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The HC Commodities Podcast
Important, Growing in Demand and Hard: Energy with Mike Howard
00:55:06
Today, we discuss the importance of energy, what the growing demand for energy means, and how hard it can be to deliver that energy. To demonstrate that, we are using Texas as a microcosm. Texas produces the greatest amount of energy in the US. Its mix of energy spans renewables, nuclear, natural gas, coal, and yet its citizens pay some of the highest prices in the Southern States. At the same time, it's ground zero for hyper-scalers and is the epicenter of fracking yielding epochal volumes of hydrocarbon. To discuss all this and more is one of the leading lights in the Texas energy sector, Mike Howard, Founder and CEO of Howard Energy Partners, the largest privately owned mid-streamer in the US. Beyond his business ventures, Mike is a key advocate for energy's role in society and the importance of getting it right, in technology, in physics, in legislation and in investment.
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- [00:00]
A
Foreign. Welcome to the HC Commodities Podcast, a podcast dedicated to the commodities sector and the people within it. I'm your host, Paul Chapman. This podcast is produced by HC Group, a global search firm dedicated to the commodities sector. Today we are talking the importance of energy, what the growing demand for energy means, and how hard energy can be. To demonstrate that, we're using Texas as a microcosm. Texas produces the most amount of energy in the US Its mix of energy spans renewables, nuclear, natural gas, coal, and yet its citizens pay some of the highest prices in the South. At the same time, it's ground zero for hyperscalers and is the epicenter of natural gas exploitation around the world. To discuss all this and more is one of the leading lights in the Texas energy sector, Mike Howard, founder and CEO of Howard Energy Partners, the largest privately owned midstreamer in the US beyond his business ventures, Mike is a key advocate for energy's role in society and the importance of getting it right in technology, in physics, in legislation, and in investment. As always, you can support the show by leaving us a positive review on the platform you're listening on. And as always, I hope you enjoyed the episode. Mike, welcome to the show.
- [01:26]
B
Thank you, Paul. Thanks for having me.
- [01:28]
A
Yeah, I've been looking forward to this discussion. We are essentially going to be using Texas as a microcosm of some of the looming challenges for energy around the world, but also some of the intricacies about actually balancing and building a reliable and sustainable energy platform that can meet the new requirements, particularly driven by technology changes. Before we get there, though, we're lucky to have you on. You're a very successful entrepreneur with that you've built a philosophy around energy itself through your experiences and travels. Can you just give us a little bit on your background for context and then give us some of the, I guess, your philosophy, the meta picture that you have when it comes to energy.
- [02:14]
B
Yeah. Thanks, Paul. I graduated university as a chemical engineer and started my career working in the oil fields, building infrastructure for some of the first horizontal drilling wells that were, that were being done in the US and being done very quickly and learning how to build infrastructure to meet that demand. At that time, this was in the, in the mid-90s and through promotions and that sort of thing, ended up being an executive at a very large midstream company. But the whole time I was doing that was because one, the university I went to was in a geography in South Texas that was friendly to energy, oil and natural gas. There was a shortage because it was post some of the commodity prices of the 80s where most people were escaping the oil and gas industry and not coming into it. So there wasn't that many people graduating university, getting into this industry. And so I was elevated at a pretty young age to an executive. And after about 15 years of doing that, I quit the publicly traded career and started the company we're with today, which is Howard Energy Partners. It started it as, you know, with the idea that more infrastructure is needed and I wanted to work for a meaningful endeavor. And there was a great public market supporting infrastructure like that. And so we started the company with some private equity and, and that was 14 years ago. Today we have 450 employees. We operate in four states. Texas is our largest state and we operate in the country of Mexico. And so it's been a. We've allocated almost $4 billion in capital in that time frame. We're infrastructure builders. And when you talked about philosophy, my friend Clay Gaspar at Devon Energy said it best recently. And I didn't come to this realization until I had a, a fossil fuel company with my name on the door, which is that energy is important, energy demand is growing and energy is hard. And I've really done a deep dive on those three foundational truths and kind of built our company to meet the demands of those truths. And so I love to get into that with you a little bit because you have a unique perspective on commodities and energy. Yeah, I'd love to get into that with you.
- [04:37]
A
So important, growing and hard. And I do want to dig into each of the three of those. You're being rather modest about your career, but I don't know where to slot this in, but I think it's really important to get across there is that kind of the miracle of shale, right? It is a phenomenon that I think is sort of under reported, under recognized and I think will be one of the big stories of historians looking back 200 years about sort of what happened to America in contrast to Europe and other regions. Because if you go back to that the 2000s, the entire narrative was one of energy scarcity. In fact, the whole backdrop to concerns around the Iraq war was just that. Right. And then we had this shale revolution which essentially the US discovers, you know, two or three Saudi Arabia's under Texas and other regions on that period that time, you know, phenomenally know, lucky in a way. But obviously do you think that could have happened in, in another region? What was it about the sort of the, the constructs of Texas at the time and the surrounding regions that allowed that revolution to happen because you were that right there on the front line. And, and I guess this will tie into that energy is hard bit.
