbore, to significant length of shales, you had to drill horizontally, you couldn't draw vertically. And then what you had to do is you had to inject huge amounts of energy into those, that shale rock to fracture it and create artificial permeability, which then had to be remember propped open by sand so it wouldn't reclose and then those hydrocarbon molecules could flow out. And that's the shale revolution. person if they perfected all those techniques and gas with the Barnett and then the, the Bethel few fields in the early 2000s. And then we perfected it in the oil shale started with the Bakken.

Chris Keefer  19:48  

And I mean, this really took off as you said, adding Saudi Arabia of natural gas and the Saudi Arabia of unconventional oil is just a massive increase in accomplishment. Why did this happen in such a A quick fashion and maybe not such a controlled fashion, I understand a lot of money was lost on Wall Street. Because of the glut natural gas prices that came, what had things go so crazy.

Leigh Goehring  20:10  

It's interesting. The whole concept of being able to unlock the hydrocarbons that were in shale is been in people's minds for a long time. And of course, I recommend everyone to read the book, the frakkers. That it I believe, was written by two Wall Street Journal reporters. And it describes George Mitchell, who is the CEO of Mitchell energy, who had this theory that that were some someday going to be will unlock the mystery of how to get those hydrocarbons out of the shelf. And he pursued it for years and years and years, with a lot of setbacks and things like that. But by the by the year 2000. For some reason, they figured out what they were doing, they figured out that the technologies, what they had to do, and they were successful. And after that, once that once that was successful, then, as usual, there is like the California gold rush in 1850 Is it there's a huge amount of capital and people that want to go in to exploit this new resource. And that's what they did. And like I said, it first happened in the in the Barnett and then in the Fayetteville. But in then we said, Okay, where are these other shales, and we knew where they were. And we, we, we figured out, you know, how to delineate them. And then the techniques needed to to optimize the drilling and production of hydrocarbons from them. And that's we throw a massive amount of capital at that. And like I said, before, we discovered the equivalent of to Saudi Arabia's wanting gas, and what an oil,

Chris Keefer  21:49  

this overproduction that occurred, though, because I'm trying to get a sense now, what you're arguing in the report is that these fields are starting to behave a lot like conventional oil fields, or conventional gas fields. You know, the hypothesis here, and I think you've got some neural network AI technology that's been crunching a lot of data on this is that, you know, these fields are starting to peak and decline as Hubbard's curve would have predicted. Tell me a little, I mean, this seems like a, you know, 1015 years for that to occur. This idea of peak oil is really receded into the background. I think people, you know, are almost kind of laughing are mocking a lot of the folks that got caught up and they were, you know, proven wrong, I guess, on some of the dire predictions that were to come. But what you're saying is that we should be a little bit careful, and take a closer look at these ideas. So again, I'm trying to get a sense of how quickly we're burning through these these reserves, and ultimately, the impact that's gonna have on our societies. I mean, I don't need to answer that. And just this one question, but

Leigh Goehring  22:47  

yeah, well, there's a couple of questions that you have their crystal approach. But one of the things is that going back, I was saying, Remember, conventional oil is peaked and is now in decline. And the only reason that we've seen any growth in global oil supply over the last basically 10 to 12 years, is because of primarily the shales, a little bit from biofuels a little bit from oil sands of Canada, but it's been primarily 80% of it has come from the shales. So the question is, is that is that what happens if the shales all of a sudden stopped growing? Because once the shale stopped growing, then all of a sudden we're going to start realizing, hey, conventional oil production on a global basis is now in decline. And it at that point, we will begin to have to re familiarize ourselves with concepts like covered peak, it is so interesting, you know, obviously, like my brother just emailed me right now is there's a story in Bloomberg today. Again, to say your fears of Hubbard's peak, are reemerging. And all of a sudden, people are beginning to recognize why this is happening. Or that is something that is in the process of taking place. Now, why is it taking place today? And how quickly will this take place? Though basically there's there's four big oil shale basins the United States, there's the Bakken, there's the eagle furred is the Permian. And there's the DJ basin out enough in Colorado. Now of those for both the eagle furred and the Bakken have peaked and are now in decline. And we'll talk about neural network in a minute. And the thickness is that the Permian is still growing. So we still have some growth in the Permian left. However, you think of it this way. The entire global oil industry, as far as its growth is now dependent on basically six counties in West Texas. That's the only growth that's taking place in global oil supply today. Everything else is either plateaued or in the process of decline right now. So what So the Permian, actually, because the decline, then all of a sudden, where is where's the next great source of oil supply growth going to come from? And the question is, is that it's probably not.

