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Oil and Gas Investor

Sometimes dressed in a self-described pink power suit, Regina Mayor, KPMG’s global head of energy, spent March globetrotting. She visited oil companies in India, talked shop with OPEC leaders and saw a new intensity in decarbonization in the United Arab Emirates (UAE).

She listened to world energy leaders irked by their exclusion from the U.N.’s Climate Change Conference, COP 27.

As the world plunges into the chaos of war, inflation and potential recession, Mayor and KPMG, one of the world’s largest accounting firms, see opportunities in that disorder. She also sees the necessity for all fossil fuel companies—whether members of OPEC or independent E&Ps in Texas—to find their place in the low-carbon narrative of the future.

Darren Barbee: You recently did some traveling in March. What took you abroad?

Regina Mayor: I was in Delhi for two days, Abu Dhabi for two days and Dubai for two days. So, it was action-packed. Part of my mission was going over to support the launch of one of our decarbonization hubs we kicked off in Delhi. We’re creating a series of decarbonization hubs all around the firm; we’ve got one in Australia, we’ve got one in the U.K. [and] we kicked off one in India. And these are hubs of expertise to help companies define, achieve, measure [and] report their net-zero commitments. So, what are your pathways to decarbonization, what’s your strategy, how do you decarbonize your products and your operations? And then, how do you effectively measure, transparently report, comply with all of the regulations that are swirling around? And we believe, given the fact that we’re a public accounting firm, that we can help clients run cradle-to-grave in support of that overall energy transition.Oil and Gas Investor June 2022 C-suite Chat - Regina Mayor KPMG

“If I were to bet on which development in the U.S. has the longest, most prolific, largest source of production, I’d place my money on the Permian.”—Regina H. Mayor, Global and U.S. Head of Energy and Natural Resources, KPMG

We had a formal event [with] about 100 clients, senior executives there to help us kick it off and talk about the challenges of energy transition for a country that is not as developed relative to its energy ecosystem as India. And it’s a country that’s highly dependent on fossil fuel imports; they import 85% of all of their energy needs. So, how they make the transition is critically important. I was there for that, did some media, got to meet several senior executives from some of the largest Indian oil and gas companies, as well as the government officials. And it was [when] the war in Ukraine had just started. And so, talking about the opportunity to buy the stress, cargoes of Russian crude and what that could mean for the Indian government and what their strategy was.

Then we headed to Abu Dhabi to see our team that supports ADNOC [Abu Dhabi National Oil Co.]. That was really eye-opening, so we had the discussion about OPEC+ and what they might be considering prior to the actual meeting. And then [we] went to Dubai because I was a guest speaker at the Atlantic Council’s Global Energy Forum. It featured a number of very senior executives, as well as energy minister-types. And I got the chance to meet [OPEC Secretary General] HE Mohammad Sanusi Barkindo, and as a groupie of the energy industry that was the highlight of my trip, having lunch at a small group table with him.

DB: Your last trip through this area was in 2018. What things did you see that had changed?

RM: I think the biggest change is how prominent the energy transition and decarbonization conversation is. When I was at the Atlantic Council’s Global Energy Forum, HE Dr. Sultan Ahmed Al Jaber was there. And Abu Dhabi is hosting COP 28, not 27, which is in Egypt this year, but 28, which is next year. And he said, “COP 28 will be the most inclusive COP to date, where the energy industry has every right to sit at the table. Because if we’re not there leading from the front, being the scions of technology and innovation in energy as the industry represents itself today, I don’t think the world can decarbonize. I don’t think you can decarbonize without all of the international oil companies and the national oil companies leaning in and playing a role.”

I think the industry was chagrined that they were left on the sidelines purposefully when COP happened this year in Glasgow, and I think the industry is vowing not to let that happen to them. So, that would be the biggest change, how prominent the energy transition features in, how decarbonization is a part of every conversation; there’s not as much talk about, “Oh, maybe this is a fad, maybe this will change.” And then the second piece is the global pickle that we all find ourselves in where we just don’t have enough oil and gas resources that we need to power the energy demands of today. And so, we’re seeing these massive commodity price spikes that a lot of people didn’t necessarily expect. I know there were some that said, “$100 oil is coming.”

And there are some that are saying now $200 oil is in sight. But $100 oil was not conventional wisdom, even just a year or two ago.

DB: Did you sense any tension among OPEC members? I remember in the past years, whenever there was a quota there was a presumption by U.S. oil and gas producers that OPEC always cheats on its quotas. It seems like it’s the opposite now; they can’t quite get to the quota for a variety of reasons. What are your observations about the way OPEC is functioning right now?

