Invest Like the Best with Patrick O'Shaughnessy
· 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?
· Matthew Smith, Patrick O'Shaughnessy
[00:00:00] S1: In some cases, it's processing. The natural gas flows to the surface with natural gas liquids embedded therein. In some cases, there's sulfur or nitrogen that has to be dealt with. In some cases, it comes with oil, and so you have to have surface-level infrastructure to produce the oil, which is different. Gas primarily has to be produced into a pipeline system, and there's a certain spec on regulated pipelines — that's 1,010, 1,030 BTU is the spec. So you have to remove enough of these other hydrocarbons to get it to pipeline spec, to be able to produce it into the system to be consumed by folks downstream. So processing is the first major constraint. There are a couple of basins with a little bit of extra processing — we'll fill it up pretty quickly. We do not have processing yet to get to our assumed 20 Bcf production target that's necessary, but processing would be something— it takes either two or three years to build, at the midpoint. We generally know what processing investments are being made and the projects that have been announced by Permian processors or by Appalachian processors. We know where the materials and liquids handling throughput capacity will be in '27, '28 at least. You really would need to, in the near term, even to get to our 20 Bcf of incremental gas production we're willing to estimate, you need to have more processing built. [00:00:00] S0: Build stuff now.
· Patrick O'Shaughnessy, Matthew Smith
[00:00:00] S0: Build stuff now. [00:00:00] S1: Point one. Build it now, imminently. Small diameter pipes — gathering is what takes it from the wellhead to processing or pipeline system. There is a fair amount of disclosure around processing systems being expanded and built, and we would posit we have put all those on a map, on top of every one of these wells at their lat and longs. In order to grow even a fraction of where we must have natural gas production go in the US, gathering has to be invested in very materially over the next— imminently, to get to the place where we can achieve 130 Bcf/day of production in the US. The last one is the interstate gas pipeline system, and this is where I come back to your answer on LNG. Lots of rules and regulations around these things. Pipelines are monopolies for the most part. Local distribution companies that deliver gas to your stove, those are monopolies or oligopolies. In the last 10 or 12 years, we've really built one interstate gas pipeline — that was Mountain Valley Pipeline connecting Appalachia to Mid-Atlantic. The various environmental permitting and regime changes have made it very difficult to build interstate gas pipelines. This administration — and this is an apolitical comment — but this administration has been trying to reduce the barriers to building interstate gas pipes. We've started to see some more progress to that end. There is an urgency to build more connectivity, to wheel gas around the country, to serve this incremental AI compute load.
· Patrick O'Shaughnessy
[00:00:00] S0: Before we keep going through this sequence here, can you just say what you think the state will be? Let's assume that there's roughly inertia in the system and nobody listens to this, nobody does anything. A lot of people will listen to this and have ideas, but what is going to happen in the world? What will the state of the world be like in 2030 if none of this starts getting addressed sooner than later? What's your best guess as to what it looks like?