Running On Empty ft. Wil VanLoh

Summary

Episode Summary: Running On Empty ft. Wil VanLoh

Podcast: The 47 Morning Update with Ben Ferguson
Host: Ben Ferguson
Guest: Will VanLoh, CEO of Quantum Energy Partners
Release Date: April 11, 2020

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1. Introduction to the Crisis

The episode opens with a stark portrayal of the multifaceted crises facing the United States in early 2020. Ted Cruz sets the stage by highlighting the severity of the global pandemic, economic downturn, and collapsing energy markets.

• Ted Cruz [00:00]: "A global pandemic. Over 16,000 Americans dead and over 17 million Americans have lost their job. And global energy markets crushed by collapsing oil prices. These are extraordinary times in which we live."

2. The Dual Impact of Low Oil Prices

Michael Knowles steers the conversation towards the plummeting oil prices, questioning whether low prices are beneficial for consumers or detrimental in the long run. Ted Cruz elaborates on the broader implications of the energy market crash.

• Michael Knowles [00:27]: "Low oil prices are not necessarily a bad thing when we look at it. What are we missing here?"
• Ted Cruz [00:56]: "If you end up seeing American energy producers driven out of business, that also has massive implications in terms of you and me paying higher prices at the pump in years to come and also geopolitically making us dependent on foreign countries."

3. Direct Engagement with Saudi Arabia

Cruz details his proactive approach in addressing the energy crisis by meeting with the President and engaging directly with the Saudi ambassador to confront the strategies threatening American energy producers.

• Ted Cruz [02:23]: "We started by writing a letter to the Saudi ambassador... it was the most bare knuckled, candid conversation, really, I've ever had with a foreign leader in eight years in the Senate."

4. The Shale Revolution and Its Drivers

Introducing Will VanLoh, the conversation delves into the technological advancements that fueled America's rise in energy independence. VanLoh emphasizes the role of independent companies over major oil corporations in driving innovation.

• Will VanLoh [06:43]: "So what's an independent?... The independents are the ones that have made this independence of energy possible."
• Ted Cruz [07:57]: "The shale revolution was started and driven by independence."

5. Environmental Concerns and Fracking

Addressing common environmental criticisms, VanLoh provides clarity on fracking processes, assuring listeners of its safety and dispelling myths about its impact on drinking water.

• Ted Cruz [17:58]: "So is that for real? Should I be worried that fracking makes it dangerous to drink the water?"
• Will VanLoh [18:00]: "No. You're fracking 10,000ft below that. That's two miles away from the water."

6. The Price War: Saudi Arabia vs. U.S. Energy

The discussion shifts to the strategic price war initiated by Saudi Arabia and Russia, aimed at undermining U.S. energy producers. VanLoh explains the geopolitical motivations and the economic ramifications of such tactics.

• Ted Cruz [14:58]: "Saudi and Russia have decided they were going to basically launch a market share war on the US..."
• Will VanLoh [16:19]: "Saudi ... break even cost today is probably $80 a barrel... Russia's is only about 40 to $45 a barrel."

7. Financial Pressures: The ESG Movement and Access to Capital

Cruz introduces the challenge of restricted access to capital for energy producers, exacerbated by the ESG (Environmental, Social, and Governance) movement, which discourages investment in the energy sector.

• Ted Cruz [27:35]: "There is a real problem with the banks cutting off capital to these American energy producers..."
• Will VanLoh [28:45]: "Banks are saying, you need to put equity in and pay down this loan or we're going to throw your loan over to the workout group."

8. The Urgent Need for Policy Intervention

Recognizing the critical state of the energy sector, Cruz recounts his efforts to influence presidential policy, urging support to prevent the collapse of American energy producers and safeguard millions of jobs.

• Ted Cruz [31:18]: "The President said, I'll do it... Make sure that the banks are not discriminating and bankrupting these energy companies."

9. The Ticking Clock: Time is Running Out

VanLoh underscores the limited timeframe to reverse the downturn in the energy sector, warning of irreparable declines in production and the loss of technological momentum essential for future recovery.

• Will VanLoh [34:16]: "We are running out of time to solve this problem."
• Ted Cruz [34:25]: "That's hitting the energy sector and the American energy producers."

10. Personal Reflections and Conclusion

Ted Cruz shares a poignant personal story about his family's experience during the oil price collapse of 1986, illustrating the human cost behind the statistics and reinforcing the urgency of preserving the energy sector.

• Ted Cruz [35:30]: "I still remember my dad... We lost the company, we lost our home, the home I grew up in."

Ben Ferguson concludes the episode by emphasizing the multifaceted impact of the energy crisis on jobs, the economy, and national security, leaving listeners with a sense of the pressing need for effective solutions.

