Welcome to the Oil and Gas Council podcast. Investor Series. Hey guys, this is your host Tim Powell from the Oil and Gas Council. Today Tom Petrie returns to the podcast to talk about the upcoming US presidential elections and how a Trump versus Biden presidency and Republican-Rest Democratic Senate will affect the oil and gas industry. Let's jump into the episode and hear more of what Tom has to say. Tom, welcome back to the podcast, round two here, but US election edition. So I'm looking forward to a great discussion. So am I. Thanks for reaching out. No, listen, in the conversations I have across the space, there's obviously a lot of contention on what's going to happen in November and how that impacts the oil and gas industry just to remove kind of Republican versus Democrat and the emotional side of it. It's just how's it going to affect the industry, how's it going to affect tax rates and what's the trickle down effect of that and all the things involved. And I thought you are one of the best people to comment on this just given your background and your particular knowledge set on geopolitics and how that all plays in. Because we all know that's a big factor in the oil and gas space and from a presidential standpoint, right? How foreign policies dealt with. So we're looking forward to jumping in here just before we do that. What is the outcome here, right? When you and I spoke before kind of preparing for this, it's not to say that it's Biden versus Trump or Republican versus Democrat. This is meant to be a discussion to look at what is likely to happen in the scenarios of a Trump or a Biden presidency and which way the Senate goes and just trying to kind of canonly so people can get in that headspace of what can we prepare and where should we look to go. And then when November comes around, we can kind of reassess and circle back, right? And agree. Yes. So there are really four scenarios that are fairly obvious. But I'll give you the way I like to think about them with a razor to associated with each. The first one is Trump wins and the Republicans keep the Senate. If that outcome comes to pass and some of the pollsters have their doubts, but you know, I think it's arguable that this is still a winnable proposition by either party. And I would characterize that as the most like a business as usual proposition. We've got four years of data on what the Trump administration would do. And I think a second term of Trump would try to build on his more successful initiatives, especially in the energy industry. We've lived through a time when some of the geopolitical things have bent the shell supplier, but some initiatives to help overcome the effects of that would be like we'll get into that more later. Second scenario would be Trump wins narrowly, probably based on what we think we know today. But the Republicans lose the Senate. And that's one that is more consequential for our sector. I think for a variety of reasons because at that point, I'm presuming that the that the House is not taken by the Republicans so there would be a sweep in Congress. And that would make it a much more difficult path or the Trump or Trump presidency to navigate. So I'd characterize that as largely a Republican stalemate situation, at least for two years to the degree that might be an overreach involved in some of the things that Congress would do under complete democratic ownership or majority control that if they do overreach you after two years. And if there's an effective program and in some reasons to wonder whether there would be, you might have a switch in Congress where either the Senate is regained or not maybe a shift back in both houses, but that would be speculative right now. So I think thinking of it as largely a Republican stalemate and two years further on entering the last two years of a Trump administration. Let me ask you this time, do you think from an all in gas industry perspective and just the ability of government to influence it is a change over from Republican to democratic at the presidency level or at the Senate level more consequential. I actually personally believe it's a pretty close call, but I would say that it's arguable at the Senate level. It's more consequential than the presidential. There are certain things that Biden wants to do, but as a president, but I'm not convinced you'll be able to do them all. And so I have felt for really for the last several months keeping the Senate was the highest priority. And what I have today is it's not clear to me that it's been President Trump's highest priority getting reelected. He I think he presumed if he gets reelected and he is thinking assumed that he was going to. And it's late now to really see that remedy. I think the likelihood if there's a loss at the presidential level, it may well be a loss at the Senate level as well. So it will be a serious combination because there are other priorities, quite clearly across a lot of the other issues that will get into where the Democrats are going to want to build a coherent record of change. So the other two scenarios would be Biden wins in the Republicans keep the Senate if that were to happen. I don't think it's highly likely, but that would be somewhat of a democratic stalemate, probably less so for President Biden than the Republican stalemate would be for Trump. And I think both of those scenarios involve stalemate with the split government. There's a long history of the US electorate wanting to have split government. And I think at this stage, there'll be a lot of Republicans hoping for that in this outcome. And then finally, there could be Biden wins and in the Democrats take the Senate. It's more of a Katie bar, the door proposition. And there's a number of issues that will be talked about very quickly if that's the outcome. And obviously there is one other scenario, which probably doesn't something we want to spend a lot of time on today, but we are being told certainly that we may not know the outcome sometime past midnight on the election day or right after the election day. And the uniqueness of COVID and mail and voting and just the delay of counting it all being it, having to be too close. That's right. And there are signs already that a lot of early voting is occurring and a lot of turnout is occurring in early voting. And so all of that complicates the picture as well. You would say you'd think initially, well, jeep, if people vote early, then they can counter early and so on. But the rules on counting go state by state. And there's some liberalism on delaying the count that has been pushed in some of the Democratic quarters and so on. And so, you know, as I say, I don't think we want to spend too much time on it, but we do have to allow for the possibility of some kind of a rough analog to what happened to the president bush in Florida decade and a half ago, whatever it was. Just the other thing to think about in this framework that we're pointing together, they claim some of the obvious big issues, climate change policies that are a real priority