RM: I did pick up quite a bit of interesting insight. I think something that we all have to pay close attention to is that OPEC is not a homogenous block. As you pointed out, there’s the behemoth, which is Saudi, and then there’s sort of the rest. And it’s a little bit of cats and dogs, relative to the size of these quotas for some of these countries. And the cheating was more with players that didn’t necessarily move the needle anyway. So, I don’t think that there’s concern whether or not Nigeria might cheat or other countries like that. Now it is the case that the smaller players really can’t meet their quotas, and I think they’re just suffering from the underinvestment and the lower-price environment that we found ourselves in.

So, there’s sort of that part of OPEC. The Emirates are keen to ensure that people don’t forget that it’s not just Saudi and Russia, [and] that they actually are sitting on very substantial reserves, particularly when it comes to natural gas. And if natural gas and LNG becomes a big part of the calculus at getting the EU off its overreliance on Russian gas. You know, the Middle Eastern gas reserves or even the gas reserves that we see in northern Africa and Israel for example, [they] all potentially become part of where future supply can come from. So, I think the Emirates are really keen that nobody forgets them, and they are 10% of OPEC.

And then the intel that I picked up is that at least from what people will tell you in the region, they are not producing as much as they could, and that there’s still substantial reserves that are on the sidelines that are purposefully being kept out by the Saudis and by the Emirates in particular.

DB: Did you get an idea why? Is it political?

RM: I think it is political. I think it boils down to, they have been underfunding their country’s budget balances for years. I mean, it was two years ago this month [April] when we had WTI [at] $37 per barrel. So, there’s not a desire to put all of the reserves back into the market and have the number drop substantially below a hundred now that it’s at a three-digit figure. And especially if you do believe the narrative that at some point in the energy transition, maybe global fossil fuel demand is cut in half, so maybe it’s 50 million barrels per day. So, who is going to be able to monetize that asset? And so, you want to get the most money that you possibly can for the barrels that you have today because you know it’s a diminishing resource in terms of the overall mix. And you know, at some point it’s not going to be as valuable.

DB: What were your observations regarding India? They haven’t been quite as forceful with their denunciations of the Ukrainian invasion. They’re in a more nuanced situation regarding Russian crude.

RM: I think it just goes back to their 85% reliance on imports, and the price of crude was around still at $100 per barrel today, whatever the current price is at. That’s very expensive for a country that has to import that [volume]. So, it helps them on the one hand because they have lots of sun and lots of wind. They’re experimenting a lot with renewables and waste energy types of programs so that they can accelerate their movement away from the heavy reliance on imports. But in today’s world, that’s where they are.

And coal is still—I remember speaking to the head of the gas company, and this was back in 2018. At that point in time, coal was still a third of the cost of gas. So it was like, “Am I going to keep my people warm and feed their bellies? Or am I going to spend three times to keep them warm so that I can provide for other things that they need?” Education, welfare, food, et cetera. So, it’s a country that doesn’t have the vast wealth that other countries have, and they don’t have natural resources that they can then monetize to raise the standard of living for their own people. They have to be economical about the choices that they make.

DB: Does it surprise you at all … that they need to provide energy for their people. So, it’s a different kind of moral question.

RM: Exactly. So if you have a population that is as impoverished as theirs is in certain pockets, I’m not saying it’s across the board, but it’s a very, very large population that doesn’t enjoy all the standards of living that a lot of Western nations do. So, you can’t afford to take an economic moral high ground when you have your own population that’s suffering.

DB: As you watch the Ukraine war, how do you make sense of this from a macro point of view, an energy point of view?

RM: Well, I think that the key ramifications of what’s happening today is the heightened focus on energy security and energy diversification because I think some folks would say we sort of sleepwalked our way into the EU being 40% reliant on Russian gas, and how did we collectively let ourselves get into that situation? And 40% is an average. Some countries it’s 70%, which is just, that’s a big head scratcher.

I think that’s what the long-term repercussions of what’s happening now are that we as a collective society perhaps got a little spoiled with regard to how everything seems so abundant and cheap and always available. And this is reminding us that we always have to protect [supplies]. So, I think that’s the long-term repercussion.

The second long-term repercussion is it will accelerate the move toward alternative energies and the energy transition because the double whammy of really, really expensive fossil fuel commodity prices and the volatility of those prices will push the trillions of spending that we need to make things more reliable, more affordable and trend toward more renewable technologies.

DB: Do you have any underlying worries about a possible recession, about demand destruction or the chronic underinvestment in oil and gas production?

