URTeC 2020: Opening session speakers see industry recovering, but ESG issues loom large

Representing a milestone shift in how the conference projects itself, the virtual URTeC 2020 opened on Monday morning with a fine plenary session on the future for unconventionals, with a growing list of ESG (environmental, societal, governmental) challenges to deal with. While all participants see the E&P industry recovering over the next 18 months, the growing importance of ESG issues will require attention by publicly held companies.

Opening comments. Kicking off the session, URTeC program co-chair Doug Valleau (chairman of World Oil’s editorial advisory board) offered some remarks to frame the discussion. “We can trace our unconventional journey in three chapters,” he noted. “ Shale Chapter 1.0 established unconventional resources as a commercial venture and utilized a drill-to-hold strategy resulting in significant acreage position by many companies. Shale Chapter 2.0 came along and gave us pad-development, and lean manufacturing, yielding significant volumes of hydrocarbons at acceptable costs from both operators and the service companies.”

Continuing that theme, Valleau added, “Well now, we’ve entered Shale Chapter 3.0, where shareholders are less enthused with production growth, in favor of debt reduction and free cash flow. In addition, environmental, social and governance topics have matched the importance of late-life field optimization, parent-child enigmas, and multi-disciplinary puzzles of capital efficiency. Compounding the challenge is the awareness that global economies are slowing, and demand is softening, yielding both uncertainty and depressed commodity prices.”

DOE’s perspective. The plenary panel of speakers was asked to share their insights on one or more of the issues that exist for Shale 3.0, and perhaps how technology and social responsibility can be scaled into a sustainable business case by the close of 2020. Leading off the comments was the keynote participant, Steve Winberg, Assistant Secretary for Fossil Energy  at the U.S. DOE. Looking to reassure the URTeC audience, he stated, “Fossil energy is here for the long run. As you probably know, about 80% of the energy used around the world comes from fossil fuels. And 80% of those fuels are oil and natural gas. This means unconventional and conventional both, and it’s here for the long run.”

However, Winberg did acknowledge the pain that has been experienced in the industry during last several months. “The pandemic has frozen the economy, and the energy industry is among the most seriously affected,” said the secretary. “We have witnessed an unprecedented decrease in U.S. consumption of petroleum products and natural gas in the past several months. But I believe that the U.S. oil and gas industry is now in recovery mode, and taking stock of the new energy landscape.”

Looking at that landscape, Winberg declared that oil is still fundamental to the U.S., as well as the global economy. “Within the global oil market, the U.S. is a key participant, both actively exporting and importing crude oil,” he said. In 2019, explained Winberg, the U.S. exported a record 2.9 MMbpd of crude oil to 44 destinations. Also in 2019, the U.S. exported 5.5 MMbpd of petroleum products, just shy of 2018’s record level.

“We became the world’s top exporter of oil and natural gas, because we produced more oil and gas than ever before,” explained the secretary. He added that U.S. production grew to 12.2 MMbopd in 2019, and U.S. dry natural gas production grew by 9.8 Bcfd—"that’s a 10% increase from 2018.” He also pointed out that a lot of the increase was brought about by DOE research, which opened up the possibilities for greater production. He said that while we don’t know what the long-term effect will be on U.S. output from Covid-19, we do know that the decisions that companies are making in the short term will have an impact. “But I don’t believe that that is all that the future holds for us.”

Looking at the near-future, Winberg said that the EIA within the DOE forecasts that consumption of domestically produced petroleum liquids will return to previous levels, and perhaps higher after 18 months. And the future for LNG, he added, is looking brighter in the long term. In other remarks, he mentioned how the DOE is helping the industry with upstream research. “Today, we capture about 1 GB per day of data from our various projects,” he said. This work includes AI and machine learning, and real-time visualization. So far, DOE’s NETL has established 17 field labs.

Other speakers/viewpoints. Next up was ConocoPhillips Executive V.P. and COO Matt Fox, who talked about “some of the fundamental truths of this market.” He said there are three of these truths—“The first is, in a competitive commodity business like ours, the lowest cost of supply wins.” Second, he said, “Technology is the key to lowering the cost of supply.” And third, added Fox, “people are the key to technology.”

Following Fox was Kenneth Medlock, the James A. Baker, III, and Susan G. Baker Fellow in Energy and Resource Economics at Rice University, as well as the Senior Director of the Center for Energy Studies. In an attempt to show what the future of energy might look like, Medlock offered some trends and numbers. “The world of energy is a world of haves and have-nots, but that is changing,” said Medlock, who noted that the shifting energy landscape is a developing nation story since 2006, with energy choice also evolving.

“Any further growth in petroleum and gas usage will be in the developing world, not in the OECD countries,” he added. “And the U.S., in particular, is in a really interesting position, through innovation, to drive down costs, to help to facilitate the delivery of energy services in an environmentally sustainable way.” He went on to explain a couple of things on the EGS front, principally difficulties in attracting capital, and reporting GHG metrics.

For his part, Bob Brackett, Senior Research Analyst at A. B. Bernstein, asked the question, “Why do we care about ESG?” Well, he said, from the perspective of unconventional production, “most of it comes from public companies, not private companies. Wall street is being automated faster than the oil patch.” He explained that at the top of the ownership of publicly held oil companies are passive investors, yet, “why do oil companies care about ESG, because that’s where the money is.”

Brackett said that the ESG front is slow, but growing. “An increasing number of investors are saying that they want active fund managers, who pick company stocks on the basis of these firms addressing ESG issues. The reason you should care is one, these investors ultimately are responsible for owning the company. The board of directors is beholden to these investors. Number two, to the extent that you ever need money, to the extent that you need to raise capital to go drill more wells or accelerate a program or pay down debt, you’re going to have to go to Wall Street, and if they have a strong ESG lens, it’s going to matter.” He went to say that whatever a company’s ESG footprint is, this is going to affect how it can raise funds.