Chris Keefer  25:14  

So what why, why is that? Are there not other countries that have similar geology as the US? It's just their lack of technology to unlock their sales? Or what's what's the limiting factor?

Leigh Goehring  25:24  

You bring up a really good point, Chris, that absolutely no one, for whatever reasons, I am a little bit mystified why No, no one has done any research on that. But we have Gary Rosen, right. Roses, white associates. And that is, and that's a question that people always said, Well, you know, can't we export the shale gas, the shale oil revolution to the rest of the world, there is a lot of shale in the world. And that's correct. There's shale all over the place. Now, what's interesting about that is that it turns out that not all shale is productive. For hydrocarbon production, it turns out that you need four or five characteristics in the shale, for it to ultimately successful to be a hydrocarbon producing basin, for example, some in your need, you need a certain thickness of the shale, if the shale is too, too thin, you can't you can't get a drill bore through it and contact enough of the shale to make it productive, that the shale has to have the right organic content. The shale has to be it has to be formed in the basin of a marine basin, and not what's called a custom basin, which is the bottom of the lake. Why is that important? Well, you have to have the right geochemistry of the shale, you have to have a lot of silica, and not a lot of clay, if you've got too much clay and none of silica, the shale will never produce, it has to be in a in a seismically inactive area, because of the thin a seismically active area, the shale will get all broken up. And you will not be able to interject that huge amounts of energy to to wind up fracturing. And finally, it has to have the right thermal maturity, it has to be cooked long enough at high enough temperatures and pressures for those hydrocarbons to be released. So you need all these things to happen. Well, you know, a number of years ago, we wrote a great paper on this is that we we talked to a lot of geologists, we talked to a lot of oil executives. He said, okay, all these characteristic, one of the most important and how would you weight them if you want to determine if a shale was being productive? And we use that their inputs and their suggestions, and we built a model. And what we did is we modeled all the shells in the world based upon this model model, and we rank them. And you say, Well, how in the world did you do that? Well, it turns out that the US Geological Society has has mapped all the shells in the world, and has has put many of those characteristics that I just talked about in their database. Now there's some missing, for example, the shales, the Middle East are not part of that database, but they're almost every place of the world is. Well, it turns out that if you, if you build this model, you wrangle the shales, and it turns out get this that's the 10 best shells in the world that will be productive for hydrocarbon production are of the 10, six, seven of the United States. Wow, in the top, and it's interesting. In the three others that are out there, they're very productive. What is the vacuum or take in Argentina, which is you know, that's that's a world class shale. It that should be developed if Argentina can ever get itself act, its political act together. The other is the Luna shale in Colombia, which is the source rock for all the Colombian oil, we call the oil field, that's a great oil shale. But that the Colombian government has put that off limits you are not allowed to try to access the luda shale in Colombia. And finally, the mother of all shales, the Bauer shale shale in Russia, which is the source rock of the Great Western Siberian oil fields. And that that is number one that ranks number one on every metric. And but the question is, is that Will that ever be productive given given all the obviously socio political political problems in real estate? I should point out in 2014, when Russia invaded Western, sorry, Eastern Ukraine and Crimea, the US and so all the US company, you cannot go in there and lend any technology, the development of the Barshop sale. So nothing has been done there. And given what's going on, nothing has to be done in the future. But if we look, here's it. Here's a great model of a test of that shell model we built your back. It's almost it's gonna continue because 10 years ago, 12 years ago, there was a little bit of a craze of Companies that rushed into Poland, they try to basically drill for shale gas and pull it. And we said, you know, not so fast. This is not going to work the the geochemistry of the shells and right, and I think was ConocoPhillips, I think Chevron might have been involved in and there was two or three Canadian companies that went there. And of course, they drilled their wells and nothing happened and they disappeared. And that's because the shale is just weren't right. And so the ability for us to export the shale gas and shale oil revolution to the rest of the world is going to be incredibly difficult, if not impossible.

