What The Funk?

0:00 Round two, Never Nervous Dwayne Purvis. Oh, a new one. I like that one. I'm like, that one better than Purvis Master. Never Purvis Ellison. Did I ask you guys last time we did this? I don't

0:13 think you did Purvis Ellison, no. Never Nervous Purvis. So a lot of people have reasons for why they go to whatever college they went to, right? My reasoning for going to Brandeis, literally,

0:23 in the late 90s, NBA basketball teams used to practice at local universities It was a thing, and the Celtics practiced at Brandeis. So when I went on the school tour, when I was a junior or senior

0:34 or something in high school, I'm walking through the hallways and I see the whole Celtics team right there. Paul Pierce was there, Antoine Walker, Never Nervous Purvis, Allison, and they're

0:44 super friendly, right? Like, you know, it's college kids, and they're only a few years older. So it was so welcoming. They're like, you know, they're like, yeah, you know, you can talk to

0:52 them, right? You talk to them. You're going to go here. You should go here. It's a good school off meeting the Celtics.

0:59 at their practice facility had nothing to do with Brandeis. It is funny just how some of the things that should not make you choose a university or a field of study influences you into that path,

1:12 you know? At that age? Yeah, I mean, my daughter, when she was the oldest, when she was choosing a school, she applied AM and was kind of put into the second tier of acceptance. And she didn't

1:23 like that, but when she started looking at her next school, she said, no, no, I want the Saturday Division I experience big time football on campus. So that

1:33 was okay. Now we're down to whatever universities that that meets. Yeah. You know, and really shouldn't be why you choose a school, but I understand why the presidency universities use sports is

1:46 what they call what the window to the university. You know, it does have meaning Well, I'm looking forward to going to an AM game. I think you said it's November 19th or something like that. I'm

1:60 going to do it. I mean, I'm in 100 against UMass. Yeah. Well, we definitely need to do that. So, um, and now we're transitioning to Duane who does not have any interest in sports. So we'll,

2:11 uh, AM games are fun though. You don't even have to like football to like an AM football game. Oh, that's that's true. I mean, they're tailgating now, which wasn't a big deal when Duane and I

2:21 were in school, but just tailgating. We go up there and we'll tailgate with no intention to ever go into the game, just sitting out there and talking to people and, you know, meeting folks. It's

2:31 a whole day event. Oh, yeah. Absolutely. Yeah. And yeah, I did that for a reunion. Not too long ago. It was really nice. It's talk ESG. I want to talk about the carbon expo. The topic of

2:45 ESG, environmental, social governance, for those who aren't familiar with the term, is something that Duane is laser are focused on. I think Tim and I buy default. have had to become more

2:56 focused on this, and I've taken a real curiosity to it as more and more money starts to flow in, and larger operators in particular are looking to identify what the energy transition looks like for

3:07 them. So, Duane, tell us a little bit about the carbon expo, and then let's jump into some of the insights you've seen even since the last time you came on, as we trend here in 2022. So, Tim

3:19 and I are about the same vintage, and I've been in the industry 26 years now.

3:27 I saw the world starting to change again. It's changed a couple of times on my watch. But

3:34 I

3:35 was seeing the energy transition differently than everybody else. It seemed like our whole industry

3:41 took this defensive posture.

3:45 The estimates to say that we're gonna take, it's gonna take three to6 trillion of investment per year the Pathways to an energy transition require geothermal and solar and wind and carbon

4:01 sequestration As we can do that we know all that So the it's it looks to me like that the energy transition is a fantastic opportunity Though the world is creating the demand we've got the skills.

4:18 We've got the assets We've got the science to take advantage of it and we should be leaning into the opportunity And that's why I made carbon expo. So look, it's it's a good thing to do from a moral

4:31 ethical scientific thing to do 100 we need to reduce the amount of of co2 that we litter into the air

4:43 But that really has never gotten industry very motivated, right? Yeah But there's an opportunity. So if the world's gonna pay for it, man, let's do it It's a win-win all the way around.

4:57 So the Expo itself, is it, it's a conference, it was kind of a traditional conference? You know, that kind of hurts, Tim, that kind of hurts.

