Energy Markets:

Breitling CEO Faulkner discusses EIA outlook, challenges to moving oil and gas

How are independent oil and gas companies shifting their business strategies amid rapidly developing energy markets? During today's OnPoint, Chris Faulkner, founder, president and CEO of Breitling Oil and Gas, gives his impressions of the U.S. Energy Information Administration's "Annual Energy Outlook" for 2014 and talks about some of the key challenges facing oil and gas development in the United States. Faulkner also gives his perspective on local-level fracking bans and discusses challenges to moving oil and gas in the United States.

Transcript

Monica Trauzzi: Hello, and welcome to OnPoint. I'm Monica Trauzzi. Joining me today is Chris Faulkner, founder, president and CEO of Breitling Oil and Gas. Chris, thank you so much for coming on the show.

Chris Faulkner: Thanks for having me.

Monica Trauzzi: Chris, the Energy Information Administration has just released its 2014 energy outlook, and it's largely positive on oil and gas. Here are a couple things that they're saying. They're predicting growing oil and natural gas production will continue to have a critical influence on the U.S. energy economy. They also predict increased exports of natural gas as a result of higher production and that natural gas will overtake coal in the electric power sector. What are your initial impressions of what they're saying?

Chris Faulkner: Yeah, I think it's very positive. I think looking back, what's happened just last year alone, oil production up from 2012 to 2013 by 20 percent, natural gas production now still a huge supply glut, and we've been talking about LNG exports now for several years. I do think we're getting closer to exporting natural gas. And I said last year that the end of the coal era has begun, and I think now the EIA is now stating that by 2040 natural gas will be the bigger supplier of power generation. So all those things are good for the demand side of natural gas. You know, I think the country now is going to continue to increase its oil production, talking about almost a million barrels a day in production annually. I think it was, 800,000 was the number the EIA stated conservatively, and I think that puts us on the road again to the idea of energy independence. It's within reach. And this idea, this mantra that we become the biggest oil producer on the planet, I said by 2017. I think now the numbers even say 2015 we can surpass Saudi Arabia at 9.5 million barrels. So a lot of good dynamics happening for our country. But more importantly I think the one theme that I liked the best was this manufacturing renaissance taking place, companies coming back to the U.S., creating jobs, bringing back plants to use natural gas for feedstock, and that's going to continue, says the EIA, through the end of this decade, if not beyond.

Monica Trauzzi: There seems to be a lot more buzz about this year's outlook. Why do you think that is?

Chris Faulkner: You know, I think the last, sometimes the EIA, you know, people say their numbers maybe aren't, don't come true sometimes or they're not accurate. But I think what's happening is the last couple of years there's been a pattern developing that the sustainability of what's taking place in the United States now I think is less in question than it was. A lot of folks thought, "OK, look. This is a massive amount of capital going into the ground to drill these wells. There's this manufacturing treadmill. We've got to keep drilling to outstrip the decline. Natural gas is at an all-time low, so are they going to continue to be able to sustain this oil economy or this natural gas economy?" I think now folks are starting to believe. You know, they're drinking the Kool-Aid a little bit saying, "OK, this is sustainable and America is really starting to make major progress in developing oil and gas assets."

Monica Trauzzi: So let's talk about what Breitling's doing.

Chris Faulkner: Sure.

Monica Trauzzi: Where can we expect to see your company put the greatest number of resources over the next decade?

Chris Faulkner: OK. You know, I think for us, I am still pretty bearish on natural gas, and maybe I'm one of only an army of one that says that. I don't think that natural gas is going to increase by a major number by the end of this decade. So for us I think we're still a liquids-focused company. You know, we'll still develop our assets in the Mississippian Lime up in Kansas and Oklahoma. We'll still be working up in North Dakota in the Bakken Shale. We have a lot of work to do there. And then we still have a bunch of South Texas onshore assets. So for us as a company I don't see us migrating. The catalyst to migrate away from liquids back to natural gas, it has to be pretty great. And I mean, I'm happy that we're talking about $4 gas today, but you know, it's going to take something major to have us shift back over to a natural gas drilling company. So my 2020 forecast is that we're still dealing with $5, $5.50 gas, and I'm not a huge proponent that LNG overnight is going to make natural gas move in a major, major way. I'm a bit of a realist that thinks, "Look, America enjoys cheap natural gas, OK?" And if the number starts moving, will the government step in up here in Washington and say, "Hey, let's cap it; we don't want the price going back to $15"?

Monica Trauzzi: Right.

Chris Faulkner: So I'm still not a pessimist, but I'm more of a realist thinking, "Well, we can get in front of it and mess it up in a way if we don't, are not careful."

Monica Trauzzi: What do you identify as the single greatest challenge to moving oil and gas in the United States?