• Ben Ferguson [36:00]: "It has implications for national security. There's so much more to talk about... Hopefully, we turn it around before it's too late."

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Key Takeaways

1. Energy Independence is Crucial: The stability of American energy producers is vital for both economic health and national security. Dependence on foreign oil, especially from adversarial nations, poses significant risks.

2. Technological Innovation Driven by Independents: The shale revolution, which boosted American energy production, was primarily driven by independent companies leveraging horizontal drilling and fracking technologies.

3. Geopolitical Price Wars: Saudi Arabia and Russia are strategically lowering oil prices to outcompete American producers, aiming to reassert their dominance in the global energy market.

4. Financial Constraints Exacerbated by ESG: The ESG movement is restricting access to capital for energy companies, making it increasingly difficult for them to sustain operations during price downturns.

5. Urgent Policy Intervention Needed: Immediate government action is essential to support energy producers, prevent bankruptcies, and maintain energy independence.

6. Human and Economic Costs: The collapse of the energy sector leads to significant job losses and economic hardship, as illustrated by Ted Cruz's personal anecdote.

Notable Quotes

• Ted Cruz [00:56]: "If you end up seeing American energy producers driven out of business... it also has massive implications... making us dependent on foreign countries."

• Will VanLoh [06:43]: "Independents are the ones that have made this independence of energy possible."

• Ted Cruz [14:58]: "Saudi and Russia have decided they were going to basically launch a market share war on the US."

• Will VanLoh [28:45]: "We're hearing stories every single day about banks going to companies and saying, you need to put equity in and pay down this loan or we're going to throw your loan over to the workout group."

• Ted Cruz [34:25]: "That's hitting the energy sector and the American energy producers."

• Ted Cruz [35:30]: "We lost the company, we lost our home, the home I grew up in."

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Conclusion

The episode "Running On Empty" provides a comprehensive analysis of the intertwined crises facing the American energy sector amid the COVID-19 pandemic. Through insightful dialogue between Ted Cruz and Will VanLoh, listeners gain a deeper understanding of the economic, geopolitical, and human dimensions of the energy market collapse. The discussion underscores the critical need for strategic interventions to preserve energy independence, protect jobs, and ensure national security.

Transcript

[Ted Cruz]

A global pandemic. Over 16,000Americans dead and over 17 million Americans have lost their job. And global energy markets crushed by collapsing oil prices. These are extraordinary times in which we live. This is Verdict with Ted Cruz.

[Michael Knowles]

Welcome back to Verdict with Ted Cruz. I'm Michael Knowles. Senator, you're starting us off on a little bit of a downer there, but I guess we're living in fairly down times. I want to focus in on something you said there about the energy markets because last I checked, oil was trading at something like $22 a barrel. I mean it was very, very low. And I think for most people the interaction we have with the oil industry is when we fill up our gas tanks. So low oil prices are not necessarily a bad thing when we look at it. What are we missing here?

[Ted Cruz]

Well, I think right now we're facing three different crises all at the same time. We've got a global pandemic, the coronavirus virus crisis. We're all familiar with the cases, the deaths, and we're taking extraordinary steps to try to stop the spread of that virus. There's an economic crisis, a disaster. 17 million people in the last three weeks have filed for unemployment. We've seen entire industries decimated and that's producing enormous damage. But at the same time you've got energy markets and in particular the global price of oil has dropped more than in half. And the consequence of that is it potentially risk bankrupting most if not every American energy producer and particularly in my home state of Texas, that's devastating. But if you end up seeing American energy producers driven out of business, that also has massive implications in terms of you and me paying higher prices at the pump in years to come and also geopolitically making us dependent on foreign countries in a way that we just now managed to get free and independent from.

[Michael Knowles]

So what you're saying is we shouldn't be celebrating maybe a little dip in the gas prices right now, cuz in the long term financially that could really hurt us. And also it has these national security implications that look pretty bad down the road. I just want to point out something you said, Senator. You said you flew out and met with the President. You met with the President specifically because of this energy crisis. That's how bad it's gotten.

[Ted Cruz]

No, that's exactly right. On Friday I got on a plane on a United commercial flight that was practically empty. There were only maybe 10, 15 of us on it. Flew up to D.C. went to the White House, had a two hour meeting. And we're all from states that are big energy producers. And we started by writing a letter to the Saudi ambassador. Then a couple of weeks ago, we did a conference call with the Saudi ambassador, nine of us. I gotta tell you, it was the most bare knuckled, candid conversation, really, I've ever had with a foreign leader in eight years in the Senate.

[Michael Knowles]

Can you give us a little behind the curtains here?