5:08 Just try to get the definition. Right, so we're doing, it is a virtual conference. I was recording a promo video for it yesterday. The first slide was a picture of Zach Galifianakis between two

5:18 ferns So your most

5:21 virtual conferences are like community access television, right? Except not as funny as Zach Galifianakis. And most ESG

5:30 conferences are a bunch of talking heads and a little slide there about Ron Burgundy, you know, who is,

5:38 I think they call it yogging. I'm not sure, but these are people who are talking

5:43 in abstracts, this is what we gotta do. Nevermind that, Carbon Expo is a virtual conference, social media style.

5:52 and focused on how to get stuff done. It's a business exposition for oil and gas in the energy transition. So some of the cool things we can do is you can search the attendance list so you don't

6:06 have to worry about randomly running into people, walking around the exhibit hall. We have a virtual breakout room for lunch. We'll have a couple dozen rooms organized by theme. So instead of

6:17 sitting with some random person at a 10 top table and hoping you have something in common with them, you go find a table of people who are interested in methane emissions or Bitcoin mining or

6:30 plugging wells, and you can network with people with common interests. We're gonna have a virtual happy hour. I keep that in my bottom drawer. Oh, here we go. Can we do this? Is this like - Go

6:42 ahead, let's product. Yeah, the product plays well, that's okay. What's the crime? Actually, actually, my real favorites, TX. TX is my real favorite. But I keep it in my bottom drawer. So

6:53 we have a virtual happy hour for an hour and a half in the hour. For those not watching on YouTube, Dwayne held up a Crown Royal Reserve bottle to entice Jeremy and I away from the show here. Go

7:07 ahead. Next one. But you keep it in your bottom drawer. Keep it in my bottom drawer. Actually, truth be told, it's a top drawer, but never mind that.

7:16 Because for

7:19 occasions like this, BYOB 90 minutes, choose a room based on your geographic area. If you're working in West Texas, go hang out in the West Texas breakout room for a while. If you're working in

7:30 California, we'll hang out in the small live video breakout room in California. And then the other thing is all the presentations are gonna be focused on something a little bit more practical, and

7:44 then they're gonna be available for six months after So you can come as one day conference. You can be a bop around video chat with exhibitors video chat with other attendees Watch a pre-recorded

7:58 video do live QA go back in search and if you missed something come back on Monday

8:05 So we're trying to make it at least as good as a live conference with With no omicron. Yeah, when when is it? March the fourth Carbon Expo dot us We'll tell you about it, and we're gonna be on

8:21 March March the fourth Let's

8:24 march forth with this ESG carbon expo Haha, anyways, so I'll be in I'll be in Canada then but I'd still like to to attend if that's at all possible You wanted to talk about the market in oil and gas

8:41 and ESG and this is an observation I had a meeting with a top 20 domestic operator and Last week. And I had sent them some information on the ESG solution I wanted to approach them about. This was

8:56 the most educated and researched I've ever seen a group coming into that meeting. Whatever information was passed on to them, relating to ESG, they devoured and they did extra research and they

9:09 came very prepared. Which shows me the level of seriousness amongst large operators is there. I mean, it was really, really impressive to watch The caliber of people, most of them with advanced

9:21 degrees, a lot of VP, director, sea levels, saying this is the priority. And it was really, really kind of cool to see that because oftentimes it's the opposite to him. We're pushing, we're

9:34 pushing, we're pushing, we're pushing. Put this on the table and then grab it. It's like, oh, cool, all right. Yeah, well, this is - I was just gonna echo that with the, we talked to Jeremy

9:45 Sweet a couple of weeks ago

9:49 what we kind of found out from him or what we discussed is some companies are out there going to be very aggressive and upfront and kind of thought leaders. But he said, most of them just don't want

10:00 to be last. So they're going to, they're going to just, they're going to let everybody kind of pull, pull them through. So they're not last, but they're also not going to go be first. And I

10:12 think the nature of leadership though, isn't it? Right. And there are some folks who really see this as a priority. They really see it as a valuable thing. There are other people who resent it,

10:25 but the fact is, it is a fact of life. You cannot get away from it. It's coming to every aspect, particularly of finance, but even indirectly through banking and insurance and are licensed to

10:35 operate on the

10:43 line if it's becoming the cost of doing business. Remember, at this point, we think HSE is just That's just it. You just do it. But back at the beginning of our career, man, oh, HSC was stupid.