Chris Faulkner: You know, two things are happening. Number one, the United States has to get serious about the idea that we cannot export crude oil, OK? So there's going to be a glut of crude oil if we're not careful. We're already seeing light Louisiana sweet crude on the Gulf glutting in ... and now trading at a discount to Brent. And so we're already seeing pockets of this glut of oil, and I think that it won't happen like it did to natural gas and prices plummeted, but we have to get serious as a country. If we're going to be the biggest producer of oil in the world, well, then we're going to have to export oil at some point. Not today, not tomorrow, but at some point we're going to need to be able to monetize the excess oil or we're going to see massive storage numbers and the price will plummet. And if it plummets too far, there is this number where it doesn't make sense to continue drilling for expensive oil. The difference in us and Saudi Arabia will always be this isn't cheap oil here. They have cheap oil there, $20 to bring it out of the ground; here, $50, $55 a barrel here. So there's a big disparity in the price of oil in the United States. We're going to need to be able to monetize that. On the second side, I think that we'll export natural gas. I just don't think in massive, large-scale quantity. But the one thing we don't talk a lot about in this country is the fact that only last year about $12 billion in investment in our midstream sector was put in, and we invested $150 billion to $200 billion in drilling. OK, that's not going to work forever. If we don't get serious about pipeline and infrastructure, I mean, we can't even get the Keystone [XL] pipeline approved. So I mean, we've got to get serious how we move oil around. And I think that the winner here is still going to be crude by rail. There's going to still be a big, big increase there, and that's a tremendous cost to us as producers, that it's not cheap transportation. So that's going to have to be discussed, and the refiner piece of it is going to have to be discussed as well.

Monica Trauzzi: So how many of these LNG export facilities that have received approval by DOE are actually going to see funding?

Chris Faulkner: You know, that's the interesting part. The average one of these things costs about $10 billion, right? And, you know, Cheniere is going to be up and running here in the next year or so, the first contract. You know, up and running is great, but up and running with someone who wants to buy gas is really the story, right? And so Centrica, British Gas has a contract to take gas shipments into Europe from Cheniere, but in 2018. So, you know, I think we're going to have to, I think folks are looking to say that this resurgence of manufacturing, will it impact natural gas prices? And there's not a huge margin here to go to Europe with gas. If we're at Henry Hub plus $5 per thousand cubic foot, well, Europe's been paying $11. So if Henry Hub moves to a $6 number, Europe's off the table, and now we've got to look at Asia. So I bet a lot of folks are cautious, saying, "Look, we can buy gas, but at what price from the United States?" Australia's definitely looking at it and seeing what we're going to do. But I think that this is an Asia play more than a European play, so I would be interested to see if any Asian countries start to buy cargo from the United States between 2015, when they're ready to go, and before they start delivering to Europe.

Monica Trauzzi: I want to talk to you about fracking. We recently saw fracking bans on the local level in Colorado.

Chris Faulkner: Yep.

Monica Trauzzi: Where do you think the public perception is right now on fracking? And are you concerned when you see these very localized bans of fracking?

Chris Faulkner: You know, I've always been concerned about the power of the grass roots and the power of the people with social media. The Arab Spring wasn't possible 10 years ago. It's possible because there's instant messaging. And grass roots is very powerful, so yes, it does concern me that we see these pocketed frack-free zones appearing in the United States, on top of frack-free states like a New York or California could be heading. So yeah, it does concern me. Do I think that it concerns me to say the country would ban fracking? No, I think there's no chance of that. Do I think that it causes concern that the EPA could step in and take state-based regulation and bring it up to the federal level to respond to this movement and just cause more duplicative regulation which adds more time and red tape? Sure, that's a concern, and that adds more cost. We talked about the cost of oil. It's expensive oil to produce. More cost creates a concern that, you know, if the music stops, who's left standing without a chair? Hopefully it won't be the oil and gas industry. But I think that we still have a nice delta to think that it, Saudi Arabia and OPEC can't push oil down that low, which is in the $60s, to cause us to have issues raising capital here. So there's still a lot of room to move, but I think don't write off environmentalists. They raise a lot of money and they have a lot of power, and people shouldn't discount what they were able to do. Just look at the coal industry in a very short amount of time. And I have no enemies in the coal industry, but they were able to attack them in a way that they've started into coal. And that's the concern, is if they get out of the way, well, then who's standing there facing them? Hopefully it won't be us and them going at it, because coal is the number one enemy for them. And if that gets pushed aside, then natural gas and oil become enemy number one.

Monica Trauzzi: How has your business model changed since 2004 when you started with Breitling? The oil and gas industry has really gone through quite a change in the last decade.

Chris Faulkner: Yeah, sure.

Monica Trauzzi: So how is the business model different?

Chris Faulkner: It's interesting. You think about, it's like one year in this industry now seems like it's five or 10 in a normal industry. Things are moving very rapidly. You know, we shifted, within a couple years of the business in 2006, 2007 shifted toward drilling horizontal wells and fracking. And someone asked me in the United Kingdom just last week when was the first time that I heard the word fracking and fracking became this mainstream word. You know, from day one we discussed it as an industry, but I don't think the world really heard about it until just 2008 almost when it became this word that everyone knew what it was. But it had been used for so long before, but it became that polarizing topic that environmentalists said, "OK, how do we stop this? Well, all these wells are being fracked. Let's stop fracking." And so, you know, for us we've shifted towards unconventionals. I mean, that's now, we shifted toward natural gas initially in the Barnett, and then we've shifted back towards liquids and natural gas liquids, and I think we stay there for the near and midterm. So as an industry, yeah, we've all kind of gone down the rabbit hole and back to the other one. And I think that natural gas is of such a voluminous amount now it's going to be difficult to see how we go from 1,800 rigs running today total with 300 running for gas and 1,500 running for oil, and see that switch around. So that's going to be interesting to watch how that happens.

Monica Trauzzi: All right, Chris, a lot to watch. Thank you so much for your time. Thanks for coming on the show.

Chris Faulkner: Thank you.

Monica Trauzzi: And thanks for watching. We'll see you back here tomorrow.

[End of Audio]

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