Chris Keefer  30:35  

So some really big geologic limitations there. In terms of those, you know, that ban or that export ban on on fracking technology to Russia? I mean, how complicated is this technology? How difficult would it be for the Russians to you know, reverse engineer it? I mean, it doesn't sound incredibly difficult, but maybe I'm ignorant.

Leigh Goehring  30:56  

Yeah, I mean, for example, but you need to you need, you need the ability to all that horsepower, that you need to force that those liquid sand down into the wellbore, under incredibly high pressure, that you have to be able to, to basically underground to space, your fracking things to get them right. So that you, you, you frack the amount of right amount of rock, and all these types of things. And you think it's we all sort of say, oh, it's simple. But it turns out, if you ever went to a drill site, you'll pull this up, say, how does this all work? I mean, who's who's making sure that all this stuff is doing what it's supposed to do? And yet it happens. Now, I know, Gazprom has been working hard to try to unlock the the oil that's in some of those shells that are so shells. And as far as we know, they've been very unsuccessful. So the thing is, is that, can it happen? Yes. Will it happen? I don't know. But the evidence so far says the Russians don't haven't been able to figure it out.

Chris Keefer  32:00  

So you seem pretty confident? Well, in the paper, it sounds like your confidence around the peaking of a number of us shale deposits has to do with having essentially gone after the sweet spots first. But you know, in terms of playing devil's advocate, how much of this could be because of limits on financing, whether that's ESG related or just Wall Street not wanting to lose its hat again, you know, with a glut in natural gas supplies? What are the key limiting factors? I guess, in terms of the remaining sales,