for the Democratic scenarios, a democratic dominant scenarios financial implications similarly with wealth transfer initiatives and tax initiatives possibly. And then longer term. And I don't think this is getting as much attention as it probably should. The geopolitical consequences, how the US is going to be tested by China, whoever wins. There's no doubt in my mind that even if Joe Biden wins, there may be an initial sigh of relief that the antagonism and virtual Cold War of ideas and philosophies between Trump and President Xi of China might dampen down for a while and that might even be taken as a positive in the market. But I happen to believe when you think about the geopolitics in the Pacific, North Africa and the Middle East are all going to be redefined these of the much of what we've learned in the last 50 to 70 years since the end of World War two China has ascetic goals and it's called the objective. It's called a hundred year marathon where they're objective to be a and maybe the dominant superpower by mid century. A lot of their actions can be traced to actions designed to advance that call and we can talk about that perhaps in our wrap up. Well, yeah, listen, I think you're personally very well positioned to talk about the geopolitical impact and like you said, it's not getting the coverage in the mainstream media. I think there's all sorts of things, COVID and just kind of the distractions that are in the circus, if you may, of just kind of the day to day stuff that's covered. Whereas the geopolitical stuff and the stuff abroad isn't as much so let's finish on that because I think that's a really I know you personally are very passionate about that and concerned about a lot of things that are developing so we'll finish with that. To start out, let's start with something that really isn't Democrat or public and both presidents are going to step into the same situation and that's the uncertainty of COVID-19 as it pertains to the economy. I mean, we're not through it. How the presidency addresses it and the best path forward is still uncertain and tying it to the economy. I think what are your thoughts on the implications and the impacts of the government, PPP, small business loans and the stimulus plans and you know, when you look at any type of government aid or energy subsidies when you start talking about renewables projects and things, you know, if they're going to start lowering or increasing certain taxes or certain things related to the all gas industry. I mean, the financial health of the system, there was just trillions of dollars sucked out of it unexpectedly because of COVID. So where do you think we all stand with that and regardless of what your policy and issues are, what's feasibly possible given the health.
of the economy. Well, you know, you've summarized that pretty well. And we have a situation where the Democrats, you know, have put forth some ambitious goals about taxes. They're talking about $4 trillion and they haven't talked in detail about it. But I think assuming a scenario where there's a President Biden, and we know it by January, I think we'll be thinking a lot more about the cabinet he puts together, the kind of initiatives they have. 4 trillion is a lot of money, but we have to also recognize that there is a basis for seeing the need for some fresh revenues in order to begin to address the aftermath of COVID-19. I'm not convinced that in 2021, we can really characterize it as the aftermath. So there may be some struggles as the reality of what a second wave is beginning to look like. Certainly, the numbers on COVID-19 would suggest we won't be out of the woods quite as quickly as we might hope or prefer, and certainly not as quickly as the President Trump has tried to talk about it. So in any case, I think even if it's a Trump victory, there'll be some pressure to begin to address the kind of price that has to be paid to pay down some of the debt that's being incurred. But in the case of a Democratic victory, especially a Democratic sweep in Congress, along with the presidency, I think we should expect to see some pretty controversial changes in the tax point bill. They've talked about essentially undoing what President Trump did. I think there'll be some pushback because both Democrats and Republicans have benefited from it, and there's a lot of people when they read the details of what's being talked about, we'll want to know. There are proposals to have some self-taxes in the form of perhaps figuring out how to go after the savings accounts contained in IRAs and 401(k)s and so on, and beginning to tell people, "Well, we really wanted to incentivize you to save money for your retirement, but you know what, we've decided we need your money more than you do, and they won't quite put it in those terms." But there are already signs that that'll be one of the areas you have to go to in order to raise enough. Sounds like Greece circa four or five years ago, no? It does, doesn't it? It really does. Going back to one question you asked, I actually believe that the Triple P program, the payroll protection program, represented a pretty good program, and I think it's head bipartisan support, so will we get another one as part of, and I haven't seen anything in house today, but we're coming up or maybe just past the deadline of messy policy, but there are some things that I think the Washington should take some credit for in the Triple P program. I think did stretch out, and if you will mitigate the risk of a deeper, longer lasting recession in 2020. But in the end, they've got to decide and the rules have been very slow coming back on Triple P, but how much is going to be forgiven, how much is going to be second guest or challenge in audits, and what the threshold might be for those because trying to do it for, you know, five figure loans, you know, could take quite a while, could be quite a career path for auditors for the US government, but I think the approach that they seem to be heading for is finding some six figure level of where they'll want to look carefully at what was done, and they might be later in their review of smaller loans just so they don't create a big distraction. The overall issue of what they're going to do, how fast they want to do it, and so on, is going to be important. It'll be important for our industry as well because our industry is often characterized by Democrats as an industry where there's all kinds of tax subsidies. Now, most people in the oil industry don't think of them as subsidies. They think of them as settled tax law that incentivize them to allocate capital, and, you know, to be fair about it, that along with the technological changes that created the Shale Revolution had a lot to do with our economic advances over the last eight, ten years. So to the degree, there's changes in the tax law, that'll become a bit of a drag by itself, and more than a bit, it'll be, I think, who the degree there's discussion of it, and who the degree there's genuine deliberation on the initiatives. I think