- [05:49]
B
Yeah. So you know, take us back to 2005. The Barnett shell up in Fort Worth in that area of Texas. They had been working in that area for gosh, 20 years plus trying to figure out fracking and a horizontal way. You know, we're drilling horizontal wells plus fracking. They've been fracking wells in Texas for, you know, since the 60s, maybe longer. But horizontal drilling into a Shell and, and getting a resource from a very tight rock was kind of the innovation at that time. And if you think about what was going on in the US at that time, we were using a lot of coal, we were using about 55 billion cubic feet of natural gas at that time. We were producing a lot of the Gulf of Mexico and the traditional conventional oil and natural gas areas of the US is starting in 2005 we started re piping America. So when you fast forward 20 years, today we produce twice as much natural gas. This year we're producing about 100-809-billion cubic feet of natural gas. Back whenever I was talking in 2005, today we're producing almost 14 million barrels a day of oil. Back then we were producing four to five. So we tripled that in the last 20 years. It's hard to overstate the impact that it's had on the planet and the economic engine that that's driven not only for the US but for our allies. Where today natural gas in the dead of winter here in Texas, really close to Henry Hub is trading about $3 in MMBTU. In 2005 we would have been seeing anywhere from as minimum of $6 to $9 MMBTU. Then every cold front that we would receive it might shoot up to $20 mmbtu. We were looking to import 6 to 9 bcf of natural gas from LNG at that time. And so now we export almost 20 bcf a day of what's being built. So far that's 2025 numbers. And so it is in the repiping of America. Today we get most of our natural gas from the Marcellus Shale up around Pennsylvania, Ohio, West Virginia, that area, the Eagle Ford Shale, the Haynesville Shell, the Still, the Barnett Shell, the Permian Basin, the Delaware and Midland associated gas with oil and Gulf of Mexico very little, the Peonce Basin very little. It's a, it's what a change that that's happened in the last 20 years. And I couldn't have predicted if I was doing a podcast 20 years ago.
- [08:35]
A
Well, the people were people building, as you said. Right. Like, you know, there were shops setting up Gazprom, you know, were in the US in Houston building a platform to be able to import Russian LNG. Right. In 2009. I find it fascinating. I'm starting with this kind of idea that energy is hard because in some ways, you know, sat here in Houston, the experience we've had, you, you'd be forgiven for thinking it's easy. And I would argue that it was a confluence of, you know, deep technical engineering base knowledge and understanding, you know, free capital markets that were allowed to take big risks and an all of government incentive to be able to actually realizing the trap of being hydrocarbon poor. And we're talking nations here. We're going to come on to energy poverty in a minute. And I can hear some people screaming in the background what they think is coming. But it seems to me that, yes, my point being that it was very hard. It was a unique set of circumstances and capacities that actually delivered that in 20 years. And that's sometimes forgotten.
- [09:39]
B
Yeah. No, to answer your ultimate question was could it happen anywhere else? No. Every well drilled in the US is a scientific experiment. And the beneficiary of that experiment is private property owners. And when you compound the just in Texas alone last year, we drilled over 5,000 wells. And you look at all the wells drilled in the U.S. they're optimizing. And there's a whole industry of optimizers and free market capitalists trying to figure out to extract and maximize the returns of every capital dollar spent on every well. They are relentless. When you look at the number of drilling rigs that we had in the US back in 2005, you probably had a couple thousand drilling rigs in the U.S. today you have less than 500. You have less than 150 frac crews right now in the U.S. the number of people required to produce these record volumes of oil and natural gas. It's 20 years of compounded innovation. And that's how innovation works, is you do it over and over and over again and you optimize, optimize, optimize. The things we're doing today, the laterals we're drilling today, the way we recover oil and natural gas today, it was unfathomable to predict that 20 years ago and nowhere else on the planet that in my understanding. Or do we do this, this level of innovation with every well this drills like this.
- [11:07]
A
Yeah. And the more we understand that it's the geology Itself isn't necessarily scarce. It's, it's those other, other factors. There's a really amazing book yet to be written about this. Right. I think.
- [11:19]
B
Totally agree. Like, there's probably better resources and better places. It's just there's not a national infrastructure of free market capitalism that supports it.
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A
Yeah. And that's important because again, you come back to this idea of 2, $3 gas and you think about, you know, the. It obviously has come up on the radar and it's a very front and center for any administration particularly obviously because it's so emblematic in terms of gas prices and power prices. And we're starting to feel that today as actually some lack of investment in generation is catching up with us as we see load, more load onto the grids as a result. AI and technology will get there. But can you just, you know, energy is important. This is linked to this idea that ultimately every single individual, you know, their, their costs, their lifestyle, everything ultimately wraps up in the price of energy.
