John Harpole, Mercator Energy — The Future of US Natural Gas (#61)
“From 2004 to 2023, global spending on wind and solar totaled $4.7 trillion. And yet, during that same time period, hydrocarbon use increased 3.2 times faster. […] anything that we’re doing is more than offset by the behavior of China and India and the other countries that are starving. […] There are 1.2 billion people — 20 percent of the world’s population — that are still without access to electricity. Almost all of those people live in developing countries. […] They want a quality of life that we’ve achieved over the last 100 years that extended our lifespan by 40 years in that time. So I just, I don’t think there’s really an energy transition going on.”
— John Harpole
John Harpole has spent over 40 years moving billions of cubic feet of natural gas across America.
He is the Founder and President of Mercator Energy, a company that brokers natural gas for producers and end-users in the western United States.
Today, Mercator manages over a billion cubic feet of gas per day, representing about 1% of US natural gas production.
In an industry known for its volatility, where fortunes are made and lost in a day, John has unprecedented access to information.
In this episode, John and I discuss:
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Regional differences in natural gas prices and the factors driving demand in the U.S. and internationally.
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How regulatory barriers in states like California and New York could lead to disastrous energy shortages and soaring prices.
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The “myth” of the energy transition and why fossil fuels remain essential for energy and food security.
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The untapped potential of the Permian Basin and how investors can find opportunities amidst an overabundance of cheap natural gas.
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The impending surge in natural gas exports from the U.S. and the investment opportunities it presents.
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Where John would invest his own money in the natural gas industry today.
Please enjoy!
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The transcript of this episode is included below. Note: Transcripts may contain a few typos.
Transcript:
[00:00:00] Jamie: All right, ladies and gentlemen, welcome to another episode of the Resource Insider Podcast. Now, normally if you’re a long term listener of this episode, you are listening to me talk to leaders, investors, entrepreneurs in the mining and metal sector. That is my primary area of expertise and where I’ve spent most of my career. But I have found over the last several years, I’ve been personally investing and bringing opportunities to our members at Resource Insider more and more in the energy industry, oil and gas, within primarily the United States and North America. And I will say that has been an incredibly interesting and huge learning curve. And I’ve relied on a lot of great analysts and materials to get up that curve. But more importantly, I’ve really made a mission to get out and meet and spend time with and learn from people who have had long careers operating in this space and can provide sort of the guidance we need before, before investing our own money. And so today in this podcast, we’re going to be talking to one of those people, a gentleman named John Harpole, who is the president and the founder of a natural gas brokerage business called Mercator Energy. And I’m gonna let him tell you what that actually means. But John has been phenomenal at educating me on nat gas in the United States, how it moves around, how it’s priced, how it’s purchased a thousand other things. And so part of this conversation today is to bring that information to you, viewers, but also for me to have another chance to sit down and ask John a lot more questions because I always get a lot out of it. So John, thank you very much for, for taking some time out of your day.
[00:01:55] John: Glad to be with you, Jamie. Thank you for having me.
[00:01:58] Jamie: So I think right now we are catching you in Littleton, Colorado. Is that correct? Where you guys are based?
[00:02:04] John: Yes, that’s correct. Native to Denver.
[00:02:08] Jamie: Native to Denver. I guess that’s becoming rarer and rarer with the influx of Californians and Texans that you guys are getting on a weekly basis now.
[00:02:17] John: I don’t want to overstate it, but I think there are only about five of us left.
[00:02:22] Jamie: Are they all related to you, would you say?
[00:02:23] John: They are, yes.
[00:02:24] Jamie: Okay. So getting starting off, can you explain people what Mercator Energy is? I think This is the question I first had for you when we met, which was at the beginning of this year at NAPE for those listening, a big nat gas, or not gas, a big energy conference in Houston held every year permining. It’s very similar to the PDAC for those familiar with that. I did not know what a nat gas broker is. So maybe if you could give people a sort of a high level overview of what that is, what you do there and how you got into that. I think that would help set the tone for this conversation.
[00:02:59] John: So Jamie, a little background that kind of helps describe what a broker does, but I’ve, I’ve been in the, in the natural gas business since 1980. I graduated from the university of Colorado Boulder, but before I graduated, I worked for an oil and gas company that was owned by two Texans, Bunker and Herbert Hunt. After I graduated, I worked for General Electric, an oil and gas production company that was based in Denver. And I really started there in 1981 as an oil and gas landman negotiating contracts to go out and, you know, essentially be allowed to drill for oil and gas. In 1986, Jack GE, communicated to our president LAD Petroleum, GE’s LAD Petroleum, John Moore, and said, Look, I want to buy natural gas from my producer company, from my GE facilities. And that possibility had just been opened up because the transportation of natural gas had been deregulated. So, overnight, I was in charge of 65 GE plants in the US, most of those east of the Mississippi, in fact, probably 58 of those east of the Mississippi, and showing those General Electric industrial facilities how to buy natural gas. From their sister company in Denver, rather than from their utility.
[00:04:20] Jamie: Right. So this was internal sales for GE.
[00:04:24] John: It was, but we were still really competing against other potential suppliers, but I really started jumped into that in 1987, really. It was deregulated that interstate transportation of natural gas was deregulated in 1985 under a FERC, Federal Energy Regulatory Commission order, and so we could, in fact, then go out and own capacity in a gas pipeline, something that only interstate pipelines own capacity and prior to that. So now my company is essentially, there are five of us, and we’re essentially, I think the easiest way to describe it is a travel agent for a natural gas molecule.
[00:05:01] Jamie: Right.
[00:05:01] John: Ensure that that natural gas molecule is sold for our producer customer at the highest price possible and we track it to the sale and then we also help industrial facilities like ammonia plants buy natural gas and we try to show them the best path on an interstate or intrastate pipeline and the least expensive, most economic, most reliable path to source natural gas. So there’s, to give an idea of scale, we’ll talk a lot about scale today. The US produces about a hundred billion cubic feet of gas per day. A hundred BCF of gas per day. We manage a little over a BCF of gas just amongst the five of us.
[00:05:44] Jamie: So you’re managing about 1 percent of the movement of all the US is daily gas production.
[00:05:50] John: And you got to recognize a lot of people can claim that because it’s retraded as it moves downstream from the production wellhead. But yeah, we manage a BCF of gas per day.
[00:06:00] Jamie: So let’s start with like Nat gas for idiots here. And, and I might, I might have to include myself in that, in that category. So let’s start from the very beginning. So Nat gas is produced in a well, whether that’s a conventional well or a fracked sort of a fracked well. Doesn’t really matter. Comes out of a well. Can you walk us through kind of what happens next? And like, what’s the chain of things that have to occur before, you know, you’re turning on your stove in your kitchen and, and, and cooking some eggs with natural gas?
[00:06:31] John: So natural gas really never comes out of the ground and the quality that we need to use it at our home. Okay, so you may have wet gas, and when you say wet gas, what do you mean? Well, there may be, have so many natural gas liquids embedded within that molecule of gas, let’s say, that’s, you know, moving through a pipeline that if, if you put it into a room that was 10 by 10 by 10 A room at 10 by 10 by 10 is about a thousand cubic feet of natural gas can fit in a room 10 by 10 by 10. Well, some gas is produced where it’s wet, where there would be a, you’d be standing in a puddle of three inches of natural gas liquids. So essentially what we’ve got to do in order to get it into interstate pipeline quality spec, you’ve got to make sure that gas is not wet. Interstate pipelines don’t want wet gas because when it gets cold, it’ll freeze. You’ll have ice form inside the pipeline and you’ll clog up the pipeline. So we’ve got to prepare or condition or process. That wellhead natural gas in order to get it to the quality spec the interstate pipelines require.
