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Welcome to Big Digital Energy with Chuck Yates, Mark Meyer and Kirk Coburn. Weekly news in energy covering oil and gas and cleantech.
00;00;00;00 - 00;00;41;14
Unknown
Hey, Clyde, welcome to a special edition of BD Special Holiday Edition. I think my, regular co-host here off in different directions, hopefully, headed into, 4th of July holiday weekend early and it's a thrill for me. I've been, talking about this for a long time with origin to maybe come in and do a special edition or just come in for a general BD discussion, but our schedules, fortunately coincided on something specifically that I've been wanting to talk to origin about, and that is what's going on and what has led to where we are in, in refining and marketing.
00;00;41;14 - 00;01;01;04
Unknown
But origin want to just give our audience a brief introduction. I'm I'm happy to do it, but I think you tell the story better. I know it well, in my background, yeah, it markets, you know, it's great to great to be here. We of course met was probably about 25 years ago when you were at Goldman Sachs for a year.
00;01;01;07 - 00;01;19;28
Unknown
And we've stayed friends, and colleagues through this entire time. It really is a thrill and a pleasure to be here. You know, first 20 years kind of mostly sell side a little bit of buy side analyst. Mercifully retired from that last job at Goldman was was director of research that kills you managing a bunch of other crazy analysts.
00;01;19;28 - 00;01;46;04
Unknown
And we're doing board and advisory work for the last decade, and I'm still doing all that. ConocoPhillips more recently, Liberty senior advisor, Warburg Pincus and then joined, our mutual friend, my former Goldman colleague Maynard Holt, at his new thing, Veridian, where I've been now again, retired, working full time for the last three years. And it's been a lot of fun being kind of engaged back on the front lines of the energy sector with all the craziness that's that's been going on.
00;01;46;06 - 00;02;13;09
Unknown
Yeah. I've, I've always admired your expertise across a lot of the, you know, pretty broad spectrum of energy. And I think, you know, a lot of that came from living for 15 years with a front row seat to particularly the the integrated and the majors and the super majors. Not insignificant to that whole conversation, as has been the refining and marketing or the downstream aspect to those companies.
00;02;13;09 - 00;02;38;12
Unknown
But I will say one of the most brilliant things that you've done was elected to retire about six months before the Thanksgiving surprise of 2014. Neil made it gives me credit, he still has the, you know, dropping coverage or transferring coverage or whatever was called back then. Oil was still 110. And I will tell you, I, you know, I didn't know that was going to crash by November.
00;02;38;12 - 00;02;55;01
Unknown
But I did know I didn't want to go through another down cycle as sort of a sell side analyst and that kind of stuff. So there was some method to the madness. I will tell you, our Briggs guy, Jim O'Neill, also retired just to sort of China was rolling over back then, and I think it was a either a year before, a year after me.
00;02;55;01 - 00;03;19;27
Unknown
And so, do you know, whether that's luck or not, we'll, we'll take it. So, yeah, I think one of our, our first collective experiences and we talked in the pre-game yesterday, you know, Lee Raymond has been significant in both of our careers. I think revered is not too strong of a word. He was one of a kind.
00;03;19;29 - 00;03;50;04
Unknown
And I think it goes we're in the room. We weren't colleagues at that point. But in 1999, they held an investor analyst day at the New York Stock Exchange. And, that was jointly hosted, I guess if there is such a thing, if Lee Lee Raymond needs a co-host with Lou Noto, who was the CEO of mobile at the time, and I just the contrast and in personalities and styles was, was was pretty stark.
00;03;50;06 - 00;04;23;10
Unknown
You know, there is a lot of, a lot of interesting sort of takeaways from that specific exchange and meeting between, Lee and Lou and used the word revered. I've said if, analysts could have a CEO is a hero. For me, it is absolutely Lee Raymond. And I think there probably is it there certainly isn't an executive there may not be a person who's had a bigger impact on how I view analyzing the sector, what it means to be a successful company over the long run, what you should focus on, what you should not do, things to lean in on, things to push back on.
00;04;23;11 - 00;04;42;10
Unknown
I think I applied all of those learnings to how I viewed kind of, quote, the energy transition and the madness of the net zero years. It's what ultimately sparked sort of the creation of super spiked and the desire to push back, what I thought were completely incorrect narratives. But the, the philosophy of all that ultimately stems from from Lee Raymond.
00;04;42;10 - 00;05;00;25
Unknown
And I am sorry. And, you know, that he passed away just a couple of weeks ago. I will say that leading you're referring to, Exxon and Mobile had announced a merger. And while Lee was larger than life, Lou Noto was a highly well-respected CEO in his own right. I mean, there were some great CEOs in that era.
00;05;00;25 - 00;05;31;21
Unknown
I mentioned Core Hertz, daughter of Royal Dutch Shell, back when shell was a real giant of a company, and even the original incarnation. It has since faded, but the original incarnation of John Brown, when he was just John Brown and took, a really challenged BP in 1992, I want to say 1993, and made it the equivalent of a we weren't call them super majors there, but a company that became a pair of Exxon and Mobil and Chevron, that initial incarnation of John Brown deserves credit.
00;05;31;26 - 00;05;51;04
Unknown
But at that meeting, to me, this is how you do a merger. You had two legendary CEOs, two very successful companies. Mobil's got sort of as meaningful a history as Standard Oil Company of New York as Exxon, a Standard Oil Company in new Jersey did. But at that meeting, some analyst or investor asked Lou no to a question.
00;05;51;04 - 00;06;11;02
Unknown
And Lou turns to Lee and says, do you mind if I answer this question, or would you prefer to? And clearly, Lou could have simply answered the question or come up with some different answer. But but it was a clear signal. It was a merger of equals. But Exxon was running the show, and there really never should be a, quote, merger of equals.
00;06;11;04 - 00;06;36;07
Unknown
You need a management team in charge, and maybe you have a selection of, executives and so forth from the different companies. And they did at the end of the day. But there is no doubt that Lee Raymond was the CEO going forward, that Mobil was being acquired by Exxon. And I thought, Lee Lou Noto deserves a lot of credit for subsuming his ego and for saying, what's in the best interests of Mobil and Exxon Mobil going forward.
00;06;36;12 - 00;06;55;03
Unknown
It's for me to clearly signal to all of my employees that Exxon is in charge here, and that I have confidence and trust in both Lee Raymond and the Exxon Mobil management team. So that was a really telling exchange that that I can still remember. I still remember Lou's facial expression turning to Lee and saying, would you like me to answer this?
00;06;55;03 - 00;07;36;26
Unknown
Do you mind if I ask you this, or would you prefer to? It really stands out well, what? One of the highlights from that was probably more amusing than anything. I remember the servic legendary veteran analyst Mark Gilman was pressing on the returns objectives for the core ventures and sorting that was topical and timely. Those were big gas development projects in the kingdom and asking, I think he asked in paraphrasing, you know, basically implying that there would be a relaxation to get the deal done of Exxon's rigorous.