it'll be a distraction for a while in 2021. However, I think if there's a sweep, and there's not a Senate controlled by the Republicans under a Biden presidency, I think they're one of the highest and really most urgent priorities will be to change the tax code. And then the real issue for President Biden is going to be, do they go too far and create the right backdrop for a change in control of one or two, one or both houses of Congress because of the dissatisfaction. We know that we did have a pretty healthy economy a year ago, less than a year ago until the COVID came along. And if we have continuing drag from COVID, and in tax initiatives that have been on transferring wealth and altering the allocation of capital to imported industries, including oil and gas, and overreach by the Democrats in how they implement the changes they want to make could backfire. But we won't be able to judge that. I suspect until the third or fourth quarter of next year, when we really have something self-centered to analyze. But there's no doubt in my mind that they do plan to make changes. And to some degree, they'll be able to make an argument that it's needed, because of the unusually aggressive steps that have been taken, including by a democratically controlled house to try to force even bigger allocations of capital in the final stimulus bill here. They were now looking to see whether it's going to die a natural death, or and if it does die a natural death here, the next outcome may well be the Democrats looking to create something additional next year to offset what they want to do on the tax bill. What about market sentiment and sentiment from investors? Because if there's a deliberate, you know, even if nothing happens around taking away a lot of the favorable tax codes for oil and gas, just the threat of it could create uncertainty to where someone's not going to want to invest in 3 to 5 to 10 year plus project. Do you, outside of speculation, can you kind of talk in kind of a general terms, just what a Trump presidency versus a Biden presidency would mean to the capital markets, which are already largely shut off to oil and gas, and kind of from that perspective, let's take a look at that. Yeah, I can. And basically, I think that we're going to be looking at a challenging time. You know, we have to remember that even before COVID hit, there was a buyer strike on Wall Street for the long-gast sector. The great success that occurred less than 6 million barrels a day of oil output in the U.S. was overcome and with new developments in the shale revolution, and some degree of significant new production in deep water Gulf of Mexico, we went, we advanced fairly expeditiously from the mid last decade. Actually, I have to think in terms of other decades. I'll use the years. From about 2005 or 2006, when we hit a low of less than 6 million barrels a day in the U.S. Over the following decade, we reached a high of almost 13 million barrels a day. And last year, we had early this year, I should say, we crossed into 13 million barrels a day. So, we more than doubled our output. Well, so another thing kind of, and then we'll move on to some of the other broader topics. We talk about capital gains because that I've seen kind of firsthand in conversations, both corporate A and D activity starting to uptick. There's been some mergers, and I don't know if capital gains is a catalyst to try to get those discussions to get inked. And then on the mineral side, which is where I'm spending a lot of time, I've also seen an uptick in individuals wanting to sell their minerals before November, just because they're uncertain about an increase in capital gains tax. So, you, peachy partners is an A&D advisory firm. Any insights on the A&D markets and the impacts of capital gains tax policies? We're definitely, I think number one, I do think the prospect of cap changes in tax policy and tax rates is a motivating factor for some people. There's a demographic motivation because we're beginning to see more aging and therefore people who are beginning to plan for their retirement and looking to provide some degree of certainty in their retirement programs. So, I think all of that is a factor, but in addition to that, I think the buyer's strike that I mentioned a while ago has also changed the attitudes of people. And I think people realize that even when we get through the challenges of the pandemic, they may want to be thinking in different terms. One of the issues that we have out there is also what is going to be the global demand growth. And that would say for the last 15, maybe even 20 years, people could take pretty good comfort in the notion that there's still several billion people out there living at a subsistence level. And with normal growth in the global economy, more of those people would want to see an upgrade in their life with more ability, in quality of life to consume more. And as they get the benefit of economic growth, being able to afford it, COVID gave us a real shock effect in
March and April when we were looking at daily declines that were very large. And so there's a memory of that. And to the degree we're talking about a second wave, even in 2021 I think we're going to have concerns. But as people think about positioning for 2021, that's a factor that would enter into their thinking as well. So it's both the possibility of significant tax rate changes, but also concerns that the current enthusiasm in certainly in Europe and to some degree elsewhere in the world for renewables and various measures involving solar and wind challenging traditional fossil fuel alternatives is out there. I tend and many in the industry that have tend to think people are seeing the future too soon, but there are those who argue when the change starts you can sometimes be surprised by how fast the change can occur. And certainly in a democratic administration they'll be looking to do that. They do I'd live in a state Colorado, which is democratic controlled. And there's a lot of people from academia who believe that more renewables sooner is always a good policy. And there are times when I would debate that, but to the degree the election gives us more people in government that have won on that kind of a theme, it'll be a factor as well. So on that let's transition. I want to talk about climate change before that. Just real quick, you mentioned Colorado. I think the state level is something where when you hear people concerned about democratic policies versus Republican policies at the federal level, the state level is where you really can have some policy changes that drastically impact day-to-day business. And Colorado has experienced that in the last few years, do you foresee either in November or in two years from now any massive disruptions at the state level? And I guess you can talk about Colorado if there's anything in the Northeast. And then New Mexico has got a big focus on it right now just because of the federal lands, but it's largely a blue state dependent on all gas revenues. So that's an