On-Demand Webinar: Inside the Energy Tech Revolution
In this 45-minute webinar, Privcap joined with experts from Trilantic North America, Vortus Investments, and EY to discuss the current state of energy technology, its impact on human capital, and what the future holds for energy companies and technological innovation.
In this 45-minute webinar, Privcap joined with experts from Trilantic North America, Vortus Investments, and EY to discuss the current state of energy technology, its impact on human capital, and what the future holds for energy companies and technological innovation.
Inside the Energy Tech Revolution
With Glenn Jacobson of Trilantic North America, Brian Hansen of Vortus Investments, and Rachel Breen Everaard of EY
Matthew Malone, Privcap:
Hello, everyone. This is Matt Malone. I run the editorial operation here at Privcap. I’m very happy to have you all here today for our webinar on energy technology and very happy to be joined by Rachel Everaard of EY, Glenn Jacobson of Trilantic North America and Brian Hansen of Vortus. A couple of housekeeping matters—there will be a Q&A session at the end of the webinar, so I encourage you all to submit questions to the online panel early and often throughout the conversation. We’ll try to get to as many as we can.
To start off, I’ll have our panelist introduce themselves and give you a bit of background. Then, we’ll get into the program. So, without further ado, I’d like to introduce Rachel Everaard of EY. Hi, Rachel.
Rachel Everaard, EY:
Hi, thank you so much. I’m Rachel Everaard. I am a partner in our oil-and-gas practice and I focus on talent management. We have been working with companies in oil and gas and energy around the talent revolution that is taking place as the industry changes with technology and the impact of the downturn and the (hopefully, coming soon) upturn. I’m happy to be a part of this conversation. Thank you.
Malone: Thanks, Rachel. Now, Glenn Jacobson from Trilantic.
Glenn Jacobson, Trilantic North America:
Thank you for having me as well. My name is Glenn Jacobson. I am a partner with Trilantic Capital Partners, a private equity firm based in New York and Texas. I focus on the energy area, where we invest across the upstream, midstream and services sectors and very happy to be here. I have certainly witnessed what’s gone on during the last up cycle and, quite frankly, more changes during this down cycle that we’ll talk about shortly.
Malone: Great. Thank you, Glenn. Now, Brian Hansen of Vortus.
Brian Hansen, Vortus Investments:
Thank you, Matt. I’m very appreciative to be on the call. Thank you for having me. I’m a principal and member of the investment team for Vortus Investments. Vortus is a private equity firm based out of Fort Worth, Texas, that focuses on upstream, onshore, U.S.-operated invested in the lower to middle market, which we define as sub-$100 million of equity per deal. I’m very happy to be on the call. Thank you.
Malone: Great, thank you. Let’s start off looking at the macro picture. I think anyone who’s tuning in clearly understands that the world of energy, particularly oil and gas, has changed significantly in the last few years in terms of the pricing environment, which has led all types of energy firms—upstream, midstream and downstream—to re-engineer their businesses to be able to make money in that environment. One large way they are doing that is through the implementation of technology.
I wonder if you could all give your perspective on how that evolution has occurred. What are some of the technologies being put in place? What are the outcomes we’re seeing? Rachel, if we can start by just giving your sense from your clients how they’re grappling with this new price environment in the context of technology.
Everaard: Sure. I think what we’re seeing is that certainly there has started to be a resurgence in looking to implement technology—particularly refreshing ERP systems and also the introduction of robotic process automation with the lens of trying to increase efficiencies. Given the downturn, when there was a lot of cost-cutting and a sense of trying to make sure companies were as lean as possible, particularly in support functions like IT, the desire as we look to the upturn is to keep those support functions as lean as possible. And one way to do that and to keep costs down is to increase technology. Certainly, from what we’re seeing, there is an increased focus on meaningful technology spend—implementation of new ERPs and robotics—as a way to help minimize some cost increases.
Malone: Great. Glenn, what are you seeing out there?