- [12:11]
B
Yeah. So, you know, this journey started whenever I started establishing what a meaningful endeavor looks like at Howard Energy. I didn't have a foundational truth of what energy is. I, you know, like, I'm a capitalist. I came from very humble beginnings in South Texas. My family is not an oil and gas. I'm a first generation oil and gas person. My dad was a teacher, my mom was a teacher's aide. And so, you know, I thought I was just going to work for a living. And this is a good industry because they gave you a good paycheck. And whenever I started Howard Energy Partners and wanted to start leaning in on, on meaningful endeavor, the fossil fuel industry was under attack from a standpoint of we need to rapidly eliminate fossil fuels. And I'm kind of like, okay, if they're going to eliminate fossil fuels, what industry do I need to be focused on? So I was looking at renewables, I was looking at any, any sort of alternative fuels and that sort of thing to maybe start, you know, there's plenty of capital available for that. The capital was drying up for traditional infrastructure for fossil fuels. And. But as I did a deep dive, you know, starting with the moral case for fossil fuels written by Alex Epstein, or understanding how the world, what the statistics of the world is and how beautiful of a world we live in, reading Hans Rosling's factfulness or reading IPCC papers and the flaws of where climate science had gotten to, I came to the understanding on how important energy is and how this kind of a odd philosophy that we had to eliminate the 85% of the energy that we use on a global primary basis. We're trying to eliminate it and we don't thermodynamically understand how to replace that. As a chemical engineer, thermodynamics is everything. And then when I figured out that thermodynamics links energy to gdp, meaning that countries that use more energy have cleaner water, cleaner air, better education, longer lifespans, you start understanding and you, and you've traveled a lot. Some of your listeners are travel a lot, go to the countries that use energy versus countries that don't. I've been to many African countries, many Latin American countries, and there is a difference. Those that have access to cheap, reliable, affordable energy have better lives. And so that's where the energy poverty conversation came in in the late 2018, 2019. And we started talking about delivering positive energy and started giving more talks to non energy audiences to educate more people on what energy is. This is, this is transcendent of pop of politics. We try to get above politics to say like if you are anti energy, you potentially are anti human because we work to make a really unsafe environment safe. And the way we do that is we impact the environment in a positive way to help humans thrive. And so anyway, that philosophy came from this work of figuring out how important energy really is and working to educate more people about it.
- [15:22]
A
And let's sort of grapple this thorn, right, because there's a perception out there that it's fossil fuels at the expense of renewables. And there's a, this is a premise that leads to the idea that we shouldn't be investing in renewables. On the flip side of that, there's this, you know, quite a valid, a valid argument, a real argument to say, you know, renewables out there, their technology is not fuels. You know, these provide essentially free electrons once you've built the technology and installed it for a period of time and are in, in the right circumstances, particularly actually I think at the micro, you know, sat on our rooftops, sat on our, you know, on your ranch, whatever it might be, are invaluable pieces of the mix. It's my understanding from our conversations that there's no dispute on that. Where there probably is dispute is when we get distortions in that means that we're chasing technologies or alternative fuels that are really politically mandated as opposed to viable in a free market economy. Is that a fair analysis?
- [16:26]
B
Yeah. So the conversations on renewables versus fossil fuels always centers around electricity. Electricity is 18% of our primary energy use. We've not invented technologies for long distance transportation for industrial heat. We don't know how to make steel, concrete, plastics or other things besides using fossil fuels.
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A
Even, even the, the, you know, dare I say it, the lithium ion battery is all made in China.
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B
Yeah.
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A
To heat it to 3,000 degrees C to, you know, to get the lithium carbonate. Right?
- [17:01]
B
That's right. Right. We don't know how to make steel that way either. So, you know, we spend most of our energy and conversation on electricity. So on electricity then you're, and other forms of fuel you have market distortions because of incentives. In Texas, we have more than five times the wind of any other state combined. We have more industrial solar than California, which may mean we have more industrial solar than anywhere else in the world. We produce more natural gas than anywhere else in the US we produce more oil than anywhere else in the US and you already mentioned it, but in 2021 we ran out of electricity. And why is that? How can you produce more energy than anywhere else in the world essentially in a geographic area like this and run out of energy? That's an interesting start to where you were headed.
- [18:01]
A
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- [18:06]
B
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- [18:08]
A
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- [18:12]
B
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- [18:14]
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- [18:24]
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- [18:27]
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- [18:30]
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- [18:33]
A
And insight matters. Learn more@encoinsights.com just staying on this for the moment though. Like it is, you know, it's stark around as you say, there's, there's obviously a huge one defining gap between the developing world and the developed nait world is essentially energy consumption per capita. It's also been brought into stark relief. And again we sit here from a very privileged circumstance, a privilege born of a lot of hard work, innovation, lost money and made money in the US which is a hydrocarbon exporter producer. It's fascinating. We're going to get on to Texas in a moment. But it is stark around the world that when you suddenly see energy scarcity and this is sort of perhaps the transition over the last four years we've gone from this trilemma of security, cost and sustainability where sustainability and cost were kind of the leading factors in decision making for many nations, many companies only stated as such, to now one where it's cost and security. And we're obviously seeing this play out on our television screens, you know, in a sort of refracted way through what's going on in Venezuela. But, you know, I just, I kind of wanted to, you know, just that that thesis of energy poverty just wanted a few more sort of words on how stark that can be and actually how quickly the tables can turn, you know, the minute you reach your limits of production or access to energy.