interesting one. But any comments on the state level governments and then we'll transition on? Yeah, well already there have been changes proposed and well along to being adopted in offset rules for drilling horizontal wells. And it would be if they follow through on this, the oil and gas commission that has come up with it is going to have, I think, an adverse impact on the current operators and reduce the amount of drilling that they can do. And it's already down because of prices, but this would be further undermining of what can be developed in the relevant timeframe. When, as an if we have a recovering oil price environment that would normally incentivize reallocation of capital to this sector. So it is a serious issue. I think there's a shock effect of what's already been announced because they're talking about 2000 foot offsets versus what's traditionally been typically 500 feet. So you're quadrupling the size of the offset. And when you work through that on the best rock that is yet to be developed for operators, it's going to truly stretch out and reduce actually absolutely reduce the resources that can be developed in a timely way and do it in a way that Colorado has some of the same issues as New Mexico in that this industry has been a source of important funds for state government programs. And there's a degree of complacency that I think I detect almost daily in the press. That's okay because we're going to become a lot greener state. We're already a blue state. We've gone from red to blue. Some would try to argue it's still purple, but it's hard to see it these days. We've gone to blue. And we're going to go to green in terms of wind development and solar development. How much of a smooth transition that represents I think is a very debatable proposition personally. And so I think probably one of the most politicized things at least in the primaries was the band on fracking. If you're in the oil gas industry and you watch the democratic primaries, it was kind of terrifying. We all have a head on our shoulders and can say okay, a lot of that's political rhetoric. But nonetheless, there's some pretty bold statements. The world's coming to an end and you have to band fracking. You have to band fossil fuels all this stuff. If anyone's watched the last, what was it with Kamala Harrison and Mike Pence? She reiterated multiple times. A Biden presidency will not band fracking. And she even went further to say they'll revisit the impacts on federal lands. And so that's a totally different stance. It's a walk back in many ways. Outside of the rhetoric and getting on the kind of saber rattling, if you may, what's actually possible? Can you peel that back? Because there's a reality and perception reality in it. When I speak to folks that are very active in the DJ and very active in the New Mexico side of the Delaware, they're not as concerned. And so the folks that are diversified across multiple basins and have the option to play elsewhere just put a pause on these areas because they can avoid that risk and go somewhere else. But the specialist in these areas really see as an opportunity to double-triple down. So yeah, some insights on what is actually possible, how hard is it to do this stuff that the politicians are saying? And is there risk of fracking? And you know, federal versus private lands, all that? Well, it's interesting. Let's talk about Colorado a little bit here. Initially, the current governor, who was a member of Congress before that, our current governor was a strong supporter of some initiatives to really diminish the degree of activity. And it wasn't an outright ban, but there were initiatives. And Colorado is a state that has an initiative process. It's relatively easy to get things on the ballot. And so there were two rounds of that in the last seven to ten years. And in both cases, there was a big education program by the industry and the electorate responded to that and the initiatives did not carry. But what ended up happening is that enabled the current governor to run a successful campaign succeeding Governor Hitt can loper. And then there was a sense of relief when he named who was going to be on his advisory council on the on-guess council. And it turned out once the council came in, they actually found a backdoor way. There's no ban on fracking per se. There's simply a significant diminishment. My guess is that that may become a pattern that we also see and that will enable Kamala Harris to successfully in a way, duck the question or diverted the question and not let it become a decisive issue in the national elections. But the anti-oil development theme is strong in the Democratic Party. It's all part of the belief that we need to go green and go big green with lots of subsidies and other things to make it happen sooner and faster. So I think it would be somewhat polyanish to think that the industry would be out of the woods after the election because of that prediction. I think we'll see a series of things that are somewhat naive as to how much they disincentivize people to consider continuing to drill. Obviously, if you've got leases and you're going to lose the lease, you want to establish a help by production status. So people with that will look to do that to some degree. But you know, if you told me a year ago, while this in the election year is going to be a lot of talk about banning fracking and so on, what do you think is going to happen? I would have seriously, as George Bush would say, underestimated the impact because you know, things were still going along pretty swimmingly. But that was also in a recovering oil price environment. We'd gone to the lows, $26.40 after 2015. And then we recovered back to $55.00 oil and had periodic forays into the '60s and up on occasionally into the '70s. And what we learned, of course, is self-correcting forces kicked in on that and took us back down. But then the COVID scare of March, when it looked like not only was there going to be diminished demand, but the inclination of the two most important exporting countries in the world for oil, the partnership that they had forged back to overcome the mistakes that were made by OPEC Plus in 2015 was falling apart. And so there, the first week around the seventh or eighth of March, we had a situation where suddenly the 33, 34-year-old Crown Princess Saudi Arabia told Putin he thought that the two of them should really join together once again to rebalance supply demand. Putin said, "No, I don't think so." And $40.00 oil went to 30, which I think he expected. But it didn't stop at 30. It went like a hot knife through butter down to test below 20. And Putin had a, an epiphany that maybe they do need to cooperate with each other, that being Saudi Arabia and Russia. And so they credibly put together an OPEC Plus consortium again to rebalance supply demand. So I think the combination of what's happening politically with this fear of the worst case possible effects of climate change and the immediacy of that threat are really hitting the policy makers, especially center left and further left. And to the degree, they're figuring out how to win