Jacobson: Yeah, focusing on a bit of a different lens here. What we’re seeing out in the field and with our E&P end-service companies has been a continuation and acceleration of the trend of more intensive and complex well completions, which, to a certain extent, would have been a natural evolution coming out of 2012, ’13 and ’14. But, actually, rather than the pace of evolution decelerating during the downturn, it accelerated. So, what we saw three or four years ago in some leading-edge basins of lateral lengths of 4,000 to 5,000 feet and 10 concentrations of 600 to 1,000 pounds per foot in terms of fracks, we’re now seeing 8,000 to 10,000-foot laterals and anywhere from 1,500 to 3,000 pounds per foot of profit concentration and completion.
So, on the E&P side, we’re seeing a drastic increase in the use of fracking technology and continually changing in the mix. On the services side, which tends to be the more labor-intensive side, we are seeing the beginnings of using some automation technologies that will, I think, at the end of the day, improve margins and perhaps displace some of the need to rehire folks in an upswing. Although I’d say those are early days and we have a few examples of those that we could certainly speak about.
Malone: Great. Brian what are you seeing?
Hansen: Thanks, Matt. I’d echo what Glenn said. If you look on it from the upstream basis, we’ve certainly seen a huge move in continued improvement in technology with a big focus on the completion of a well. And one thing I’ve always liked about being in the commodity business is that it’s fairly simple. You want to be the low-cost producer. And, as you think about how technology has been applied across the U.S. in many of the shale basins, it tends to improve the economics of each shale play across the board. So, a technology such as pumping more sand per well or adjusting your cluster spacing or a longer lateral may be proven out in the Barnett, for example. Or it may be implemented initially in the Permian, but it tends to have a broader impact across the United States in that it will be applied later in the Bakken, for example, and improve economics there.
Malone: Glenn, I’m wondering…you alluded to some, but are there particular technologies that you think have the greatest impact on efficiencies?
Jacobson: I’d say part of this is process technology, so to speak, in that there’s a lot of different ways you can complete a well in terms of what chemical additives you use. Whether you use gel frack or slick water frack, a foam frack, in what combination the sizes of sand you use. So, a lot of what we’ve seen over the past few years has been fine-tuning those completion recipes. And, quite frankly, in fine-tuning them, they’ve gotten larger and larger per volume of rock that we’re trying to fracture.
There have certainly been some other technologies involved in this as well. One thing that doesn’t get as much focus is the improvement in drilling time that we’ve seen. People talk about cost-cutting and better results in the E&P space and we all have to reflect that some, if not a good portion, of that cost-cutting came as a result of simply driving down the prices that E&P companies are paying to service companies. But other efficiencies have really been driven by, again, what we talked about on the completion side by lowering drill-cycle time—everything from better drill-bit selection to better seismic imaging to find out where there are geo hazards to better rotary steerable tools, which help you get through your curve and your lateral section faster.
These are all things that take drilling days three or four years ago in some of the leading basins from 30 days to drill a well down to 15 days to drill a well. So, even if you go ahead and increase rate costs and other service costs by 20% or 40%, you’re not going to redouble the time it takes you to drill a well. These are permanent efficiencies gained by the industry. It’s like what we see year over year may seem new one year versus the next, but none of this is new if you look at the 100 or 150-year history of onshore drilling in the U.S. We, the industry, have continually improved recovery factors in any reservoir they’re drilling into year after year. Eventually, we get to the end of the sequential improvements and evolutions changes and something revolutionary comes around. Those are tougher to predict, but these evolutionary changes have just been coming faster and faster by way of necessity for survival in this downturn.
Hansen: I would like to just add to some of what Glenn touched on about improving drilling times and drilling costs. Another factor on top of that is not only are we getting the wells cheaper and faster, but we’re getting higher quality wells. I’ve got a background with oil-and-gas operators as well, and you have this history of this continued dynamic or battle between the geologist who tells a driller where they want the well placed and the driller who has to execute on that. The geologist gives the driller a window and it might have a height difference of 100 or 200 feet and the driller wants a really flexible one.
It turns out that not every 10,000-foot well is equal, if a certain percentage of that well wasn’t landed in the optimal rock. So, with improved drilling technologies and improved rotatable steerables that Glenn mentioned, you’re able to place the well more specifically where you want it. So, the geologist can give the drilling engineer a 50-foot window and expect to have 100% of the well landed in that interval and at a very straight line—undulations in the well-bore matter. That’s a case where improved drilling technology is improving the quality of wells as well, not just the cost and time.
