Odd Lots - Why It's So Hard to Get the Oil Taps Turned Back On

Episode Date: June 20, 2022

Oil prices are sky high. And there's plenty of oil in the ground in North America. And so far the supply response has been disappointing. Frustration is boiling over among drivers and politicians, and it's made life more complicated for the complicated. So what's the hold up? On this episode, we speak to longtime energy investor and industry participant Peter Tertzakian about the reality on the ground. He explains that there are numerous operational factors constraining oil supply, including degraded quality of equipment and a shortage of labor, not to mention a reluctance among investors to splurge on new production. We discuss the specific constraints, as well as what it will take to get supply going on.See omnystudio.com/listener for privacy information.

Thanks for listening to OddLots. Follow the show on Amazon Music for more future episodes or just ask Alexa play the podcast, OddLots on Amazon Music. Today's show is brought to you by Vanguard. To all the financial advisors listening, let's talk bonds for a minute. Capturing value and fixed income is not easy. Bond markets are massive, murky, and let's be real. Lots of firms throw a couple flashy funds your way and call it a day. But not Vanguard. At Vanguard, institutional quality isn't a tagline. It's a very big. It's a very big. It's a very much. commitment to your clients. We're talking top grade products across the board of over 80 bond funds, actively managed by a 200-person global squad

of sector specialists, analysts, and traders. These folks live and breathe fixed income. So if you're looking to give your clients consistent results year in and year out, go see the record for yourself at vanguard.com slash audio. That's vanguard.com slash audio. All investing is subject to risk

Vanguard Marketing Corporation distributor. Visit Don Dolly North Lexus for interest rate reductions of up to 3% for lease and finance rates, resulting in lease rates as low as 0.9%. Plus, delivery credits of up to $1,500, only until April 30th. Visit dawn valley northlexis.com. Oh, and welcome to another episode of the Oddlots podcast. I'm Joe Wisenthall. And I'm Tracy Alloway.

Tracy, you know, we recently talked with Goldman's top metal strategist, Nick Snowden. And one of the things that really stuck out, there are a lot of things. We talked about copper scarcity. But one of the things among many interesting points was the idea of, like, there's been a talent shortage in this industry. Yeah. And you can kind of see why, right? I mean, first of all, environmental concerns.

And I imagine that, like, particularly the younger generation might have some reservations about going into something like mining. Yeah. And then secondly, it just wasn't a problem. profitable industry for quite a long period of time, or at least I'm thinking specifically about shale oil in the U.S., but you had the big boom, and sure, people made a lot of money in that, but then you had the massive bust, and it often feels like kind of an uncertain industry that swings between feast and famine all the time. Yeah, so imagine you're like thinking about your career and

you're like pretty technical minded, you're pretty smart, you could do a lot of things with your intelligence, and you're like faced with like two options. It's like, okay, you're, Do you want to go to North Dakota or somewhere up in Canada and analyze rock formations? Or do you want to live in California and work for Facebook and get lots of free lunches and free dry cleaning and maybe make millions of dollars? I don't know. It seems like kind of an easy choice from the perspective of a potential talented person thinking about which direction they want to take their life in. Well, also, I mean, Silicon Valley was very good at selling the idea of making the world a better place. Yeah, that too.

Right, which I don't think is as impactful as it once was that message. I don't think as many people believe it. But certainly for a while it was about come build a better future in tech versus come dig out of rock in northern Canada. Yeah, so come to Canada, dig out a rock, be cold all the time. Oh, and by the way, you're contributing to the worsening of the planet through global warming. Oh, and by the way, this industry has no future. These were like the messages. Yeah, yeah.

This is the message being told. It's like, you're going to contribute to climate change by participating in this industry. Also, the industry has no future because it's all going to be, you know, disappear because of electric cars or whatever. So all these things, it's like, or, you know, do software, make a fortune. It seems like a, you can see why people made one choice and not the other. Yeah. So we obviously have to dig into this.

No pun intended. But, yeah, we're going to dig into the talent shortage in energy and mining. Right. And so there's all kinds of bottlenecks. Now, of course, everything's flipped and, you know, there's like, well, why can't we restart the mines and why can't we get drilling again for energy, you know, natural gas and oil? There is a pickup in activity, but it has not been as robust as people expected. So what are the constraints on getting everything going again and getting dirty stuff out of the ground for whether it's gasoline or fuel or metals that we need for decarbonization and electricity? I'm very excited about our guest.