some elections and maybe the big one here in this country, I think we'll still have an issue. - Do you think, let's paint out a hypothetical? So Biden wins, they through kind of back channeling policy without banning, fracking, slow it significantly on federal lands in the US Gulf of Mexico, 'cause that's really what they have, the most immediate ability to affect. - Do you think, there's theories out there when I talk to folks that say, we're gonna get private lands in the New Mexico Delaware. We're gonna get private lands in the core core basins back in the equal fird Midland Basin Permian, because you know, and then you can look at gas as well, a hands-ville appellation. Because we feel that the dollars that we're gonna be allocated to those offshore Gulf of Mexico and federal lands are now gonna get reallocated towards these private lands. Therefore, this could be a net positive for certain areas. Do you think that there's too many layers in between is that a simplistic view of the world? - No, I think there is something there. Let me put it this way. First of all, look at the red count. The red count is so low today that to the degree there's some truth and there is that some players in the industry have private lands under lease that they can still develop with relatively smaller constraints on them from an operating standpoint by government. So that is where they'll go. And frankly, we're so low right now in onshore drilling in the US that it doesn't take a lot of that for next year to be above this year. And maybe another year after that to be above next year. So I don't rule that out. And I think for those who don't have too much debt right now, in other words, are not on the candidate list to have to file for restructuring a euphemism for that chapter 11 term. But those who don't, I can see that happening. And we do have an active program of restructuring going on for those who've run out of optionality. And one of the big changes that has occurred and it's an important one is that a lot of mistakes were made in chapter 11's done in the aftermath of the price collapse after the Thanksgiving surprise of 2014. So in 2015 when some of the companies went bankrupt, the bondholders only equitized, only converted from debt to equity enough to have the analyses look like now you're normally positioned in terms of your debt equity ratios. They didn't count on a second down wave like COVID-19. And so the more recent ones are, in some cases, involved companies that went through a chapter 11 in 2015. And the bondholders who find themselves this time around going through a second one are actually initiating saying, we want to over-equitize because we've come to realize this is a cyclical capital intensive business. And so we need to get the debt levels right size for these enterprises that we have confidence in such that they can not only can they do well on average, but they can actually survive the periodic down dip that occur. So I think I could see there's some signs of a recovery next year. I don't think it's going to be up up in a way, but I actually think it wouldn't take much. And when I say much, I'm talking about price incentives, $48 oil, I think would bring on some drilling programs that don't make it a 38 to 42 because to the degree we're in a tighter volatility ban for oil prices, people are beginning to think this is the new norm. If you got to a one that was around 48 and people begin to realize, oh my downside may only be 45 or 46. My upside may be 50. And boy, can I hedge it 50 on the kinds of things I want to drill in a $48 environment? So I think there is some basis for what you're talking about and some of the factors I just add to that. The last thing on climate change before we move on to geopolitics and wrap up the episode is infrastructure. Dakota Access is a recent example of this. We've already talked about New Mexico and it's a blue state and there's a lot of federal lands. So there's a lot of infrastructure needed in New Mexico side of Delaware, Northeast. It needs a lot of gas infrastructure. Is that more state driven? We saw Obama ban keystone through his presidency. So clearly there was a blockade there. How aware on the priority list, you can use your political capital and a number of things. Does a Biden presidency and a Biden Senate use their political capital on blocking all gas midstream infrastructure or is that further down the list? How concerned should people be about that when assessing and underwriting risks on project? I think relatively big projects are going to be more suspect in a democratic success. That's why I say President Trump, if Trump wins narrowly and keeps the Senate, that becomes very much business as usual. And I think be a real return to wanting to post out of the coronavirus with policies that would be good at the federal level, but also would be consistent with encouraging state level initiatives and state level regulatory, lighting and state level regulatory oversight where it might otherwise become much heavier in a democratic victory. There are certain areas. One of the problems that we have, you mentioned the gas areas of the Northeast. And there's no doubt that the pollution areas, the Marcellus and Utica, credibly prolific in the wells or the economics best wells in that play. And really, just the average wells in that play are impressive, but getting it to the relevant market is a task. And it's partly political because it's so well developed and so populated. And therefore, there are valid human interactions, human impacts that have to be taken into account. But it is a situation where more than anything, it's a job creating program. So again, I think if Trump were to win, I think you'd see a real heavy action there to overcome the other opposition that's been there for quite a while. And of course, what you really had in the lead up to all this is a situation where the Democrats look to stay as quiet as possible. And part of the whole thing about saying, we're not going to ban fracking by Camela Harris and by Joe Biden is they don't want to, they think they're going to win Pennsylvania. But they know that if they were to be as decisive as they were in winning in the primaries and saying things about fracking, they might not have survived to be running in the main campaign. So at the state level, I think New Mexico has maybe the best chance to have a fairly pragmatic, a democratic oversight, because they do understand that they're having the flexibility that they'll have with the revenue gains if they're pragmatic will be there. So I feel pretty good about that. To the north here in Denver or here in Colorado, I should say, I think something has to happen. And I suspect, we've gone from under 100,000 barrels a day at our production a decade ago, about 93,000 barrels a day as I recall, to almost 500,000 flirting with 475,000 barrels a day and growing. And I think when we get the revenue impacts of what might be a 400,000 