RM: There is a scenario that says, this war, this conflict continues and maybe there is no end. I haven’t heard that it could go on for a decade, but I’m hearing it could just continue like this for months. So, what’s the repercussion? We’re already seeing evidence that Russian production of oil is declining, and you’ve had very high-profile departures of western energy companies from that region. So, that could exacerbate a more precipitous decline. And they have roughly 10% of the oil that we use today comes from that part of the world. So, that is a scary scenario when you potentially imagine that kind of output coming out of the market.

Hopefully, it doesn’t come to that because you still have countries that are amenable to purchasing those crude barrels so they’re not completely isolated from the market. And hopefully, nationally owned companies that operate in Russia have the wherewithal to maintain some level of production so that you don’t see the precipitous drop.

And then the question of access to capital from other sources. I guess I get less worried about the doom and gloom, negative downward spiral that this scenario that you had just described because I’m seeing bigger [resource] finds. So, you had the announcement from Exxon Mobil on another big Guyana development. You’ve seen the quieter announcement but the big find of Shell and their partners in Namibia.

You’ve got what Chevron is saying that they’ve got in Israel. So, I think we’re seeing other sources that can come to market relatively quickly. I mean, even the Guyana one was 2025, right? So, that’s only three years from now for quite a lot of production boost to come in. And then you said you were going to save the shale guys, but to me that’s another wildcard in here. You are seeing rig activity pick up in the Permian again, and the Permian could end up being a very strong last man standing scenario, even in a 50-million-barrel-a-day energy transition for the outlook.

So I get less pessimistic about the other sources of capital because I think that the markets have tended to show in the past that there’s no shortage of capital for oil and gas, and I think that’ll continue to be the same. Especially with the companies making their net-zero commitments and demonstrating how they can create lower carbon footprints of the underlying products.

DB: I love this idea that the Permian may be the last man standing. How soon do you think we will get to that point?

RM: I think the Permian will remain the most prolific basin and my sense from talking to the folks that know the rocks and the fiscals out there. My GoM [Gulf of Mexico] players will say they are going to be the last man standing, so is it [the] Gulf or the Permian? And one Permian senior executive said, “I wouldn’t dip my big toe in the Gulf of Mexico, absolutely not.” This is where we will be the last man standing. I mean, it’s easier, it’s quicker, it’s cheaper, it’s faster, it’s there [and] it’s got the right regulatory regime. You don’t have the vagaries of the federal government, are we on, are we off? The investment cycle’s nowhere near as long and as large and severe.

And so, I think yeah, if I were to bet on which development in the U.S. has the longest, most prolific, largest source of production, I’d place my money on the Permian.

DB: Some investors have washed their hands of fossil fuels. Have you seen any backsliding as we see returns from E&Ps and other energy companies prospering?

RM: I would say there’s two components to what we’re seeing. I would say there’s still a hardy group of investors that are saying, “No, we’re just not going to invest in fossil fuel companies.” So, I’m not seeing a change in that demeanor. But when you look at the overall landscape of potential sources of capital, that’s still a relatively small fraction of the total. And more discerning investors are seeing what the energy companies can do that could be hugely additive to the world’s ability to address climate change, carbon-capture sequestration, clean hydrogen, biofuels and the e-fuels, carbon-neutral gasoline. My clients are seeing a lot of interest from green investors that want in on those kinds of projects.

So, what you might end up seeing is several different types and stratas of capital that come in for the clean projects. I may not want to invest in oil and gas production, but my large clients are not worried about the cost of capital at this point. I keep telling them they need to because I do see the inflation rate and the challenges with certain investors. But these guys and gals have phenomenal balance sheets; you’ll see it in their earnings coming out. There’s not a shortage of capital, I don’t think that they see the death knell. I think investors, especially the ones that have committed to green investing, they’re going to want in on those specific projects. So I might not own IOC [integrated oil company] stock, but I might buy in. 

DB: What are your views regarding the health of the global economy? The International Monetary Fund said in April that the war in Ukraine would slow the post-pandemic recovery.

RM: Even with all of this uncertainty and volatility, a person on our leadership team from all over the world remains very bullish about our business. Our business thrives on disruption because disruption means change, and change means you usually need somebody to help guide you, especially when you want to think radically, differently about your business, your operating model or cost takeout or how you improve performance.

And so, yeah, I think even with the uncertainty and some of the concerns about the economic outlook we’re a little bit of the canary in the coal mine, so we’re still pretty bullish about opportunity and what business is going to want to achieve on a global basis. Even things like “my supply chain’s been disrupted.” All right, well that means you need to redesign your supply chain; that’s a consulting project. So, there’s just going to be lots of different things that companies need to do to respond to be resilient and productive in all of these changing geopolitical circumstances.

DB: Do you think we’re going to see a realignment of the way that Europe gets, especially natural gas? And do you see the U.S. emerging as a leader in LNG?