[00:07:40] Jamie: Let me ask a technical question here. So does the, does the natural gas liquid, so NGLs, I think people refer to them as, do they get separated out and go somewhere else? Or do they get something, do they get processed in a manner which turns them into a gas? Or, or some combination?
[00:07:56] John: Okay. I’m actually working on an expert witness case for an attorney that’s a friend of mine right now and, and, and let’s just say in eastern Utah, the interstate pipeline recognized that a lot of the small producers couldn’t afford to strip that liquid out of the gas themselves. So that interstate pipeline wrote a tariff, the rules and regulations and said, okay, producer, I know you can’t afford to do it. You don’t have the scale to go out and do it. And build a billion dollar gas processing plant to dry out this gas, so we’ll, we’ll do it. We’ll build it. Later on, you had an enterprise product partners, big midstream company come into Meeker, Colorado, and literally build In the 19 nineties, the largest natural gas processing plants in the world that could process up between a billion to 2 billion cubic feet of gas. Essentially, they were making it so that you could drill in that area, you know, strip the liquids out of the gas. They separate that, and they send it to different points of the country and a natural gas liquids pipeline. So, but again, of the 90 some odd interstate pipelines in the US each of those require a certain quality spec that says, Hey, bring us dry natural gas. If, if, if your gas is rich in natural gas liquids, strip it out, you’ll have a different income stream for the NGLs that you sell.
[00:09:19] Jamie: And for clarity though, as I understand it, the NGLs, they’re, they’re, they’re a product in their own right as well, right? There is an end use for them and they can like propane and stuff like that, I think. Do I have that right? Yeah.
[00:09:30] John: Yes, we’re, we’re exporting, the US right now is exporting quite a bit of natural gas liquids, propane, butane, and ethane out of the Gulf Coast enterprise. There are about seven or eight different companies that have. Facilities on the water. You sit, let’s say, in the Gulf Coast, and there’s even one in Marcus Hook Philadelphia, where you can export natural gas liquids by ship to other countries.
[00:09:54] Jamie: Okay. So, okay. They’ve stripped out the liquids from the dry grass, the actual gas. What happens to the dry gas after that? Obviously, I would say I assume 100 percent of gas moved in the United States occurs in a pipeline. There’s no liquefaction of that that occurs within the continental United States, I presume?
[00:10:12] John: If there’s any LNG is kind of de minimis, and it’s just kind of a short term solution until you can get a pipeline built to an area, but even then, it’s really, really rare. So, yes, 100 percent of that 104 billion cubic feet of gas per day that we produce moves from the wellhead downstream to its end use destination.
[00:10:34] Jamie: And then so this can be used in industrial processes, this can be used to generate electricity, this can be injected directly into someone’s home for be it heating or cooking or what have you. Yeah. As the end product.
[00:10:47] John: So let’s talk about scale again. So one of our clients is an ammonia company based out of Australia, and they literally take natural gas and convert it into nitrogen fertilizer, ammonia based fertilizer. So your house up in Canada might burn about 4, 000 cubic feet of gas per month, okay, in a cold winter month, they might burn about 4 mcf thousand cubic feet per month. And again, remember 1000 cubic feet is the amount of gas it would take to fill a room 10 by 10 by 10. Well, one of our ammonia plants down in Louisiana, in Geismar, Louisiana, may burn 180, 000 MMBTU a day. When I say burn, I really mean consume, because they take that. Converted into ammonia and then current converted then into fertilizer, nitrogen based fertilizer. One of those LNG tankers that you hear about, typically those hold the average LNG tanker holds 3 billion cubic feet of gas per day. So three, three BCF, not for the three BCF encompassed in that one LNG tanker. So that 3 billion cubic feet of gas again, scale is enough to heat 42, 000 homes for a year. And it was really those LNG tankers that kept Europe going after the gas was cut from Russia after the invasion of Ukraine. We saw incredible volumes of liquefied natural gas exported to Europe to kind of maintain their ability to get through the winter.
[00:12:20] Jamie: That’s so that’s I think where we should go next, because I’d like to talk about demand and pricing on this and what I think where I’d like to start is, and you may not have these numbers off the top of your head. I’m putting you on the spot here. But do you know what percentage? Like what the breakdown of the end use for natural gas is within the United States, like what percent is, is used for nitrate fertilizers. What percent is used in the home versus industrial? Do you have a broad breakdown of where that goes?
[00:12:50] John: Good question. It’s a good question because I have the answer for you.
[00:12:53] Jamie: There we go.
[00:12:54] John: If you, if you aggregated all the fertilizer, ammonia based, nitrogen based fertilizer demand, In the world, okay, it would be about 11 billion cubic feet of natural gas worldwide that’s converted, converted to ammonia and nitrogen. So about 11 percent of what the US produces on a daily basis is converted worldwide. Well, let’s talk for a moment about
[00:13:17] Jamie: And I think the US is about 25 percent of global supply, is the number I’ve heard. I think the US is what, about 25 percent of global supply is the number I think I’ve heard?
[00:13:27] John: The US, well, the US is kind of the world’s energy superpower. So right now, in 2023, The US produced, or had LNG exports of about 114 billion cubic meters per day. Okay, 100, excuse me, per year. And Qatar, which is second to the US, was 108. Australia, 107. Russian Federation, 42.7. So, we are, in fact, the superpower. But I think a good way to dial into this is to talk about what happened in Russia. And what happened with Germany and and really the folks in Western Europe shortly after there are three kind of worldwide prices that everybody follows for natural gas are near New York Mercantile Exchange price. That’s a price located at the Henry hub here at Louisiana. You’ve got the. J. K. M. price that’s the price of LNG delivered to Asia. And then you’ve got the price delivered to Europe. Okay. On a one year look forward, what’s the price for natural gas in the US? Yesterday, it was $2. 90. That is, if you wanted to sell gas based on an IMEX price for the next year, you’d get $2. 90. The price in Asia is $13. 00. $13. 06. Price delivered to Europe is $37. Okay, during that crisis after the natural gas debacle, that price in Europe got as high as $97 per unit per day. $97
[00:15:08] Jamie: per unit per day
[00:15:09] John: of the US price shortly after the invasion of Ukraine was $70.70.
[00:15:14] Jamie: So we’re looking at something like 30 plus times the base US price today. Now, I mean, at the time, US gas price, I think, spiked almost 10 per MCF. I think, I think, or that’s,
[00:15:27] John: Yeah. They did. That was,
[00:15:29] Jamie: And was that driven by this foreign demand effect?
[00:15:32] John: Without a doubt. Yeah. Without a doubt. It was. A lot of fundamentals. That was the number one fundamental, though. But again, if you looked at a three year forward price for natural gas in the US, it’s $3.67. Asia, it’s $12.20. And Europe is $35.
[00:15:50] Jamie: So it’s going up.