[Ted Cruz]

I can. So we're on a conference call with the ambassador. Here's what I said. I said, listen, no state in the union does more business with Saudi Arabia than Texas. And right now you're taking advantage of a global health pandemic to try to screw and bankrupt people across Texas. And it is devastating. And the 13 of us who signed onto the letter as a matter of national security have come consistently been allies of the Saudis. Saudi is an important counterpart to Iran. Iran and the Ayatollah are really dangerous for national security. But I said, listen, you know, we've been with you, but you're now trying to bankrupt people in my state. And that is not gonna stand. Now here's the Saudi ambassador's defense. But Russia. But Russia sounds like the mainstream media.

[Michael Knowles]

For the last three years.

[Ted Cruz]

Well, they do. And I said, listen, Russia's our enemy. We know that. They behave like our enemy. We treat them as our enemy. You're supposed to be our friend. You want us to treat you like Russia? Fine. You want to be our enemy? How about we pull up all our soldiers out of Saudi Arabia, we pull our Patriot missiles out there. Because every time someone screws with you in the Middle east, you pick up the phone to call the American military and say, save our asses. Well, then don't bankrupt people in my state. And I was pissed.

[Michael Knowles]

Yeah.

[Ted Cruz]

And I gotta tell you, it was interesting, that call. I think it got. In fact, I know it got their attention. So you and I, we've invited a guest. It's a longtime friend of mine, Will Van Low. Will is the CEO of Quantum Energy Partners. Now, that is an $18 billion private equity energy fund. Quantum is the third largest driller in North America. And I gotta tell you, Will is someone who knows the energy markets as well, if not better than anyone I know. And so in the last couple of weeks, as I went up to meet with the president and major energy CEOs, last week, Will was someone. We literally spent probably six, seven hours on the phone trying to understand what's happening here and the real threat to jobs and energy security in our country. And so, Will, welcome to verdict.

[Michael Knowles]

Will, for so many years, we complained about how we're dependent on the Middle east for energy. We are totally trapped for energy. And yet this technology helped to lead us away from that and get us to what I guess we'd call energy independence. Until maybe five minutes ago.

[Will Van Low]

That's right. And I think that is a huge. When you think about the United States has had more wells drilled in it than the rest of the world combined. That's a pretty amazing statistic to think about.

[Ted Cruz]

And when it comes to shale, do we have a lot of it here?

[Will Van Low]

Yeah, oh for sure. Probably 95% of all shale production in the world is in the United States. Part of that's due to our geology. Right. So they've tried it, for example, in Europe. They don't have the same rocks over there. Now, there's other parts of the world where there's a lot of shale, but those are parts of the world that typically have a lot of conventional oil and gas as well. And if you don't need to drill, it costs more money to drill wells unconventionally, horizontally and put the big fracs on them. So places like in the Middle east where they have a lot of conventional production, that they don't need to drill horizontal Wells.

[Ted Cruz]

So last 10 years we have this technological innovation. We discover how to access massive reserves that were there but we didn't know how to get to it. And suddenly America passes everybody. We pass Saudi Arabia, we pass Russia, we become the top producer in the world. Who is it that drove that and is the energy industry? Look, I think a lot of people think of energy and they think of big oil. They think of a couple of giant companies, Exxon and Shell and these giant companies. Is that who did this innovation?

[Will Van Low]

No, and that's the interesting thing because so much of the dialogue right now in Washington is involving the Exxons and the Chevrons of the world. And they're certainly big players in shale today, but they didn't drive the innovation. It was actually the independents that drove that innovation in the United States.

[Ted Cruz]

So what's an independent?

[Will Van Low]

Well, an independent is basically an oil and gas company that's not a major. So the majors are typ Integrated companies. They're the largest companies in the world in terms of publicly or privately owned, outside of government owned oil companies.

[Ted Cruz]

And these majors, I mean, they're massive. I mean some of them, they have GDPs that rival companies.

[Will Van Low]

Well, they do. Like Exxon, for example, they produce over 4 million barrels a day. Right. There's only a couple, there's only a handful of Countries in the world that produce over 4 million barrels a day.

[Ted Cruz]

But the shale revolution was started and driven by independence. And independence, you're talking, you and I both spent a lot of time out in Midland, Texas. You're talking sometimes 5, 10, 20 guys in a little office who are raising some money and going out and drilling holes and innovating. That's what drove this entire revolution and changed the entire geopolitics.

[Will Van Low]

It did. And to be fair, the technology was probably driven more by the larger public independence. Companies like Chesapeake, companies like Pioneer, those types, they drove the technology. But the smaller independents were very quick to get in and really take that. And they're much more nimble than the public companies. So they take the big technology revolutions and then they do a lot of evolutionary changes in that technology and they get it out there very quick and they're able to access large amounts of land. And so the independence, both the public, the larger public independence, as well as the thousands of smaller kind of mom and pop independence, they're really the ones that have made this independence of energy possible.

