Invest Like the Best with Patrick O'Shaughnessy
· Matthew Smith
[00:00:00] S1: So after we did most of our work, we went on a bit of a listening tour to target conversations with who we think are maybe the subject matter experts in that thing. So energy storage or hyperscaler compute deployment and energy consumption. And the common pushbacks, which we've spent a lot of time understanding, are Permian oil play — oil's high, Permian has lots of gas in the ground associated with it. Why can't Permian productivity fix problems? So our base case model already accounts for the 7+ billion cubic feet a day of pipelines that are already being built or developed that come on between '26 and 2030. If there were a new gas pipeline that would come on between now and 2030, we would know about it, because of the regulatory processes and the time it takes to build these pipes. So we've mitigated the risk of being surprised by the Permian by moving into the midstream to understand the bottlenecks and constraints. So beyond the deliverability of the resource or the gas in the ground itself, how much can actually get to market and either leave via LNG export terminals or be consumed in Texas or nearby? We've already included that in our base case model. And so that will be one of the pushbacks — there's plenty of gas in the Permian. But I would posit this may be controversial: there was plenty of oil in the world before the Iran conflict surfaced. Eventually there will be oil aplenty again. That's why it was at $55 a barrel before the Iran conflict. In order to make more Permian natural gas, you also have to be incentivized to make more Permian oil, and those incentives didn't exist until Iran. In order to produce a lot more Permian gas than even these 7+ Bcf pipelines being built that we're already modeling, you'd need much, much higher oil for longer, which only exacerbates this consumer crisis that we are concerned about. So we don't think the Permian solves the problem. And then the other one is, you can locate a bunch of behind-the-meter local Permian power generation, which is happening. But we are modeling what has been announced and proposed, and if it's going to consume local Permian gas, that means it's not going to make it into the pipeline downstream. We can accommodate that with our model.
· Matthew Smith, Patrick O'Shaughnessy
In any case, we always try to think about technologies that can disrupt, change structurally the need and consumption of natural gas, and so it often leads us to focus on battery technologies. There's sodium and other battery technologies that are currently not commercial, but people are getting a bit more enthusiastic about. The vast majority of economic battery deployment today is lithium-ion. It has a fairly fast discharge cycle. Those are being deployed in earnest across the system, and yes, we are also modeling known battery deployments as a part of modeling this generating system across all fuel types. A step function battery technology change could be something that would affect you, but that would affect some of these pieces that I described — winners and losers — in meaningful ways. It would be a watershed moment that I would welcome, because it would solve a problem that we're pretty concerned about. [00:00:00] S0: If you were czar for a day and you had to decide everything that gets started and to solve this problem, what are all the things that you would do to most solve and mitigate this? [00:00:00] S1: If I were the US government, I would find a way to build entirely — from beginning to end — two to four AP1000 nuclear reactors. That would de-risk the supply chain. It would invite in and really open up doors to folks who want to see somebody do it first before they do it. [00:00:00] S0: With the hopes that we get more like China — build 30 of them.
· Matthew Smith
[00:00:00] S1: Currently there are ten to 20 nuclear reactors envisioned by the US government through different groups, but no one wants to be first. I think we're close to a few stepping forward. But if the US said, hey, we have $260 billion to spend at the Loan Program Office — now, the EDF. It's $260 billion, I think, to spend by the end of '28. We need to build four nukes with this. That would de-risk this materially. And I think you would see it jumpstart the nuclear equation. Energy and resource availability, egress and knowledge, we think, are the biggest bottlenecks to productivity and deploying all this incredible technology that America has really been the leader of developing. When we set up our firm and started building a team, things are happening pretty quickly in AI, and especially with regard to power. So we didn't set out to understand the now. It's important to understand now, but we set out to understand where the puck is going, and where it's going looks like it will meaningfully diminish growth if not dealt with. And so that's why it brings me to the nuclear solution, as maybe the most viable long-term. My comments on solar are probably the most important thing that I would do. I think everybody should get a solar system on their houses. It won't be perfect. It will deliver electricity when there's sun out, may not deliver electricity when it's cloudy, but it's a way to protect yourself from very high peak power prices from 10:00 AM until 6:00 PM, which is the biggest part of your bill. I would incentivize people to study your state's rules and try to put incentives in place to really, really start to grow residential solar faster than what's been a stagnating industry the last year after some incentives were removed. That would be one place to be reinvigorating solar incentives because they're going to be needed in a few years.
· Patrick O'Shaughnessy, Matthew Smith
[00:00:00] S0: Could we build a giant pipeline from Canada or so, try to tap our neighbors to help us solve this problem? [00:00:00] S1: Canada's an interesting partner of ours. They have the capability of delivering about 11 or 12 BCF — usually in January — periodically. And there are meaningful pipelines from Canada to the US, but largely it's seasonal and it helps us solve winter, but otherwise they're net imports most of the year. But we're not really set up to take from Canada year round. There are a few reasons for that. One is Canada has limited storage. It's about just over a TCF, about a fourth of the US storage. If I think about this on a three to five year plus basis, Canada by far has the deepest and richest resource of economic gas in the ground, but it's been trapped behind pipe. I would build a 1 to 2 Bcf a day, at least, pipe into the US Midwest, the MISO power market, and then wheel it around MISO, PJM, SPP, ERCOT, and try to satisfy this demand because I really don't want to see demand slow. I really don't want to see consumers' bills go up. [00:00:00] S0: What are the implications of this for the rest of the world?
· Patrick O'Shaughnessy, Matthew Smith
[00:00:00] S0: What are the implications of this for the rest of the world? [00:00:00] S1: The US has become the leading provider of natural gas with, our exports going from virtually zero to starting in the mid-teens. And now we're at 15 Bcf a day. That'll be 35. Many countries in the world are building gas-generating assets that are dependent on our delivery of that gas to them. And so lots of political conflict-related tensions or bottlenecks today or Russia-Ukraine. Russia used to be one of the biggest deliverers of gas to Europe, for instance, and then we filled the gap. To the extent we cannot deliver our 30 to 35 or more Bcf a day of gas to the global consumer, rebalancing will be required. You probably impact Europe meaningfully, and they're left with a trade-off of taking Russian gas or much, much higher cost US gas because they can't produce it there domestically themselves enough to satisfy their need. Asia is a large consumer — the largest consumer, until Russia-Ukraine — of US natural gas, and they probably will be at some point the largest consumer again with some of the outages in the Middle East. We potentially hurt important allies at a time where we really want them to be allies if we can't send them the gas they need. And so it is pretty important that we don't curtail LNG, although that will certainly be one of the levers as we go out to the late decade that we will be forced to think about to deal with rising electricity prices in the country.
· Patrick O'Shaughnessy
[00:00:00] S0: Anything that we haven't talked about that has surprised you in this year-and-a-half-long analysis of trying to understand the state of things and where we're going? Obviously, we've covered the big conclusion, which is scary and hard to deal with even if we start acting now. Anything else that's surprised you either in your work or in people's reaction to it as you've started to share it?