00;07;36;26 - 00;07;57;11
Unknown
And I think immovable returns target and. Lee's response was marked what? What makes you think I would answer that question for you?
00;07;57;14 - 00;08;17;06
Unknown
You know, Gilman was never afraid to to put it in a very pointed way. So he killed the one of a kind. I was a client of his for four years, and I actually have a great. And he was a servic. He had a unique personality, but the guy did his work. And, I'm not sure we have kind of analysts like that anymore.
00;08;17;06 - 00;08;35;14
Unknown
And frankly, this sector could use them. But I'll tell you an equivalent story. I was in Beijing. It was either with Doug Harrison or Jim Clark, but we were over in Beijing meeting with a bunch of different oil companies. And at the time, there was this really big, Chinese, I think it was a sour gas project that everyone was going to bid on.
00;08;35;17 - 00;09;01;28
Unknown
And Exxon Mobil at the time stood out. This is probably, this would have this might have actually been pre Mobil was probably would've been the late 1990s. And we asked Exxon executive in Beijing, why aren't you guys bidding on this. He's like, have you seen the returns on this project? I am not going to be the person who has to go to Dallas and explain to Lee why we've, taken on a 7 or 8% return on capital project that's going to be locked in for 30 years.
00;09;01;28 - 00;09;21;29
Unknown
That's sort of both fear of Lee, but also culture of profitability matters more than some strategic win in an important future country like China. And no one knew what China was going to become in terms of this BRICs dominant nation just a decade later. But at that time, the resistance to, hey, this is not going to be at the low end of the cost curve.
00;09;21;29 - 00;09;48;26
Unknown
This is not the kind of strategic project Exxon should be winning that culture, permeated all of all of legacy Exxon. Yeah. So the what would Lee Raymond do framework, I think you introduced and subs in your Substack super spiked which to all of our listeners and audience is free and it's a good weekly either watch or read.
00;09;48;29 - 00;10;09;29
Unknown
Typically I'm having Sunday morning coffee when I read it and it's, it covers a lot of, of the, you know, the kind of the vexing issues that we've, I couldn't anticipate dealing with, with the types of things that we've dealt with over the last 5 to 6 years in the midst of the quote, unquote, energy transition.
00;10;09;29 - 00;10;38;12
Unknown
So it's a it's a very thought provoking read and also very entertaining. You'll you'll also learn that origin is is a bit of a metalhead. Anyway, so I guess let's kick it off and, you know, all of the things that have been going on the last few weeks, Trump getting more vocal about retail prices lagging, crude oil prices in this air pocket that we've been in since the MoU seemed more certain.
00;10;38;15 - 00;11;11;21
Unknown
I still call it the memorandum of uncertainty. But to frame it in that kind of in that aspect, you've got a president who, in an unprecedented fashion and maybe because he's, he's been a, a profligate user of social media his entire social media life. And so basically taking the industry to task, you know, how would Lee Raymond be responding, if at all, in the midst of all this?
00;11;11;23 - 00;11;32;17
Unknown
I mean, I say the first point is always at the presidential administration level, right? The risk of energy ignorance, the risk of bad energy policy that is sadly bipartisan. It is not a question that the rhetoric from Democrats or the policies they may do is somehow going to be worse than what could come from the Republican side.
00;11;32;17 - 00;11;58;07
Unknown
I think both sides had the chance at a point of stress, to do actions that don't make sense. Now differentiate that from people further down the administration. I'm a huge fan. And absolutely love Chris. Right. For example, our Secretary of Energy, Doug Burgum, I think rightfully is very well respected. So a lot of people with deep and true energy knowledge in the Trump administration, and it may be a surprise to people that was actually true in the Biden administration.
00;11;58;07 - 00;12;17;05
Unknown
You didn't always see them. For sure. You didn't hear it out of the equivalent Secretary of Energy at that time. Did you go further into that administration? There were plenty of people within that administration that also truly understood energy. So this but that doesn't solve for dollar, $5 a gallon gasoline in the short term. So there's sort of gut reaction.
00;12;17;08 - 00;12;41;29
Unknown
What can I do to make it better in the short term? It's it's an Achilles heel of frankly, any administration. And we have worried as much about the risk of bad energy policy and the gut reaction of should we ban exports, should we do this or that from President Trump, as we would have, if, you know, under President Biden, I think the specific attack on Big Oil was honestly just simply shocking and ridiculous.
00;12;41;29 - 00;13;10;11
Unknown
I I'm not sure President Trump's quote was any different than what President Biden said about big oil price gouging, and I think that has since been corrected. He's now talking about retail gasoline as needing to get the price of gasoline down to 250 in his most recent post, but that still misses the issue. If you simplistically think of your gasoline price as the oil price, plus the refining margin, plus the marketing margin and plus some other taxes, the oil prices come down.
00;13;10;13 - 00;13;34;23
Unknown
The gasoline prices come down, but not as much. The difference is not the marketing margin. The difference is the refining margin. We've had outages, most notably, Ukraine showing some incredible success with their drone technology to attack and disable Russian refineries that are nowhere near, the country of Ukraine. You've had, you have the current summer driving season in the US, where demand seasonally picks up.
00;13;34;23 - 00;13;58;15
Unknown
And in a nutshell, and we were already having low inventories prior to, you know, prior to and then through this crisis, all of those have contributed to refining margins being about $50 a barrel. Instead of, let's just call it a more normal or long term average of about 20 to $30 a barrel. Difference in refining margins, divide by 42 gallons in a barrel.
00;13;58;18 - 00;14;20;03
Unknown
It's about 55 to $0.60 a gallon on the gasoline price. And if you were to duck the current average retail gasoline price by these higher refining margins, you would see that crude and retail margins are moving in lockstep. So the fact that big oil companies really don't own gas stations in this country anymore, they haven't owned them for decades.
00;14;20;05 - 00;14;39;28
Unknown
It is mostly mom and pop, privately owned businesses. There are some larger chains. There's a couple publicly traded companies, but it's essentially sort of a private, family owned type business. It doesn't mean they don't make money. They some of them do. They of course, make money on things like cigarets and beer and the convenience store as opposed to actually gasoline.
00;14;39;28 - 00;15;04;12
Unknown
So just the whole notion that somehow gasoline prices are being manipulated or being price gouged, it is never been true. And in my 34 year career, we've had both Republicans and Democrats instigate investigations about price gouging. They have all failed and this investigation will fail as well. And it is honestly just simply really disappointing rhetoric. But it is what it is.
00;15;04;14 - 00;15;40;18
Unknown
Yeah, I think we've said well before the 24 election and we're talking about, you know, I don't I don't know if we're conditioning the industry, which is our audience, that Trump is not an advocate or an ally of the industry per se. He cares about low oil prices and low gasoline prices. And I don't think that's really any different than I call it the kind of political emotional trigger when we have periods where gasoline prices rise and it's the thing consumers and the electorate see every day.