- [20:03]
B
Yeah, in my opinion, it's the number one problem when you look at the UN's sustainable goals. You know, energy access is by far. And energy poverty is, is the number one issue on the planet. We, we went through a period of a decade or more. The acronym we like to use is CARE C A R E, where it's clean, affordable, reliable electricity. And today we would say it's reliable, affordable, clean electricity or energy is that we kind of left out reliability. We left out energy access. We started restricting energy to countries that if they were not going to use renewables, we would not, you know, world, the World bank would not provide funding for dams or for coal plants or for any fossil fuel extraction. They would only fund projects if it met their, you know, their ideological goals. And so I'm glad we're kind of evolving from that. And now energy poverty, we're hearing about it more and more in a sense that people understand that it's actually less compassionate to restrict energy to people because again, the countries that use the most energy have, have the best lives, the best quality of lives. And you know, by the way, energy alone doesn't cure poverty, but you can't cure poverty without energy.
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A
Yeah.
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B
And so that, that's a Scott Tinker quote. And, you know, there's still. Venezuela has more energy than possibly Saudi Arabia, as we've all been watching in the last week. That doesn't mean they're going to come out of poverty quickly.
- [21:48]
A
No, this is the energy is hard bit. Right. I mean, that's the energy is hard, the entire equation, which is why I happily bought some Canadian oil stocks on Monday, because these things are hundreds of billions of dollars. 20 years of investment in a stable environment. You know, it's very unique to be able to develop these resources. And they take a long time. And some of that has been forgotten, which is why we're hearing the arguments. We've had a few people on the last couple of months talking about we're underestimating the volatility that's coming up. We're underestimating the lack of investment that's going in. Okay, but let's turn to Texas. And this is kind of a. I find this fascinating because you've just posed the question. And it's also weaving in that story of growing demand. Because just like, you know, every well is a. An experiment, every state in the United States is an experiment with its own set of laws and approach. And that's part of the sort of the, the vibrant magic of its capitalism that you do have these 50 petri dishes to work in and people are allowed to freely, freely move. People in capital can freely move between is this, you know, Texas is its own beast. It's its own energy. It's its own country. From an energy perspective, it has, you know, 85 gigawatts of demand, you know, at peak. And, you know, people might be surprised to know you've already mentioned it. The mix has changed substantially. So it's now sort of 50 gas, it's 22 wind, it's 10 nuclear, 10 coal, 10 solar. That probably doesn't add up. But just to give people a sense of it, and yet still we've had, you know, big blackouts and probably more forecasted some as a result of weather events, some as a result of demand. You know, can you just give us. Yeah, I guess set the scene up for us. Why energy? Why Texas produces so much energy, yet even itself has not cracked the code here? And what's going on?
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B
Yeah, so what happened in Texas is they went through what they called a deregulation in the year 2000, so about 25 years ago, and free market capitalist on the Republican side and the Democrat side, and just also recognize that Republicans have run Texas for over 20 years. And so this is a conservative mindset, a pro energy mindset. And that's a very important point here as we go in. The story is that they work to deregulate the energy markets. So prior to 2000, it had more of a traditional energy market where you had a regulating body that mandated a reliability factor to be put into the grid, meaning that you have some excess power in the event there's some power plants offline, that you could be guaranteed a return on your investment if the power reliability factor, let's say, went below. I can't remember the number right now. Let's say it's 14% excess power that you could, you could, a utility could build a power plant and get some minimum return on that too, because you're providing reliability. Well, the thought was the ratepayer is paying too much for that reliability. And free market capitalists believe that if we let the market work and pay people for the energy they produce, then that will always provide a rate in the market to incentivize investment. At the same time, back 20 years ago, the federal government started doing investment tax credits and production tax credits for wind and solar. And so Texas, being an abundant land resource, Texas is very large, has a lot of wind, has a lot of sun. Wind started being installed at such a rate that there hasn't been, I think net, net any dispatchable power and dispatchable meaning something that can turn on no matter what the weather scenario, whether it be natural gas, coal, nuclear. There hasn't been any net positive dispatchable power plants built in Texas in over a decade, while at the same time renewables, solar and wind. You've already mentioned it. We have 170 gigawatts total installed and so about 80 of that is solar and wind. So you have a power market that incentivizes resources like solar and wind that, that don't have a variable cost, they don't have a fuel cost to them. And then the other resources just got old and retired. So coal plants have gone out of service, old natural gas plants with high heat rates have gone out of service. So now you're left with this energy mix in Texas and an energy market that does not have a mechanism to pay for reliability. So now we have no spare reserve margin and no entity or person or legislature is required to provide a reliability margin in Texas. And what I've learned by studying this is that politicians will now not allow the market price to react at a high enough rate to incentivize dispatchable power to be constructed. So that's a lot of words and a lot of. That's a mouthful and a lot to get your head around there. So I'll pause there.