someone who understands the space deeply. We are going to be speaking to Peter Tertakian. He is the managing director of ARC Financial, a private equity company that specifically focuses on energy. And he knows a lot about the nuts and bolts of this space and investing in this space. So Peter, thank you so much for joining us. Well, it's my pleasure. I'm delighted to be on the program. So is that true, sort of like the premise that we started out this conversation, that they're really, the number of people wanting to make a career sort of like petroleum engineers or mining engineers has really tailed off over the last decade? Yes, that's true. Actually, there's a double whammy. Also, what we're seeing and we're going to see more of is that the older generation is set to retire. And now with these higher commodity prices, they are going to cash in, so to speak, and be much more apt to exit the business.

with nobody coming into the business, it's going to make the problem more acute. So the higher prices increase the need for talent, but what they do in the immediate term is a bunch of people are like, oh, I can finally retire because my oil stocks are up or my commodity, whatever it is, my copper stock company that I worked for. So the first order effect, even before it has the effect of bringing a new talent, is to accelerate the departure of the existing tail. Yeah, that's going to be a big problem. And the other part of losing the older generation.

is that resource exploration, certainly oil and gas, has a lot of tacit knowledge. In other words, it takes years to really build up gut-feel expertise, which is just as important as, you know, raw numerical expertise. I have this image of like Bruce Willis and Armageddon teaching the youngsters how to mine properly, right? Remember that? Yeah, right. The asteroid. Yeah. Yeah.

Yeah, I mean, those are sort of the Hollywood perceptions of the way things work. I mean, I have to say that the industry is actually very technologically advanced and that, you know, the loss of knowledge is much more than just sort of these perceptions of people going and digging holes in the ground. It's much more complicated than that, which exacerbates the problem because there's a lot of tacit knowledge that needs to be replaced. So when you mention an older generation potentially entering retirement, it reminds me a lot of the pilot shortage that we saw and this idea that, you know, we had a lot of pilots that were coming through the military primarily. And then after they completed their service, they would go into commercial flying. And then they entered retirement age and we don't have a lot of people to replace them. Where historically has energy talent. come from? Well, energy talent comes from two places. First of all, there's the field, and that talent typically comes from hiring people and training them, also out of technical schools. And there's a lot of training that goes on in terms of safety and how to operate equipment, and that can take many months certification. And then in the offices where a lot of the engineering

is done and the geoscience is done. I mean, the talent pool there comes from universities, petroleum engineering courses, geophysics, geology, chemical engineering, you name it, petroleum engineering, yeah. So what has enrollment been like at the university level for petroleum engineering in some of these related fields? Well, it's declining. And in the handful of universities in the sort of Western Hemisphere, I'll call it. in Europe, United States, Canada, where there's a lot of expertise in the universities to train

students. The enrollment is going down. In some instances, the university are shutting programs down. And it's what you said earlier. I mean, the emphasis for students and the desire for students with technical backgrounds is to go into Silicon Valley type ventures and so on. It's not to go into the resource economy. So it's problematic. What was the sales pitch earlier? So, you know, I guess the 70s, 80s, 90s, if someone was thinking about a career in resource management, what would be the benefits of such a career? Well, the benefits certainly would be pay to start with because historically, and even now, these are very high-paying jobs. And even so, it's difficult to attract people.

But historically, it's also been viewed as well with the growth of the economy. You need more energy, energy dominated by fossil fuels over the course of the last couple centuries. Therefore, you are contributing to the growth of society and energy needs in the economy. And so it's historically been the paradigm. But now that paradigm is broken, certainly in the level. Western world it's broken and that leads to the problems that we're going to see are an already seeing in terms of the price of the commodity and the supply shortage.

Can you what schools have actually shut down? I went to University of Texas so there was a geology program there pretty I think at the time there were a pretty decent number of people going into the petroleum industry but where have we actually seen you said some schools have shut down like just their department? Yeah I can't speak for the American universities as much. I mean there's Certainly the Texas universities, including SMU, some of the schools in Louisiana. You know, Oklahoma, that's big. I mean, those are the states that have a lot of the resources. Not surprisingly, that's where the schools are.

Ditto here up in Canada, or unlocated University of Calgary. Canada is the fourth largest producer of oil and gas in the world now. And so we have the schools here in University of Alberta, University of Calgary. The enrollments are way down and some of the programs are likely to be shut. So we are going to see a talent pool shortage. There's no question. Can you give us a little bit more color on how much enrollment is down or exactly what the extent of the talent shortage actually is? And are there particular areas where it's more acute versus other types of energy jobs?

Yeah, so the Petroleum Engineering Department here, I had a conversation a couple weeks ago with one of the faculty members. And he indicated that, which school are you referring to? This is the University of Calgary. I mean, you know, typically you'd probably see 30 students a year in a graduating class, maybe more. I mean, historically, it would have been much more than that. I think they have an enrollment for one student. Oh, wow. It's that kind of thing.