00;15;40;21 - 00;16;20;11
Unknown
And there's a pretty high level of ignorance, not stupidity, but ignorance about how the industry works. And you pointed out one thing what big oil doesn't control. I think it's far less than half a percent of the 150,000 retail outlets. And in fact, almost two thirds of those are controlled by single to two store operators. I don't know, a more, textbook example of a fragmented market or a level of fragmentation where the participant has zero price setting control.
00;16;20;13 - 00;16;51;17
Unknown
Yeah. Right. And so and we can get into, it may be a little bit dismissive, but when you see gas gasoline creep above four, if you look at what 2006. So take 20 years back, 2006 gasoline prices averaged. If you adjust for inflation and bring them up to $2,026, we're at $4.83 a gallon for a US average gasoline price.
00;16;51;19 - 00;17;17;04
Unknown
And I think gasoline in particular has been one of the most inflation resilient commodities over time. Not insignificantly, at least in, in the last 20 to 25 years, because the US industry added 9 million barrels a day of production from a US trough of around 5 million barrels a day in 2006 to now knocking on the door of 14 million barrels a day.
00;17;17;04 - 00;17;41;07
Unknown
So, you know, there's there's there's ample evidence and data that suggest, you know, we're in a really good place as far as, crude oil and refined products go from a consumer, an electorate impact step, standpoint. But that doesn't really matter because I get emotional and I see the digital, you know, the price on the digital signboard.
00;17;41;10 - 00;18;07;07
Unknown
It's branded Exxon, therefore big oil and price gouging. The thing that's been missing in the whole political discourse, I guess, is the old playbook, the congressional playbook dating back to one fall profits tax days. There was always a parade of industry executives into these show show hearings, you know, for a good would sharing with accusations of price gouging.
00;18;07;10 - 00;18;17;06
Unknown
Congress has not been as high profile here. And maybe they're just kind of drowned out by what's coming from the presidential level.
00;18;17;08 - 00;18;39;13
Unknown
Absolutely. Now, you know, I we have been critical of sort of bipartisan energy policymaking. I do want to highlight in a bipartisan fashion two examples where a longer term view was taken. The first was Bush, and so after, I guess it would be Gulf War two, we went into Iraq. And that was also the start of the China Bric supercycle.
00;18;39;15 - 00;19;03;02
Unknown
The focus there was on how do we add supply. But he also focused it on how do we improve the efficiency of our energy usage. And both things are always needed. So that was the original rules to basically enable fracking. I think Vice President Cheney deserves credit for understanding, what, specific legal language needed to be in a specific bill.
00;19;03;02 - 00;19;24;03
Unknown
And that is protected the fracking industry ever since it got passed and there was an explicit desire to motivate, at the time, shale gas drilling. And that was might have been in the plans and it might have been in a bunch of different areas. And suddenly it turns out that the Barnett and then Appalachian that led to the shale oil revolution, which was not anticipated in 2004, but is how we solve that.
00;19;24;03 - 00;19;51;07
Unknown
But it was president W Bush and his administration saying we need to motivate supply. But President Bush also pursued alternatives to energy. We can perhaps critique some of the choices made, the initial expansion of bioethanol. I'm not clear to me that that really is good for the environment. It's not clear is good for anything other than farmers. But the original ethanol mandates, trying to focus on things like cellulosic ethanol and miles per gallon.
00;19;51;11 - 00;20;17;02
Unknown
These were all things that President Bush also promoted along with supply. We're going to try and make our economy more resilient on the demand side, and we're going to try and grow. Absolutely. What's needed. Even if you want to critique some of the specific steps you took on things like bioethanol as an example. And while President Obama rhetorically often sounded anti oil and pro-environment, the reality is he specifically used the phrase all of the above.
00;20;17;02 - 00;20;42;04
Unknown
It actually comes from him. He certainly didn't get in the way of fracking. So we can say that he didn't promoted as W Bush did, but he also made no real effort to get in the way of it. And what he did do, because there's political realities here. Say, I'm going to pick on one specific pipeline, the Keystone XL pipeline that connects like five Canadian heavy oilsands producers to a handful of Gulf Coast refineries.
00;20;42;04 - 00;21;02;14
Unknown
So I'm going to upset the least amount of people, eight generally unsympathetic companies to the general public. And if we're being pragmatic about it, he probably saved a bunch of wasted capital, because if that pipeline had gone through and you referenced the crash in oil, when I elected to retire at Goldman, we would not have needed that pipeline probably till right now.
00;21;02;14 - 00;21;22;08
Unknown
So it's still say I disagree with President Obama's decision to block that pipeline. I don't think that was a good decision, but it it honestly did not really matter until probably literally right now when what I think we could have used a pipeline otherwise. He promoted all of the above and also tried to take the steps on increased fuel economy and so forth.
00;21;22;15 - 00;21;44;08
Unknown
And some of the extremism we see on the left today about, you know, energy transition and climate crisis, types of mandates. That was not a feature of the Obama administration. So I just want to give president W Bush and frankly, President Obama credit for at least being two people in the long history of bad U.S. energy policy of having but that trend and have tried their best to have that long term.
00;21;44;08 - 00;22;23;04
Unknown
And if Keystone had come online, it would probably save the US upstream industry from making worse than 0% return on capital. In the first decade of the shale revolution. I mean, it it it would be interesting whether, you know, would shale have grown slower if that had come on, I don't know. But yeah, it for sure. There would have been a bunch of wasted capital, no question about, I mean, pragmatic things on, you know, like cafe standards or miles per gallon, standards, you know, the typical, American is as has been demonstrated, you've talked about this a lot over the course of your career.
00;22;23;07 - 00;22;53;14
Unknown
We want more and we want more now with respect to what we choose to drive and how much power and how much fuel that consumes. And so that is, you know, that is completely overrun the pivot to smaller, more efficient vehicles, right? So didn't have the demand lever impact that it was intended to have. And I think that's, you know, as we've seen largely cultural, Mark, this is the biggest reason the peak oil demand forecasts have failed.
00;22;53;17 - 00;23;20;25
Unknown
It is the assumption that, quote, efficiency, how many barrels we use to generate a dollar of GDP, that that rate of efficiency was going to double or triple. People have taken things like Cafe standards, fuel economy, if you will, at face value. If our government has mandated, under both Democrat and Republican presidents, a 3 to 4% improvement in fuel economy, the actual number has been 0.2 to 0.4%.
00;23;20;25 - 00;23;41;14
Unknown
We've missed those targets. You look at a rolling five year basis, annual basis anywhere from 75 to 95%. Now, if you drove a BMW x5 today, it is more fuel efficient than one, 10 or 20 years ago. But that's sort of the point. We've gotten from 70 to 80% light cars to 70 to 80% SUVs, and it's really been vehicle weight.