[Michael Knowles]

Now, Will, I don't want to rain on your parade here, but this sounds too good. This sounds too good to be true right now because you've got this great energy revolution here. You're empowering so many people. American ingenuity, and then the prices all plummet. So I understand how it worked out so well, but what went wrong?

[Will Van Low]

Well, let's back up a little bit and you think about prices plummeting. Prices plummeted from about $60 a barrel at the beginning of the year down to about $20 a barrel a few weeks ago. Now they're up in the mid to high 20s now. But let's not forget, before the shale revolution started in 2008, oil was $147 a barrel.

[Ted Cruz]

Hold on a second, $147 a barrel. And then it came down to 50, $60 a barrel. And now it's plummeted to the 20s. Is that right?

[Will Van Low]

And through American innovation and ingenuity, we were able to get the cost. Initially, these shale wells were very expensive and you didn't recover a lot of hydrocarbon. And through a lot of science, through a lot of just innovation and trial and error, we were able to meaningfully perfect, if you will, the way we drilled and completed these wells. And we got the cost down to a level where at $50 to $60, the US oil and gas companies a respectable profit. And the industry for the last four or five years has been chugging along.

[Ted Cruz]

And 50 to $60. Look, most of us don't buy a barrel of oil, so that number doesn't mean anything to us. What does that mean? 50, $60 oil? What does that mean in terms of a gallon of gas at the gas pump?

[Will Van Low]

And understanding a lot of the cost of gas is actually taxes. Right. And those don't change. So three to four dollars depending on the state and city you live in is what, $50 to $60 oil trips.

[Ted Cruz]

So Michael will pay a lot more in California than we will in dollars.

[Will Van Low]

He will absolutely pay more.

[Ted Cruz]

Although I don't know that you need to fill your electric scooter, Michael, so that may help. That's the thing.

[Michael Knowles]

We actually just run on moonbeams out here. So we don't need any sort of energy. So what I'm hearing though is you don't want the price of oil to be so expensive that it's going to kill us all at the pump, but you also don't want the price of oil to be so low that you put all of these companies out of business. You want there to be some medium in there. What are the odds that we're going to be able to get back to that before the American energy industry is just destroyed?

[Will Van Low]

Yeah, you know, right now it's not looking good. It's not looking good for two reasons. One was Saudi and Russia have decided they were going to basically launch a market share war on the US and as Senator Cruz said a minute ago, you know, the US went from being a huge energy importer, you know, we imported more than 12 million barrels a day less than a decade ago to literally over the last six months or so. We given, on any given week we will export or import a few hundred, you know, so we'll be a net exporter, net importer of maybe 100 or 200,000 barrels. Right. And so that if you think about that and you think about the impact on our economy, that's depending on the price of oil. But say at $50 oil, that's about $250 billion a year that stays here in the U.S. that U.S. oil and gas industry has created additional revenue. The taxes that come off millions of jobs that were created.

[Ted Cruz]

What does that mean for jobs? How does that. Whose jobs are we talking about here?

[Will Van Low]

Well, we're talking about very high paying middle and upper middle class jobs. We're talking about engineers, geologists, geophysicists, production engineers. We're talking about a lot of jobs out in the field. So for both, lots of blue collar jobs, but also a lot of white collar jobs.

[Ted Cruz]

So if we lose American energy production, if these companies go bankrupt, we're still going to need energy when the economy comes back. We're still going to drive our cars, we're going to fly airplanes. And so if the American companies are bankrupt, where are we going to get our energy?

[Will Van Low]

We're going to get it where we used to get it. And that's from foreign sources like the Middle east, like Russia. And that's really, to me, Senator, the key question the US has to ask itself is do we want to be energy independent or not? And the answer to that question, all policy will flow from whether the answer is yes or no.

[Michael Knowles]

Sorry to interrupt, Will, because most people, I think, want that energy independence. That's what we always hear our politicians talking about. Certainly what I want for us. But what you're describing as the problem here, I just assumed it was all the coronavirus that's upsetting all the global markets. You're saying there's something else in play, which is this price war between Russia and Saudi Arabia going after the United States. What does that mean? I mean, is that related to the virus or is that a totally separate issue?

[Will Van Low]

Totally separate. And to be fair, the demand destruction that's associated with coronavirus is a much bigger issue today.

[Ted Cruz]

In the near term, if I understand it, globally, the demand for oil in normal times four months ago was between 95 and 100 million barrels a day.

[Will Van Low]

About 100 million barrels a day.

[Ted Cruz]

As a result of the economy slowing down and grinding to a halt in the US and globally, it's dropped to about what, about 70 million barrels a day.

[Will Van Low]

There's a lot of different estimates out there, but I'd say they range anywhere from a 20 to as much as probably 35 million barrel a day demand destruction. So that would say somewhere between 65 and 80 million barrels a day is currently what the globe is using today.