[00:15:51] John: Yeah, you obviously get an idea of the demand relative to the price by those three, you know, international markers for the value of natural gas. And that’s all in Europe, that’s all things that they brought upon themselves by relying too heavily on that one supplier being the Russian Federation.
[00:16:10] Jamie: And this is very interesting to me, kind of coming from the mining sector, of the regional nature of natural gas. Because in mining, you know, an ounce of gold is an ounce of gold, it’s today something like 2,300 bucks, and it’s 2,300 bucks in Russia or in Canada or in England or in Brazil. And so it’s a very different commodity. And what, you know, We have the supply and demand dynamics here internationally. But when we look at say within the continental United States, what’s driving demand and what’s driving use cases, you know, the most simple version I always hear is it often comes down to the weather, right? That when it’s hot, people have their air conditions on more knack gas gets consumed when it’s cold and people are heating their houses, more knack gas gets consumed. Is that. Is sort of weather and I guess heating and power uses, is that the primary driver of sort of like nat gas within the United States over a given year? Or are there other big factors there that need to be considered?
[00:17:10] John: I think there are other big factors to consider. One of those is kind of the regulations that occur or exist in different areas. One example of that is that it’s very difficult to get interstate pipelines built into the far northeast. That’s why you have a New York, what we call Citigate price, that during peak day demand is off the charts relative to what it should be. If there was plenty of pipeline capacity to get that what we call Marcellus or Utica production in Pennsylvania and other parts of the world into New York City. And so pipeline and transport can play a big role in it. Now, the wild card is always weather, is always weather. And yet the systems typically are trying to be designed to what’s called a peak day, where you have all the factors. You’ve got the industrial baseload demand. You’ve got the residential demand by virtue of the natural gas fire generation and create the electricity and then you’ve got the weather factor and that peak day demand is something that we would like to think that we’re building to. But I, I see. I see a clash of kind of some of the regulatory and some of the NGO efforts to increase renewables at the cost of reliability for the delivery of fossil fuels. And if I, if I can, if I can give you one story, this is yes, please do it. And I think it speaks to it nationwide. I won’t name the investor on utility, but a good friend of mine that runs a group, a set of interstate pipelines, five of the bigger pipelines in the Western US met with one of their biggest customers a few months ago, they said, look, based on your energy plan, as we see it going forward with your heat pumps and with your natural gas fire generation to back up wind and solar, we don’t think you own enough pipeline capacity on our pipeline to meet your peak day requirements as we see them going forward. And the utility executive’s response was, well, we’re not investing in any fossil fuel infrastructure because we’ve taken a net zero pledge by 2050. So Jamie, it’s really one of my biggest concerns is that over the next five to 10 years, you’re going to see things I think break down like what we saw in ERCOT after Winter Storm Uri, when that market is tested on peak day, because of this political position that some of these utilities are taking to kind of mimic the efforts of investment that Nexterra, one of the biggest renewable providers in the country, they’re trying to appease a lot of folks that think we can do without fossil fuels, And I think we’re going to have a train wreck relative to peak day demand on some pretty stressful days for the next three to five years.
[00:20:00] Jamie: So I think this is really worth digging into and
[00:20:03] John: A lot to unpack there.
[00:20:05] Jamie: Yeah. And you referenced ERCOT, can you give the summary of that story for people who might not be familiar with it?
[00:20:12] John: So ERCOT is the Electric Reliability Council of Texas. It managed probably 95 percent of the electricity that flows in the state of Texas. It’s an animal in and own to itself. It’s not interconnected with any of the other regional independent system operators. And an independent system operator is essentially the The entity that manages electricity in a certain area. So up in the northeast, you’ve got the PJM, Independent System Operator, PJM. I’ll refer to that a little bit later as an example. So ERCOT is, has a design that’s been changed a little bit since Winter Storm Uri, where essentially they assumed that there would always be electricity available at a given price. Okay. They never anticipated that there would not be electricity available at some sort of given price.
[00:21:04] Jamie: Yeah.
[00:21:04] John: So when Winter Storm Uri rolled in, it was kind of the, the perfect storm in a sense that wind couldn’t run because of the ice storm that was occurring. So you’ll saw the availability of the wind drop off dramatically, clearly in a storm like that, you have very little, if any, solar. And the coal fire, the, the natural gas fire plants could not rely on the kind of the natural gas supply that they typically had because very few of the production areas of the natural gas element had been winterized because those same areas that you want to winterize, you don’t want to have enclosed in a big insulated building when the heat comes through in the summer.
[00:21:46] Jamie: Yeah. Interesting.
[00:21:48] John: So the presumption was on the Monday after this. Of this three day weekend that if they just unilaterally decided to raise the price, ERCOT raised the price for electricity, people would respond with electricity, but there was none to be had. What we really saw is a lot of natural gas fired generation could not get natural gas supplies through the pipelines because Electricity was cut off to the compressors and the power stations that were running gas through the
[00:22:20] Jamie: okay.
Yeah So, you know, okay. Yeah
[00:22:22] John: the opposite of a self licking ice cream cone It just the dominoes started to hit and there wasn’t a solution and so
[00:22:29] Jamie: And this is in texas, right? Like maybe the most energy friendly space in the
[00:22:34] John: starving grocery store. Yeah Grocery store just it’s And so again, one of my favorite sayings comes from one of my favorite writers, a guy that goes by the name of Doomberg, he’s on Substack, he said that in the 2000 year competition between political platitudes and physics, physics remains undefeated. So the politicians can promise all sorts of things, but on a peak day, can you deliver? And what I’m worried about is this clash of the progressive concept that we can do without fossil fuels. And that’s really assumed by a lot of people that don’t understand the scale of what fossil fuels brings to someday we’re going to just be in this great land where there are no fossil fuels And yeah, we’re still going to have electricity to flow one of your favorite writers. Daniel Yergin Once said that this is a 90 trillion dollar world economy that gets 80 percent of its energy from fossil fuels 90 trillion dollars world economy 80 percent from fossil fuels This energy transition is not going to happen overnight. It’s just not. And if I can, one more thing on scale, in trillion dollars, a million seconds is equal to 12 days. A billion seconds is equal to 31 years. And a trillion seconds is equal to 31, 000 years.
[00:24:01] Jamie: Yeah. It’s hard to wrap your mind around. That’s a very good,
[00:24:04] John: I mean, people just really can’t do it, but this, the notion of this energy transition occurring right now is just a fallacy. And I, I can share more numbers on that also.
[00:24:13] Jamie: I mean, what part of what really got me interested in natural gas was, you know working in the carbon credit sector as well, investing in that sector and looking at how emissions were. Organically reduced. And what I saw in the United States, and I’m going to get these numbers wrong, but directionally correct was that, you know, there’s been something like 5 trillion of subsidies into renewable energies globally. And again, That they had very little impact on reducing emissions. But what had made a major impact in the United States and reduced emissions by something crazy, like 30 percent over the last 15 years, was the transition from coal electricity generation to nat gas. That alone had saved, you know, I don’t know how many millions and millions of tons of emission, but to your point, it’s, it’s been the most impactful thing the United States has done to date that I’m aware of to reduce emissions, and it’s completely hated upon by, by the, the, I would say the climate evangelists you know, and, and there’s no Perhaps there will be an energy transition, but there certainly won’t be an energy transition in the next five years or the next 10 years or probably the next 25 years, in my view, and looking at nat gas and to another degree, nuclear energy as those transition pathways, I think, is the only credible way to do that. And yet it’s, it seems that there has been a lot of regulation and politics thrown in the way to make that nearly impossible.