00;23;41;16 - 00;24;06;09
Unknown
That has been the missing variable to ensuring fuel economy is actually been achieved. Now, perhaps once we're at 100% SUVs, which we're frankly not too far from, maybe we'll start seeing a bigger impact. But on everyone's peak oil demand forecast, they have overestimated that rate of improvement in efficiency. And it's frankly the the biggest miss. And why we've pushed back so hard on that peak oil demand argument.
00;24;06;11 - 00;24;09;08
Unknown
What's,
00;24;09;11 - 00;24;47;00
Unknown
Let's take a step back and walk down memory lane. But I think the coincidence of the time frame that you were on the sell side, covering the majors and the refiners is, is very illuminating and instructive as to where the refining business was prior to the, you know, this the, the, the start of this century and all the things that happened, not the least of which was tremendous amounts of capital spent anticipating, a slight, crude, slight future that ultimately did materialize.
00;24;47;02 - 00;25;10;24
Unknown
Yeah. If you go back to my career started in 92 market, and if you go back to those 1990s periods, first of all, they were a lot more integrated oils. Then today there's essentially just Exxon Mobil and Chevron in the US. But Mobil and Texaco were separate companies. Amoco, Arco, Kerr-McGee, Marathon Oil was integrated, Murphy Oil was integrated, Phillips Petroleum integrated legacy, Conoco integrated, Unocal integrated.
00;25;11;00 - 00;25;36;28
Unknown
I'm forgetting a few along the way that I picture my career. Whatever. Orix with diamond Shamrock and Max's, everybody had an integrated operation. It was critical to actually developing your business. And then as the world became more specialized, it became less needed to have a specific downstream outlet to your upstream business. But if you go back to the 1990s, everybody knew with 100% certainty upstream is where you generated profitability.
00;25;36;28 - 00;26;02;18
Unknown
It was the exciting, sexy part of the business. Downstream is where capital went to die. And so to a person, people were bearish on the refining sector, and there's been a bunch of incarnations of refining over the last 30 years. The first was simply the recognition that through restructuring, through selling, your lowest quality refineries or the entire businesses, you can improve your profitability as an integrated oil.
00;26;02;18 - 00;26;22;11
Unknown
So we saw a lot of, divestitures of refineries, we saw divestitures of divisions. This was the original Asco strategy. Tom O'Malley inherited the stock in 1995 when they bought circle K. And the portfolio manager said, I've never heard of tobacco. Could you look into it? And his approach at the time was, yes, refining is a bad business.
00;26;22;11 - 00;26;48;19
Unknown
It's low return, but don't spend a dollar by someone sells assets for ten, 20, $0.30 on the dollar run and better care about it. Cut costs whatever you can do, improve utilization rate and you can get a good return on. Just call it depreciated capital. And Tasca was the first to do it. Valero others followed suit. The other thing people knew at that time is that if you were going to be profitable, refining it was through complexity.
00;26;48;19 - 00;27;11;18
Unknown
The ability to run heavy crude would sell at a discount to light crudes or to process more sulfur, sour oil, if you will, which also would sell at a discount to sweet oil. That was the original Valero's single plant. I think it was Corpus Christi. It could be Port Arthur. I think it was Corporate Christi. It was a heavy coking refinery, and everybody knew because Venezuela was growing, OPEC was going to be the marginal barrel.
00;27;11;22 - 00;27;32;22
Unknown
This is these were all the views of the 1990s that you either wanted to do this, acquire and exploit strategy of Tom O'Malley or from just a pure refining perspective, you had to be heavier and sour and you fast forward, we've had a light sweet shale oil revolution. We've had all the divestitures of, you know, no one's integrated anymore.
00;27;32;25 - 00;27;57;28
Unknown
You've had a consolidation. This is now actually the highest return portion of the business. The refining sector over the last decade has generated double digit and often mid-teens cash on cash returns. And it's beaten the upstream. It's very dependent on war spike premium credit spreads. I mean, that's exactly right. So no one associates us refining with a growth business.
00;27;57;28 - 00;28;21;02
Unknown
So the expected growth rate has been 0%. It's probably been on the demand side something closer to plus 1%. There's been lots of and growing environmental regulations which honestly have generally proven to be more of a barrier to entry than sort of a cost to the business. And these companies have become very efficient. They've become very flexible in the types of crudes they can run.
00;28;21;02 - 00;28;43;00
Unknown
So they learn to run light sweet shale oil. They can still run some of the heavy sours. We're seeing that in real time today. And what was for sure, what everybody knew. The worst part of the value chain in energy has actually become the best part of the value chain over the, over the last decade. I think you're barriers to entry is is really instructive.
00;28;43;06 - 00;29;05;26
Unknown
And you look at some of the at least rhetorical attempts and some of the actual pivots. You know, you have the case of Delta Airlines buying a refinery. I forget which one that was on the East Coast. Now Marcus Hook, I think, is the one they bought in Philadelphia, Marcus Hook and then Mr. Wonderful. It hadn't been that long ago.
00;29;05;26 - 00;29;42;12
Unknown
He's talking about putting in a group together to, you know, build a massive refinery in the US, massive greenfield refinery in the US. And he's now pivoted to building a data center campus that's larger than Manhattan in Utah. So but I think I think the, the, the hard to see barriers to entry of just how uniquely complex and the balance between cost management, cost efficiency and real kind of life and death safety issues.
00;29;42;12 - 00;30;04;18
Unknown
I mean, you've been in a lot of refineries as an upstream guy. They always they made me they gave me the willies a little bit. I spent a summer as a kid in high school on a painting crew, and then later in my, career, spent some time and seemed like most of my engagements when I was in the management consulting side of the business were inside the fence.
00;30;04;21 - 00;30;35;23
Unknown
Always had a little bit of uneasy dizziness. It is a it is a massively complex and hazardous operation. And then when you have coming out of, you know, it being a bad business, the extreme pressure both for maxing utilization and uptime and cutting costs where you could, you know, and fortunately we've I think we've seen a really, really good in parallel safety track record and operating performance track record.
00;30;35;23 - 00;31;11;00
Unknown
You know, we have the big events from time to time. But those seem to, you know, be well within the, the acceptable industrial standard, of safety. And so one of the things I'm a little concerned about and maybe shouldn't be, is that we're running pretty hot in terms of utilization, and have for an extended period because, you know, to run those high utilization rates, we're in the mid 90s when historically we kind of low low 90s, high 80s.
00;31;11;02 - 00;31;39;02
Unknown
And so something at the margin is being produced because the pressure, particularly as it lines up with peak summer demand and driving season, is to crank out the gasoline. And you started with a low gasoline inventory situation, and there are some things being pushed to the right, I would guess, in terms of routine maintenance. And so you, you know, you hope you're not pushing that too far.