plus barrel of a level of production, dropping to beginning to test 300,000 barrels a day, that may be when the moment of pragmatism comes in, if not for the current governor, then for whatever the next permanently elected democratic governor will be. I'm not sure I see a Republican governor who's going to take over from this, but I think the consequences for this state with some of the problems they have with retirement burdens for public employees and so on. The reality of balancing the fiscal budget is going to kick in, but that may well be mid decade or later. Not this year, not next year, not probably not the 23. So now let's shift gears. And I know this is, again, your wheelhouse. Let's talk about international geopolitics. And if you can, Tom, can you, as you go around talking about each point, can you try to tie it back to domestic oil and gas and the trickle of the effect? It could be short term, long term, but I think making that connection will be really helpful for everyone listening. Absolutely right on that. The Shale Revolution went global when people began to realize, hey, the US has gone from six million barrels a day to 13. They've now surpassed the other large oil exporters in total production. And they've backed out a large amount of their own import dependence with the Shale Revolution. Let's keep that in mind all the way through this, because that's what began to change the geopolitics of the Middle East. It began to change some of the power triangles I talked about in my book following oil in the Middle East and in the Eastern hemisphere. And now there's no doubt in my mind that the Thanksgiving surprise of 2015 was at very carefully thought out attack on to bend the Shale supply curve by OPEC and BiOPEC plus mainly Saudi Arabia and the rest of OPEC along with Russia. And they succeeded. They were very successful in getting it done, but in bending that supply curve, they didn't count on the--
second order consequence. And I'll get through this very quickly and then I'll talk about some of the layouts on these as I tie it back. Basically, when you think about what happened is they too quickly caused the price of oil to collapse. And then the pressure in the private sector caused a much more effective learning curve and technological advance in how you exploit shale reservoirs such that the the private sector development in North America got their costs down for developing new supply faster than OPEC could get its costs down given that a big compound of their cost is social programs in their own countries. And it's a lot harder to cut social programs than it is to in a relatively free market of the west of European and then the US to reconfigure corporate entities. And it happened big time. So that's something to keep in mind. The geopolitical things that I'm thinking about coming out of this election really probably I think we're going to be in for a head fake. I think if Biden becomes president, I could see a degree of rock pro shmong between the US and China and some people would conclude gee you know it's not as bad as some of the naysayers were saying. And China might very well start buying more agricultural goods which is something that they've been choosing to do selectively but not predictably and not even in line with negotiations perhaps. They could be doing other things that represent a tamping down of the strained relationships that were you know recorded this week when China was objecting to the US having identified members of the Communist Party who were in the US but not having revealed that they were full time members of the Communist Party for over here on whatever other business they were representing they were. And then threatening to arrest and detain US citizens that are doing business in China and with the idea that they do a prisoner exchange that's a pretty serious combination of polarization and I think a lot of that would go away in the near term but what I really worry about is that China's made a lot of the big moves they needed to make to become a much more feared and dominant force in the Pacific Rim. What happened with the man-made islands was very serious and the US did nothing to counter it under the Obama administration and when you combine that with those man-made islands that have now been fortified and you combine that with the technologies that have now been implemented to build hypersonic missiles for a 7,000 miles per hour but hyper hypersonic missiles. What you're dealing with is a real neutralizing of the ability of the US Navy to be a stabilizing force in the Pacific Rim along the lines that it enjoyed between the end of World War I, sorry, the between the end of World War II and 9/11 and 9/11 was a pivotal point and China began that program with the islands and so on. So that's a big part of their game to be a much more dominant player and I think that then raises questions after the full subordination of Hong Kong which is happening as we speak. The next goal is to deal with either co-opting or co-ordering or just really diminishing Taiwan as an independent player. They're daily incursion not every day but I would say several days a week incursions on Taiwan airspace right now. Nobody's dropping bombs on Taiwan but they're sort of signaling when we get done subordinating and subjugating Hong Kong, you're next and I think that's a message that is not being missed by Taiwan even though there's a very strong anti-reunion of Taiwan with China but that's a big goal of Chairman Xi and I- Let me say this time so you know, stranglehold of power on the Pacific Rim. Taiwan's next Hong Kong you said that China's mobilized full naval operations in the South China Sea, China and Iran have kind of mobilized naval operations in the Indian Ocean. What does that mean for domestic oil and gas? Tidal back. There's one other element to fully answer that and give you that tie back. At the same time they're doing that China has a very sophisticated program to be the dominant player in Africa and they're well on the way to doing that. They are also they've got a very sophisticated program to become an important player with Saudi Arabia on nuclear. The US can't do that. Saudi Arabia for the US to aid Saudi Arabia nuclear power would meet big objections in the US Congress because the fear would be that Saudi will want to have a nuclear weapon in order to counter Iran's programs to have that. So you combine that China is making is working very systematically to take traditional US allies in the Middle East involving Saudi Arabia and some of its allies, UAE, Kuwait, etc and have programs there and it's mostly soft power with economic clout and then combine it with other things that are going on in North Africa where we find that the US traditional allies Egypt and Saudi Arabia on certain issues like Libya. The support for the rebels in Libya is coming from Egypt and Saudi Arabia and so China's got a program to do that. They've also got a program to play Iran and Saudi Arabia off against each other given the enmity between the