10:57 Right? HSC was an annoyance and it helps you the same way in another 10 or 15 years. He is. He's just going to be the rigor. I do want to add there's one other category. I think you left out of

11:10 the two that you put in there, Dwayne. And that is those that are just making big statements about it, but not actually doing anything Well, the green watching is a great point though, but it's

11:21 only a temporary strategy. You're under, all of a sudden you find yourself under pressure, and so what do you do? Justify. Oh, we're really good. Actually, we're really, we've been doing this

11:31 really well. But that's a first step, but it's not a sustainable strategy. You start making promises. Well, we're going to do XYZ. Well, people are going to ask you about it at the next

11:43 quarterly call. And in two years, they're going to be asking about it again whether you care about it or not. you're still gonna be accountable to do it. Yep, once you make the statement of net

11:54 zero emissions by 2045, you then have to actually have an executable plan to hit that target. If you just put it out there because it's something that you think you were supposed to do, that shit's

12:07 not gonna fly. Well, I think, so I guess what I've seen is people make the statement and then don't put the teeth behind it. Some. You know, well, I've seen a couple of places where it's, hey,

12:18 we're gonna be net zero by whatever, or we're gonna reduce it by 50 by 2025,

12:24 and it's a statement at the board level. CEO makes at the board level, and it's a headline grabber, but they really haven't put the investment throughout the organization to be able to achieve it.

12:39 And so what they're gonna find out doing is they're gonna sell an asset in 2024 to meet their requirements.

12:47 and just pass off to somebody else. And that is happening for sure. There was a big New York, who was watching post in New York Times article that looked at EPA emissions data and found that Hill

12:59 Corp was one of the worst emitters there is, and those were assets they bought from majors. That's right. Yeah, the last one. But the thing is that the circle is tightening. So here's Hill Corp

13:13 all of a sudden on the front page of national news And the thing that I think is gonna be the biggest game changer is the EDF emissions satellite, methane emissions satellite going up this year. Now,

13:29 I haven't double checked this myself, but I understand it's extremely high resolution and extremely high sensitivity. So that they'll be able to publish a map that says, where on your line, what

13:42 spot in your yard is linking natural gas And then this is going to - There's gonna be third party accountability for it. Yeah, Sarah Stogner who was As we record today was released yesterday. Thank

13:56 you. That was one of her big things she mentioned and her her Thing was really looking forward to seeing that side those satellite images going up. Yeah I've been studying the the flaring in Texas

14:07 and venting so in in theory we're supposed to report the volumes that we flare or vent over a certain number of

14:18 But there's a lot of gas that doesn't have to be permit permitted or reported at all And there are hundreds and hundreds of leases in Texas who every month produce oil and report one MCF a day Or one

14:32 MCF for the month And they're just venting their gas, right? Wow

14:40 So there's there's two topics I want to jump on in this in this short session today Okay. And the first one I think is really relevant to something you said early on. You mentioned the defensiveness

14:52 of the industry.

14:56 And I think that this actually goes back a very long time and it's gonna be something that fundamentally will be hard to shift. This is why. If you think about the etymology of the oil and gas

15:08 industry, marketing and oil and gas is something completely different than marketing to everybody else in the world It's sales, right? You don't actually have to market your product. People always

15:18 want your product. I love that. Now all of a sudden you're 80-some idea. I'm a marketing guy. That not oil and gas marketing, like a real marketing rest of the world. Right, right, right. But

15:27 that's created this situation where all of a sudden, well, you've always wanted my product. You need my product, right? So then you feel like, okay, we're special. You need what I have, right?