Now that may pick up as we get it closer to the fall session, but the numbers are not looking positive in terms of replenishing the knowledge base. One student. I introduced you as the managing director of ARC Financial. But can you just sort of give the summary of like you've seen these cycles come and go for a while? Like what's your person, what's your sort of like general background and story having watched and been involved within the extractive? resources, industries. Yeah, well, I started out as a geoscientist back in the 1980s. I worked for one of the multinational oil companies. I worked in the field. I worked in the office. And then I migrated to the world of finance, the world of technology, the world of energy technology. And so I've sort of

have a very holistic background in energy and energy technology. And in my career over the last 20 years, have financed everything from oil and gas to solar to wind, to you name it. So, as a very important, As I watched the boom and the bus cycles, there was always a repetitive theme on the oil and gas side is that when the price of oil and gas went up, that was the signal, the siren goes off for the companies to go back and drill more and bring more supply on. Now, as we all know, over the course of the last half dozen years, that signal's been broken. right? It's because of the vilification of the industry, the climate change concerns, the divestment movement, end of oil narratives, all that kind of stuff. And then, of course, the turnover of investors in many of the publicly traded Western oil and gas companies, basically who want their money back in terms of dividends. So that means that there's not a lot of money going back into the ground, certainly not as much

is used to be to give a supply side response to to meet the demand, which is still there. And as we can see growing, everybody's back flying and going on vacations and driving. And so, you know, it's a, and then you lose your upstream talent pool. And that just combined with a war in Europe with Ukraine. And it, boy, it just sort of like the perfect storm to create an energy crisis, the likes of which we have not seen since the 1970s. Perfect storm. We hear that phrase so much on this podcast, but, you know, for very different things.

But, okay, so I'm looking at the chart of Brent Oil, and it's currently above $120 a barrel. So in olden times, olden times being, you know, just 10 years ago or so, you would expect a shale driller of some sort to see that chart and go, oh, we're going to restart some of our old wells. and presumably they would have gotten that done fairly quickly, given the incentive there from the price. When that happens now, when oil goes above 120 as it is now, what's the hold up for restarting those drills? Like walk us through exactly all the true points in actually ramping up that production. Well, first of a little bit of perspective, $120 a barrel today. if you inflation adjust the price of oil and take it back historically all the way to the beginning of the last century, in other words, 120 years ago, $120 is typically the high point on an inflation adjusted basis. Like beyond 120, all of a sudden, you will get a demand response and people will start peeling back.

The supply response typically starts around $75, $80 in earnest. Now, we didn't see that this time around. So last year, the price started to escalate through $75, $80. And the call went out, hey, you know, like the price is going up, we better get some more production going. Well, the publicly traded companies and the CEOs basically said, well, wait a minute, everybody told me to focus on profitability, not production growth, and give the cash flow back to their shareholders. is what are we doing here, changing the tune? And by the way, everybody's saying it's the end of oil, so why should I go back and drill?

So at 80, 90, then you get into 100, oh, that's interesting. And the rig count starts to go back up a little bit, but it's very muted relative to what it would have been historically. And so here we are today at 120. The allure of going back and bringing on production will be irresistible, but it's still, I believe, not going to be the same level of drilling.

And then there's all the field level constraints, which we haven't talked about yet, the physical equipment and the people in the field. I mean, to this point, we've talked about university graduates and engineers who typically go work in the office. Now you've got to talk about the shortages in the field. So, yeah, what are the, let's talk about those.

So how many people, like, compare the sort of upswing cycle now, the ease of hiring, the number of people willing to do the work. How is that different than, you know, previous cycles that you've seen, the challenge of staffing the field? Yeah, so what we've seen, well, you have to wind back to late 2014, early 2015. At that time, shale drilling was so prolific and the money was being given to the industry from Wall Street to drill. we created a supply glut. The Saudis said, well, wait a minute, we're not going to give up our market share. So that started the price war.

They flooded the market. The price of oil collapsed down to 30 bucks, 35. And that started a prolonged period where prices were low. So the industry went into sort of a downturn. Prices recovered back to kind of like the 50 level and stay there. 50 is not compelling. 50 is not compelling. And then layered on top of that, the end of oil narrative started.

And so there was this whole negative pall around the industry. So in that context, it's been now seven years of negativity. And so the service companies that go out to the field with their people basically said, well, why would I build new equipment? Why would I even maintain equipment? I'm just going to cannibalize parts off old equipment to keep the equipment a smaller equipment fleet going. So here we are today with a shrunken field capacity. And by the way, a lot of loss of knowledgeable people trained on how to operate this equipment that's being

called back and saying, hey, go, go drill again. We need it because we want to get off Russian oil. Well, wait a minute. Like, I can't just tool up and hire a cruise overnight to do this, even if I wanted to. And then on top of that, you have a lot. You have a lot. You have a lot. have the inflationary effects of things like steel and chemicals and raw parts, supply chain issues. And so even if you wanted to grow it meaningfully, it would be very difficult. Can you talk a little bit about this from a technical perspective? So if I have a well that I haven't been using for a while because oil prices were so low, what does it actually take to restart it?