00;31;39;05 - 00;32;03;03
Unknown
I mean, no question about it. So I'd say that commitment to safety, you go to visit any of these plants anywhere. It's overwhelming in a very positive way, that commitment to safety. But I've also always appreciated his bullishness towards the business has never crept in, actually. So, you know, at times companies have acquired assets where you can say, well, did that acquisition made sense?
00;32;03;03 - 00;32;28;03
Unknown
This one did I don't know about this one, but no, the companies are inherently they've employed the Lee Raymond philosophy, which is we're never going to put that on a bullish track spread. We're never going to bet on a bullish oil price at Exxon. We're not going to try and guess where oil prices are going to go. We're going to try and figure out what is the next low cost project that's going to be at the low end of the future cost curve, and that type of approach has been taken by the refineries.
00;32;28;07 - 00;32;47;06
Unknown
You don't always succeed. Sometimes you think, okay, this is the type of crude or project we want to do, and maybe there's a bit the optimism is never in, oh, the crack spread is going to be really good. And therefore I'm going to invest a bunch of capital. There's been an inherent pessimism there. I I'll give you one, one, one example of car gasoline in the late 90s.
00;32;47;06 - 00;33;08;23
Unknown
So California said we got this smog. Smog. Terrible. Let's make the gasoline cleaner. And you refineries, you're going to have to invest to make that happen. Every company and every analyst, including myself, said, oh, these environmentalists, these, you know, crazy people in California. And again, this isn't current crazy. This is 30 years ago crazy, which is far less crazy than it is today.
00;33;08;23 - 00;33;31;08
Unknown
You have to you have to go back in time. But we all said this is bad. This is anti-business. It's too pro-environment and and to make. And so the costs are going to be high. There was also the expectation demand was going to roll over. So this whole peak demand argument, it has always been there on the US gasoline side due to this fuel economy thing that we just talked about.
00;33;31;08 - 00;33;49;27
Unknown
And none of that turned out to be true. So they did have to spend money to make car gasoline that served as a barrier to entry. It also created, a unique formulation of gasoline. But Lee Raymond, famously quipped, as a boutique fuel and so suddenly very few people could make California great gasoline, their Valero plant could.
00;33;50;00 - 00;34;10;12
Unknown
There was a finished plant owned by Nestlé in Finland that could, and almost no one else could. A decade later, reliance in India had a plant that could, but they created a really special form of gasoline, and demand didn't fall off a cliff. And you had less competition. So, we also got rid of the smog. When I went to college in Denver, we would have the brown cloud over there.
00;34;10;12 - 00;34;26;03
Unknown
And I think some of it came from the LA base. And so they cleaned up smog, which is undeniably a good thing. They created a barrier to entry and the profitability. And this again, this is going back to the 1990s was best in California. Now you fast forward today. They've gone way too far. They're causing the refineries to shut down.
00;34;26;09 - 00;34;56;20
Unknown
There's all sorts of problems in California on the refining side. But I think in analyzing these things, the sort of gut reaction, you just have to always be really careful that it's just not always right. And I think we were all wrong. I was wrong about what it meant to pursue carb gasoline in the 19. I mean, over long time horizons, the the lack of greenfield based expansion, the US industry has proven that it can keep pace with that plus or -1%.
00;34;56;22 - 00;35;32;23
Unknown
Yeah. Type of structural, growth and and refined product demand. And so what you have in California is a severely accelerated contraction and really base load refining capacity that no amount of what what do they have? Seven plants. When the last two get mothballed or go off line, you went down from I heard a number. I think Chuck talks about it as a benchmark in, you know, early mid 80s California, I think, had 43 refineries.
00;35;32;25 - 00;36;01;22
Unknown
Yeah. And so that's not and back to the point of the barriers to entry, the difficulty at restarting that capacity under a new investor and operating group, whoever that may be, is going to be extremely difficult. Until at least the cost of liability protection, the way I think about it as a refining operator in California changes dramatically.
00;36;01;22 - 00;36;35;26
Unknown
And I don't see that politically happening anytime soon. So California has, in essence, created and built a wall around it. It is a it is a definitely, definitely a crude and refined, products island. And, you know, some of the things that we've been able to do administratively or from the executive seat is do things like the Jones Act waiver, here, which I think was extended to another 60 days beyond the original 60 days.
00;36;35;29 - 00;37;00;25
Unknown
Glad Chuck's not on because we go off on this wild tangent. He he talks about the Jones act with the same fervor that he talks about the JFK assassination. All. Oh, well, meaning, Chuck, I love the the whole JIT Jones act conversation, but my my view is that the Jones act will never get changed. And I used to say this, I'll try and say this as neutrally as possible.
00;37;00;27 - 00;37;31;15
Unknown
I thought this country would change its views on, a woman's right to choose or not choose the fate of her unborn child before the Jones act would get changed. And I used to say, that's, not to make light of a serious situation, but somewhat jokingly. And it actually turned out to be true. America's views on abortion were more changeable than the Jones Act, and I can't explain why, other than we spent enough time with shipping executives to say they wouldn't even touch the question.
00;37;31;18 - 00;38;09;19
Unknown
You you invite a shipping executive and they won't even touch the question. It is more controversial than other controversial social issues, is my point. And it's what, 1923 legislation. Yeah, yeah. And that's, you know, when the data shows how starkly kind of noncompetitive we are and things with the strategic criticality like shipbuilding, I think China produces 300 times, the, the marine or the ship, ship capacity that we manufacture on an annual basis.
00;38;09;22 - 00;38;40;24
Unknown
Anyway, so, you know, although one other point on this, there's a difference between environmental policies and climate policies. When we think about California as the example. So the carb smog policy I talked about, there was this idea that we care about security supply, we care about affordability, but we definitely want to clean up the smog. And we're willing to perhaps pay a little more for gasoline and incur some costs to meet this very clear environmental benefit.
00;38;40;27 - 00;39;05;17
Unknown
At some point that morphed in California or else to say it's a climate crisis, and we're going to prioritize that over every other thing where you can really debate the benefits of any of the actions taking. Reducing smog is as clear as daylight. Literally. It used to be a brown cloud. Not it's not anymore. Less asthma, an obvious benefit, even if it might cost a little more.
00;39;05;20 - 00;39;30;22
Unknown
When you think about California enacting, quote, legislation in the name of climate crisis, all they've done is, you know, shifted their emissions to other parts of the world. They now import, I think, 80% plus of their gasoline and oil and so forth that are coming from inherently higher carbon intensity areas. They've ended up shifting their industry, much like Europe, to other regions, but that de facto are higher emission in in nature as well.
00;39;30;29 - 00;39;59;02
Unknown
So in the name of climate policy and prioritizing that without considering security, supply and affordability, you've made everything worse, including the climate. It's what I don't understand about it. You've made the climate worse if that happens to be your number one priority. And again, it's a that's a big change in mindset, even for a place like California. Then my carb example of the 1990s, Micah Umbro, who is on the front lines of of California energy policy, he's been a great voice out there.