two and where they can be if you will the go between and the source of stability. So all of that says the US needs to make sure that we have a practical pragmatic and effective program even as we do some things with the renewables and we do them at a logical pace of advance for renewables but in our energy portfolio but we also really need to make sure we don't try to undermine we're highly competitive in developing our natural resources in oil and gas in a way that is environmentally responsible and effective in making us less dependent on trade routes from the Middle East to the west coast of the US and certainly less dependent on being a military source of stability in that part of the world at great costs and where a lot of the look backs that are critical of some of the policy mistakes and the mission creep and so on are not repeated in coming decades and don't have to be repeated because we are competitive as an energy source. So that's the type of yeah that's interesting so you know put another way kind of on your point of renewables if there's a distraction here you virtually affect domestic fossil fuel production you put these subsidies in place for renewables we lose our place in the global race for energy supply and then let's just say a Biden presidency comes in it negatively impacts the industry and the overall economy and Republicans come back in four years and try to reverse that maybe it's too late and you start to lose some ground that you can't make up because of a lot of these international chest moves that China is making that take decades right that's exactly right and I'll add one more to that China and Russia do have a coordinated effort to try to create a different world currency than the dollar and they've been buying gold and they they're building the gold reserves they're building a eastern hemisphere trading market in oil they will strengthen their economic importance to the key suppliers of oil coming out of the Middle East because they're the key market as opposed to the US. One of the things we haven't talked a lot about is as we become more independent more oil independent and gas independent that diminishes our the role of the dollar in pricing oil so far we haven't seen it but if you study what China's doing in building its argument for a more actually more credibility for the one for the remember if you will it's all tied to that as well and they've got a sophisticated long-term view of what their goals are and on 2030 I think there will be Chinese dominated Chinese created markets trading in currencies away from the dollar the strength of the dollar turns on the strength of the US economy in terms of future global growth and it has to be a key part of that it's whistling past the graveyard for those who think well if we just go full bore to renewables we'll be fine China's going to be challenges because China's already made a major move because of their labor cost advantage in solar part and they're looking to do it in wind but their labor cost advantages they have peaked in that and that's going to come back to Hanan in my view. So on the topic of China the US China trade war has been a very big headliner in the Trump presidency can you talk about kind of the trickle that impacts of that I think one thing I'll comment on we've been talking about oil a lot is the LNG markets and I know that there was a lot of developers in Gulf Coast LNG that we're looking to secure off-take contracts from China and when the US China trade war took place that was really off the table and you know when we talked about this offline you said well it looks like US LNG isn't really needed by China anymore they've diversified another the new end markets are going to be South America and Europe and that plays in the geopolitics as well with Europe needing alternative to Russia and so it all kind of ties together but yet can you suss that out a little bit because that's important for the Haynesville that call Haynesville one of the more active plays right now very very right no you're exactly right and you know and then some of the relief that's come recently we had a big overhang of gas looking to come out of the premium base and get to the Gulf Coast
so it can get on some form of as LNG going to international markets. Predominantly, the hope was for China and for other Asian markets. Number one, to the degree that Chinese desire is to throw their weight around in the Eastern hemisphere, in the Pacific Rim. There are other relevant markets. Certainly, Japan is still in that condition because of the nightmare scenario that came to them with their loss of nuclear capability, with that terrible tsunami. But Japan needs it, Taiwan needs it. It's certainly Indonesia and elsewhere now is seeing declining gas supplies. So there's enough cases in there where there's some niche markets for US LNG. But first and foremost, I think a lot of the LNG will come out of the northwest shelf of Australia. However, China's willing to be pretty heavy handed in what they do. So right now, China, because of the alliance of Australia with the US on a lot of geopolitical issues, China is punishing Australia. It's at least Australia's calling them out for it by interrupting and negating cold purchases from Australia. And it's a way to signal, look, you may like to align yourself with other English-speaking countries like the UK and the US. But you understand we're the market for some of your resources, some of your mining exports. And we can go elsewhere if we choose to. And so there is a heavy handedness to that that's there. And to the degree that occurs, it incentivizes even the northwest shelf of Australia that compete more for some of those other markets in Asia besides China. China has got such a bad mark for systemically poisoning its people with bad emissions that they really did buy into the notion. Let's buy more of this LNG and both our own natural gas as well and clean up the environment. And they are working on it. They've talked about, I think, at 2060, as I recall, carbon neutral goal. That's 10 years beyond what many people are talking about. And in some cases, it's 20 to 30 years beyond what other people are talking about. But they, at least, officially awaying into a goal, which is more than the US has done in most cases so far. Although private sector companies are certainly beginning to do it here in the US. So that's another story to be told. And we'll be an important one. I do think one of the big things that people miss is if you want to have the kind of magnitude of wind and solar, you have an inter-mintancy problem. Let's maybe wrap up on this one. But the inter-mintancy problem is still there unless you have reliable, relatively attractively priced natural gas development. And that's a case where, in many parts of the Pacific Rim, the markets that are there that want to have renewables will need to deal with inter-mintancy. And inter-mintancy, of course, is when the sun doesn't shine and the wind doesn't blow, you better have something else that can fire up