I mean, assuming I can get the labor, what are the technical things that I need in order to get it going again? Well, it's not so much restarting old wells because wells you typically do not want, especially oil wells, you don't, you never want to shut them in because restarting them is problematic. So a lot of wells, they either get choked back. But if you want to grow production back to where it was before, you have to drill more new wells. And so that's where the problem lies is you need drilling rigs, you need hydraulic fracturing crews, you need all sorts of peripheral service. to get these things going. And so the ability to bring on new wells, and then you also need service equipment, by the way, to ramp up the old wells again. It's said that you want to bring on the amount

that we're forfeiting from sanctioning Russia. I mean, you're talking several million barrels a day, which the Permian and fields like that, and up here we can do, but you just can't turn the spigot on overnight. And then there's just this general reluctance by investors and others saying, well, I don't know if I believe all this. And by the way, you told me it was the end of oil. So why would I put money into the ground? Today's show is brought to you by Vanguard. To all the financial advisors listening, let's talk bonds for a minute.

Capturing value and fixed income is not easy. Bond markets are massive, murky, and let's be real. Lots of firms throw a couple flashy funds your way and call it a day. But not Vanguard. At Vanguard, institutional quality isn't a tagline. It's a commitment to your clients. We're talking top grade products across the board of over 80 bond funds, actively managed by a 200-person global squad of sector specialists, analysts, and traders. These folks live and breathe fixed income. So if you're looking to give your clients consistent results year in and year out,

go see the record for yourself at vanguard.com. That's vanguard.com slash audio. All investing is subject to risk vanguard marketing corporation distributor. Eating well shouldn't be complicated, but somehow it turns into recipes, prep, clean up, and half your Sunday gone. Factors solves all that. These are fresh, ready-to-eat meals designed by dietitians, delivered to your door, and ready in just minutes. No prep, no cleanup, no excuses. And it's not just about convenience.

You're getting real food, balanced nutrition, and zero artificial stuff. Meals that help you stay on track for all of your goals. without the grind of doing it all yourself. Grilled chicken, roasted veggies, steak plates, postables. They taste like something you get in a restaurant, but they come out of your microwave in two minutes flat. If time, cost, or effort have been holding you back from eating better, Factor just took those off the table.

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Like what equipment, where was it housed, you know, for these last seven years while the industry was sort of shrinking or downsizing whatever? Where was it housed and what, you know, now it's like, okay, we're back and then they opened the warehouses. What is it like literally rusted? Like, can you tell what type of equipment and what? What is actually the condition of it? Well, I don't know if it's a rust.

I guess I'm hearing of a human environment. I don't know. I get what you're saying. Yeah, so I mean, the whole thing is that when prices fall and they still, commodity prices, when they fall and they stay low, that's a signal to just contract. So basically the service companies, unfortunately, especially if the downturn is severe, which it was, have to shed people. and they basically have to stop building new equipment.

In fact, you have to contract your fleet. So you say, well, why would I keep, say, 100 units active and maintained when my customers, the oil and gas companies, only want the equivalent of 40 units. So basically, you park everything in a yard and you keep the 40 units going. But instead of buying a whole bunch of new spare parts, you just start cannibalizing the other parts of the equipment.

So for the existing 40 units that are in action, you're cannibalizing the other 60 to keep them going rather than buying new spare parts because you don't wipe anything new. But then when it's time to go access those other 60, they're missing parts. Exactly. So that's what's been happening over the last seven years is saying, well, why would I buy new stuff? I just sort of keep things going. And so, you know, this. creates the situation now where he said, okay, I need a bunch of spare parts if I want to ramp up. And then you say, okay, now we've got supply chain issues. Now we've got people issues.

And so the ability to ramp back up at a snap of your fingers is very difficult. So I remember back when oil prices were quite low. So I guess around 2015, 2016, one of the talking points in the industry was, well, why do people keep pumping at these prices? And we saw production be a lot stickier, I suppose, than many people had expected. And so A, why do you think that happened? And then B, one of the things that I remember people talking about around that time was standardization of parts for rigs and drills and things like that. And basically just a discussion that technological advancement and standardization meant that producing oil was a lot more efficient than it used to be. so you could pump more without necessarily spending tons of money.