Jacobson: Interesting, really good points. The interesting thing with some of those windows, and this actually goes back to what Rachel was saying at the beginning, is that a lot of what goes into geologists determining this is really the implementation of a ton of data analytics, whether it’s—I hate throwing around the cliché of big data, but effectively the ability to build incredibly robust data sets using publicly available information and complementing that with privately available well logs and cores and putting it into these incredibly sophisticated software programs like Petra or Geographics, which get better year after year.
Certainly, even small companies are investing reasonable portions of their G&A budgets—hundreds of thousands of dollars a year in five-person organization—to make sure they have access to both these public databases of raw information as well as these software programs that are able to crunch this data so that we can go from “Hit the 1,000-foot Wolfcamp” to “Hit this 10-foot thick porosity streak in the Wolfcamp,” because that’s what’s worked on these wells.
Hansen: That’s a great point, Glenn. Just a real-life example—I was with Pioneer Natural Resources for a while and, after drilling one of the early horizontals in the Permian, we had a pressure-monitoring device in a nearby well to monitor performance over time. It took real, live pressure data every five seconds across a 5,000-foot well bore. So, it ended up being a ton of data and it was delivered to us by the service provider who we used to get that data. It was too big a file to email or to even transfer online. He delivered it to us on a hard drive. It was a one-terabyte hard drive just sitting on the desk and we all sat around staring at it, not knowing what to do with it.
That really ties into some of your early questions on how does this technology change the industry? Well, it’s a whole different type of skill set to analyze it, because you’re no longer strapping the tank to determine how good the well is. You’re looking at a terabyte of data from one well and how to properly analyze that to improve completions going forward.
Malone: Thanks, Brian. Sorry. Go ahead, Rachel.
Everaard: No, I know we’re going to get into this, because I was just about to go down the skill-set path. But, Matt, if you want to tee that up, that’d be great.
Malone: Yes, I think that that’s where I was planning to head next. All of this has implications for the human capital, for hiring with these firms, the idea being that we’re probably looking at more highly skilled labor oftentimes to handle this new technology. Also, in that context, I wonder if we can get into a bit about the impact? We focused on the E&P side, but this has implications across midstream, downstream, oil services and other areas. Starting off with Rachel, how is this impacting the hiring practices of energy firms? Is it up in the sector? What are they looking for?
Everaard: Sure, I think it really is. It hasn’t yet, but it is starting to transform the skills and capabilities needed. I think we’re on the cusp of seeing hiring in a very, very different area. Technology is new—it’s been coming in over the past three or four years is where we’ve really seen a focus on using new technology. And now, as things are orienting back up, particularly as we’re starting to see some things ramp back up for some of the services sector, the skill set they’re looking for particularly in drilling is more technology.
With the rise of remote operations, it’s really people who have the skill sets to be able to be onshore, yet still operating equipment or monitoring equipment. And it is a background in technology, so they’re hiring more people coming from engineering but with an IT focus than they are really looking for traditional operators or technicians. That’s going to be very meaningful when it looks to who you’re hiring back. They’ll still be hiring back a lot of the same people who might be out in the field. It’s certainly not going to be in necessarily the same numbers, because they’re going to need different skill sets.
It’s going to be interesting as we see, over the next year or two, how the industry is going to have to change and really think about not hiring from traditional places. While they may still be recruiting from some of the core oil-and-gas schools, they’re also going to have to start looking broader at programs that are focused more on IT and technology and looking for people from places they didn’t traditionally recruit or hire from.
Hansen: I think that’s a great point. Just to add on to that, where companies are hiring from and how it has moved away from more of those traditional sources—I got a petroleum engineering degree from A&M and, thinking back to the reservoir engineering classes I had, they all focused on conventional rock. When you think about oil-and-gas production today in that the dominant source of low-cost supply is from shales, it really involves a hybrid of multiple technologies. Importantly, it involved reservoir engineering in that you’re still flowing oil and gas through rock. But it also involves a lot of civil engineering, as you think about rock mechanics and how you can most efficiently and effectively break up that rock. That’s a skill set that—as the U.S. turned to shale production—was predominantly in the service sector in the Halliburtons and Schlumbergers of the world that had done most of that hydraulic fracturing.