00;39;59;02 - 00;40;31;12
Unknown
Lives in San Diego and you know, work works up in the in the, in the current area and is is just all over, you know, what's going on and how diverted it's been from its original intent and points out that, you know, let's, let's have more kind of Amazon negative impact because California gets a significant portion of its imports from Ecuador, not to mention the emissions from the increased marine traffic that's required to bring those barrels in.
00;40;31;15 - 00;41;07;26
Unknown
And oh, by the way, for the here and now, the largest current pre-war import source was Iraq. And so we've got to scramble to make that up. And so, you know, it just just keep tightening kind of the handcuffs on, you know, a misguided I think objective. Now that is all in the name of, of climate policy, which has a real serious impact on everyday citizens and consumers.
00;41;07;28 - 00;41;27;22
Unknown
If I was to give free advice to climate activists, climate success should be measured by do you have maximum industrial production in your region? I mean, that to me is the metric. So if you're Europe, if you're California, are you building refineries, chemical plants and all sorts of industry that are needed, including critical minerals, refineries and processing mines?
00;41;27;24 - 00;41;45;07
Unknown
If you're if you are doing that, you actually have successful climate policy because it means you have successful energy policy. Right. And so we can have, you know, no methane flaring, we can clean up orphan wells is a gazillion things we can do. We can have vehicle weight restrictions, which no one wants. But you could actually do that if you did care about fuel economy, which no one actually does.
00;41;45;07 - 00;42;05;18
Unknown
But you could do that. The metric to me will be what's your industrial production relative to your energy policy? And then it's going to go hand in hand with less emissions and actually better labor standards as well. And so I would challenge Europeans in California. How do they bring back industry to their countries? And Canada probably needs to be in that bucket as well.
00;42;05;21 - 00;42;31;26
Unknown
Good energy policy is foundational. Yeah. You can't get out of you can't get out of poverty without our if you have energy poverty, you're not going to get out of poverty. It's it's so you grow wealth and you maintain wealth by having good energy policy. Full stop. And good energy policy, by definition, is going to be better for the environment, clean air, cleaner water.
00;42;31;28 - 00;42;53;23
Unknown
And in the modern age, it's actually going to be lower carbon intensity. Again, if that's a high priority for someone, it's going to be lower carbon intensity coming from Canada, coming from Europe than it will be coming from China, Russia, Iran, or a whole bunch of other places. And I like to point out the absolute emissions data as a using the US's example as an example.
00;42;53;23 - 00;43;22;14
Unknown
Over the last 20 years, the mirror kind of marketplace, some of it was was mandated, but the mere marketplace substitution of natural gas for coal and the power sector overall, we're down in greenhouse gas emissions over that 20 year time frame by 20%. Show me who else in the world has that kind of scorecard. And those are absolute reductions per capita has gone down to.
00;43;22;16 - 00;44;02;05
Unknown
So, while the population has grown over that 20 year time frame. Yep. So before we leave this, maybe a couple of minutes on Rand's and Ahrefs and what what what those are in this whole kind of evolutionary story of of refining. Well, I was complimenting Bush, earlier in this podcast. This is probably now going to shift to the critique side of the parts of the sort of let's add supply policy that, I'm gonna say that, Renewable Fuel Standard and Rins all started under his watch.
00;44;02;07 - 00;44;31;08
Unknown
And it just, you know, adds a complication to producing gasoline in this country. And again, that I've always thought this really wasn't about energy security or energy supply. These are basically ag policies. And I guess the Democrats have moved Iowa to no longer be the first primary. I think perhaps and Republicans also move out of Iowa. Then perhaps, you know, we can rethink the sensibility of mines and renewable fuel standard, but this is about blending ethanol into the gasoline.
00;44;31;10 - 00;44;54;21
Unknown
Having an accounting system around it, the regulation always lags. You know, it's, just a huge mess in a nutshell. And contributes to, I think, unnecessarily having an increment to our gasoline price. This is not the fault of California. Just to be clear, this is us. This is a federal, it's a federal issue. And, it's contributing some element to the higher gasoline price.
00;44;54;21 - 00;45;12;21
Unknown
It varies over time. You do need octane. So there's, you know, there's some element of ethanol that has a logic to it. But, you know, I think it's all part of, you know, we live in a, we live in a political economy. And this is the sop to the ag community, from what I can tell.
00;45;12;22 - 00;45;41;27
Unknown
And I just wonder if there's a different way to support our farmers than forcing ethanol on Americans. So, yeah, the I guess the import barriers of the tariffs on things like Brazilian sugarcane for, you know, most of this period of time to make it obviously less cost competitive, although it's, as I understand it, a better ethanol product derived from sugar cane sugar cane than it is from from corn and other agricultural products.
00;45;42;01 - 00;46;02;18
Unknown
The sugar cane. You should get more energy out than energy you put in. It looks like last time I looked more of a wash at best on the corn ethanol. So it's, you know, huge protectionist type of behavior that we've, we've really seen manifest and things like the RF and the rains. It's my old friend Jeff Curry. You had the line when this first came out.
00;46;02;18 - 00;46;35;05
Unknown
Burning your food is never a great societal strategy. Right? I think he's right about that. So so kind of wrapping this piece of it, if, if the refining industry didn't go through that transformation and optimization that took place over the last, you know, the first really the first part of the last 25 or 30 years was a real kind of almost radical or revolutionary pace of adjusting to the reality of the business.
00;46;35;07 - 00;47;05;04
Unknown
If we had that same kind of refining capability today, how would we be responding to what's going on? Or we would be in a much worse situation as consumers, if the refining industry hadn't done what it has done? I mean, it is both the shale oil and shale gas revolution and the refining revolution. So it is it is interesting, Mark, to I think I'm instinctively critical of both parties when it comes to not thinking long term.
00;47;05;04 - 00;47;24;04
Unknown
I made some exceptions for Bush and Obama, and maybe that maybe that's all that matters. You know, since Nixon, we've been saying we want to be energy independent, and we only went in one direction the other way. So it took the China BRICs $147 oil at the peak. It took all of this radical restructuring. We are a learning economy.
00;47;24;07 - 00;47;42;11
Unknown
We're not tapped down. There are entrepreneurs like Tom O'Malley who said, hey, I've got a different view of how we can make money in refining. Imagine if this was Europe or some other place where you don't have the incentive for an entrepreneur to figure out a business model and see if they can get rich doing so and their shareholders along the way.
00;47;42;11 - 00;48;07;23
Unknown
And so I think there's, in the same way we talk about shale being a US thing, because when we settle this country, people got the rights to the land and the minerals and so forth. That was that was very critical. You don't have that in other places. In general, the government owns the land, when, you know, shale hasn't worked in other parts of the world as easily, not so much because of the geology, but because if one company, a state owned company, is asked to figure it out, that's not how we did it.