[00:25:53] John: So you’ve just met a good friend of mine, Robert Bryce, and Robert speaks on this issue quite a bit, and I’ll just throw out three different numbers that he provides and this is in a presentation that he puts out there called what energy transition? Coal use in the last year jumped 1. 6 percent worldwide. And India’s use India’s use has greater than exceeded the combined use of Europe and North America for the first time ever. Another one from 2004 to 2023, the global spending on wind and solar totaled totaled $4. 7 trillion. And yet during that same time, time period, hydrocarbon increase, hydrocarbon use increased 3. 2 times faster. Okay. In 2023, US gas fire generation grew five times faster than wind and solar. So again, it’s difficult for people to understand that there really isn’t a transition going on that anything that we’re doing is more than offset by the behavior of China and India, you know, and the other countries that are starving. You gotta people need to realize that there are three billion people in the world that use less electricity on an annual basis than Then your refrigerator at your home. Okay, less there are 1. 2 billion people, 20 percent of the world’s population that are still without access, access to electricity, almost all of those people live in developing countries, and that includes 550 million people in Africa and 400 million people in India. You know, they want a quality of life that we’ve achieved over the last 100 years that extended our lifespan by 40 years in that time. So I just, I don’t think there’s really an energy transition going on and you know, even if there were It took oil 60 years to achieve 40 percent of the energy input for the world. Another number, natural gas took 60 years to achieve 20%. Nuclear took 80 years from discovery to widespread, widespread deployment. And it’s just, people, I don’t really, it’s such an easy way. People don’t appreciate it.
[00:28:10] Jamie: Transition narratives are really interesting, because I think I read another one once that it took wood, it took coal about 100 years from to overtake coal, or sorry, to overtake wood as the primary source of, of energy. And you mentioned Doomberg earlier, and I’m glad you did because, and for those listening at home, Doomberg is a, a phenomenal writer on energy and commodities on Substack. I subscribe to him, does a great job, and he shaped a lot of my thinking around this. But I think one of his common sentiments is that. You know, every molecule of energy created is going to be used by someone. And, you know, to your point you know, obviously renewables are up substantially, but last year, 2023, we burned more coal, more gas, and more oil than in any other year in history. And what I want to do today is. Get a better idea and for people at home to get a better idea of the opportunity to invest in natural gas. And is this something that we should be thinking about? And part of what I want to think about is. Is what, you know, we’ve talked a little bit about demand and the need for this, but what pricing is going to look like over time. And as you mentioned, you sort of touched on earlier, it’s very regional pricing and you know, what it, what it’s valued at in Henry hub in Louisiana is different than it’s valued at in the Rocky mountains in Wyoming and part of where I’ve. I’ve been learning about this is two, two very good commentators online. Again, Doomberg was one of them. The other one is a, is a fund called, I’m, I’m reading this ’cause I’m gonna get these names wrong and I’m sorry if, if you guys hear me is, Goehring and Rozencwajg, who are a fund that in New York, very commodity focused. They’re very bullish on natural gas. And they talk about a lot of reasons why they think that gas price is going to run and demand is going to run. And it’s going to be driven by these export terminals coming online and a variety of other things. We can, we should talk about that. Doomberg takes a more. I was a conservative approach where they think there’s a, they, they seem to, to, to, they seem to theorize that, you know, the, the days of very high nat gas price are over and that given the sort of the gas coming out of the Permian as a by product, and we should talk about that, and given the infrastructure in place today, that we’re going to see more stable, less volatile, but sort of moderately lower priced gas. What are your thoughts on this debate? And given how much time you spent in this and what you see on a day to day moving, moving gas around the country?
[00:30:51] John: So one of my hobbies is fly fishing. And we have a great saying that, you know, in fly fishing, you can drown in a river that averages three feet deep. In the spring runoff, that river may be eight feet deep. And so I think, I generally agree with Doomberg says, but a lot of, a lot of this will be driven by what’s the peak day demand and the peak day price and the Winter Storm, Uri black swan type event. An Oklahoma friend of mine always says that the Permian Basin is just screwing everything up. And let me, let me give you an idea what he means by that. So imagine a basin, so West Texas, Eastern New Mexico, that is producing 26 BCF of gas per day. So nearly 26 percent of what the US produces on any given day that we have an industrial potash mine in Eastern New Mexico. They got paid to take gas the last few months because there was so much gas down there. And remember, this is a basin where there’s not a
[00:31:52] Jamie: Gas has gone negative, right?
[00:31:54] John: Gas has gone negative. It’s like, please take this. We’ve got to get rid of it so that we can produce our oil. This is a basin where there’s no one drilling for natural gas. And yet this is such a monster producer that the Permian Basin would be the third largest producing area in the world if it was its own country.
[00:32:15] Jamie: For oil or gas for gas?
[00:32:17] John: For natural gas or natural gas. It produces 50, 50 percent more on a daily basis than Qatar does. Okay. So just since, since 2014, the last 10 years, the Permian Basin gas production has gone from 5.5 BCF a day to 26 BCF a day in 10 years.
[00:32:39] Jamie: And I think it’s important to note that that is a byproduct of oil, right? It’s for people who are not familiar with that concept, that people are drilling for oil and getting oil.
[00:32:48] John: It’s associated natural gas that they’ve got to do something with because they can’t flare it. So imagine those oil numbers. Those oil numbers, Jamie, in the last 10 years have gone in the Permian Basin from a million barrels a day to over six million barrels per day. Huge, huge volume. And so what the Texas or New Mexico producer has to do is find a home for that natural gas.
[00:33:10] Jamie: And so in some cases they’re paying people to take it off their hands.
[00:33:14] John: They are. That’s the market working its way into a price signal that says, Hey, come build a pipeline so we can get this gas outta here and take it down to the Gulf Coast so we can export it. So take down to,
[00:33:25] Jamie: so you’ve got, sorry about that. I didn’t mean to cut you
[00:33:28] John: off.
Take it down to Mexico so we can get rid of it also. But so you say
[00:33:33] Jamie: you’ve got this region though though. Best that. Basically creating 25 percent of the global or the national output for free or worse. So, to me, you know, you hear that, that’s very bearish for natural gas, right? When you have to give away your product. So what’s the, what’s the, what’s the counter?
[00:33:52] John: So for that region, so let’s take the other, the opposite side. Say, what is the price of New York City? Well, again, pipeline after pipeline of the pipelines is wanted to be built to New York City to the northeast of Boston has been stopped from being built by NGOs that were opposed to fossil fuel infrastructure. And so place where you want to own natural gas if you had it was New York City. Place where it’s abundant and so it’s to your point at the outset of this part of the conversation was there are regional pockets of natural gas that you want to have. Like the Haynesville area, Louisiana, Northern Louisiana. That’s an area that can easily access the export facilities. And I think the, the 600 pound gorilla we haven’t talked about yet is that we can export right now about 12 billion cubic feet of natural gas. So let’s say
[00:34:45] Jamie: 12 overseas, right? Export.
[00:34:48] John: We can export it from the Gulf Coast, a little bit from the East Coast. That export number is going to increase in the next 18 months. By by half. So instead of 12 BCF a day, it will be 18 BCF a day.