We’ve seen that in big—you look at the operators and they’re pulling that technology out of the service providers, either paying Halliburton to do it or trying to get the key employees to join the operating company.
Malone: Glenn, how are you seeing it impacting your investments?
Jacobson: I think we still tend to believe in a mix of core and multi-discipline experience combined with people that may have a single—a more techy background. Even as it comes to the geologist example that we were speaking about earlier, we still see a lot of value in having both the old draw-map-by-hand approach combined with the terabytes of data approach. The reason is, for one, there’s just no substitute for experience. But two, I always think about it as a bit of a sanity check and that it’s good to have someone who understands a real macro picture of how rock behaves and how depositional environments formed and evolved, combined with someone who’s plugging a bunch of data into a program that’s a bit of a black box.
You don’t want to come up with an answer based solely on the data that has no bearing in reality of any formation we’ve ever found or dealt with before. Again, that’s one example on the geology side where we like to have both. But I’d say that permeates throughout. You need someone on the drawing side and on the completion side who understands how new tools and technology work. You also need someone who’s been in the field for 15 or 20 years or more who’s seen when things have gone wrong and understands how to solve issues. It’s really a mix of skills and, for us, I don’t think the other folks on the phone agree that we don’t see a new generation of 22-year-olds with comp-side degrees replacing the experience out in the field, but more as complementing it.
Malone: Is that what you tend to be seeing, Rachel, as well?
Everaard: Absolutely, absolutely.
Hansen: I would completely agree. You look at the abilities that technology give you to implement any solution you have faster—they also open up the risk of implementing mistakes much faster, as in the world of copy and paste or dragging down a formula. Having the ability that Glenn mentioned of being able to draw it by hand and that sanity check—that’s the skill set that the younger 22-year-olds are not going to have. They’re going to have to lean on the more experienced experts in the field.
Malone: Right. And it may just be those experienced professionals upgrading their skills to be able to do both. That may be an answer for many firms as opposed to looking outside.
Everaard: Right. I think that’s where you’re going to see lots of companies focusing, because people want to work longer, so you haven’t seen the surge in retirements as was expected. It is going to be some retaining and re-skilling of the workforce, which is going to be somewhat challenging in figuring out how to change a paradigm that people have ways of working for 20-some years. But I think it’s a big opportunity because you don’t want to lose the knowledge of the company and the industry, so making that effort is something we’re seeing companies start to think about in how they’re going to do that. Because retraining a workforce that’s very experienced can have some challenges, just in how to train them. What’s the best form for doing that, right? [Is it] in-person or e-training, as we’ve all been working toward? I think we’re starting to see companies really try and tackle that challenge and figure out what’s going to be the best way to retain that element of the population.
Malone: Rachel, say we are looking for skill sets that perhaps are not amenable to retraining at a certain point or they are looking for the young, very tech-savvy individuals. Are you finding that the supply is there? Are we creating enough people to satisfy the demand today? What may become increased in the future?
Everaard: I think what we’re seeing is [that] it’s less an issue about supply but more an issue about increase in the industry or interest in the industry. What we are seeing (and we are just about to publish some research around this) is that the new generation coming in—the millennials—while they may have the skills, they don’t necessarily see oil and gas as an attractive industry from a long-term employment perspective. I know companies are very, very focused on how to change that and how to make the work environment and the industry seem more attractive to get people with technology skills more interested in coming to live in cities like Houston or Oklahoma City where a lot of oil-and-gas companies operate. Also, in changing their comp benefits, work environment and culture to make it more attractive for that group as well.
Malone: Great, thank you. Before we move to the next topic, I just wanted to encourage everyone listening in and remind them that they can answer questions. We’ve got great panelists here, so please use the opportunity to get their perspective on anything that’s on your mind. Now, let’s move on to the next section, which is looking at the future. I’d love us to spend some time both on the technology front and the hiring front, which we’ve touched a bit on already. But what are we looking for? What are the expectations—Brian, starting with you—for the next 10 years? I think we’ve seen—and you can all disagree with me—some pretty significant leaps over the last two or three years in technology deployment and efficiency. Do we expect that to continue in the next one to three years? What does that environment look like right now, Brian?