15:37 Now all of a sudden, somebody's telling me, I don't need what you have. The industry's response is, yes, you do And it's like, okay, yeah, right. but that's not the way we need to start this

15:47 conversation, right? You're feeling threatened because people are not taking this away, right? We're just trying to find an appropriate means that's one, the defensiveness and the posture. So if

15:56 you want to talk about that, go ahead and then I've got another one. No, I agree. And it's the wrong way of response entirely. And it's not, it's not wrong that we're going to be using oil and

16:06 gas for a long time. The question is how much and how. And for those of us in the industry, the question is the trajectory of how it turns The full range of possible oil demand forecast from the

16:17 IEA shows a long plateau to one or 2 decline or at the most extreme, a 5 decline per year in oil consumption. 5 decline per year is not really very high.

16:34 And we still exit 2050, even something like 23 million barrels of oil per day No, it was not one that it's not really going anywhere, but. The inherent natural decline of existing oil fields is

16:47 about 5. Maybe it's 6. So if our demand is declining at 5 or 6, well, then we don't need to add new reserves, add new fields. We don't need to explore. If we're declining at 2, or 3, instead

17:04 of growing it 1 or 1 and 12, we need a whole lot less exploration. And that rearranges the industry. The production engineers, they're going to shut the doors. The landmen, the geophysicists,

17:17 and the explorationists are going to be the first out the door.

17:22 But the second thing, natural gas is a totally different story. Natural gas has real legs. I'm a bull. But in both cases, we have to change the way we use it, the change the way we do it. But

17:35 the good thing is we're in the right position to clean up the fuel So the theme for carbon expo this year is the dawn of Counterstream. So upstream, midstream, downstream, flow our products down

17:50 where we make good and valuable things, but we make this pollutant, this like plastic semi-permanent molecule that goes into the air. Well, if we capture that, encounter, flow it back to where

18:05 it began, all of a sudden you can have the benefits without the pollution. So, you know, this is the term I coined, call it the counter-flow business, to take our waste products back to the

18:17 beginning, whether it comes from carbon taxes, cap and trade, or voluntary carbon markets, which are growing. There's gonna be plenty of demand, and we've got the science, we've got the skills,

18:30 we've got the assets. So, if we add this segment to our business, then both are true, right? You continue using oil and gas, yep, You can also pass it and we'll clean it up for you. You can

18:42 have the benefit of using our fantastic product and we'll clean it up for you.

18:48 I mean, that's the approach that needs to be taken. The good stuff, Dwayne. The final point I wanted to make is around the talent that the oil and gas industry is able to attract or lack thereof.

19:02 And that's all I really need to say on that topic.

19:06 However, however, if oil and gas companies start positioning themselves as energy transition leaders, ESG leaders, you throw different buzzwords out there, cut some of the pride of just being an

19:19 oil company, you will attract the best of the best who are excited about an energy transition. Well, and that's, listen, I'm studying Sustainable Energy Johns Hopkins right now. And there are

19:32 some people in my cohort and in my classes who really are all in renewables.

19:41 But mostly, it's all in, I want to make this happen.

19:46 There's no serious discussion of an energy transition, which is a long, complex, multifaceted, multi-step process, but there's no route that doesn't involve oil and gas. The

19:60 question is how?

20:03 You know

20:05 the SPE, the Society of Petroleum Engineers and the AAPG are looking at a merger.

20:11 My belief is that we need to change the name of our society, of this joint society. We're no longer petroleum engineers and petroleum geologists. We are subsurface engineers and subsurface

20:23 geologists because we know all about drilling and completions for four different kinds of geothermal. We know all about pipelines and injection and geomechanics and pore space and conservation of the

20:38 energy for carbon sequestration.

20:41 we know how to make hydrogen in a fire flood. We've got multiple skills that are essential to this process, both directly in the oil and gas part of the transition and in the adjacent parts,

20:56 they're gonna grow piecemeal and part wise over the next 30, 40 years. So we, I agree, man, you can't get people to sign up. I had to change the name of the class, I teach at TCU. Yup, yup

21:09 And that's the mandate to me from the university was a third of the class was supposed to be about sustainable energy.