Leigh Goehring  32:29  

I think, the key remaining factors. And we'll step back here, Chris, to talk about the framework in which we've analyzed this, you mentioned before neural network. And we've talked about how we've used the neural network to try to answer those questions is, you know, how much drilling is left in the shales? And what would their production profiles look like? You would a number of years ago, if when the shale gas, shale oil and gas revolution was really going, there was a common belief among energy analysts outside or even people within the oil industry, that the amount of amount of oil and gas that could be produced from shale has almost unlimited. And it was Unlimited, because because what we were doing is we were we were learning more and more on how to drill more efficiently and better. We were changing the drilling and completion technology to the point where the wells are becoming more and more productive. And basically, what we're doing is we're taking to tear acreage, and through increases in drilling technique better increases drilling technique and completion testing, we were taking tier two inventory and turning it into tier one inventory. Now, if that was true, then you should really be bearish on oil, because all that all that acreage could eventually be turned true. With with improved filling in completion technology into tier one prospects. Well, okay, is that was that true or not? Well, we really didn't know everyone said it was true. So what we did is we went partner, Adam was quite computer savvy. You know, he built a an artificial intelligence neural network, that we put all this data into it and said, Tell us what's happening? Where are the productivity improvements really coming from? As you look at all the data? And we had, obviously, you know, we bought a database of every gastro Willdan drove in the United States with its various its various inputs, locations and inputs. And what the what the neural network came back and told us it said, it's the property of the productivity improvements that everyone is talking about in the shales is not occurring because you're putting more fluid down the well. You're putting more sand on the will you're putting more pressure, you're changing. You're you're you're doing more complicated stage tracking, all this type of thing, but that has nothing very little to do it. What's what you're doing is you're taking that drilling rig drilling a tear to prospect and moving it over to drill a tier one prospect. And so what the oil get oil and gas industry was doing was basically just becoming more productive by just getting better to understand what were their sweet spots and moving more and more of their rigs into the sweet spots. And so that's what the productivity was where it was occurring. Now, if for example, if that, if that were true, then if we do how much drilling activity could take place in those sweet spots and how much inventory was left that at that point when that inventory was exhausted, that would be the end of the of the production growth abilities in those fields. And then then that we said, okay, that's really interesting, because now we know we know that it's hydrating, which is producing the drilling productivity increases in not anything else, there was some increase in the the length of the lateral increase the amount of sand loading and profit in the in the fluid that that did have marginal increases. So two ways about it, but 80% of the productivity improvements were happening because you're just drilling a well any tier one prospect areas. So, okay, then they're going to be said, Okay, now we've got two, two shale gas fields that have now began have are now producing now get this perfect Hubbards peaks. And what I'm referring to is that the Barnett Shale, which was really, really started to develop that and say, 2002 2003, that ramped up from zero gas production in the early 2000s, and peaked around 2012 at about almost 5.2 5.3 BCF of production a day. And it produced, like I said, a perfect Herbert curve, that it plateaued. And then all of a sudden, it began a steep decline. the Barnett Shale today is producing about, I believe it's a little over two and a half BCF of gas a day, it's down about 60% from its peak. And if you were to if I were to put up a profile of it, it's producing a almost a perfect company curve, or a bell shaped curve, which is what Hubbard said, A oil field or gas field should do. It was developed without constraints. The Fayetteville shale gas field in Arkansas was with their first successful there with wells where there were 2005. And that, that field ramped up from zero to, you know, almost two and a half BCF of gas production a day of a street BCF gas production really peaked and then declined, again, in a perfect bell shaped curve. So we say, okay, neural network, tell us tell us what characteristics were going on those fields, drilling patterns that caused those peaks, and then the fields to decline. And what the neural network came back and said, when you drill 60% of your tier one prospects in the neural network can map it says it will map the fields for you and say, This is where your tier one prospects are. It says when you drill 60% of tier one prospects, you are going to you're going to plateau and begin to decline. And if you looked at the Barnett in the Fayetteville fields, they they began to plateau a little bit for that they peaked, and it declined exactly when they when they hit their 60% saturation of up to one inventory drawdown. Now, the thing is, is that both both the Bakken and Eagle Ford shale have reached their 60% of their tier one inventories have now been drilled. And those fields are in decline, just like the models say they should. And what's so interesting that leaves the Permian is the only source of shale growth, the only source of oil supply of growth the world. So when is the Permian going to begin to plateau and then dip into decline. And our model said that we probably still have close to a year and a half of production growth left in the Permian, before it actually begins to ply to a decline. However, we should begin to actually begin to slow as we go into that plateau phase.

Chris Keefer  39:27  

And so again, just to just to confirm this, this decrease in production is not happening because of decrease in drilling activity because of under financing from Wall Street. Now we talked to think about drilled and uncompleted wells and how that inventory was dropping off. I just want to I mean, it sounds like you've looked at this enough and found this pattern enough, but I'm just wanting to confirm that crystal clear in my mind because I have heard that there was kind of a over investment early on. And this decline is it being driven at all by under investment.

Leigh Goehring  39:56  

Yeah, no, I think what it's been driven by and you'll the people talk On an under investment, they talk about companies getting more disciplined returning capital, as Cheryl was doing that, that's if you want to be cynically say, what they're doing is that they are doing exactly what they should be doing, given the fact that they're too one inventories have now been drawn down. And think of it this way, there's two things going on, and why companies are not drilling. One is that they're running out of tier one prospects. And think of it this way, say, for example, I'm a big premium player, and I've got, I've got 78 years of pure one inventory left. And do I add two or three more weeks and take that tier one inventory down from 10 years, down to five years? Well, in five years, I've got to start thinking about how I'm going to reinvent myself, where I'm going to find the next Permian Basin. So why not just slow down drilling, and just enjoy the 10 year, tier one inventories that you have left in? That's one thing. And the second thing is that energy stocks have never been more cheap. And we wrote about it, we've written about this extensively. And we wrote a big essay, and whatever our logic is, why are companies drilling, and one of the things is that many EMP companies now trade below their debt adjusted per share, PB 10 values per share, PB 10s are a sec mandated valuation that every company has to make once a year to determine what is the value of their reserves based upon the discounted cash flow, and that will be returned to shareholders from those reserves. And, you know, if a company is trading at such a big huge discount, it has a limited to an inventory, and you can buy your your reserves cheaper, and your stock price than what the market is going to reward you for if you actually drove for them, then you should do that. And companies are acting very rationally. They're trying to conserve their tier one. And what they're doing is they're buying their own reserves as cheaply as possible where they will be rewarded for it. And that's why they're not drilling today. And so it's the other investment is cause being caused by two very, very important and fundamental reasons.