Okay. So let’s dig into why that’s about to happen, right? Let’s talk about why that’s about to happen. Yeah.
That’s why we see that price jumping. So that right today, the NYMEX is trading at $2.11 for gas tomorrow. The one year price of $2.89 for NYMEX gas, the three year price is $3.66 again, all driven by those prices that you see in Europe, a three year price in Europe, $35 The one year price in Europe going forward is $37. So the demand for what we’re producing is huge in both Asia and Europe. More so even in Europe because of what’s happened with Putin and Gazprom.
[00:35:42] Jamie: So, so why is that tomorrow and not today? Is it because these export terminals still need to be built and brought online to, in order to service that overseas demand?
[00:35:52] John: Yeah, the in service date, for example, like one down in, That one that’s fed by US gas Altamira Downing in Mexico just turned on two days ago. We’ve had the facility that’s Freeport facility has been offline for some time, just kicked back on, two BCF a day, second largest one in the US, just kicked back on about a week ago. And so, imagine that kind of demand that can turn on and off based on maybe a force majeure type situation impacting the price of natural gas. Then imagine the machine of what the Permian Basin is in terms of producing natural gas at a very discounted price. That is going to ultimately, I think, find its way, then that gas is going to find its way overseas or down into Mexico for gas fired electric generation, or even some exports on the west coast of Mexico.
So, you got to realize that in the last in the last 15 years, liquefied natural gas worldwide, the availability of this has gone up fourfold. That’s doubled its share of the natural gas trade worldwide. So LNG, LNG tankers is really a kind of a relatively new phenomenon if you’re looking at this on a 30 to 40 year scale. And we’re just seeing that expand and we’re seeing the ability to export these NGLs expand also. You can’t get enough propane and butane delivered to China, and you can’t get enough of it even through the the Panama Canal, you know, because of the issues that they’ve been having down there. So, it’s about demand.
[00:37:35] Jamie: So for people that are listening at home and thinking, okay, natural gas might be something I want to invest in, I guess they need to choose their They need to choose their place carefully, right? So they either want to get exposure to these export terminals, so gas that’s going to be going into the foreign markets, or servicing places within the United States that are not readily serviced by this cheap slash free gas coming out of Texas coming out of the Permian, right? Is that, is that a safe summary?
[00:38:06] John: Yeah. Or you may want to look at midstream companies that are addressing the overabundance of gas in the Permian who’s coming up with the best new solution. There’s an issue going on in the Permian right now where the large companies in the Permian, the Chevron’s know what they’re going to do three years from now with all their production, natural gas. Natural gas liquids and more importantly oil. It’s the hundred thousand a day type producers. I say smaller producers that have not, that have benefited by the, the expansions that have occurred because of the large companies that are going to run into trouble as the pipeline capacity, the availability of NGL capacity, export capacity out of the Permian and gas production capacity starts to tighten up and Jamie, anytime we see what I call the capacity utilization of a pipeline exceed 85 percent of that capacity that’s available, the party that owns the capacity extracts a toll from the producer that doesn’t by offering a lower and lower price. And so you can really study that midstream solution that’s being proposed by a number of different companies. For both NGLs and natural gas out of the Permian and watch what happens over time, you’re going to have the larger companies being able to get the price that they want from the smaller ones, not, not, not having that reality and at least occur for their pocketbook. So there’s an investment, even though we may be long, you know, there’s an investment, you know, where is any of this gas going to go to ammonia player? They’re, believe me, their ammonia companies that were based in Europe that saw that incredible increase in their number one feedstock cost go up such that they want to come to the US for this abundance of natural gas and for the rule of law that exists here. So a lot of different plays within the plays and, and we could go on and on and on, but those are some of the big things to watch.
[00:40:12] Jamie: You’ve been doing this a long time. And are there any like, you know, this is what’s interesting to me about natural gas is that it’s very complicated and it’s very volatile. And when you see those. those, those sort of markets, often you see a winner take all game, right? Where people who make the right bet at the right time in the right scale, make a tremendous amount of money or create a huge company or have some sort of major success. Are there any of those stories that really set you apart? Stick out to you over your career of people that have done this incredibly well, that highlight the opportunity in natural gas that you would say for investors. And then maybe some cautionary ones, if you want to touch on those too.
[00:40:54] John: There are many cautionary ones. But quite frankly, and I know, you know, this through your career, the people. That have been at the right place at the right time, you know, consider that to be lucky and they don’t have the hubris to say that I knew this was going to happen. You know what I mean? That’s why I stopped really trying to pick stocks a long time ago. And really what I focus on are what are the big events that are going to occur midterm and long term, not short term, not, not necessarily what’s going to happen the next month, but when you look at a 50 percent expansion of the LNG takeaway capacity. You understand why that two and three year price for NAD gas is, you know, two and three times higher than it is right now. You see these big kind of movements. Probably one of the best pieces of advice I ever got was that if, if you’re a trader and you’re right, 51 percent of the time, you’re lucky and you should admit your luck. But you can see these big issues kind of moving that there are five or six companies that really export NGLs out of the US and I really like energy transfer enterprise and Phillips 66. I think Phillips 66 is really a quiet company, but I, I was representing a Chinese buyer of butane and propane and they could not get enough of it. And I think that’s even more the case than it is necessarily for LNG. And believe me, it’s a lot easier to decide an export facility for propane and butane right now than it is for LNG. But we are going to be more and more Driven by a worldwide price for natural gas our prices here, but then you still have this issue of basically free gas in the Permian, which is, you know, for our, for us as being Americans is kind of a true blessing that we have that, that’s what a good friend of mine calls tiramisu, a production down in the Permian Basin that’s going to be there for many, many, many, many years.
[00:42:52] Jamie: You mentioned something that I’ve been kind of thinking about in the back of my mind a few minutes ago, which is that the opportunity to export out of Mexico. Are you able to export gas out of California or is that a, that a no go?
[00:43:08] John: No, that’s, that’s one of my great frustrations is that I actually worked on an LNG import facility back in 2003. This will give you an idea of the way that things have changed. So in 2003, before the shale revolution, we thought That by now in the 2020s, we would have to import anywhere from 25 to 40% of our natural gas. Mm-hmm , 25 to 40%. In 2003, Putin through gas problem was trying to hire 200 natural gas marketers in Houston to market Russian natural gas in the us. So in 2002 and three, I partnered up with an Indian tribe. In northwest Washington to build an import facility that ostensibly would have been on Lummi, or excuse me, tribal lands. And so you could really argue, do we have to, by virtue of our treaty rights, the Indian tribe, do we have to negotiate with the DOE or FERC for a license? And so that’s really when I got onto this thing of trying to understand what Gazprom, what Putin, what the Russian production was all about. And then think about it. We have the turnaround of the share revolution. Imagine a 2 billion pipeline being built in 2004 from the Rockies, Southwest Wyoming, all the way to middle of Ohio, where the environmental impact statement in 2003 said, Hey, by 2020, we should see an increase of demand in Ohio of about 2 billion cubic feet of gas. So we can justify this all day long, boom, the share revolution has, occurs, and instead of two BCF a day of additional demand, we’ve got 25 BCF a day of production in the Ohio. Pennsylvania area. So that’s how much this shale revolution kind of shook up the world. But it’s really the, the notion that right now you cannot export or import LNG into California, Oregon, or Washington. There’s like this blockade. And so in order to get Western US gas
[00:45:13] Jamie: California, Oregon or Washington. You can’t Washington, you can’t import LNG in or out,
[00:45:19] John: You can’t, I mean, you can’t export it. Now there’s an export facilities being built, you know, not far from you up at Prince Rupert.