So is that, like, doesn't that also work the other way? You know, with high oil prices, shouldn't standardization help keep some production up and hopefully increase it? Yeah, okay. So I think it's actually brought up some really important points, but let's tackle the one why keep pumping if prices are low, as I said, because it's very, very costly for oil wells to turn them off and then to bring them. So you want to keep producing for as long as possible. Now, in 2015, when the

price went down, you know, we went down to $35, $40 for a while. But for the most part, over the course of the latter half of the 2010s, it was $50 a barrel. So there's three kind of costs here. There's operating costs, which is the cost to keep pumping. And the op costs are typically lower than that. And so you make money just by pumping. But what happens is that if you don't drill more into the same reservoirs, the production declines. And it's called a decline curve. In other words, today you're pumping 100 barrels.

And typically some of these wells decline at 20%, maybe more a year. In the first year, it's even more. So a year on, you're only pumping, let's just say, 70 barrels for the sake of argument. And then next year, it's only 50 barrels. So the basic operating costs keeps the oil flowing. Then you need the maintenance capital costs, which is drilling just to keep production level. So what happens is when you go into a downturn, depending upon your cost structure of an individual company, you typically pull back on your maintenance cost and you might decline your production. But if you're in growth mode and you want, there's the call because prices are high,

then you start drilling new wells to not only offset your declines, but to grow. So for the past seven years, it's largely been a SPOC cost plus maintenance costs to keep production level. The big event was the pandemic. Okay, when the pandemic, you know, we saw zero dollars for a few days. We saw a prolonged period. That's when they said no maintenance costs, no growth, no nothing. And American production fell by at least a couple million barrels a day. and we haven't really recovered.

Actually, I realize we haven't really discussed, like, what happened in those months of the acute early months of the pandemic. You know, of course, there was the infamous, like, briefly, like WTI, at least on a computer screen, traded it negative $40 a barrel, I think, at one point. But obviously, it seems like something snapped there. So you had this degradation of the industry from 2014 through 2020. and then something like broke there, it sounds like, that really changed the trajectory so that the energy players were just not going to go back to the old way of sort of, well, losing a lot of money, basically.

But what was it? Can you talk a little bit about more like that, how transformative and significant those few months in 2020 were? Yeah, it was huge because, you know, the 2014-15 event really weakened the industry. and created the contraction and the capacity and the cannibalizing of spare parts and so on. But, you know, many companies still hung on. But when you get to $20 a barrel and, you know, momentarily zero and all of a sudden,

all the pipes are backing up because there's no demand and there's global immobility with lockdowns and nobody's using the stuff momentarily, then you create cash flow crisis for service companies and producers. And those that were on the verge of bankruptcy went bankrupt. And certainly there was more layoffs. And so you lose more talent and more tacit knowledge. And so the pandemic really was problematic. And it was at the same time, again, that was layered on top of that,

the whole end of oil narrative, like, okay, electric vehicles are taking over the world and so on and so forth. We don't need this stuff anymore. and Zoom is going to help us, you know, overcome our commuting and blah, blah, blah. And so it really weakened the industry further. And then all of a sudden, of course, the demand comes back, comes a roaring back. And the supply side is hampered, especially the Western oil and gas industry, which has been under intense pressure to decarbonize, cut its productions,

so on and so forth. And so here we are. So talk to us a little bit more also about the financing aspect of it. And this is something that we hear from energy producers in particular, this idea that, well, for them, credit, you know, for the rest of the world, credit has been in ample supply for the past few years. But for anything that's considered a polluting industry or a non-ESG compliant industry, it's much more difficult. So how real has that been for the industry? It's been very real. I mean, there's two major sources of financing like in any company. It's equity and debt. So historically, certainly when the price of the commodity goes up, equity players from Wall Street come in and say, here, go drill, go produce more. And you produce more of the cash

flows are strong, so you're able to borrow more. But the combination of seven years of low prices and not making any money, already investors were saying, well, you know, give me a call when you make money. And then on top of that, the divestment movement and end of oil narrative, ESG and many financial institutions, pension plans, for example, saying, no, we're not allowed to invest in these companies in anymore. and banks coming out and joining things like the Net Zero Banking Alliance, which basically says no more fossil fuel debt investing. And so now we're in a situation where the oil and gas companies are making a lot of cash flow. They can finance themselves and they can even drill themselves.

But the investors who stuck with those companies are basically saying, well, you know, I stuck it out with you. give me my money back and a dividend and buy back shares and so on. And so again, we're in a situation where the ability to make decisions to put money back into the ground to grow production is very encumbered. Yeah. So in theory, okay, so the shareholders of these companies who are sitting on years and years of cash full losses, they're like, no, don't invest.