Chris Keefer  42:06  

Interesting, interesting. Well, let's step back and look at what the implications of the shale revolution were more broadly for the US economy, obviously, there were big geopolitical ripples to this. The plunging price of oil had had big impacts on you know, the influence of countries like Venezuela and Iran, for instance, but focusing more domestically to get a sense of maybe what's ahead. What What was the economic impact more broadly through the US economy in particular, of the shale revolution?

Leigh Goehring  42:34  

It was unbelievably positive, unbelievably positive. is one of the the big consequences of this is that people really don't talk about it too much. Is that great getting back to that, that concept of, of, you know, OPEC oil supply, that if it begins to slow for pickets, pricing power. Well, conversely, what happens if all of a sudden non OPEC oil supply begins to grow strongly, then all of a sudden, Wolfpack begins to lose market share, and what is open can and do it has to wage market share price wars. And it's no coincidence in the 2010 decade, that the big price war in 2000 was 2014. And again, in 2020, we're brought about by, by the fact that the shales were gaining market share from OPEC or causing non OPEC to gain market share share from OPEC. And of course, price wars are incredibly good for for the American economy, you know, in in 2014, oil in the summer 2014 was 100. By the end of December, it was in the in the low 40s Going down to 27. In the next year, in the 2020 price war, which is obviously brought about the COVID as well, the price would negative and so they were huge beneficiaries to the US economy because of all that oil price weakness that occurs. Now that we're on the flip side of that, what happens when non OPEC oil supply begins to disappoint hugely, OPEC is going to get pricing power, and a guarantee they're gonna use it.

Chris Keefer  44:15  

And just to clarify, in terms of price war, that was countries like Saudi Arabia flooding the world market with oil to make the cost of production of fracking,

Leigh Goehring  44:24  

uncompetitive? Yep, yep, what they did is in the 2000 price war, we can argue whether they were waging a price war marketshare war with Iran where they waging a market share war with the US oil shale industry. But what they were doing is they they definitely were losing market share. They wanted that market share back they realized the only way they didn't get that market share back was by lowering their prices and increase their supply in the air. They were successful in doing that, but the oil price from peak to trough fell by close to 65%.

Chris Keefer  45:00  

I want to circle back again because, again of the importance of as I understand it, the importance of the heavy distillates to some of the most fundamental drivers like long trawl, Hucky sorry long haul, trucking, mining, running tractors, that sort of thing. And that, you know, I've heard that the US kind of diesel reserves are quite quite limited maybe under 30 days. And that's you mentioned that the light sweet crude is sort of you know, what we've been after or what's been highest value and a lot of the natural gas liquids etc are you know, in the the higher part of the the distillate column and great for making plastic bags with but not as good for running our tractors or other sort of civilization, dependent machinery? Am I Am I off base on that? Or is that is that an accurate summary?

