AMERICA IS IN THE MIDST OF AN ENERGY REVOLUTION.
By capitalizing on American technology, ingenuity, and frontier spirit, the Shale Revolution—driven by horizontal drilling and fracking—is turning the world’s energy markets upside down.
Former BP Geologist On Energy
Last week my partner Henry Hoffman and I had the opportunity to chat with Peter Hill. Peter holds board seats or is on the advisory committee of several companies where he provides energy advice, including Edge Natural Resources, Jaguar Exploration and Citizen Energy LLC. His long career includes 22 years spent at BP in various executive positions including Chief Geologist. He still retains contact with a number of people there. We were interested in Peter’s outlook for energy. His views are summarized below.
Peter thinks many commentators underestimate the scale of change that the energy transition entails. It will be a very slow process, as it has been so far. He expects that we’ll still be using oil and gas in 2100, and says the most effective way to reduce emissions is coal to gas switching. The Energy Information Administration regularly reminds us that this is the biggest source of US emissions reduction – far more impactful than solar and wind.
Peter thinks OPEC’s production at around 28.5 Million Barrels per Day (MMB/D) is at or close to its peak. He doesn’t think they have much undiscovered oil remaining. The Ghawar field, which was discovered in 1948, has produced around 65 billion barrels, far more than expected.
The US is becoming the swing producer, a consequence of the shale revolution. Peter noted that shale formations exist in Saudi Arabia, but there’s no appetite to exploit that resource at $60+ per barrel since they currently produce at under $5. They would also struggle to find enough water for fracking, and the oil services business is dominated by American firms who would have to invest significant sums in Saudi Arabia.
Saudi Arabia’s Jafurah Gas Field has 200 Trillion Cubic Feet (TCF) of recoverable natural gas, according to Crown Prince Mohammed bin Salman. This is enough to swamp world markets if produced, but Peter thinks the Saudis will never be willing to invest the $BNs necessary.
For reference, US daily consumption of natural gas averaged 90 Billion Cubic Feet per Day last year.
Peter thinks Russian production will tail off within 12-18 months. Having lived there, he feels Russia’s oil industry has no culture of maintenance. Given a new truck or any piece of equipment, they’ll use it until it breaks down and then discard it.
The Bezhenov Formation shale that sits at the base of the Siberian Basins in Russia is the biggest source rock system in the world according to International Energy Agency. Reserves are estimated at 2,000 TCF gas in place and 1,200 billion barrels of oil. The sanctions that followed Russia’s invasion of Ukraine have cut off any western expertise in extracting these resources. Peter dryly notes that Putin has inadvertently settled who will own these stranded assets once the energy transition takes hold.
For all of these reasons, Peter thinks crude oil is going higher.
BP made a big mistake with their focus on renewables, which has so far consumed $40BN of capex. As a result, they neglected their core oil and gas business, something Peter called “a huge mistake”. This strategic error was ultimately responsible for CEO Bernard Looney’s firing. He was an unapologetic champion of renewable energy. Looney’s admitted affair with a subordinate, in violation of company policy, may have provided a convenient opportunity to shift BP’s strategy back towards more profitable fossil fuels.
We’ve seen this regularly – big energy companies feel pressured to invest in the energy transition but find that the returns are poor. American investors are more inclined to reward more disciplined capital allocation, which is why NY-listed energy companies trade at higher multiples.
Both TotalEnergies and Shell have publicly ruminated on shifting their stock listing to NY. In recent years pressure from left wing politicians created disingenuous enthusiasm for intermittent energy, for a while displacing astute financial judgment. Remorse is now common among those who drank too heavily of the progressives’ Kool-aid.
Peter has great admiration for Exxon Mobil. They are resilient, and seem to produce an endless succession of talented executives. He described the company’s culture of career specialization, aimed at putting the world’s best in each key role and paying them enough that they rarely want to leave. He contrasted this with BP’s approach of regular rotations, to develop more rounded executives.
On the Deepwater Horizon disaster in the Gulf of Mexico, Hill attributes it partly to a failure to follow the company’s own operating manual, a document on which he spent much time and describes as BP’s “bible”.
Peter feels the Eagle Ford basin in south Texas is a misunderstood shale formation with untapped potential. Current activity focuses on the “hard bands” of rock which are more easily exploited than the soft bands in between. He thinks improvements in technology and technique will eventually allow these soft bands to be more readily drilled.
In terms of emerging technologies, he puts hydrogen in the “too hard” basket, noting the significant technical challenges in handling it. We commented on this recently (see Discussing The Energy Transition With An Expert). Hydrogen has to be super-cooled to reach a liquid state so that it contains enough energy to be worth transporting, a process that is itself very energy-intensive and costly.
AI on the other hand offers huge opportunities. Peter said, “Seismic is made for AI.” He expects it to provide a “significant improvement in 3D.”
With data centers driving power demand higher, the energy sector is well positioned to be a winner from artificial intelligence.
Peter Hill offered many fascinating insights. We hope to check in with him regularly for an update.
We have three have funds that seek to profit from this environment:
Energy Mutual Fund Energy ETF Inflation Fund