00;48;07;23 - 00;48;29;03
Unknown
Here is I know you all know, and probably your listeners know, which is it's the competition of hundreds and thousands of independent producers, some of some size, some of single well in nature who cracked the code. They didn't always do it with maximum profitability. As we know. But that has been to the benefit of America as a country and, the American consumer as American citizens, without question.
00;48;29;03 - 00;48;49;28
Unknown
And that applies to oil. It applies to natural gas. How miraculous that ten years ago we had basically zero LNG exports. And now we passed Qatar and Australia in 2023. And we're number one. And we saved Europe during the initial bout of Russia, Ukraine and that war. And the refining side is gone with it. So we've improved oil, we've improved natural gas.
00;48;50;01 - 00;49;07;18
Unknown
We've got the lowest natural gas prices domestically in the world. We have improved our LNG export capacity, we've improved our refining business, and our midstream business is also best in the world. So, maybe we should not be rooting for, quote, energy policy. Maybe that's one of the lessons we should be rooting for capitalism to continue our country.
00;49;07;18 - 00;49;26;19
Unknown
And maybe there's some questions about that. We should be rooting for competition and the kind of style that we have, because it is certainly worked out in a very big way. On the energy side, by accident, you might say so certainly not. From a top down planning perspective. There's a there's a lot of evidence over the last century and a half that that's that's a good path.
00;49;26;22 - 00;49;45;11
Unknown
It can always feel bad in the short term. But we are at at heart a capitalist economy, rights of individuals, rights of businesses. And that has worked out for us as a country as we are on the verge of turning 50 years here.
00;49;45;14 - 00;50;12;17
Unknown
Well, that's, that's that is a great historical foundation and context of understanding where we are, where we've been. You know, we're we're in the midst of, I think, a, an inflection point where everybody is asking what's next? And I look at and, you know, just kind of wrapping things up here, I look at the time frame between now and I think it's November 1st.
00;50;12;19 - 00;50;41;09
Unknown
And it does seem to us that all of this has really been pointed at success in the midterms. I don't know if that can be salvaged for a lot of other reasons that are beyond the scope of this conversation, but I'll ask you kind of what's next in the short term and in the long term. You know, we spend most of this conversation talking about the downstream business, and I think there are a lot of lessons from there.
00;50;41;09 - 00;51;00;10
Unknown
And it goes from where we started. What would Lee Raymond do to an analysis of the in a history of the downstream business? I to me, this is the approach upstream oriented companies should be taking. No one debates. No one asks what is the normalized refining margin to any. I mean, most people I think couldn't really name the refining margin.
00;51;00;10 - 00;51;19;17
Unknown
It happens to be $58 a barrel. As I'm looking at the Gulf Coast WTI 3 to 1 margin all spot today. Yet to be very clear on what you're saying. Are you talking about a have you all refinery are you targeting. And so Gulf Coast 3 to 1 WTI based refining margins. There's $50 on my Bloomberg screen is probably average low 20s over the last decade.
00;51;19;17 - 00;51;39;14
Unknown
And it's been anywhere from low double digit to 20s 30s 40s. The barrel companies approach things with the perspective that I appreciate, which is how do we ensure that when things are down, we're a viable company? And if it's really, really down, we're we're not going to risk insolvency or balance sheet debt crisis or these kind of things.
00;51;39;14 - 00;52;09;03
Unknown
And then when the times are good, like they are exactly right now, how do we ensure we've maintained our plants, that we're running them safely and that we can therefore collect the, the rents, if you will, when margins are good? And that mindset, to me is where the upstream business is headed. And so I can't tell you how many question I've gotten with this is prior to the MOU or the MOU being announced a couple of weeks ago, where will the oil settle out once we kind of resolve things with the and I don't view it as the correct question.
00;52;09;05 - 00;52;27;14
Unknown
There's going to be a lot of choppiness on both demand and supply. The street was generally closed. It is more open today, but you've kind of had an evacuation of ships. That sort of short term is flooded the market at a time that I'm going to say temporarily. China's reduced their oil imports by a crazy 5 or 6 million barrels a day.
00;52;27;14 - 00;52;42;13
Unknown
And they didn't just wake up one day and say, oh, it turns out we didn't need 5 or 6 million barrels a day of our 12 million barrels a day of oil imports. There's no doubt those imports are coming back. But they might not come back next Tuesday, but they may not come back July 15th. Right. So there can be these timing mismatches.
00;52;42;13 - 00;53;03;19
Unknown
And so again, what would Lee Raymond do with Lee Raymond be trying to do an analysis of oh oil deserves to be 75. I'm going to add $3 a risk premium. So it's 78 and like no, how can you be a viable company through all the choppiness? My phrase is geopolitical Super Bowl. And it is meant to be a mindset of how to run a company and a normal trough.
00;53;03;24 - 00;53;25;09
Unknown
You should have at least a cost of capital return. Exxon did in 1998 during the Asian financial crisis, an 8% return on capital in deep troughs like Covid never lose money in the great financial crisis. ExxonMobil did not lose money they did in Covid for the first time since Standard Oil Company was created. That was disappointing, but I think it has led to some very positive changes at that company.
00;53;25;09 - 00;53;40;27
Unknown
And then during the good times, how do you ensure you can generate a lot of excess returns? And through all those ups and downs, double digit profitability, through all the ups and downs and ideally mid-teens or higher if you want to be a leading company and that's a whole bunch of words. It's a whole bunch of returns, but it is.
00;53;40;29 - 00;53;57;26
Unknown
I don't know where it's going to settle out. I don't think it's going to settle out. No one else knows. We don't know. Last year or I guess it was going into this year, everyone said there's going to be massive oversupply and we don't have to go into critiquing the IEA, which you and I share a fondness for.
00;53;57;28 - 00;54;22;14
Unknown
But we can just say even non IEA people had some amount of oversupply, but China sopped it all up. No one expected that. Now do they stop it up because they got lucky that we were going to close the Strait of Hormuz. Did they do it because something about Taiwan, who knows what the reasons were? But it, it it was not I did not predict that China was going to, you know, snap up a lot of the excess oil that happened at the time.
00;54;22;14 - 00;54;40;00
Unknown
And so the point would be there are a lot of different moving parts here. And the same way no one tries to guess that on the refining side. No, no one thinks $58 cracks are going to be sustainable. But they do think, hey, maybe I can rest another week, maybe less than a few months. So make sure we run through this.
00;54;40;02 - 00;55;00;14
Unknown
Yeah, but let's not run. So hard that we risk sort of losing money if things go down. And so it's just a different way to kind of think about the world. The market I think is still adjusting to it. So it's been painful for energy equities. But refining companies, the publicly traded ones, they're more profitable than the aggregate of the upstream companies.