Leigh Goehring  45:50  

That's somewhat accurate, but I would say that the big problem, which is distillate, just to look production, at least the United States and in the Western Hemisphere, is that we just don't we haven't invested in our refining business. I mean, there's nothing prevents us from building a brand new huge refining complex, that can produce the oil that we have today, that produces a high distillate middle barrel. Except we don't do it. So we've got we've got an outdated refinery complex, we've got a you've got a crew asleep now, which is mismatched to what it's up to we can produce. And the you know, you wind up with with producing things you don't want, and not enough of what you do want, which in this case, is the middle middle part of the barrel. And to that middle part of the barrel is also being exacerbated by the fact is that, you know, it's huge parts of the developing world, China TV and things like that, where, you know, their big demand is in trucking, and transportation services, that's all diesel, that's all middle distillate. So the demand for is really strong at the same time, that you have various supply constraints.

Chris Keefer  46:58  

So you know, my listeners be remiss if I didn't drag nuclear into the conversation here. But, you know, there are many reasons why the nuclear renaissance, so called renaissance of the early 2000s, were a bit of a flop in Europe and America. You know, Fukushima didn't do us any favors. Frankly, the the industry itself did a pretty poor job at pulling off its new builds. Vogel was just achieving its first criticality of quite a few years too late. But another another player there, in terms of making life difficult for nuclear operators, was cheap, natural gas. You guys, I think, as a as a company are pretty bullish on nuclear. But what do you think the impacts are going to be of, you know, peaking of oil and gas, on prospects for nuclear?

Leigh Goehring  47:49  

Well, you know, Kristin, we're, we're, we've done a huge amount of work. And we talked about it a little bit on on my last podcast with you is that the renewable energy business as it structured today, is not going to solve the problem. And the problem that being of trying to reduce co2 output, and at the same time that it's not going to solve the problem of co2 output, it there's going to be all sorts of really unfortunate unintended consequences of which just you have to look no further than what's going on in Europe today, in the sense that you do something like this. And we may have talked about this, a little less podcasts like Germany, you're 25% of electricity was produced from nuclear power, the energy efficiency of nuclear power is unbelievable, you put one unit of energy in mining uranium process, it turned into a gas, enrich it turned to fuel rods, spent $10 billion to build a huge, huge nuclear power generating electric generating facility, that what unit of energy represented by all that comes out 100 units of energy out the other side. I mean, it's unbelievably efficient, even with huge cost overruns of building the plants, you know, renewables, and then you start, this gets really complicated, like, where do you draw the energy boundary and stuff like that, but you can make the case that the most efficient offshore wind farm, which mind you is does not account for its intermittency and unreliability has a you know, an energy and energy out ratio between one to 12 to 115. However, you know, then you begin to talk about the redundancy that's needed, then you're talking about the storage that might be needed for that instrument, see issues. And then you begin to drop that energy and energy out ratio from one to 12, one to 12, to one to 15, down to maybe between one to five to one to 10. So and then you're talking about situations, one to five, one to 10. You say, Well, we're still getting energy out, aren't we the energy out, but we're back to where we were. This is what we talked about in our last podcast. That's where we were back in 1600. With with domesticated animals and burning firewood, it what happens is that that excess energy that's produced that is, is just enough to keep us from freezing to death in the winter, and from starving to death, and to feed our animals from which we get our work. And there's no surplus energy left. And so that's the renewable world. So the thing is, nuclear power, which is so interesting is that is that it not only solves the solution, the problem of co2 production, but it's unbelievably incredibly efficient. You know, it has the highest energy out energy and energy out ratio that there is. And so eventually, we're going to, we're going to, we're going to drop this idea that nuclear power is a dangerous, a dangerous way to generate power, no one has ever been killed or even injured in a nuclear power accident. I mean, take Chernobyl out of there, because she didn't even have a containment vessel, it was a unit that was producing nuclear fuel, as well as generate electricity. I mean, completely unsafe, take that out. Other than that, no one has ever been injured in nuclear power incident, it has to be that something like 400 people a year are killed by coal trains on a global basis. Crossing train tracks. So the thing is, is that it's incredibly safe, and we're going to get over that. And so if we're going to stop it, you're beginning to see it, you know, you're you're you're seeing that Poland says they want to build four nuclear power plants, Japan has decided to look baby, we maybe got to bring back all 50 Someday as well build new ones. Francis got you. It's got 12 to 14 new nuclear power plants on the on the on the drawing board. So there's all sorts of interesting things happen.