- [27:11]
A
But it's, I mean is this sort of, I'm sort of trying to construct my question here. One is kind of the reality of, you know, no one's ever going to design the perfect deregulated market or regulated market. No. Right. There's always going to be these artifacts that are, you know, because this is the, this is of course what happens when you have free market economy. People figure out that this is the best asset to own and these cheap to put up, it has these attributes, et cetera, et cetera. I mean, I guess can we dig a layer below and say is this, you're certainly not arguing to re. Regulate the market. Right. These utilities shouldn't, you know, where we see utilities exist purely in a regulated world, you have the alternative set of problems. Right. You Know, I'm just trying to understand.
- [27:56]
B
You have it. You have it exactly right. I can't believe that I've come to this area where I'm almost arguing for regulation and I've been arguing as a free market capitalist my entire career against regulation. I just don't know how to do it. And when you have a dispersed energy grid like we have, especially in Texas with supply and demand, and if politicians can get involved and do things to the market price under times of crisis and set market prices, that's not a free, that's not a deregulated market. So it's regulated, just really poorly regulated with no responsibility for a liability.
- [28:41]
A
Well, yeah, and there's market design and then there's this government, this sweeping government intervention that's going on, right, at micro levels, like, hey, we're going to step in because this has gotten out of whack. And then, you know, and this happened on a small level with Storm Urie in Texas. Happened on a massive level, if you ask me, when it came to the global financial crisis. That creates a whole series of moral risks, right. You know, where actually, hell, you know, we can take these risks because we'll get bailed out. It also creates a hell of a lot of other premier in the market about, you know, we can't actually trust the systems to work as they, as they work. And then there's also a lot of tort risk here because now, you know, we're still, what are we, four or five years after that event here in Texas and there's still, you know, hundreds of millions being spent on court cases, working themselves through the courts on this. Right. I mean, we saw the same thing happen in over Covid as oil prices went, you know, this. So I guess there's market design and there's sort of that reaction. Let's hold that for a second. Because the problem is this is likely to become much more of a stark problem for two reasons. One is that we've got the growing, you know, Texas once again is ground zero for data centers and for this new wave of investment. We've had the bitcoin miners kind of driving around in convoys, going to various wind sites, plugging in and mining bitcoin and so forth. Now, you know, your average household is going to be paying a higher price because of data centers being put up which do demand dispatchable power. We'll come to that because they can't turn off. Secondarily, we've got obviously Texas being at ground zero for exporting lng, which is fantastic. To Europe and around the world, which is again a free market response. All of that though, combines to mean that we are going to see quite a big shift in demand for power, which means that actually that lack of dispatchable power is suddenly going to become a real issue and these things don't get stood up overnight.
- [30:37]
B
Yeah. You know, a couple more facts that I'll throw out to confuse you a little more is Texas already pays the highest residential electricity price in the south and we produce the natural gas that the south uses to produce their electricity. Yeah.
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A
So. And it's going up, by the way.
- [30:56]
B
And it has to go up. There's no other way around it. It has to go up. Most of the electricity we're talking about adding for data centers right now is behind the meter actually. You know, because Texas can actually, if you connect to the grid, Texas can prioritize you to blackout in the, in the event they need the electricity, they can reach behind your meter and turn your factory off. So most of. And all this was explored as we're infrastructure builders. Right. So I was looking to build a 320megawatt power plant at one of our industrial facilities along the Texas Gulf coast. And I only needed, I only needed 50 or 60 megawatts for myself, for, for my company and I put the other out for bid. And no one shows up to buy the electricity. Well, how are you in this increasing demand market and no one shows up to buy your electricity? Well, because the forward power price that the market shows is so much less than what the power price is for what you need to build. So that disconnect is. That's what, that's why we figured out in the last 10 years there's been no power plants built in Texas to offset retirements, any dispatchable power plants because the market price generally is based on the non dispatchable power rates. It's solar and wind has no fuel and they are compensated by the investment tax credit or the production tax credit. So you're not going to spend the money it takes to get a return on capital in this kind of market.
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A
So essentially that forward curve is low because the other, you know, whatever hundreds of gigawatts of renewables is not dispatchable isn't on all the time, as you say, which is important when you get mad storms and very hot summers and all the rest of it that is treated exactly the same in terms of price as dispatchable power and also then has these incentives on. Is it a function of again, is this, this is the natural evolution as well of this is why we have democracies that adjust and reset. Right. I mean, it's, you know, it's fantastic. We have all this renewable power. You know, I think people will be surprised to listen to how much we have is this now. Okay, well, course correction. We neither need to remove those incentives or we now need to provide a different incentive for dispatchable power. In other words, I'm asking a free market economist what the, what the, what the new government distortion should be to correct this.