00;55;00;20 - 00;55;24;16
Unknown
Yeah. You know that I don't think the upstream companies really appreciate that. How much better run the downstream companies are. And there's a lot of ethos and mindset there. Now. A refinery can last forever. You have to replace your reserves. But they're also more environmental spending on the refining side than the upstream side. I don't know if that's a wash or not, but how do you continue to extend your asset life and how do you think about it?
00;55;24;19 - 00;55;53;03
Unknown
How do I get to kind of through all the ups and downs, mid-teens kind of returns. You'll then have an attractive investment in the same way that refineries have generally been the best portion from an equity TSR standpoint, within the energy complex. Well, I will predict that even though you look at Q1 results and I've been responding to, you know, price gouging, profiteering, all these things, you go back and look historically at the best of the best, the two super majors.
00;55;53;03 - 00;56;21;00
Unknown
And in the US, their net income margins over a long periods of time, both short and long term periods of time, pale in comparison to what the leaders in Big Tech are generating, even in their troughs, like in Q1. I think, Apple may have been the lowest in the mid 20s. You've got Mehta up near 70%, and that is consistently the case.
00;56;21;03 - 00;56;45;07
Unknown
And the calls for Apple price gouging right now with their, when the Liberation Day terrorist happened a year ago, people said, oh, this could this is going to raise your iPhone from $1000 to $1400 if it's fully passed through. It's it's some exceptions were made. Who said Apple has a right to a 60%, EBITDA margin like, I mean, where is the price gouging calls for the tech industry?
00;56;45;07 - 00;57;03;29
Unknown
And I don't I'm not suggesting we do that. I'd say we should take it away from the oil industry, but, it's it's it's one of the challenges with energy equities. The profitability hasn't been competitive with some of these other areas. And the tech companies, I will say positively best in class growth, best in past profitability, but oddly are never accused of price gouging.
00;57;04;01 - 00;57;48;00
Unknown
So so what we can be certain of it has been demonstrated over getting through, you know, these peaks and valleys both within the the oil and gas macro cycle, if you will, in the longer term global economic cycles that this industry has shown an ability to pivot pretty organically and being driven by rational economic decisions, while at the same time doing it better with the assist of, you know, the industry has been one of the best at applied technology, in, in, in very complex applications, I might add.
00;57;48;06 - 00;58;17;06
Unknown
And so I think this is, this, this will be written about in the history books. And we're going to look up, you know, a decade from now and say, the world's adjusted to what happened in 2026. And, you know, the US is double in terms of the LNG exports markets, have changed markets. Suppliers have changed, destinations have changed.
00;58;17;08 - 00;58;39;21
Unknown
Redundancy has has been added to the system, you know, talking about what is going on in places like the Emirates. You know, workarounds to the street, all of these things that the industry and the market adjusts. This is this has just been a very high profile kind of violent disruption of unprecedented magnitude over the short term.
00;58;39;23 - 00;59;08;23
Unknown
And so I think that, you know, I think that happens in a positive way, regardless of whether, you know, the current administration or the current party in power wins, wins in November or not, we'll deal with it 100%. Mark. And I'd say instead of executives or investors trying to figure out where does oil settle out or where was oversupply or not, what are going to be the future business models that are going to drive shareholder returns going forward?
00;59;08;23 - 00;59;27;00
Unknown
So Tom O'Malley said, here's my way of doing it. I'm going to buy these assets for pennies on the dollar. And he ended up selling his company to, Jim Mullen Phillips Petroleum. Valero said, no, we're not quite doing that. We're going to just try and only do refining, and we're not going to do midstream or anything. And so you've had LNG companies, which didn't exist ten years ago.
00;59;27;00 - 00;59;45;23
Unknown
Come on the market, we've got pressure pumping companies said, hey, you know what? We know something about mobile distributed power. Let's get into distributed mobile power generation. And even as they got into that, they said, hey, well, maybe we can actually play in the data center market. So we'll see if they're successful. But it's a pivot in the business model of the pressure pump pumpers.
00;59;45;23 - 01;00;07;15
Unknown
Look at the changes that some of the biggest three legacy oil service companies in that they've tried to adapt. We had the Chevron Microsoft deal recently. And again we can debate what the returns are and execution is lots of questions. But I actually think a lot of the largest companies are doing some interesting things. This whole power space is a fashion area to watch, and it is not for everybody, but there's a lot going on there.
01;00;07;15 - 01;00;30;06
Unknown
That means midstream gas is going to grow and you've had some of the most meaningful midstream companies say, hey, maybe we can play in the data center thing. I actually think the part of the business where the questions are greatest is actually in the upstream business, which classically was the part of the business that was sort of most exciting, and you want it to be in for anyone that's below that sort of mega cap level.
01;00;30;09 - 01;00;56;10
Unknown
What is your evolution in your business model? What is your mixture? And I'm not saying they have to become integrated. Again, I didn't say that. I didn't say that they had to go into LNG. I didn't say they had to go into power. But I do wonder what changes they need to make. In the same way, the refining business where we started made a lot of changes over the last 25 years, and even in the context of the changes they were contemplating, it didn't work out with the macro they thought they thought light heavy was going to be the way to go.
01;00;56;10 - 01;01;18;17
Unknown
It turned out not. But they still did well, and so they proved to be very adaptable when the direction they thought it was going didn't play out. So I actually think the biggest question marks today are on what is increasingly a small sliver of the market caps, which is the upstream part of the business, and what are the business model changes they should be making to embrace an uncertain world going forward?
01;01;18;18 - 01;01;38;26
Unknown
I don't know that I got the answer to that. It's kind of what we try and do. It varied and in helping companies think through this stuff, there definitely isn't, an answer, but I feel like oil services have actually made a better job trying to figure this out in the legacy upstream area. Well, I'll close it out with what I believe is the Lee Raymond ism.
01;01;38;29 - 01;02;07;10
Unknown
It's hard to make the elephant dance. And my add to that, it doesn't mean it can't dance it, and it's proven over time. The elephant can dance and maybe it's getting more nimble so Arjun, this has been great. Appreciate your time. Certainly ahead of a long holiday weekend. I don't know when this drops. I'll say happy to 50th America to all of our, our listeners and viewers and the Clyde community.
01;02;07;10 - 01;02;33;00
Unknown
And same to you. Really appreciate would love to have you back on. Hopefully next time our schedules coincide. It can be in our beautiful studios in Houston. And, there's lots more to talk about, but appreciate you. Really. Diving in and sharing your expertise, particularly on the on the refining side of the business. Because I know it's it's deep and vast and has been accumulated over a very long career.
01;02;33;03 - 01;02;48;07
Unknown
It's been great to be with you, Mark. We go back a long way, and I'm glad we got to do this and happy to 50th, irrespective of when this drops to everybody listening, it's, happy birthday America. Happy birthday America. Well, thank you again.