[00:45:26] Jamie: Yeah.
[00:45:26] John: And LNG. So Canada will be exporting a lot of that Montey shale gas that you’ve got up there. But if we wanted, and this is the frustration, Western Colorado PE Basin. It’s as big in reserves as the Marcellus and the Utica.
[00:45:42] Jamie: Yeah.
[00:45:43] John: Yet I cannot get that world class reserve base out through the west coast of the US to China or Asia, can’t do it.
[00:45:51] Jamie: So let me ask you that
[00:45:53] John: to build south to Mexico and get it out that way.
[00:45:57] Jamie: Does California, Oregon, Washington, you know, do they rely on Coloradan or other natural gas for their own electricity? Yeah. Obviously you can’t frack, I don’t think you can do much drilling at all in California. I’m not sure what it is in Oregon and Washington.
[00:46:14] John: The in state california production in the last 10 years has dropped by probably 70%. So California relies on Southwest Wyoming, you know, the Pinedale Anaclin, the Green River Basin, the Lompsteader area, relies on Utah production, relies on production down in New Mexico and even the Permian Basin to come in by pipeline. And I really think, in terms of train wrecks, that’s where it’s going to hit, is that there’s going to be a realization that they’ve closed down too many nukes and too many coal plants, they’re relying too heavily, they’ve kind of painted themselves into this peak day and natural gas fire generation corner, if you will. And at the same time. The production and all the basins that feed other than the Permian that can feed California have seen over the last five years a 10 percent year on year decline in production. And so we’re seeing this kind of blowout certainly in January and February for Rocky Mountain based production from the San Juan Basin up to Wyoming. We’ve seen a blowout in the months when California needs natural gas for heating alone. And I think that’ll be down in December.
[00:47:26] Jamie: Presumably production is down. You said about 10 percent the basins feeding that region, but you, I think this would probably also play into the pipeline capacity as well, right? That
[00:47:37] John: Right.. But if you’re the Permian Basin, you’ll never build to California because they want to do without natural gas. So California, if you really look at it for the Permian Basin is about the sixth market of choice. You would rather take that down to the ammonia. Consumers down in Louisiana or the export facilities down the Gulf Coast to get it out of the country. And so I really see this issue developing where some of this Rocky Mountain natural gas that can get to California is going to not just see the spikes on the peak day usage that occur in January and February, but it’s going to happen really October through March because they really, you know, the adults have to show up in a room someday in California. They have to realize, and the only, the only solution that they can cite quickly will be natural gas. So that’s why I’m just a huge believer that when California figures it out, it’ll be a real benefit to the Rocky Mountain natural gas producer. But Jamie, that may take three to four to five years to play out.
[00:48:42] Jamie: How does this look on the ground when these sort of you hit these peak day numbers and you don’t have The electricity from natural gas or otherwise to service that is this like blackouts rolling brownouts? Is it skyrocketing sort of this dynamic pricing? Like what how does that actually look for if I’m a consumer sitting in my living room in California?
[00:49:07] John: So DEFCON 4 is day to day, DEFCON 3 is you’re going to have to have rolling brownouts, DEFCON 2 is you’ve got blackouts that are sustained, and DEFCON 1 is that you lose so much to gas supply that you lose pipeline pressure in your utility distribution system. Which can take two months to bring back up. Let’s just say as an example, Colorado had an issue 14 years ago, where we almost lost pipeline pressure into our utility grid here. And the estimates are that it would take a month and a half to go out and relight every pilot light at every residential water heater and cooktop stove. So again, it can get really, really, really bad. They’ll do everything they can to maintain the kind of pipeline pressure so that they don’t lose it. The kind of pressure that allows them to serve as a residential user. But we’re not seeing the infrastructure built by these investor owned utilities. So I think maintaining that pipeline pressure on a peak day sometime in the next five to ten years
[00:50:14] Jamie: becomes an issue.
[00:50:16] John: It’s huge issue.
[00:50:17] Jamie: So let me ask you this. If you lived in California right now, yeah, if you were in Sacramento, what would you be doing?
[00:50:25] John: Buy a very, very, very, very large propane tank and arrange for propane tank deliveries to my residence. And I’m not kidding. I just. You know, and even then I’m not sure how long you can keep the lights on. And I don’t mean to sound melodramatic here at all, but ERCOT came very, very close to losing utility pipeline pressure, and they did everything that they could to maintain it. But, you know, that’s kind of a DEFCON 1 experience that I hope we never really run into here. But in order to meet the peak day requirements that are forecast, As as solar and wind take more and more baseload power generation responsibility, you’re going to have to increase the infrastructure for natural gas for those peak day demands. So the PJM, I talked about that earlier, the PJM, independent system operator for that part of the New England areas of New York, the Northeast, I mean, PJM is forecast by 2040 to need 167 percent increase. In their natural gas deliverability as against measured today. And yet in that same area, Jamie, there are people that are opposed to any kind of natural gas pipelines being built in their back in their backyard.
[00:51:51] Jamie: So that’s so just to break that down. So 160 percent increase. So that means at peak times. Over 160 percent more gas needs to go through. Presumably the pipelines that exist are already more or less full. So, I mean, I know I’m making this very simplistic, but like, without more pipelines, that gas doesn’t get through. Is that safe to say? And there’s no electricity.
[00:52:15] John: Yeah. You will not have reliable service in the PJM Northeast part of the US. If you don’t see additional pipelines being built,
[00:52:23] Jamie: That’s wild. That’s, that’s wild. And that’s scary, right? Because it’s happening in California and New York, which are the two most populous places in the United States. And in some, in some, you know, there’s lots of wealthy people that live there, but a lot of the poorest people live in those places as well, too.
[00:52:40] John: The, the, my fear is that this is going to be born on the back of middle income and low income households because they can least afford kind of the backup power. Here’s.
[00:52:48] Jamie: Yeah, they’re not, they’re not buying a $10,000 generator for their house, right?
[00:52:52] John: No. This is sort of scared the hell out of you. A good friend of mine was the moderator. Of a conference for electric utility executives. Okay. Three years ago, four years ago now. And so there are 200 of these investor on utility co-op execs all at this conference over 200 in the audience. And he said, how many of you have your own independent power backup at your own residence. And he said 95 percent of the men and the people in the room raised their hand.
[00:53:21] Jamie: Because they had concerns. Yeah.
[00:53:24] John: Yes. They know. Go take a look at what’s the stock that the independent backup generator you can buy for your house. Look at their stock valuation. I can’t think of the name of the company.
[00:53:35] Jamie: I don’t know the name. Yeah. But is it going up? Is that the, the price there?
[00:53:40] John: It’s skyrocketed in value.