Hansen: Sure, Matt. I would not expect it to slow down at any time. When you think about the evolution of oil and gas, and if you go back 20 years, the big hurdle was finding the oil-and-gas field. It was conventional reservoirs after you found it, and you drill a well. It was pretty straightforward after that. The rock flowed naturally on its own and you didn’t need very many wells to drain the rock. Looking forward to the future, you see more companies committing to one or two areas. Maybe that’s in the Permian or the Bakken or the Scoop/Stack. Those areas are massive oil-and-gas fields that have been found, but need thousands of wells to properly drain.
So, not only does that provide a problem that needs to be addressed in that you’re going to have to drill wells hundreds and thousands of times over, but it also allows these operators to try new things over and over again. That implementation of technology is going to continue because hundreds of wells are going to need to be drilled moving forward.
Malone: Glenn, what are your expectations?
Jacobson: I would agree with all of that. The pace of change is always going to be a bit tough to predict and it will certainly be tough to predict more revolutionary changes. But I totally agree. On the services side, just taking a different focus, I think the winners are going to be those that couple good service and good execution with technology that tackles some logistical issues. Things that are activities—managing supply chain, managing logistics of water and sand and other inputs and byproducts of the oil-and-gas process—and being able to cut costs out of their P&L to retain their customers, maintain their margins and keep existing and growing. Those are going to be the winners.
Then, you think about just the logistical hurdles of draining these reservoirs and the thousands of wells they need, think about the water and sand needs today for a well versus 10 years ago, focusing on the water side. Ten years ago, you needed 10,000 or 15,000 barrels of water to drill and complete a well. Today, you need 500,000. It’s a 30 to 50-fold increase and, while the next 10 years are probably not going to see a 30 to 50-fold increase, you may see another two to three-fold, if not more. And…being able to take trucks off the road and utilize other forms of infrastructure than technology to monitor, manage and move all of that around the oil field seamlessly. That you have frack crews who are waiting on water to frack a well, no wait but rather have it just in time. These are all things that are going to continue to drive down costs and continue to increase the productivity of E&P companies in turn.
Malone: Rachel, just in talking with your client, do you have expectations that we will be continuing along the same path? Obviously, the impact is human capital, their human-capital needs. What are you hearing from them in terms of their commitment to continue to implement these technologies in the hopes of increasing efficiencies?
Everaard: I think so. I think there’s a recognition that, even when the market and oil prices go back up, they’re not going to go back to where they were. So, there’s a continued focus on efficiency and recognizing that it’s going to be much more of a margin play as all companies competing are becoming more efficient in the entire supply chain of looking from drilling to completions to distribution of oil-and-gas products. I think you’re going to continue to see a focus on leanness and on utilizing technology.
Even some of what we’re anticipating in future regulatory changes will continue to have companies focused on automation where they can just make sure they’re hedging off the risks and not necessarily relying on people for all of the different types of roles—particularly from a safety standpoint—as they look to how they can make it a safer industry and one that’s more automated.
Malone: Glenn and Brian, I’m curious: you can feel free to say no, but are there any particular, emerging technologies that you’re particularly excited about that you think would have an outsized impact? Brian, starting with you.
Hansen: I guess I would go back to the ability to analyze and monitor new wells or get an answer sooner. That’s one that I think could really drive and accelerate technology. Now, the ultimate answer for how a well is is how much it recovers and it takes a well a number of months to establish that decline profile. Maybe it’s six months, maybe it’s nine months, but that’s all time in which the operator is going to have drilled and implemented that same technology over and over again. So, if we can accelerate the time to get that answer, it’s going to have multiplicative impact on how fast we can implement new tech—
Malone: Great. Glenn, what are your thoughts?
Jacobson: No, I think that’s well stated. Again, the only thing that is in our line of sight is just the sequential improvements over what’s being already used. Every couple of years, the next best thing pops up and people get really excited about it. And the use comes into question a little bit down the road. The last one I could think of was the use of nano-surfactants. There was probably a 9 to 15-month period when it was the quiet secret. Then, everyone started using it and the price to use them was almost prohibitively expensive, but the results were so fantastic. And I think it’s been proven that, while it’s not necessarily that they’re inefficient by any means, it becomes sometimes hard to justify the cost depending upon the oil price environment.