[Ted Cruz]

So that had a big negative impact on price when a third or more of the demand disappears. That you.

[Will Van Low]

That's never happened. It's beyond, without precedent, that is.

[Ted Cruz]

Well, that's everybody's car sitting in their driveways and everyone's airplanes staying parked at the hangar and nobody flying and very few people driving.

[Will Van Low]

And to put that into context, during the great financial crisis, total global demand dropped by only about two and a half to three million barrels a day.

[Ted Cruz]

Wow. So we're looking at 10 times, 10 times as much reduction in demand now as during the financial meltdown.

[Will Van Low]

That's exactly right.

[Ted Cruz]

So, but then you've got a second Component which is you have the Saudis and the Russians right, as Coronavirus is breaking.

[Will Van Low]

Yes.

[Ted Cruz]

Deciding this is a great opportunity to screw the Americans, to bankrupt the American energy business. And listen, what you're doing drilling in West Texas shale, the Saudis and Russians have hated it because you pass them up with America as the top producer. And so they're sitting there, if I understand this right, they're taking this as an opportunity. All right, we've got a crisis. Let's put these guys out of business. Let's bankrupt them so that when all is said and done, we're the only players left in the game.

[Will Van Low]

Senator, if you think back to when the oil Shell revolution started and you look at total global supply growth since then. So about eight or nine years ago, 80% of total global supply growth has come from the United States of America. Okay, That's a country that today produces about 13, 14%, maybe 15 if you add in all the NGLs and other liquids.

[Ted Cruz]

What's an N?

[Will Van Low]

Natural gas liquids. But let's say the US today produces about 15% of global liquid supply. Yet we've accounted for 80% of total global liquids growth over the last decade. That's extraordinary. And that challenged OPEC supremacy and it challenged Russia's supremacy.

[Ted Cruz]

And it also helped, if I understand right, drive the price down quite a bit by 2/3.

[Will Van Low]

It drove prices. Had the US share revolution not happened, think about we were at $147 a barrel and that was pre oil shells, prices probably would have gone a lot higher from there. And so that that huge drop in what Russia and Saudi, I actually think that they may not have chosen to launch this price war had it not been for Coronavirus. Because both countries, if you look at their ability to how long can they go with low oil prices? You know, Saudi today is much worse equipped for a long price war than they were back in 2014 during the last big collapse in prices. Right. Because they've depleted a lot of their sovereign wealth funds and their break even cost today is probably $80 a barrel. And what I mean by that is they fund their entire government out of their oil revenues, whereas Russia's is only about 40 to $45 a barrel.

[Ted Cruz]

So Russia, what they're doing used to be what we would call an antitrust law, predatory pricing in that their when they flooded the market with oil and they announced they were going to do that and drove the prices way down, they were taking a big hit themselves. But they were doing it to bankrupt their competitors and then sweep in and Dominate the market.

[Will Van Low]

That's right.

[Ted Cruz]

Let me pause for a second and kind of play devil's advocate. You mentioned two technological innovations that helped us access all these massive shale reserves. One was horizontal drilling, but it was combining that with hydraulic fracturing. Fracking. Look, fracking. I've heard a lot of scary things on the Internet about that. I've heard it messes with the water table.

[Michael Knowles]

You can light the water on fire. That's what they say.

[Ted Cruz]

So is that for real? Should I be worried that fracking makes it dangerous to drink the water?

[Will Van Low]

No. There's probably not a bigger set of environmentalists in terms of people that like the outdoors, that like the water, that really love the Earth than people, the good people you'll find in the oil and gas business. Right. And I think there is. You got to remember, remember when we frack a well, these wells are anywhere between 8 and 15,000ft below the Earth's surface. The surface water that people drink is anywhere from 50ft to maybe 3 or 400ft below the surface.

[Ted Cruz]

So let me make sure I understand that. You got the surface 50 to 300ft down. That's not that far down. That's the water table. That's where the water is that we get our drinking water.

[Will Van Low]

That's correct.

[Ted Cruz]

So that's not where you're fracking?

[Will Van Low]

No. You're fracking 10,000ft below that.

[Ted Cruz]

And 10,000ft, if my math is right, that's two miles.

[Will Van Low]

About two miles.

[Ted Cruz]

Two miles of rock down low. So where you're doing this is two miles away from the water.

[Will Van Low]

Right.

[Ted Cruz]

Let me ask a different question. So my daughter Caroline, you know Caroline, she's 11, she actually said to me last night, she said, you know, everything that's happened in this crisis has been really good for the environment. The environment is cleaning up. That's right. And listen, it is true. If we have no production, if all human activity stops, that would be good for the environment. It's just not very good for people.

[Will Van Low]

That's right.