21:18 Took me a little bit to figure it out, but a third of the class is about sustainable energy now. Yeah, I'd be curious maybe to sit in on one of those classes and audit it, see what you talk about,

21:28 see what the engagement looks like. So I,

21:33 the, you know, the transition is interesting, but I wanna go back to, you know, We had Dr. Spath on in December. And he stopped short of, no, we're not changing the name of the department,

21:45 but he did echo a lot of what you said is that, hey, we know the subsurface patrol and engineers, as they are now are the ones that know how to do all the things that you just mentioned. So it's

21:58 interesting that, you know, the thought process is all there, but you have, you know, University of Oklahoma changing the name of their department Like, you know, and what is it, a total

22:08 change their name to total energies, just to kind of. So that's happening. And it's really kind of starting to change the focus. Of course, BP tried it in the 90s with Beyond Petroleum. I'm not

22:21 sure that that ever really took. Well, SME did the same thing. It's good to do the letters, whatever Yeah. I want it. Go ahead. No, I just get frustrated with. Well, this is back to your

22:36 marketing point, Jeremy. I get frustrated with the silly hats. that people have to put on sometimes to look good. Yeah, when I go back into that, that's my whole company. No, no, no. I

22:50 actually branded this Red Sox hat with my own logo right now. I branded my vest.

22:58 Not Tim, Tim's just got an AM shirt, no big deal. No, no, no, this is just a regular old shirt. This tanger box, not brand new. Actually, it is kind of more of a crimson color than it is.

23:08 See, I'm a rune, but. I see it So Dwayne, you know, you put out a lot of content on LinkedIn, that's where I receive it anyway. You probably put out in other locations,

23:20 but recently, and I think this is kind of a point I wanted to come back to. Right now, as we record this, there's a saltwater geyser out in West Texas. I guess we're on day 14 of this thing

23:32 erupting. And what I think, what I understand to be an old abandoned well, an old Gulf oil well, which is now, you know, Chevron and so on,

23:43 but you did a paper on abandonment or orphaned wells, abandonment, you know, abandoned wells. I think this is going to be an interesting topic moving forward as we start these declines. There's

23:56 hundreds of thousands of orphaned wells out there and improperly abandoned wells that are not getting the attention that they should have. You know, the we were drilling and then abandoning wells

24:09 long before we knew how to do it. And we didn't have good controls on plugging wells until the 50s.

24:17 So there was almost 100 years of wells that were plugged by sticking. I've read branches or burlap sacks down, right? I believe it Okay, that was state of the art, I guess. That was the standard.

24:37 But what we had, and those kinds of wells, man, I don't really have a lot of blame for the people. But since 1990, the rules have changed. And I'm sorry, '86, '86, the rules changed. And

24:53 before that, from about the '50s to '86, you had to plug a well within two years of stop of production. For practical purposes now, it's been allowed to run on for infinity So over the years,

25:06 I've seen more and more idle wells in portfolios. Yeah. And it didn't really matter '95 in and

25:16 '96. The production was still high, relatively high. We could still get good money for a salvage value. And the prospect was so far off with the present value. Anyway, it just wasn't material.

25:30 But last year, I had a wake-up call. It's gotten worse, right? Production's gotten worse and worse. costs have gotten higher, prices have gone higher, but costs have gone higher almost as much.

25:42 And this stockpile of abandonment liabilities has been building. So last year I had two assignments in particular. One where half the wells were idle and the other were two thirds of the wells were

25:57 idle.

25:59 What I calculated was that the economic life that remained the economic life that remained was about 10 times as long as the distributable economic life, which is to say, if you look at all the

26:14 random liabilities, you start at the end of life and you come to present time, you had to spend 90-ish percent of the time of the future productive life just to pay for the plugging liabilities. So

26:31 I'm gonna paraphrase or reword it.

26:36 So you now have eight year, you have to produce it for another eight years just so you can abandon it. If you were to abandon it right now. No, the economic life is eight years and that's about

26:46 right from one of the assignments. There were about eight months of cash that you could put away and keep and distribute news before every penny had to be dedicated to abandonment. Wow. So I wrote

27:00 this white paper about a new economic term I call hold back And the idea is what period of time does 100 of cash flow need to be dedicated to plugging liabilities if you're gonna plug 'em? And what

27:13 period of time, distributable life, can you pocket the net income?