So the idea is they don't want to invest because they want to get repaid after years of losses. And then there isn't some pool of other money. And that would be more the sort of ESG defined broadly. But that would be more of the ESG impaired financing because all different kinds of industries it sounds like, or all different sorts of players basically made a formal decision to get out of the game. Yeah. Well, so what's happening is that there's what I call the alt finance universe. that's starting to emerge.

So the alt finance universe are financial, what do you call it, equity providers, debt providers that are not overly concerned about ESG. And they say, fine, sure, we'll give you the money. It may be at a higher price. So they come in and they start financing these companies. At the moment, though, I'll reiterate at $120 a barrel and even $100 a barrel, oil and gas companies are actually vigorously paying debt down. They don't need any money.

And they are issuing special dividends and so on. But the issue is going to come when the price of oil falls back to say $80 and we think it's all okay. But really it's not. It's a very precarious situation because, you know, the root issue of still the need for fossil fuels, oil and gas for several decades, in my opinion, is not going away. So just to play devil's advocate on that question, I mean, a lot of people in ESG would presumably say, well, this is exactly the kind of dynamic that we do want. Okay, so not we don't necessarily want oil at $120 a barrel, but we want people to go into other industries. We want to choke off funding for dirtier industries in order to encourage newer types of energy, cleaner types of energy. what would be your response to that message? Well, I have the benefit of financing all types of energy and have seen how transitions work.

In fact, even written books on energy transition before energy transition was even a buzzword. So, you know, the thing is that it's not a good idea to prematurely abandon this industry because the price goes up to $120 gasoline goes to $5 a barrel. It's like a massive carbon tax. I'd say the equivalent

from going from $50 a barrel to $120 a barrel. That's like imposing a $250 a ton carbon tax on the people, which is huge. And it disenfranchises obviously the lower income strata of society and creates all sorts of social issues and polarization. So, yeah, it's one way to think about, you know, forcing people to switch off of oil and gas into alternatives, except the alternatives are not available easily.

It costs people money, which they don't have now, to, say, buy a new vehicle, electric vehicle or replace their furnace with a heat pump or air conditioning or whatever. And so we just create this really distorted economy. that speaks to a very disorderly transition that has potentially a lot of civil unrest and problems. And this is really key, because you're invested in the transition. So, A, but, well, I guess sort of a one and a half part question is like you're invested in the transition.

What new tech, I guess it sounds like this is a really bad way to accelerate it in your view. But what is like, what do you see as like the problem, What does the orderly transition look like? The order of the transition is that, you know, I'm very still bullish on renewables. I mean, the cost curves coming down and the adoption rates. Personally, I've been driving an electric vehicle for five and a half years. So I'm a fan of electric vehicles.

However, I'm also a social, what do you call, color commentator and energy. And I can tell you, like the transition business. not occur overnight. I mean, this is, if you look at the historical transitions, they take decades. And to think that, you know, it's almost a lot of hubris to think that we could get off this stuff in a matter of a few years and make a switch, which is being disproven right right now. And, you know, it's going to be disproven doubly because they said, what we have right now is the equivalent of a $250 carbon tax. And all it's doing is creating a lot of animosity in society is what I can see. And disenfranchise.

franchising the lower-income strata. Eating well shouldn't be complicated, but somehow it turns into recipes, prep, clean-up, and half your Sunday gone. Factors solves all that. These are fresh, ready-to-eat meals designed by dietitians, delivered to your door, and ready in just minutes. No prep, no cleanup, no excuses.

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Visit Don Valley North Lexus for interest rate reductions of up to 3% for lease and finance rates, resulting in lease rates as low as 0.9%. Plus delivery credits of up to $1,500, only until April 30th. Visit Don Valley Northlexis.com. So this is my new favorite question to ask people, but if you could wave a magic wand and change one thing about the way the current world works or, the way policy is formed or whatever in order to help some of the problems or help alleviate some of the problems we've been discussing. What would it be? Well, I mean, it's probably not one one, but I'll just say one thing that we should be doing is focusing back on the core objective,

which is to reduce emissions. Okay. So reducing emissions is not the same as shutting down and thinking the oil and gas industry is dead. Putting an industry out of business is a lot harder than reducing emissions, in my opinion. And you can go deep into the subject. But this to me is a core issue that, and the core mistake that's been made to this point is that the only way to decarbonize quickly is to shut down the oil and gas industry and call it dead and buried, which is what we've been doing over the last half dozen years and has resulted in the situation that we're in right now. We need to get people back into the industry that is innovating now fairly vigorously in terms of how to reduce their upstream emissions.

and with carbon capture and other technologies that are yet to come to the fore. So we can reduce emissions dramatically, and we can have a transition to electrification and all sorts of things that will help us decarbonize going forward and create clean and prosperous energy. But we have to do it smoothly, because if we don't do it smoothly, you're going to create all sorts of social tensions, which we're seeing get manifested. And that's just obstructionist in terms of getting its friction in terms of getting to the end goal.