- [33:29]
B
Yeah, so, so that, that is the million dollar question. And we're right, right now in the middle of a white paper. Because what I, what I haven't come to the conclusion on is like, okay, well smart guy, what's the fix? You know, gosh, if, and there's so many politics and as you said, in a democracy you have lobbyists on all sides of this and very large utilities involved. And people, as you're a commodities guy, they make a lot of money on the volatility of Texas right now. And the foundation of it is that energy as a, electricity in Texas as a commodity, I think electricity is a service and you have to price the service different. So if for dispatchable versus non dispatchable, meaning you should get paid a market differentiating price if you've invested in a power source that could come on in emergency and you should get paid a different price for a service. It's kind of like a babysitter at your house. If, you know, are you going to pay for a babysitter that's only showing up 30% of the time? Are you going to pay that person the same rate that you would pay someone that's always reliable 24 hours a day? They're probably two different rates of services.
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A
Doesn't that happen already though? Because again, you then step back and you say, okay, part of the problem here is that in a sense, the market did work in Yuri. Those assets that could Dispatch were charging 20,000, you know, whatever it was like incredible amounts for their power. Right. And that, that one brief window made enough money for, you know, those organizations, certainly some of the traders, to presumably go and build some more of these assets for just these kind of events. The problem was that actually the market didn't function as designed, albeit imperfectly and albeit for, you know, certainly in the interest of the commodity guys, because those were the ones designing it, you know, in 1999, some big names included, you know, because then actually those deals got rolled back. There was, you know, the moral hazard kicked in.
- [35:36]
B
Yeah, the price got capped in the middle of the storm, you know, like the price of where it needed to get to to show and no new power was built after the storm. By the way, there's been two legislative sessions in Texas trying to fix this and it still has not incentivized new power. Now if you read dangerous politically to say this out loud, there is a Texas energy fund that was created that is providing low cost debt to very large utilities like Vistra, NRG and others to provide low cost financing to incentivize more dispatchable power. The issue with that is one, they don't need the capital, they're investment grade utilities. Two, that their, their service areas are in their control. The pricing for those service areas, they own the rep, the retail electric provider as well as the generation in that area. So and then thirdly, this is a whole different topic but in order to get a lot of the renewable energy power out of West Texas and on the Gulf coast to the population centers of Austin, San Antonio, Houston and Dallas, major transmission has to get built. And so we're about to kick off another $30 billion of transmission and those costs are socialized to all rate payers.
- [37:01]
A
Yeah, yeah.
- [37:02]
B
And that, and I understand why we're doing that because that's the market that we have if we don't fix the market for reliability. Well, you have to get more of this non dispatchable power to more places when you can. So it's a little bit of a mess. If we're paying the highest prices in the south right now residentially, I don't really see that going away. Despite the fact we have, we're sending out of Texas right now. We're sending almost 15 BCF a day overseas of LNG. Yeah, we're sending 7 BCF.
- [37:34]
A
This is it. It's going to get, it's is going to get a, you know, politically. Well, it's going to become a significant issue which we thought was behind us. You know, my household energy prices aren't any costs aren't any different to what they were in 2012. Right. No, and I think we here in Texas have forgotten that. Whereas my friends back in the UK obviously, you know, it's a pretty significant topic of conversation around the dinner table, you know, every week with family, what, you know, what's going on over there. So I mean I think there's a, it's just a fascinating insight into obviously the complexity, obviously the challenge and obviously the, the issues brought by moral hazard of intervention, albeit for the right reasons. You know, when you do have these events and we don't actually see how markets function and indeed break that spurs change. It's also, I'd say, an issue of perhaps democratic capture and the fact that if you don't have viable opposition in the state, you don't get the same level of debate. But, you know, let's move change, tack towards. There's a couple of stories I want to get in that fit in this narrative. One is obviously AI. You are probably front and center, I imagine, of many data centers coming to Howard Energy and saying, hey, we'd like to be off grid, but we want to have dispatchable power. You know, let's talk. What is your view on this data center story? Because it seems at the moment, not only is the. A lot of the energy story mapped to it, but also a lot of the US Economy is mapped to it. Are we, you know, is it overplayed? Is it real? What's the sort of the energy story there in your mind?