[Ted Cruz]

Let me ask you something. What happens if all these independent energy producers go out of business, the economy gets going again after the crisis, and we're dependent once again on the Middle east for oil. Is that good or bad for the environment?

[Will Van Low]

You know, it's a great question because I think so many people think, you know, hey, let's put the U.S. oil and gas producer out of. Because oil and gas is bad for the environment. But that doesn't mean people are going to stop driving their cars. It doesn't mean people are going to stop flying in airplanes. It doesn't mean people are going to stop buying iPhones, which by the way, take hydrocarbon energy and the plastics, a lot of the parts. Everything we have in our modern life, Senator, is revolves around hydrocarbons in some form or fashion. So they're not. The need for them is not going to go away. We will just shift the source of where we secure those from and we'll go back to where we were a decade ago, which is sending hundreds of billions of dollars overseas to people that quite frankly don't like us very much. We will lose significant geopolitical.

[Ted Cruz]

And if I remember right, an awful lot of the 911 terrorists who attacked us were from Saudi Arabia and had their funding stores from there. And so fueling the Middle east with billions of American dollars is not good for keeping America safe.

[Will Van Low]

It's not. And it'll also cause the loss. If you think about the biggest growth engine in US jobs coming out of the great financial crisis was the energy industry. And the tens, if not hundreds of billions of dollars in taxes that the energy industry pays every year to school districts, to other municipalities, hospitals building roads, bridges, infrastructure.

[Ted Cruz]

But this is just Texas, right? I mean, we're only talking Texas jobs. There's none anywhere else in the country.

[Will Van Low]

There's a number of other places throughout the United States, both.

[Ted Cruz]

Like where?

[Will Van Low]

Well, you've got the B, that's in North Dakota. You've got the DJ that's in Colorado, the Powder that's in Wyoming. You've got the Permian, which is New Mexico. You've got several plays in the scoop stack in Oklahoma, that's just on the oil side.

[Ted Cruz]

Pennsylvania.

[Will Van Low]

Well, I was going to say on the gas side, the largest gas field in the United States, really one of the largest, maybe the largest in the world, sits under Pennsylvania, West Virginia, Ohio and New York.

[Ted Cruz]

So what's California? California is a huge producer, right?

[Will Van Low]

They are a huge producer in many ways.

[Michael Knowles]

I can speak to California. It's a completely lost cause. But of course we don't want the industry to go out here. I just, I see. Will, your point that this is all over the United States, that we're talking about a lot of jobs and a lot of industry all over the place. So what do we do now? I mean, looking down at this crisis, you got the markets collapsing, rather. How do we fix it? What are our options before it's too late?

[Will Van Low]

Well, you know, I think we. Again, we have to start with, we gotta decide we wanna fix it because that is part of, part of the, obviously, the Saudi and Russia and what they've done and tried to flood the market with additional barrels to drive down prices. But the other. But the much bigger issue in the short term is obviously demand destruction associated with coronavirus. And so, you know, at these prices, the US Independent cannot make money, okay? They just flat can't make money. So there's. There is, There is that fact. They're just. Revenues will not exceed their expenses. But the other thing we have to also look at as an industry is.

[Ted Cruz]

And that's just simple math, that it cost a U.S. producer, what, about $40 a barrel to produce, and so $20 a barrel, it doesn't work if it costs twice as much as the price to produce, you're out of business at these prices.

[Will Van Low]

There's not. Probably less than 5% of all locations in the United States are economic at these prices.

[Ted Cruz]

Okay, that's. Well, Michael, one of the things, I mean, you asked, what do we do about it? There's both a component of it. We get our economy going again, but there's also a component of it, the foreign policy component. I'll tell you, and you and I have talked about this, that's something I've been really active in, is taking on the Saudis in my office. I brought my national security team in. I said, all right, I want a list of steps we can take to ratchet up heat on the Saudis to make it more and more painful. We looked at things like sanctions on individual officials in the Saudi government that had directly targeted American businesses and said, if you're going to wage economic warfare on us, well, well, welcome to the game and you better be prepared for the consequences. Rewind to last week, Friday in the Oval Office meeting with the President. The President had spoken in the preceding week both to Putin and mbs, the head of Saudis. He had leaned in hard. And it's interesting, the President didn't start out that way. I talked to the President a couple of weeks ago, and his instinct is actually where you started this show, Michael. He was like, well, you know, aren't low, low oil prices good? Isn't it a good thing? He was thinking of it. He's a real estate guy from a consumer's perspective, until I and others started explaining, listen, we're looking at millions of jobs that go away, and if we destroy America's producing capability, it makes the bad guys who hate us more powerful. Yes. And it makes America weaker. That's a bad outcome. Well, what the President said is, is that MBS and Putin had Agreed to stop flooding the market to reduce their production. He tweeted out two weeks ago they were reducing their production, 10 million barrels a day. That resulted in oil. Just that announcement going from 20 bucks a barrel to 27. In the white House meeting, what he told us is, he said it's actually gonna be more than 10, it's gonna be more like 15 million. And just today the news broke that they're talking about 20 million. Now the proof is in the pudding and we'll see if they actually do it. Yeah, but if they stop flooding the market, if they pull back, that will help. It won't solve the problem. Problem won't get solved until the economy comes back and people are able to drive their cars and fly airplanes. But if Russia and the Saudis follow through and stop flooding the market, stop.