27:20 And what I was saying, because what I found is this declining cash flow that gets really narrow over time requires five, 10, 15 years of dedicated 100 of profits go to plug-in liabilities. if

27:36 you're going to plug

27:39 them, does that make sense? Yeah,

27:42 I understand that, but I can see why

27:46 it's just, well, I mean, I guess the incentive for the operator is how I'm just going to sell this to the next guy and let them plug it. You know, that used to be the case. And over the years,

27:56 I have become more and more adamant with my clients that you have to look at this. If you buy it, you better plan on burying it And the clients have increasingly paid attention. They've been

28:08 increasingly concerned. It's been about 5050, but it's only going one direction. All right, there's no probability that operators stop being concerned about plugging liability or purchasers. Stop

28:23 being concerned about probability. The only direction this goes is absolutely everyone factors plugging liability into the cost. This is an interesting segue to Tim for later this month. My friend

28:35 Eric Bruzowitz used to work at Hockwood Energy, a number of different EMPs, and he's launching a company that is only doing work around PA wells in the state of Colorado. I think maybe it's

28:46 somebody for you to speak with, but it's so niche, right? Like it is this one sweet spot right here right now, but you go to a company like that has a couple thousand wells. I mean, you know,

28:59 they've got 60 or 70 of these wells that are orphaned, maybe more. They need to take care of this problem They just don't know what to do, right? It's a quagmire and it's interesting to see the

29:08 way that companies approach it. They have to do something. They don't really want to spend money, but they have to do it anyway. And that's sort of where the PA model is. Yes. So this is a time

29:18 bomb, not just because we deferred it and 100 cash flow has got to be dedicated for a long time,

29:25 but you've got these huge, huge liabilities. It was a couple of years ago, I was working on a project. It was a couple of thousand wells with a shared gas plant, so he had this massive fixed cost

29:38 to cover. I dialed the allocation of expenses from more variable to more fixed. Didn't change the total. I didn't move it all to fixed. I moved some of the variable cost to fixed cost and it

29:54 triggered the group economic limit And all of a sudden you had a hundred million dollar liability for something that was cash flow positive by several million dollars a month right now.

30:08 And when you get to that position, you think it's going to be pretty cheap, right? Well, most has been25, 000 a plug a well. Sure. But it's a log normal distribution and your average is going

30:21 to be significantly higher than your most common And25, 000 is pretty cheap, right? Because right now it's a low demand, low margin. business, low volume, low margin.

30:37 If this time bomb explodes, if there's a change in regulation, if there is something like a couple major companies factor this in to their

30:50 ESG plans and their discussions publicly, well, then you're going to see demand go up and costs will go up. And then all of a sudden it becomes

31:02 feedback loop.

31:04 And that I'm I'm really right now, it's hard to make a business. But at some point, there's going to be a trigger. And and plugging abandonment can be a good business. Interesting. Tim,

31:17 let's wrap this up here. Mr. Purve, tell us where do we find out about the carbon expo I want to attend? Can you tell us where we go to find that sign up? What is a cost, any details, who's

31:28 welcome, who's going to be there, all that fun stuff. I'd love to have you guys there.

31:36 People can sign up to attend, right now the cost is45 a person. Okay. I'm trying to get people there.

31:44 The, because the more people we have, the more beneficial it is. True. Boots are a couple hundred dollars a piece. You can sponsor a live video breakout room post, a live video breakout room for

31:57 just like250 You

31:60 can sponsor or advertise. We would love to have you. We're looking to get upstream, midstream, and downstream folks there. But you know, at this point, the downstream are the people who create

32:12 the product.

32:17 CarbonExpous

32:19 is the URL. CarbonExpous, that's carbonexpous, 45 bucks, Thursday, March 4th I'm going to attend definitely going to blast this out to my network. really intrigued about this. I think we're

32:32 gonna see a rash of these types of shows, but you leading it from this perspective, I think is gonna be of major value. And I loved having you on here a second time. Let's definitely keep in touch

32:43 and push this message forward. Hey, thanks so much, guys. Always a pleasure to talk with you. Thanks, Dwayne.