Invest Like the Best with Patrick O'Shaughnessy
· Patrick O'Shaughnessy
[00:00:00] S0: I'm just going to try to ask really simple questions here, so as not to minimize it — it's your view that in the bad to worst-case scenarios, this is like a full-blown crisis. This is not a small thing. This is like, the story in the country. So I want to make sure — the whole reason we're going into all this detail is that in this scenario, it's really, really bad. And it's really bad primarily, I guess, through prices, that maybe you can continue to articulate why we don't necessarily want this specific outcome and what we can do about it. But help me understand — underneath the United States right now, or North America, there's a certain amount of gas, objectively. I'm trying to understand how much of this is that we are literally going to run out of the gas that's under the ground, versus it's just a problem of how quickly we can find out where it is, get it out economically, process it, store it, transmit it, use it, et cetera. Those seem like two separate problems — how much there is, and then what we can do with it and about it. So is any element of this problem that there just isn't enough of it?
· Matthew Smith
[00:00:00] S1: Starting with the— we'll call it resource in the ground. There's tremendous data availability. We can measure where we are in the exploitation of most of the major gas-producing basins: Appalachia, which is primarily the Marcellus plus the Utica, the Haynesville, which is a key swing basin, and then of course the Permian and to a lesser extent the Eagle Ford. These are oil-directed plays where the decision to drill and produce is driven by oil, and gas is a byproduct. So in each of these plays, there are some stacked pay zones where well penetrations and output can be measured with a lot of data. What that allows us to do — when you digitize the acreage controlled by each one of these companies with polygon shapes that use a bunch of lat and longs to drop in and associate a well with an area that's controlled — you can figure out what's left. And the reality is there is gas. And we've, as part of our analysis, produced the gas that is logically captured and can be produced from wells, from existing acreage positions of all these companies. And so there is gas. We're assuming it gets developed here. That's how you get to our 20 Bcf a day of growth. But there are other constraints.
· Patrick O'Shaughnessy, Matthew Smith
[00:00:00] S0: It's unbelievably cool that we can literally know with this precision what is underneath the ground, often deep underneath the ground in hard-to-reach places. It's a technology story that would be fun to tell sometime. But it doesn't sound like the actual problem is that we are literally running out of the stuff underneath the ground. We've also had a history of just finding new stuff that we didn't know existed before. So it sounds like the problem is more our ability to serve the demand in this timeframe, not that we're literally going to run out of the resource over the next 20 years. [00:00:00] S1: So it's a little more complicated than that. We get through most of the existing captured inventory of companies in the next four or five years. And so if you think about it, you bring on a new well, it has a decline rate, and each well as it's stacked on an existing company-wide portfolio decline, and a lot of these companies' decline curves are maturing some, and so they don't have to— [00:00:00] S0: Pretty steep in natural gas, right?
· Patrick O'Shaughnessy, Matthew Smith
[00:00:00] S0: Pretty steep in natural gas, right? [00:00:00] S1: It's steep initially in natural gas, but Expand and EQT and others have such mature portfolios — the replacement is less costly today than it would've been five years ago. So when you stack all of these wells based on existing acreage up on these companies, assuming they're going to drill optimally based on their forward curve, which is depressed, and we'll talk about that. You get to this 128, 130, 132 Bcf a day of maximum deliverability. So we are assuming that all of these companies develop the rest of their acreage. [00:00:00] S0: But that's a flow metric, not a stock metric.
· Matthew Smith
[00:00:00] S1: That's a flow metric — what is possible when you use known well performance parameters to maximize production before you get to midstream and other surface-level constraints, which we'll talk about. There's resource. We are depleting the known resource. If you were to assume prices go up meaningfully, you may unlock additional basins that are legacy known basins. We know a lot about most of the rock in the US. There are other known gas basins, but they're uneconomic. And furthermore, there isn't infrastructure to really accelerate drilling and activity in those basins. To solve this, the constraints are multifold. So the first constraint is the rock. We have the ability, we think, to get to 128 to 132 Bcf. I started in the most— in our highest estimate, which is 132 Bcf, as a starting place, because that's how you solve the LNG exports we've committed to. We will take the under on that, but that's where you can get to. A common pushback as we have gone through this is there's plenty of resource available to us in the Permian. There's plenty of resource in Appalachia. A number of companies describe themselves as having a lot more inventory of wells to drill than we can justify with the facts, and I'll just leave it at that. But when folks meet with companies, they should ask to understand exact engineered locations on a map — where do they have not just the ability to produce, but plans to have infrastructure on the surface to allow it to flow, for instance, and the ability within financial parameters to invest and produce. The resource in the ground, we're fairly far along in understanding it. We've accounted for all of the major productive basins in the country, and I do not think we're likely to be surprised by some new major shale find. At this point, knowledge of those things is pretty mature.
· Patrick O'Shaughnessy, Matthew Smith
[00:00:00] S0: To say it back, there's a lot of resource, but at this rate, we're depleting the known resources quite quickly. [00:00:00] S1: We are advanced in depleting the known resources, especially as we move to the next layer, which is infrastructure. [00:00:00] S0: There's a bigger, longer-term question about whether this is just a parenthetical period of time between 2010 and now when we were awash in gas. Prior to that, we really weren't, and maybe after this, we really won't be. Let's talk now about — okay, we get gas out of the ground, it still has to go get processed and transmitted and used. What are the most important rate limiters in that part of the equation?