[Michael Knowles]

Taking advantage in the meantime, before the economy comes back. If they're talking about cutting daily production by, by 20 million barrels. Okay, that's great. How much do we need to actually see an impact on the American energy sector?

[Will Van Low]

Right. So you know, going back again, I think there's somewhere between 25 and 40 million barrels of demand destruction right now. And so look, is 10 or 15 or 20 million barrels a lot? It is. It's nowhere close to what we need to really balance supply and demand. And the fact is is prices were cratering long before this. You know, it became apparent of how bad because most of the price drop happened when people were thinking demand destruction was 3 to 5 million barrels a day. Historically, if a producer, like if OPEC were to flood the market, even with a couple million barrels a day of excess supply, meaning only a million or 2 million barrels difference in supply and demand, prices would drop in half. Okay, so what we're talking about here is it's a number that's really irrelevant, number one. Number two, there's a conditionality on everything Saudi and Russia both have said in order to enact these cuts.

[Ted Cruz]

So for the econ wonks out there, there's high price elasticity.

[Will Van Low]

There's very high price elasticity. And Saudi and Russia both said if we're going to do these cuts, we want contributions from all the major exporting countries in the world, including the US, including Norway, including Mexico. So there's all these other countries that they want to participate in this. And I think the President has been very clear. The US is not going to deliver a production cut. Now he has talked about there's going to be natural shut ins and declines and that is going to be the case. The question Is, is that going to be good enough for the Saudis and for the Russians? The other thing though to keep in mind is every time OPEC or OPEC has said we're going to make a cut, but there's generally speaking not great adherence to those cuts. So they may say they're going to make a cut, but the actual cuts usually are much less.

[Ted Cruz]

So trust but verify and maybe even don't trust. Let me bring out one other issue because it's an important issue to understand. And this is something you and I have talked a lot about. And it was the one deliverable that came out of the White House meeting last week. So we spent two hours talking about energy. We talked about pressuring the Saudis and Russians. That seems to have produced some results. But we also talked about access to capital. And this is a piece where I think a lot of people don't understand what's going on, but it's really important. Wall street the last couple of years has been cutting off more and more capital to energy. There's a movement called the ESG movement which is putting pressure on Wall street to say we're not gonna fund American energy producers. And the consequence of that has been really significant. So will, I want us to understand it. Let's say you're a small independent producer, you're in West Texas, you're in New Mexico, you're in Colorado and you're in Pennsylvania and the banks decide to cut off your capital. How does that happen? How does that work? Why does capital matter and how would that impact you?

[Will Van Low]

So in any oil and gas business, companies obtain capital from banks and what's called rbls, reserve based loans. And rbls are redetermined every six months. Okay, so think about public companies, they go issue debt and it's 7, 10, 15, 20 year debt. They don't have to think about refinancing or having that debt called for a very long time. The independent producers in this country, the vast majority of them can't access that kind of public capital to term out their debt. And so they go to banks and the bank loans if they get redetermined every six months. So historically it's been a very symbiotic system and the banks understand the importance of the business and they understand, you know, they loan companies money and they're not going to change it a lot quickly in terms of the amount they're loaning them. Well, what's happening now because prices have dropped so much and the banks have actually had some significant losses on those RBLs. They've made a decision they're going to significantly tighten the amount of credit to the sector. But they had made that decision really before this price drop, they'd made that. To your point, they've been getting a lot of pressure from ESG centric groups. So the pressure is energy's bad, it's killing the climate. And so don't invest in energy companies. Here's the fallacy of that, Senator, is as we said earlier, unless people are going to quit driving cars and flying in airplanes and buying products, they're going to keep consuming the energy.

[Ted Cruz]

You were talking about reserve based lending. And I want to make an analogy to say a home mortgage. Say you've got a home that's valued at $400,000. So you get a mortgage, let's say for $350,000, you're paying your mortgage and it's based on the value of the home. Now, drawing that analogy to if you've got an energy producer, they get a loan based on the value of their reserves, the reserves that they're producing and going to produce. But you said in the energy business, every six months they come redetermine it. So what that would mean, if you think about your home mortgage, you got a $350,000 mortgage on what you think is a $400,000 house. Suddenly the bank comes to you six months later and says, Michael, your $400,000 house we now think is a $200,000 house, you borrowed 350,000, so write me a check for 150,000 now.