What about is there anything in the short to medium term, either in the U.S. or Canada policy-wise, that could just simply accelerate the production of oil right now? I mean, because that's a big thing, just getting in the U.S., right? Like, supposedly Biden wakes up every day and he isn't, he and his chief of staff look at the price of gasoline every day. Supposedly. That's what I read a report that said that. Is the other policies that could meaningfully accelerate? I mean, as you mentioned, you know, you can look at the rig counts.

They are going up. Other policies that in the sort of short to medium term could accelerate both production and refining such that the price has come down? Yeah. Well, I think actually it's as much policy. Now, Canada is a little bit different than the U.S., but maybe not too far different. I think the industry and the shareholders of the industry are really exhausted by the vilification and the negative rhetoric.

And so actually having leaders right at the top say that our domestic industry is among the best in the world and plays a valuable role not only in terms of decarbonization, but plays a valuable role in energy security and energy affordability globally. Just to say that, just to say the industry is important, I think would make a lot of people be much more inclined to be part of the solution and maybe even encourage people to come back to work in the industry. You know, there's nothing. You almost need like a rally cry and say, you know,

this is important to us that we have a smooth transition with safe, secure, cheap, clean energy. You know, in your view, we're nowhere close towards this sort of end of fossil fuels, oil and gas. What does like the transition look like? When you think about this, you say, is it decades, two decades, one decade? What does it look like? When's peak energy production, peak energy demand? What's these sort of ideal transition look like from your perspective? Yeah, so let's focus in on the word transition.

Well, first of all, I think the peak oil demand is probably around 2030. ish. That's my estimates based on numbers and things. But let's think about transition. I mean, transition, say, from DVD players to streaming. You know, basically, the demand for DVD players and DVDs goes down and the demand for streaming goes up. You know, what we're seeing in energy is that we have oil and gas and actually, unfortunately, even coal, continuing. to rise at the same time as renewables are rising and electric vehicles are rising. It's more of a diversification of our energy system rather than our transition that's occurring. And there's a big difference. And so let's bring that to cars, which is really important. There's all these

headlines and metrics measuring the sales of electric vehicles. And I think that's great. As I said, I've driven one for five and a half years. I love it. But the real metric in terms of decarbonization and transition is, well, how many cars are we taking off the road that are combustion vehicles? Because the reality is that when somebody sells their combustion vehicle to buy an electric vehicle, that combustion vehicle goes to somebody else. And then when that person's done with it, it typically goes to a developing country and it gets driven for another 20 years. Wow, really?

So, yeah, because, I mean, if you think about vehicles today, I mean, they'll go to 300,000 miles easy. Right. Right? Because they're built robotically. The quality is a lot better than the. the cars we even produced 10 years ago. And so, you know, the real metric for a transition is how fast are we not using legacy paradigms for energy versus just focusing on the growth curve

of new energy systems? We have to figure out how to retire the old stuff. And this is one of the big issues with oil and gas, oil in particular in petroleum use, is that oil demand is not likely to go down because population continues to grow in developing economies. People are buying more and more vehicles still. And they're not necessarily buying electric vehicles or buying somebody's used combustion vehicle that just gets shifted in container ships around the planet. And so it's, you know, the real transition, as I said, where you get the decline of the fossil fuel systems and the growth of the new clean energy systems

in earnest. I don't really expect that to happen until 2035, 2040. So that means between now and then we've got this massive gap that's deteriorating in terms of the incumbent systems. Well, Peter Tertzakian, really great perspective. You know, we've been sort of talking about some of these topics very generally in terms of the financing and the constraints, but it's great to like get this sort of like very clear ideas and like how they're thinking through these things and the constraints and course the machinery. So really appreciate you coming out on oblox. That was very, uh, very educational. Well, my pleasure. Thanks for having me. Thanks so much, Peter. Yeah, that was really interesting. That example of just thinking through, okay, you have 100 pieces of equipment. You only use 40,

but then you cannibalize the other 60 to maintain the existing 40, and then at the end you do not have 100 anymore because you didn't buy anything new. I think it was actually one of the clearest sort of examples of, I guess, like, hysteresis or supply-side degradation, what happens when you have a protracted slump in an industry? Totally. And then I guess extending that to the labor side, that anecdote of one person enrolled versus classes that used to be, you know, 30 or more are, that's kind of stunning to me. But I guess, you know, to Peter's point, what would you expect when for years and years and