Look, things like that tend to pop up. They’re more difficult to predict and I don’t really have a great line of sight into what the next big advancement’s going to be. But I think that, of the thousand moving parts that go into identifying where you want to drill a well and getting it drilled and producing, is just sequential improvements in all of those.
Malone: Right. So, incremental improvement, which is not to say not substantive over time. But there’s no one thing you’re looking at that could have a real fundamental impact, at least in the short term.
Jacobson: Look, in each portfolio company we have and in each play, there are going to be micro factors that are going to drive significant changes. So, we have a service company: the implementation of automation technology in that service company could have a dramatic impact on the bottom line.
Jacobson: Is that technology necessarily going to be widely applied to everybody in the oil field? Probably not, but there are pockets in which it can make a difference, so certainly examples like that. But, [it is] inherently really difficult to figure out and see ahead of time what the next revolutionary change is going to be. It only becomes evident a few years after the fact.
Malone: Right. Great. Let’s move on to our question-and-answer session. Again, I would encourage the audience to submit questions now. Starting off with a question for you, Everaard how does all this technological implementation and improvement impact the picture for executives? The skill sets—you’ve got people who are actually going to be running the equipment and these software programs. But, when it comes to the upper management level, are there changes to those skill sets as well, as they have to manage an organization that might be increasingly sophisticated technically?
Everaard: Yes, it’s very interesting because we’re seeing for leadership competencies across the board—upstream, downstream, services companies—focus on digital leadership and innovation as two key leadership competencies for executives. This is primarily driven out of the technology revolution and the need for leaders to be more technologically savvy.
When we think about digital leadership, that encompasses thinking about things like cyber-security. With the impact of technology, what does that mean from a company or an overall enterprise perspective around security and what they’re putting in the cloud? What level of information that has accessibility, prevention from hacking? What is the security they need to put in play, which definitely becomes a leadership issue? Then, also around innovation and having agility in thinking and being more creative in terms of problem-solving and open to utilizing technology, whereas there may have been a traditional paradigm around more thinking about process and the way things were. [Thinking about] process improvements, but focusing still on the same methodology and ways of working. Now, we’re seeing for leaders that it’s necessary and companies are looking for their executive leadership to really focus on innovation and thinking differently around how to operate in the industry.
Malone: OK. Brian or Glenn, are you seeing any from, call it, five or 10 years ago—is there any fundamental change in what you look for when you’re maybe looking for new management teams? Glenn?
Jacobson: I’ll say yes and no. I agree with what Rachel said. I think the lens from which she’s speaking strikes me more as companies that are typically larger than what we’re dealing with, in that they’ve got a longer-term focus, a much larger employee base and more diverse set of operations from which they’re drawing. Where you contrast that with what we have in our portfolio, if you look at the breadth of our portfolio historically, today, it certainly would look more like a large oil-and-gas company. But each individual company—we have 10 to 20 employees and occasionally a few of them have grown quite large over time to be 40 to 50 on the upstream side. Services is a little bit different—we could have hundreds and hundreds of employees.
What we are fundamentally looking for from the top set of leaders, in one request, continues to be the same in that we’re looking for multi-discipline skill sets covering the core areas of the oil-and-gas space or those services or midstream spaces or everything from technical—which covers geology and reservoir engineering—to operations focus to marketing and business development and land and finance. So, we’re looking for people who are covering that and we’re also looking for management teams that have a different way of looking at the world because we’re looking to make outsized returns without taking undue risk.
To do that, you need to have a bit of an edge, whether that’s a different and geological thesis or that’s going into an older legacy area and thinking you can improve results from an operating side. We’re always looking for somewhat of an edge. The difference—this is where the answer is “yes”—is the character of that edge today is different than it was 10 years ago. Ten years ago—or even fast-forwarding back before that, before the advent of the gas-shale boom—a lot of it was, “We’re going to go and buy a PVP asset and we’re going to improve LOE. And we’re going to drill a few in-fill wells and we’re going to apply 3D technology to find undrilled fault blocks.”
Today, obviously, most of what we’re doing is focused on resource plays and it’s just a different skill set. So, my answer is “no” in the sense that we’re looking for the general characteristics of a team to be the same, but the way we’re looking to find an edge over the competition—those edges tend to be different today than they were 10 years ago.