quickly to make sure you have reliable supply. And whether it's coming from your solar panels or your wind, windmills. And so that's a big one. And that's one of the reasons I haven't totally given up on LNG. But I do think the power lines are there. And one final thought on that is Russia is likely to challenge the degree of market share that US natural gas takes away from Russia in the 18 regasification facilities that are in Western Europe now. So it'll be a market that works. And we're now going through in LNG what happened in the US when we went from point A to point B delivery of gas to interconnected pipelines and therefore a highly flexible delivery mechanism that caused us to see very high prices created in the '70s, $10, $12 gas per million B to use coming back down to today's prices, which we've had a good rally in the markets recently with 280 gas today, say. But sub three dollar gas compares with a lot of times when there was a lot of optimism around $45 and $6 gas. We'll get back to that again someday, but not right away. Awesome. And just closing comments, Tom, I really enjoyed this. Whether it's a Biden presidency or a Trump presidency, can you lay out what you think of the top priorities geopolitically abroad? And you know, I'll wrap up in one comment that I think there's no doubt that the Trump presidency has been unique in its treatment of allies formally. And I can speak first hand just sentiment abroad has gone down on the US. You can say what you want about Trump, but just our reputation and credibility for keeping your word or just the way kind of the flip-flopping or the uncertainty of it. There's a bit of a stain on the US at least in the shorter term. Do you think that affects our ability, regardless of who's present to implement the plans that you think we need to move forward on? It does. And you know, I would hope that let me put it another way. Let's take the Biden case. Biden, I think, will early on if he's president have a real outreach. He's not oblivious to the challenge of China. But I do believe one thing that I would like to see if Trump were to win, it would be for him to do something that Biden's been promising, which is to renew and restraint them, reconstruct and restraint them. US alliances with the critical players in Europe. Trump's arguments about how much Europe played against us and how much our friendly enemy, if you will, has not been constructive. And I would hope that that'll be there. The problem I have is that I do think one has to have in the president of the United States a long term vision. And I'm worried about the conflicts that a Biden presidency would have in both fashioning a long term vision about the potential existential threat to the US as a force of good and stability in the world. And so to be successful, a Trump administration in its second term needs to go at it differently. I'm just not sure since I'm a year or two older than Trump and a year or two younger than Biden. I probably am a good gauge and I'm pretty fixed in my ways and I think both of these candidates are fixed in their ways. So I don't know if it's going to be very realistic for them to make much of a change. In the case of the Trump presidency, I think Mike Pompeo, who graduated from West Point as did I may have the geopolitical wisdom and technique to help change that in a Trump presidency. I worry that the leading candidates that I understand might be candidates for Secretary of State in a Biden presidency have a fair amount of baggage because they had intimate involvement in the misjudgments that resulted in the Benghazi execution of a US ambassador because of the failure to anticipate the problem and when it occurred to react tying a timely way to the problem. And that's just one of many mistakes in judgment that were made not just and made basically back during the Obama administration on the international side. So in the near term, I think Biden made a real sigh of relief because Trump's bedside manner, personal style, whatever you want to characterize it doesn't win you popularity. But what he did to make NATO pay more of their way on defense is commendable. What he's done to be much more effective than any president in the prior five or six presidents to actually push forward an initiative that might actually bring more peace in the Middle East is being way underestimated by the general press. But time will tell we'll see what he's achieved so far and what I think he could achieve with that initiative in the next couple of years in a second term needs to be considered. But I have to agree with you that when you speak undiplomatically to your traditional allies since World War II, you pay a price and he's paying that price right now and we're paying that price as citizens right now. So I would certainly hope for a change on his part. I think President Biden, if he comes president, will have some initiatives that'll be helpful there and we're really going to need it because he makes a very credible case to me that if you want to be effective in countering the existential threat of China to Western Europe and the United States, you better have a closely aligned United States and Europe fractured as it is. The European Union has to be our ally in that and making them a second tier enemy is not a great way to go. Well, very good time. I want to thank you again for all your comments here. I mean, it's an interesting time in this day, and we had an hour and a half conversation about politics that was not emotional and I think you did a great job at laying out perspectives and facts and historical references and just trying to give a little bit of guidance and get some clarity to everybody on what's out there. And what the implications are and whichever way it goes. This is something to keep an eye out for. So thank you again for that. It's always a pleasure and we look forward to doing this again at the appropriate time because you're a well of information and it's always pleasure to chat with you. Well, thank you and I'll leave you with one thought. You know, this is the old adage. It's a term called the Chinese curse and it is. is maybe you live in interesting times and we certainly are. So what's the point?
what I say to my partners here at Petri Partners is, the Chinese curse is alive and well, and it's not just the coronavirus. (laughs) - Oh, very good. Okay, Tom, have a great evening, sir. Thanks again, all the best. - Pleasure, I enjoyed it as well. Thanks a lot. - Hey guys, thanks for listening to this episode of the podcast, I hope you enjoyed. The ONGEST Council represents the largest network with senior ONGEST executives and investors in the world. Throughout the year, we leverage our relationships and industry knowledge to facilitate introductions of behalf of our members to help them place capital, buy and sell deals and full new partnerships. You're interested in learning more about ways our team can help fuel your business development efforts. Then please email me at
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