Chris Keefer  51:49  

It seems that the countries that are serious about it are serious for reasons that are very pragmatic, they're not climate, obviously, right? I mean, all the Eastern European countries on the border with Russia have very real concerns about energy security. Japan, and in a world of rising fossil fuel import prices makes every sense in the world to pivot back towards nuclear, I guess, in the US because of you know, this boom in cheap energy via the shale revolution, nuclear, you know, lost prominence. I guess what I'm asking specifically is Do you think that there's a case for nuclear making a revival because fundamentally, you know, the obstructionism of the NRC, for instance, that is malleable, but I think that malleability will, will come because of necessity. And right now, there's not necessity for nuclear power, because we've got lots of cheap natural gas, do you see that that changing in the US in particular, in a way in which we're going to see a pivot back towards nuclear?

Leigh Goehring  52:39  

Yeah, that's an that's an interesting comment. Christen. It's interesting. If you go back, and you could do a podcast on this as well, is that, you know, obviously, we talked a lot about shale oil today. But let's we can talk about shale gas. Now, it turns out that the shale gas revolution is, again has been like another Saudi Arabia's incredible, you know, back in 2006, to 2007, when US natural gas production bottomed, we were producing, like 55 BCF of gas a day. And earlier this year, we got back to if we hit 100 BCF a day. And that's 100% because of shale gas. And so the thing is, is that we have now get your oil has been shaped and gas has been ridiculous. You know, if you look at, you know, it used to be that in the United States that would suddenly have this ability to switch between back and forth between residual fuel oil and natural gas, that there was a relationship between oil and gas pricing, they basically, you take a like a barrel, West Texas Intermediate divided between like eight divided by eight, and that would give you the the dollar equivalent energy that was in that MCF of gas. And for example, if you do that today, that that ratio with $80 oil is basically that says the gas should be priced at $10. And here we are $2.50. Which was that, that $2. That's the cheapest molecule in the world by far. energy molecule. And of course, like you said, that is that's your marginal competition against nuclear power. It's it makes it incredibly difficult for nuclear power to compete. But I would say that, that you know, that we're just like, we're, we're ending. We're entering this world of this huge positive impact from shale oil growth. We're also ending the era of huge positive impacts from natural gas shale growth. And we're talking about you know, the peaking of the of the the the Bakken, the eagle furred and now potentially the Permian, to gas fields have already peaked, and we believe using the same analysis that I outlined before the Marcellus which I mean, the Marcellus is incredible. We've gone from one to 25 BC Gas day 25% of us gas come from one gas field. I mean, that's never before it's so much gas been concentrated in one field. And we would say that the, the, the Marcellus is plateauing right now, it should start to decline at any point in the next six months. And so if we begin to lose that, and and the fact that we now have in place 13 BCF a day of natural gas export capacity, through these all these LNG plants that we built in the last six to seven years, with true war coming on in the next year and a half, the idea that all of a sudden, will gas begins to trade back to the world price, and the answer is yes. Is that price? 10 bucks. Yes. If if gas, we have another shortage problem in Europe, we'll get $10 be much higher. Yes. So the idea that you all of a sudden, higher gas prices very well, in itself, put the push the nuclear gas, the nuclear power business into the money?

Chris Keefer  56:01  

Yeah, no, I mean, I just came back from a tour yesterday, for God's sakes, I was just at Indian Point, visiting the site as it's being decommissioned. And just thinking what a regret that it's going to be, you know, if if natural gas prices go up, I mean, it's already a massive regret in terms of everything that was lost there,

Leigh Goehring  56:19  

that you bring up a great point that that was the most ridiculous thing that anyone could have ever done. And there's gonna be, there's gonna be huge ramifications involved in that is, it's, you know, we've gotten lucky the last winters here in the Northeast have been really mild, the system hasn't been stretched and things like that, we could have a very cold winter, or a very hot summer or a hot summer, followed by a cold winter. And all of a sudden, that 25% of that power that was coming from Indian Point, which has not been replaced by anything will come to the forefront at the center of energy slash electricity shortage here in the Northeast. So when the the tragedy of Indian Point is in the process is has not been finally written yet. But it's going to happen. That was that was the that was the most ridiculous thing that anyone could have ever done. We feel the same way on that. And remember, remember all that all that electricity was produced with not one molecule of co2?