Malone: Right. Let’s move on to another question. We have a number of innovators in our audience today. Brian, one of our audience members asks about the appetite or the ability of smaller firms to penetrate this market when many L&G companies are used to dealing with the big service companies, the idea being that things like machine learning or internet of things may come from outside the typical incumbents. So, how would you gauge the appetite of bigger oil companies to engage with these smaller incumbents? Also, what would the right strategy be to penetrate that market?
Hansen: Sure. I think when you look at the different advantages a small or large operator would have, we see the place for both of them in the market. At Vortus, we focused on the smaller-sized companies—that’s where we see the best risk reward and they have the advantage of being able to focus all their attention on a small acreage piece. When you think about a large operator that may own a million acres across a basin, that company most likely is implementing a fairly similar completion design across its board and it might hedge its risk by buying a sand mine or partnering with a large, midstream water provider. Then, it’s going to be essentially committed to using that one sand type across it’s basin until it changes its mind and gets a different sand mine.
When you look at smaller operators, they have the ability to design a much more focused, specific completion for that specific rock. Because rock can change mile by mile and it also gives them—when you think about the interaction between large and small operators, the large operators (especially public operators) are somewhat committed to maintaining whatever growth profile they’ve promised. If you think about smaller, private operators, they can be more agile. For example, I’ve seen them take advantage of off time from Halliburton, who may have a commitment from a big operator like Apache. But it ends up with a week off. A small operator…is more agile and can contract with that Halliburton, get that service time for one week and actually get a cost advantage there. There’s definitely room for both big and small operators to be successful in the market.
Malone: Great. We have one question: someone raises the notion of super fuels and that it seems as though…major companies are upping their R&D efforts. Do any of you see this as a category considered to be where there will be some technology enhancement and advancement in the future?
Jacobson: I’d say the odds are that there is capital which was to any form of alternative energies versus what is currently being used in mass. It’s highly likely. Whether that’s things we know about, including renewables—wind, solar, hydro—to bio-based fuels to better process technology to go from gas to liquid to… I don’t know exactly what super fuels the questioner is asking about. But, at a high level, do I believe there’ll be significant technological change in that broad category?
Absolutely. I think it’s inevitable. Again, does that mean that oil and gas get displaced in the near term? No. Does it mean they eventually get displaced? I think it’s a matter of inevitability and economics. Eventually, we’re going to get to the point where we exhaust how great the Permian is at everything else. And if oil demand grows at a fraction of the pace per capita that it’s grown at over the past 100 years, we’re going to run out of the economic viability of hydrocarbons. We just are. It will get prohibitively expensive versus competing technologies to develop them. In a current market, at $48 oil, I’m not really sure that’s the case. But taking a really long-term view of 20 or 30 or 50 years out—absolutely. I just don’t know what point it starts to interfere with the hydrocarbon base investment decision. I don’t think that’s today.
Malone: Great. Rachel, this may be our last question, but I’ll pose it to you. One of our audience members asks about these changes to the labor force—if we’re talking a tendency or leaning more towards highly skilled labor. Even if…the labor force shrinks but we’re hiring more expensive labor, what’s the outlook for labor costs in the long term? Is it really something that we expect to trend significantly downward? Or is it likely that the composition of the labor force may simply change, but on the cost side, it’s not going to be as significant?
Everaard: I think the labor costs, for a while, will remain steady. I think it will be just composition. You may have a smaller labor force, but they’re more expensive and they’re doing more, so ultimately it will probably be a wash. I wouldn’t jump to the conclusion that, even with automation, you’re going to see much lower labor costs in the next five to 10 years.
Malone: Great. Well, we are up to the 45-minute mark, so we are going to end it here. I would like to thank our audience members for participating. I would also like to thank Rachel Everaard of EY, Glenn Jacobson of Trilantic Capital Partners and Brian Hansen of Vortus Investments for being with us. Also, if you missed any of the presentation, you can visit privcap.com in the next day or two and watch this on demand. Or, you can come directly back to the registration page here and you’ll be able to watch from the beginning. We’ll also be putting out a report in the coming weeks that summarizes all we said here in a digestible form.
Thank you again to our panelists and for all of you for tuning in. Have a great day.
Register now to watch this video and access all content.