- [39:02]
B
Yeah. So, you know, my favorite person to listen to on this is the physicist Mark Mills at the national center for Energy analytics. And some of his work that he does, he puts guest. Is he good? Yeah, I like Mark and we're on a board together and, and I followed him for many, many, many years before getting to meet him. And now I get to hang out with him pretty regularly. You know, there's more capital allocated to the construction of AI data centers right now than all other commercial buildings in the U.S. there has never been hyperscalers that are showing $400 billion of capital allocation in a single year ever. They've not had to spend money to do this sort of thing in the past. Another statistic that I like to think about is we have never built a gigawatt power source behind a meter for a factory or refinery or anything else. A sizable city or a very large refinery is 300 megawatts. And we're talking about data centers that start at a gigawatt and go up to 5 gigawatts. We've not done that before in the U.S. those are construction projects and mechanical pieces of equipment that actually have to go in and then all the supply chains around it. Not only the electricians, the concrete workers, the steel workers, the transformers, the wires, the breakers, the all the pieces and parts to build, those things are far exceeding anything that we've done before. When you look at the velocity of electricity increase in the US from 1950 to 2000, you could put your finger on 2, 2.5% growth in that time frame during post World War II industrialization of the US and then for 20 years now, we've not grown electricity production. The natural gas production I talked about earlier was natural gas production has grown, electricity has not grown. Most of that's because of efficiency. Sending manufacturing overseas, coal to gas, switching so you get better, you know, that's the efficiency part of it. So now we're predicting 5% growth a year in electricity production based on, on these, on these data centers. That's just unprecedented in the us and so I don't think it can be understated on the growth that's going to happen now. The velocity of that growth, the scale of that growth, I don't know. I don't think we can meet 5% just because of physics. And also the natural gas demand for that. A large percentage of that growth is going to come from renewables. A large percentage is going to come from efficiencies gained in the grid from running 24 hours a day. So I think that's where it gets a little dangerous, where you start talking about electricity loads, meeting the AI data center load. And you got to get real granular and specific in a geography before you start talking about where that comes from. Because again, in the last year we have increased the LNG demand, the LNG export, I guess, volume by 5 BCF in a single year. That's 5% of demand growth in a single year for natural gas that nothing's been predicted like that on the AI side, even though it's going to be significant and natural gas is going to be the source. It's very hard. There's so much hype in the market, it's hard to feel the scale of. We're talking to quite a few in the geographies that we operate in and they are significant, but I think they're many years away. Hello, I'm David Hunt, founder and Managing.
- [42:57]
A
Director at Hyperion Search.
- [42:59]
B
Founded over a decade ago, Hyperion Search.
- [43:01]
A
Has helped organizations from major utilities to.
- [43:04]
B
Startups recruit their leadership teams and key individual contributors to accelerate both their growth and the energy transition.
- [43:11]
A
Our three main verticals are renewable power.
- [43:13]
B
Energy storage and E mobility.
- [43:16]
A
The energy transition and the talent that delivers it has been our passion since day one.
- [43:21]
B
To find out more, visit hyperionsearch.com or listen to my Leaders in Cleantech podcast, available on all platforms.
- [43:28]
A
There is the physics there. There's also the capacity for free markets to solve for the. The key bottleneck, right? And if the key bottleneck at the moment is power consumption and indeed water consumption, resource consumption, and I've said this A few times on this podcast we had Adam Myrick on talking about precisely this, the power consumption. He's a former global head, well, former head of power at bp. So he knows what he's talking about and now works Prometheus hyperscale. You know, talking about that power consumption, there's part of me that thinks like, you know, the data center of the future, someone's going to design one that uses far less power. Yeah, sure, it doesn't have the latest compute, but like, you don't need it if you're just, you know, figuring out people's, you know, energy bills. Right. And actually there's some level of which it's going to solve for land, it's going to solve for power, it's going to solve for water, because those become too consequential.
- [44:21]
B
You know, it's kind of like on the drilling that we see in the US now and the amount of production we're producing today with such less people and less equipment and because of innovation, I think something like that happens, right. That constraints free market capitalists figure out how to do more with less. And so I kind of agree with you. Now what Mark Mills would say is that efficiency has never used less commodity ever. You know, that once commodity becomes cheaper, more of it is used. And his predictions are probably much more bigger than even what I can even imagine on what the electricity usage is going to be even with the efficiencies gained on computers.
- [45:05]
A
Yeah. You're still going to build more data centers.
- [45:07]
B
Yes.
- [45:09]
A
The quantum of commodity is going to increase. It's the rate of that increase that you could question, you know, over time. Okay, one other bit which I think sort of ties this together, but is interesting, right. Is obviously, you know, we've owned, and I guess you and I have talked offline about kind of the, one of the challenges for. And you see this in many private equities, sort of energy transition funds. Right. Is, is actually looking, is removing the hype and also accounting for how much is. Is government support and how, how sticky is that. And you know, I think hydrogen is a perfect story of that where actually when you look under the hood, you know, suddenly there's a lot of question marks around thermodynamics. There's a lot of question marks about everything. And we've, you know, lots of people have lost lots of money on that in certain. Certainly with hydrogen as a fuel, I should say the one that we've lived, you know, we as a firm HC group, placing lots of biofuels experts, you know, Facilities traders, feedstocks. Over the last year or last five years, six years, you know, it's been a really prevalent story, but it to me seems one of again, government artifacts than necessarily economics. You know, you're obviously heavily involved in or are involved in renewable diesel. Where do you land there as a free market capitalist?