[Will Van Low]

And that's what's happening, Senator, that is literally we're hearing stories every single day about banks going to companies and saying, you need to put equity in and pay down this loan or we're going to throw your loan over to the workout group.

[Ted Cruz]

And so in terms of deliverables from the White House meeting, what I suggested to the President on Friday, I said, Mr. President, there is a real problem with the banks cutting off capital to these American energy producers and ending American energy production. And we need to make sure that energy is not discriminated against. And so I suggested to him, Mr. President, you should ask the energy secretary, Dan Bruyette, who is a Texan and a good friend, ask him to work with Steven Mnuchin, the Treasury Secretary, to work with the bank regulators to make sure that the banks are not discriminating and bankrupting these energy companies in America and causing millions of people to lose their jobs. And the President said, I'll do it. He directed Dan. Dan was sitting in the meeting. Make it happen. I can tell you I've spoken with Dan almost every single day since then in order to make sure that we just have the capital so these guys can survive.

[Michael Knowles]

Well, that's great news, because it does seem, from what I'm hearing, like it's one damn thing after another that the American energy industry has to face. And this leads to my last question. We're running out of time here, but I suspect we're running out of time to solve this problem. Will, do you have any sense of the timeline here before we reach a point at which we can't turn this around anymore?

[Will Van Low]

Well, if you think about the amount of capital that it took to basically get the shale revolution to where it is today, it's about a trillion and a half dollars. Okay? And that capital, a lot of it, was not spent very efficiently. And public investors lost a lot of money over the last decade on their investments in the energy space. The problem is today is that magnitude of capital will never come back to our sector again. And so if we lose the momentum, the problem with shale wells is they on at prolific rates, but they decline very rapidly. And so what's going to happen over the next 12 to 18 months is US production will decline probably two to two and a half million barrels a day. Okay? That's off a base of 13 million barrels. That's very significant. And we'll never be able to recover that.

[Ted Cruz]

And if you shut in those wells, we don't know if you can open up again.

[Will Van Low]

Well, you'll open them up, but there's a big chance you've damaged the reservoirs. Okay? So they'll come back on less productive. But the bigger problem is, is that shale is very expensive to develop. It's like a treadmill. And the more you produce, the faster the treadmill goes. And you got to keep reinvesting and reinvesting and reinvesting. And as soon as you break that cycle of reinvestment, you can never get back up unless you put a lot of outside capital back into the system again. So for every dollar that came in the door, the energy industry was spending about $1.50, okay? That's how production from 5 million barrels a day in 2010 to 13 million barrels a day this month. But now that that cycle's been broken.

[Ted Cruz]

5 million to 13 million in 10 years.

[Will Van Low]

10 years, but now that cycle's been broken. So you ask the question, how much time do we have? Not much. And that really is the critical, critical.

[Ted Cruz]

Question in terms of this crisis. That's hitting the energy sector and the American energy producers. I gotta tell you, for me, this is very personal and real. As you know, I grew up in Houston. Houston's my hometown. When I was a kid, my parents owned a small business and it was in the oil services world. It was a seismic data processing company. So my parents are both mathematicians, computer programmers. And in 1986, oil collapsed. It dropped to $7 a barrel. Texas went into a full on depression. I was in high school at the time and I still remember my dad. It was one Monday. Now, his was a small business. He had 25 employees. I still remember the Monday where he had to lay off 19 of the 25 employees. He came home. I've never seen my father look as unhappy. He looked like he'd been beaten with a stick. And he had employees arguing with him going, raphael, I'm not going to leave. No, I'm going to stay. This company is my home. And he said, look, I don't have the money to pay you. You have a family. And so my parents went bankrupt. We lost the company, we lost our home, the home I grew up in. And it's. Look, I've lived through that firsthand.

[Michael Knowles]

Well, you know, it really shows you that in the price of oil, there is a whole lot more going on. There are a lot of jobs, there are a lot of families. There's an entire sector of the American economy that's being destroyed. It has implications for national security. There's so much more to talk about. Unfortunately, we are out of time, but thank you, Will. Thank you so much for giving your insight and sending us. I had never heard that story. I mean, it really brings it home on a personal level and we'll see. Thank you, by the way, for your leadership and going to the President trying to turn this around. We will just have to wait and see in the coming days. Hopefully we turn it around before it's too late. In the meantime, I'm Michael Knowles. This is Verdict with Ted Cruz.

[Unknown]

This episode of Verdict with Ted Cruz is being brought to you by Jobs, Freedom and Security Package, a political action committee dedicated to supporting conservative causes, organizations and candidates across the country. In 2022, Jobs, Freedom and Security PAC plans to donate to conservative candidates running for Congress and help the Republican Party across the nation.