RM: It does absolutely redraw energy supply routes and trade maps. So, I think Middle Eastern gas becomes so much more important as well, and then I do think U.S. LNG—even though Henry Hub’s gone up much further than I would have ever thought—is going to remain a very, very large exporter of LNG. I think you'll see more of those LNG projects come online.
My last client visit pre-COVID was a dry-gas producer in Appalachia in March 2020. I was like, “Good luck with that business model.” They’re minting money right now, you know?

DB: What about oil? Will we see any changes with oil exports?

RM: The question mark becomes, how much more crude can the U.S. really produce? So, will we get to the 12 million barrel per day mark? Will we get to 13 million? And I think I was hearing a lot of question marks as to whether or not we could see a substantial increase. So a million, 2, 3 million barrels per day, to me that’s not a needle mover when you’re looking at demand that’s greater than 100 million barrels per day. The thing that I get on my soap box about when I’m in developing countries like India is, why are you just relying on crude? The world is long gasoline.

If we started making gasoline a globally traded commodity and having countries like China and India being comfortable buying cargoes of refined products instead of ensuring that they have the capability to do it themselves, then I think we get even more efficient use of the fossil fuel capability and production capacity that the world has. There’s just for whatever reason, maybe it’s energy security [or] energy diversification, which I was just harping on, that they don’t want to. They feel like they have to have the means to create it into the higher-end products themselves, and they only want to access global crude markets.

DB: When you look at your client base, how are they aligned regarding fossil fuels or renewables, or do you get a lot of “I don’t care which one, as long as it’s profitable, as long as it’s returning on my investment?”

RM: They’re very focused on return on investment. So, it’s not an emotional calculus, it’s “What do I think is going to give me the greatest returns? Then that is consistent with what I’m good at today? So, what are my core competencies, where do I invest and what can give the greatest returns?” So as a consequence, the things that can be really interesting is if you look at the biggest integrated oil companies, each one of them has a different strategy on how they’re going to compete for the future. This is probably the first time ever that they’ve all had a different strategy, and I was having lunch with a senior group of them, and they kind of commented on it themselves, “We all have different strategies now, so we’ll see.” 
But they’re all pursuing different ones, and to the extent that some are embracing renewables and others aren't, that's them making that choice of, “where can I get the greatest returns that’s most consistent with my core competencies?”

DB: What advice would you give U.S. independent energy companies as they look at the second half of the year and into 2023 from a strategic point of view and from a financial point of view?

RM: The biggest piece of advice that I give my clients now is you must have a carbon narrative; you must be able to articulate how your company survives, thrives and navigates the energy transition. And it needs to be compelling, and it needs to be backed up by action. So even if you say, “I want to be net zero by 2050,” what’s the 2030 objective? And most energy companies have put things out there that are compelling and actionable. Whether or not they talk about Scope 3 emissions or not, some choose to, some choose not to. But having that carbon narrative, and then starting to re-architect how your energy company remains viable when the world is using less and less of your products because that’s the aim, that’s the goal.

There are some utility company executives that I think are incredibly articulate about how they want you to use less of the product that they have to offer, and that’s what they’re here to do. So I think it’s all about your carbon narrative isn’t just who you are, it’s about encouraging your relationship with your customers to be different too. Use less gasoline, use less electricity and be a part of that narrative for the future. That’s my single biggest piece of advice.

DB: Those energy companies that have put out their various plans, and I’ve seen a lot of them, are they realistic in your view?

RM: I think that they are. I will say that we don’t know exactly how we’re going to do it yet, and I said to another executive what I hope is not a strategy. But, I also do believe that we will find the technologies that ultimately will get us there. And by placing a lot of mini-bets in different types of solutions, we’re going to find those technologies that will ultimately close the gap. So, we can see our way to 2030, seeing our way to 2050 is a lot harder. But I also know that by 2030 we’ll know a lot more, so that we know what the 2040s [have] got to look like to get us to 2050. And that’s how a moon shot ultimately works.

DB: Particularly in the past 12 months, we saw these massive mergers with very big companies. Do you think that’s going to be an ongoing theme?

RM: Yes, I do. I think we’ll see continued consolidation across the board. Shale is scale, and there’s a definite need ... You could drive a lot of synergies by collapsing some of those operating models, and it’s a little bit harder to do right now because of the crazy crude price. So, the multiples are probably through the roof, but to the extent that we can get some more compression in those prices, I believe we’ll continue to see quite a lot of consolidation. And then I also believe we’re going to continue to see more buying of startups, right?

They have these innovative e-fuels, or charging stations, you name it in terms of an alternative energy technology or solution. I think we’ll see more consolidations of those companies too. So yeah, we’re very bullish on the A&D market.