[00:53:43] Jamie: You know, it’s, it’s crazy to think that in like this day and age in the United States, that we’re like having the power go out is a real concern and not because we can’t do it because the regulations being put in place make it almost impossible to succeed. So here’s my question for you on that. Do you think that, you know, you mentioned the, the comments sort of event at some point physics wins over rhetoric, but Do you think that regulators and politicians in, you know, the New Yorks and Californias of the world wake up before it’s too late and say, look, we actually got to build the infrastructure to make sure we can service our populace? Or do you think something horrible has to happen before people say, oh, shit, we’re This is a real problem. We got to fix it now
[00:54:36] John: I think the Winter Storm Uri and the ERCOT example is probably the best example Is that they have kind of created a new system. It’s not an energy only bidding market system down in texas now But there’s some base load generation that if you don’t show up with it, you get fined you lose you get penalized I think the real problem is that,
[00:54:56] Jamie: but this is Texas, right? That’s the most pro energy state.
[00:55:00] John: And I think there’s going to have to be some major accidents and major prolonged outages for the regulators to wake up because they’re appealing to an audience of people that really don’t care to be educated. And when you say, what do you mean by care to be educated? The state historian for Colorado, a couple of years ago, it was a very different friend of mine. And I said, you know, Patty, if I could just sit down with someone and explain to them how this machine works and how fragile it is, I think I could change their mind. And she said, John, Some people don’t give you permission to teach them and so it’ll take that kind of an outage or problem to educate them I’ve got to tell you a funny story. This is a true story and you’re not going to believe it But
[00:55:41] Jamie: Okay, I’m ready
[00:55:42] John: member of the Colorado oil and gas association I was asked to go out and speak at different functions about hydraulic fracturing five years ago six years ago Got invited up to northern Colorado Rotary club back room of a village in lunchtime. I’m the speaker. I’m supposed to talk about hydraulic fracturing about 80 people in the room. I opened up with I said, Look, I’m going to tell you today about hydraulic fractured. If I used any kind of industry jargon, stop me, you know, raise your hand. I don’t want to lose you. So I started and I said, folks, you got to realize that we’re getting so good at drilling now that we can drill down two miles. Take a right hand turn and drill two miles through a natural gas producing formation or oil producing formation, formation that’s no thicker than this room is tall. And we’re so accurate with that drill bit because of computer technology. There’s a breakthrough is we can hit a target at the end of that two miles at the end of four miles. We can hit a target the size of a refrigerator. Well, Jamie, in the back of the room, his hand goes up, and there’s this elderly woman, and she, she, I said, yes, ma’am. She said, you mean to tell me you’re burying refrigerators underground? And the whole crowd just kind of looked at him. It was kind of one of those, I can’t believe Aunt Betty came today. So the only thing I can think of, I leaned into the microphone, I said, ma’am, that’s a metaphor. And she responded with, I don’t care what brand of refrigerator it is. Now you think that that’s a made up funny story. That is gospel truth. I’ve got witnesses. But there are people that don’t care to understand, don’t care to be taught. They have no intellectual curiosity and that’s not until There’s some kind of significant upset in their life, like doing without electricity that the regulators that are supposed to watch out for them will wake up. That’s my fear.
[00:57:38] Jamie: Yeah, and it’s a, it’s a good indicator of the, I guess call it general energy competency within the United States and, and the, the role that it plays in people’s mind, which is shockingly limited
[00:57:51] John: And the lack of intellectual curiosity.
And, you know, the fact is that the
[00:57:55] Jamie: lights have just turned on. For so many years that no one has to think about what actually has to go into turning them on and what it might actually be like if they didn’t,
[00:58:05] John: We’ve taken it for granted. And it’s a sad testimony when, when you consider that, you know, I, for me, when, when people start talking about the climate change issue, and, you know, we’ve got to eliminate fossil fuels. My first comeback is, what about fertilizer? And then people say, what do you mean, what about fertilizer? And I said, well, there are only four grains in the world, wheat, rice, corn, and soybeans, only four. And that, those make up 70 percent of the caloric intake worldwide. And each one of those grains relies heavily on three fertilizers, phosphate, potash, the two fertilizers we mine, but then also man made nitrogen based fertilizer, ammonia. And did you know, folks, that you think you’re going to do without fossil fuels, that if you do without nitrogen based fertilizers, five of the eight billion people on the planet will starve to death within five years. Plant based diets can only be, can only serve, can only help three billion people stay alive. And so then they say, well, that can’t believe that. So we’ll take Sri Lanka is an example. You know, President Gotabaya in April of 21 banned synthetic fertilizers. Okay. 85 percent of synthetic based fertilizers made from natural gas. 15% of it’s still made from coal in China ’cause they don’t have enough natural gas. So what happened in Sri Lanka, they had a 20% decline in domestic rice production is six months, a 50% surge in domestic rice prices. They paid $450 million for rice imports. They lost $425 million in their tea crop, and they incurred a $40 billion debt default. Because of that position that we cannot produce, we cannot use synthetic fertilizer. What do you think the, the, the farming wars are in the Netherlands? It’s all about their ability to use synthetic fertilizer based on natural gas, based on fossil fuels. So, okay, if you want to cure climate change or the concerns that you have by eliminating fossil fuels, the cost of that will be half the planet’s population. Those are just stone cold hard facts. I mean, Norman Borlaug, who is kind of the father of the green revolution. He was the 1970 Nobel laureate. He said, there’s a basic problem to feed eight billion people without fertilizer. You can’t do it without synthetic ammonia based natural gas feedstock based fertilizer. You can’t do it. You just never hear that discussion.
[01:00:46] Jamie: Do you think that, do you think that the policymakers driving these positions, do you think they’re just, I guess I’m kind of asking you to answer some philosophical question, but do you think they’re just naive to the role of this, or do you think there’s something kind of more nefarious there in that people are, you know, I don’t really buy into a lot of the conspiracy theory side of things, but I do think people are driven by economic incentives, and when you, there’s a lot of people incentivized to make money off the Green Revolution, they’re going to do it, and they’re going to lobby their, their congressmen and their senators to support that, and, you know, it just becomes a, it becomes a business, and this gets pushed off to the side. I’m kind of answering my own question, but what do you think is going on there?
[01:01:35] John: I think it’s a mix. So let’s, let’s talk not about a political leader, but a faith leader. Do you think, I’m Catholic, do you think my Pope is aware of what I just ran through on food?
[01:01:44] Jamie: I would say it certainly does not align with his narrative.
[01:01:49] John: His narrative is we’ve got to do away with fossil fuels, but there’s intentionally there are cardinals and advisors to him that are not telling him about this. And I’ve talked to a bishop about I said, How do I get through to make him aware of this? I said that there’s no way based on what He stated publicly that he can be aware of this. There are other politicians that see this as a way to elevate themselves because there are so many people that are just in favor of eliminating fossil fuels, eliminating fracking. When they have no concept of scale, they have no concept of the economic, societal impact that that sort of position is going to take. You know, it’s, it’s to me, that’s my worry about the future. My, I’ve got three kids all in their twenties and Jeremy, Jamie, they can give this speech and they’re constantly getting caught in arguments with their more progressive friends at that age saying, you have no idea what you’re talking about. You have some intellectual curiosity. That’s why I, I’ve told you when you said, would you like to be on a podcast? Any time, any place to get this message out. And it’s just about it’s just about fertilizer. I mean, consider this in 2019 the world you used a staggering 4. 5 billion tons of cement, 1. 8 billion tons of steel, 370 million tons of plastics and 200 million tons of fertilizer. All of those are, you know, fossil fuels are critical to the production.