Chris Keefer  57:19  

Yeah, that was incredible. I mean, my I've been processing my thoughts about it. And it was the kind of analogy or the mental image I came to was, it was like, being next to the carcass of a rare endangered species that had been shot by a environmentalist Trophy Hunter. I know, that's a weird concoction. But you know, just the gratuitous nature of it, and the clear ways in which it contradicts the stated goals of environmentalist, just in the in a couple of minutes, we have left. Lee, if you don't mind, you guys did reflect a little bit on the inflation Reduction Act. In this quarterly report. You called it perhaps the largest malinvestment of capital in history. Can you just give us briefly your thoughts on the IRA? Is it going to reduce inflation? What are the impacts going to be in terms of further distortions of the energy market,

Leigh Goehring  58:04  

we're going down the road that Europe went down, and the idea that you can only invest so much money and divert capital away from high energy returned businesses into very low energy returned businesses, before it all of a sudden has huge impacts on our lives. And Europe, Europe, you've seen that? Now, you're it took us took a circuitous route, in the sense that you know that you invested a trillion dollars in renewables, you shut down your nuclear power business in Germany, and you start to head to it because of the energy for shortfalls that was causing you were lying, and more and more on Russian gas until the Russia triggered off. So the thing is, is that is that it the same thing is going to happen here, United States, and you're seeing it? And can you see in places like California, where electricity rates are really what they're, they're double what the national rates are even more than they are. And as you as you spend more and more money on renewables, invest more and more money, that the problems are going to come become greater and greater and greater. And what the problem is, is that with this inflation Reduction Act, the the weight of the government is subsidizing this is just incredible. There's no caps on this, Warren Buffett can go out and buy is it can build as many windmill farms as he wants, and the government's gonna pay half of it. And not only gonna pay half of it, but they are going to then give him on the first two, two kilowatts, the cells there basically to reimburse them paying for that as well. And so the idea that, you know, it's the ultimate, it's the ultimate renters paradise, but somebody's gonna pay for it. Well, what is more important you're going to do, he's going to he's going to cram that down. The local state utilities are going to have to buy that power in three to four times the price that the local utilities could ever generate them themselves with natural gas plants and things like that. So the thing is, is you do that enough and enough enough in everyone's electricity rates are going to are going to go up and up and up, and you have an unreliable system. So, it now the government because of the IRA act is, is given an open ended subsidy a mechanism in place for huge investments to take place, which would not have been economic, but which now because of the subsidies will be economic, especially if you could get the local utilities to buy all that excess power from you.

Chris Keefer  1:00:31  

Okay, well, you've been very generous with your time. Thank you, for tacking on that little addition there for folks to find you and Adam, and the great work that you do. And these these quarterly reports, where should they go for that?

Leigh Goehring  1:00:44  

Okay. All our research, it's, we don't charge for it. It's on our website, just go to our website, go or just type in gearing and Rosensweig associates, you'll come up and all our all our research, podcasts, everything that are are on that website. And I should also remind you is that a lot of people take We're a research shop, we're not we're money management shop. You know, I've been investing in the world of commodities and natural resources for the last 30 years. We have phenomenal track record. And we're really investors and our research is really the basis for how we invest money in the global natural resource and commodity markets, but free for people that are interested in what we're thinking. Go to website, download it and enjoy it.

Chris Keefer  1:01:29  

There you have it, folks, we gearing thanks for coming back, hoping to bring you on in the near future again, and just waiting with delight for that inbox for the next one of these to come along. Thanks again for coming on.

Leigh Goehring  1:01:41  

Okay, very good, Chris. Good. Thanks for having me again.

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