years people have been like, oh, this is a terrible industry? You're ruining the planet. Who in their right mind would want to go into that? No, it doesn't seem like, you know, okay, yes, I'm sure in many cases they were very, very well-paying jobs still even during the downturn years. But very little about that career over the last 10 years would have seemed to be particularly appealing for a lot of people. And then it's sort of like kind of mind-blowing to think, you know, the first order effect of a surge in energy stocks is that you probably have a lot of people who

work for Exxon or whoever else. And like, finally, my portfolio of stocks is high enough that I can retire. So even before you have the positive price signal of putting people into the market, you finally get people who could cash out and retire. The two other things that struck me, me was one, just the idea that maybe if people were a little bit nicer to the industry, and again, like, so much of it, it sounds like messaging and it is, but I think that matters to people, right? Like, no one wants to feel like they're coming into a job and they're not making a difference. Yeah, I know, I know, it's weird. But on the other hand, and that's true, but something else I've thought about is, like, Trump was like really nice, like rhetorically to the industry.

and that was the years when like they lost hundreds of billions of dollars, you know, how many hundreds of billions of dollars did the industry lose from 2016 through 2020? Yeah, but I mean they were still producing, right? That's the difference. I know. It's so weird. It's like, oh, we're nice and we're like going bankrupt and now we have a president who doesn't, you know, doesn't quite say as nice things, at least in the U.S., about the industry,

but they're all making a fortune. It is sort of this weird, I don't know. Well, and the other thing that I thought was interesting was this notion of, you know, when he was talking about peak oil, which is something that I haven't heard about for a long time because it kind of died during that 2015-2016 era, which again tells you, you know, how extreme the sentiment kind of swings here. But when he was talking about the energy transition, we're not actually replacing all these combustible engines with new electric vehicles. We're just moving them to a different place. So if the pool of the global population that needs a car

continues to grow, then you can have a situation in which maybe in the U.S. and Norway and some of these other places is booming EV demand. Of course, China as well, but then still like all of these used combustion vehicles don't actually leave the road and go to poorer countries. And the fact that, you know, cars are made pretty well these days. I was sort of that they might live another 20 years, even after the second owner in the U.S. sells it to someone in emerging market. Well, I mean, And even like Landrovers from the 1990s are really desirable. No, they're not. No, no.

I had a really bad experience with the used land rover. Never buy a used Land Rover. I think you would feel differently if you were living in like Tanzania or something. No, no, no, no, no. I would never wish anyone, even the most desperate person for a car to buy an old Land Rover. Okay. They're great. I love them visually and aesthetically.

But I would never, no matter how hard up you are, Never buy an old land rover. Okay, I feel like we're going to have to talk about this. Have you ever looked at that website, Bring a Trailer? No. It's so cool because they have all these old classic cars. But it's called Bring a Trailer because it's old classic car auctions. But like these really like beautiful land rovers or these like BMWs and Mercedes that are like from the 80s and 90s that are like so cool and retro looking.

But you just know like it's that it's not going to work. You're going to drive yourself crazy only one. But okay, but here's my point before I clearly touched a nerve by mentioning Land Rover. But, you know, like a lot of the newer cars, people don't have the expertise needed to fix them if something goes wrong because they're computers. You don't trust me. You don't have the expertise. I know this because we had a Land Rover that we got used in our family. And the problem was not that like actually no one had any expertise.

Like it was like, oh, we had to like find someone manual. No, don't do it. It doesn't matter how cool they look. Don't buy it. What if I, okay, what if instead of like rover, I say land cruiser, would that be better, like a Toyota land cruiser? Toyota would probably be a little better. Okay. Okay. Okay. My point is there are different reasons why you might want an older vehicle. And so to Peter's point, the assumption that we're just all going to switch to electric vehicles might be unrealistic. The broad point, you just picked a category that I have a pin that.

Okay, look, if anyone, if anyone wants to get a reaction out of Joe on Twitter, just tweet, like, pictures of land rovers at him, I guess. I mean, all the way they look. I just don't drive one. Tell him you're thinking of buying one. All right. Don't buy, I don't give it financial advice, but don't buy a 1990s land rover. Okay. Shall we leave it there?

Let's leave it there. This has been another episode of the Alld Lots podcast. I'm Tracy Alloway. You can follow me on Twitter at Tracy Alloway. And I'm Joe Wisenthall. You can follow me on Twitter at the store. follow our guest on Twitter, Peter Tertzacian. He's at P. Tertzacian.

Follow our producer, Carmen Rodriguez, at Carmen Armin. Follow the Bloomberg head of podcast, Francesca Levy, at Francesca Today. And check out all of our podcasts at Bloomberg, under the handle at podcasts. Thanks for listening.