[01:03:24] Jamie: Yeah. Yeah, incredibly energy intensive.
[01:03:29] John: It’s, it’s stunning how little some people care to know or want to know about the scale of this energy issue.
[01:03:37] Jamie: I’ll give you a, I’ll give you a story. It’s similar to what you just told me. So about a year and a half ago I was in where was I was in Italy and I was at an event and I met a European energy lobbyist. I think he was French, but don’t quote me on that one. And we were talking and this was as things had kind of, we’re starting to go to hell with Russia and the, and the Gazprom pipeline had been cut off. And I mean, he said to me, he was like, oh, you know, this is disaster. It’s all comes down to our reliance on fossil fuels. The sooner we get on to totally renewable energy. A problem like this will never occur and I just remember, I don’t even think I argued with him. I kind of just like sat there slack jaw and was like, this guy’s entire job is energy. And meanwhile, at this point, you know, Germany shut down their nuclear power plants. They’ve left themselves totally exposed to, to Russia. They’re firing up coal fire power plants in a way they haven’t in decades. And this
[01:04:36] John: Lignite, lignite coal.
[01:04:37] Jamie: Yeah. Yeah. Because their renewable infrastructure is failing to meet demand. And it’s like, and this guy’s only answer is, well, you know, we need more wind farms. And I was just like, how the hell does someone whose job is in this industry, not see the risks that they’ve built into their system? And I think he was totally genuine. That’s the thing. I think he, I think he believed it and it’s wild. Yeah.
[01:05:01] John: Well, think about the impact on a low income household. And I was raised in a low income household. My mom would, would sweat bullets over a hundred dollars a month gas utility bill. Think about the impact on the, what we’re seeing right now in Germany is the deindustrialization of Germany. Had that gas outage been prolonged, had LNG not been available, had we not had the shale revolution here, the amount of fertilizer that would have been available for sub Saharan Africa would have been a third of what it is now. Okay, so imagine this. Also, if you if you Peter Zion. You look at the demographics of births, 60, excuse me, 52 percent of the birth by 2050 will be occurring in sub Saharan Africa. Guess where the most difficult place to get fertilizer to on the planet is right now?
[01:05:54] Jamie: Sub Saharan Africa?
[01:05:55] John: This is a train wreck of epic proportions that’s coming our way because of this naivete or just this platitude that, hey, we can do without it. People don’t get how critical it is.
[01:06:07] Jamie: And I mean, it wasn’t that long ago that there were famines in Africa, right? All throughout Africa. When I was a kid in the 90s, I remember, you know, you see the commercials on TV raising money for it. And there were the Live Aid concerts and whatnot raising money for it. And it wasn’t, you know, it’s less than a generation ago that that was a global issue.
[01:06:25] John: Well, I think in the future, we may see some of these famines. Famines that I think will occur blamed on climate change.
[01:06:33] Jamie: Yeah. So,
[01:06:34] John: people at risk are the people, the people at risk here are the people, the 1. 2 billion people, 20 percent of the world’s population don’t have electricity right now. That some French regulator is making decisions that will impact whole regions of Africa in terms of what it might be able to, how they might be able to feed their children. And so I, I get very upset, very emotional, very concerned about it to the point where. I just, I can’t talk about it enough to people. My poor wife, I think, can give this talk right now.
[01:07:07] Jamie: Well, I appreciate you coming on today and running us through this and giving a bit of a course on this, you know, you and I have been chatting a lot over the last couple of months and you’ve been helping advise me and my team on this sector, let me ask you a question that I try to ask people so you can answer this whatever way you want. If you’re just like most of our, our listeners, middle class person, somewhere in middle America or Canada or Europe, and you’ve got 100, 000 and you want to address this problem for you personally, now thinking about what’s going on in gas, what does that look like for you? Do you, do you buy a generator? Do you invest in that gas stocks? Do you, I don’t know, buy futures? How would you do that? If I gave you that today and said, John, you got to spend that money in the next 12 hours, what do you do?
[01:08:02] John: I honestly, I think I’d look at one of the butane, propane, butane exporters, look at their whole portfolio and try to determine how much of that You know, these are big companies, obviously, Energy Transfer, Enterprise, Phillips 66. They’re only, look at butane, you know, do your own research, folks, but look at propane and butane exports on the water. There are only about seven companies that do it. The amount of demand in Asia for those two products, the ability to get it there. The ability, there’s a neat little company out of British Columbia and even I think Bellingham, Washington that’s exporting propane and butane that doesn’t have to worry about the Panama Canal capabilities. Mm hmm. I think it’s AltaGas, something like that. And i, I just, you know, check them out, but I think about the incredible demand for that product, propane and butane where it rests and then where it is, you know, where it’s located and think Permian Basin, think of some of the wetter shale gas plays and kind of noodle through it. Now for me, that would be a five year investment, not a flip it, you know, in six months, kind of a deal. You want to be risky. Watch the winter contracts for NYMEX over the next two winters. You know, take a look at the JKM price or the price delivered to Europe comparatively. You know, look at the LNG stocks, look at the LNG shipping stocks, look at the, the ship, the ship companies that own the propane and butane carriers. That’s kind of what I would dig into right now. Look at the midstream companies in the Permian that are going to have to solve the liquids, NGL and the natural gas solution for those smaller producers. There’s a lot to research a lot. And you know, the market will work this thing out. But it’s just try to understand the scale of it all and where your investment might fit in that scale.
[01:10:06] Jamie: You’ve been doing this, I think you said for almost 40 years now, you’ve been doing this pre shale revolution, during the shale revolution, post shale revolution. What’s your general sentiment on the US gas sector today? You know, comparatively throughout your career, is it, is it high, low, medium? How do you feel about it?
[01:10:25] John: Here’s a really tough part, Jamie. I looked at this a few years ago, and I think it still holds true that 90 percent of the open interest position on the NYMEX natural gas contract, 90 percent of the open interest position is the next three months. So there’s no liquidity on anything beyond three months. And that’s why I think we’re completely understating the value of that natural gas relative to the demand that we’re going to see when these new LNG facilities come on board. And the trader does the coefficient correlation predictability of that price relationship predicated on a model that’s going to completely change when these LNG facilities come online. You know, but he just can’t see the counterparty interest in it because, again, you have this short term, not mid term, not long term look on that gas. You know, as a friend of mine said, you want to buy the horse at the gate, not the finish line. And I think any investment in natural gas is going to be a good investment, but there are better investments within the trade itself also. But think about that. If only, if your NYMEX price If the open interest position on current trades is only the next 90 days, it doesn’t reflect what’s about to happen with all the huge expansion of LNG export facilities. All waters will rise, I think. We might even see a positive price in the Permian, too. We’ll see.
[01:11:55] Jamie: All right. John, we’ve come up on just over an hour now. Anything I didn’t ask that I should have asked? Anything you want to say to people before we say goodbye?
[01:12:03] John: No, just tell your friends to have some intellectual curiosity.
[01:12:07] Jamie: Well, I can tell you the people listening to this definitely do. So I think this will be very well received, and I appreciate you taking the time today.
[01:12:14] John: You bet, Jamie. Thank you.
[01:12:16] Jamie: Take care.
[01:12:17] John: You too.
Jamie Keech
CIO; Editor
Nick D'Onofrio
Head of Research