- [46:29]
B
Yeah. So we've always been very, very cautious not to follow just the cool trends. I think the constraint of our understanding of thermodynamics has probably hindered us from jumping in too fast, but it's maybe saved us now, right. Is that we are capital allocators for a pension fund in Alberta, Canada, and for a very large university endowment here in Texas. And it never felt right to us to only use government subsidies as the foundation for allocating capital. And because of the what we've seen, we started our business under the Obama administration, obviously went to Trump, Biden back to Trump. And so we've been in this, this up and down yo yo of opinions and strategies and energy and we've watched many friends build pipelines and be billions of dollars deep into projects and with a swipe of a pen get their projects paused or canceled or that sort of thing. And so we've been very cautious when we look at something like the renewable diesel terminal, I think we're probably the largest handler of renewable diesel here in Texas, is that if the customer wants infrastructure built, you provide us certainty, we'll provide you infrastructure. And so the customer in our situation provides that certainty through their credits and their business line of providing renewable diesel to California, which has a low carbon fuel standard. And they can take the risk of California ending that or whatever. Our risk is tied to their balance sheet. And so we look at it more of a traditional infrastructure. And so. And we also had a very, we have a very large industrial facility that takes the emissions off of six refineries and we fractionate those emissions to take them out of the atmosphere and sell those different components into the market. And this is things like hydrogen, ethylene, propylene, ethane, methane, propane. And so that's a high ESG scoring facility. But we did it because it makes money for a return for our investors and it does good for the environment. And we wanted to sequester that carbon dioxide underground. That project really hasn't kicked off yet because we can't figure out an economically viable way to get it underground in a way that our customers would want. And so our philosophy has been, if you ask for it and can support it, this is the blue hydrogen conversation. The Green Hydrogen conversation. We're chemical engineers. We know how to do it. We can build it. These are not technological problems, they're economic problems. And so if you want to pay for that, we will build it for you. But, but we're not going to take the risk and risk our pensioners and college students money on the hope that these non thermodynamic, these endothermic reactions are going to make money. You know, we're not going to, we're not going to take that risk.
- [49:31]
A
Yeah, yeah. One final piece. Obviously we also go back, let's say 10 years. You know, I was spending quite a bit of time with our LATAM team in Mexico City, all quite excited about the coming liberalization across, you know, the midstream, the downstream, the upstream in natural gas and oil and some quite vibrant activities going on there. And then we have AMLO come in and it overnight shuts down. Right. 2018, when all that happened, you have pipelines to Mexico. I mean, I don't know if there's any sort of thoughts around that and whether, you know, again, it's sort of this idea of politics meets energy. But is there any hope there that there is sort of a reset on that front?
- [50:13]
B
No. I'm from the border of Texas, where I started my career. It's where I graduated college and high school. And I love Mexico, I love Latin America. And what I've learned there is when they ran on energy reform under Pina Nieto back in 2012, we invested over half a billion dollars in pipelines there. We continue to invest in pipelines, but. But the things that we've learned are we have Mexican ownership in our pipelines, which I think is very important to show the country that we're not the greedy gringos coming in to steal their resources. So this is giving them the reliable, affordable, clean energy that they have access to. So we provide natural gas to them through these pipelines and we're expanding those pipelines. But we wouldn't do it without Mexican ownership in our pipeline. We wouldn't do it under Mexican law, we do it under New York international law. We also have the molecules in the US that we're delivering to Mexico. So we're delivering a commodity to them that they're in need of. But we don't see a trend where they can arrest their decline of production just under their structure. The way PEMEX is a nationalized oil company, the way efficiency works and innovation that we were talking about while ago with private property rights in the US they just don't have it there. And so I had really high hopes that energy freedom was going to compound there. And what we've seen is just, it's not happening. And the flip side of that is near shoring is happening. There is energy. There's a burgeoning middle class there. More energy is working. They need more energy from the US and we're going to be providing that to them, but it's not going to be from Mexico. You know, like, I don't, I'm not very bullish on them being able to produce more oil and natural gas domestically.
- [52:04]
A
Yeah, yeah. And I agree. And it's a tragedy what's happened to the tragedy, you know, domestic production. But then you go to see like Monterey and it's phenomenal, right?
- [52:13]
B
Phenomenal. It's a beautiful place. Mexico City is a beautiful. And a ton of investment is going in. Near showing is really happening. A lot of Asian investment, a lot of European investment. And along our pipeline that we built from Texas to, to Monterey, we are completely full. We produce, we provide about 10% of the natural gas to Mexico today. And, and it's completely full. It needs to be expanded. Well, so the, the thesis of, you know, energy demand is growing and energy is important, it works. You know, we're seeing an energy poverty country here coming out, continue to climb out of poverty. It's just not at the velocity in which we, we hoped it would be. Just because we love the country and want to see them do well.
- [52:57]
A
Yeah. Well, that brings us nicely to ask the question that we have many listeners that, well, across the energy world, utilities, oil majors, traders, merchants, you know, when should people call you? When should people call Howard Energy Partners?
- [53:13]
B
Yeah, whenever they're looking to get their, you know, oil and natural gas from wherever they produce it to somewhere where somebody needs it. We're the midstream provider, so we, we provide the gathering, processing, treating, in some cases, refining of the downstream products. We're very large exporters of diesel and gasoline on the Texas Gulf Coast. Obviously we have deep ties to Mexico on exporting natural gas there. You know, most of our areas of operation are in the south, southern part of the US and so when it comes to integrating and scaling natural gas and all the associated products to the Texas Gulf coast, that's kind of how to think about us.
- [53:57]
A
Yeah. And the largest privately owned midstreamer, I believe that's right. We're swiftly and, and all the benefits that brings.
- [54:05]
B
That's exactly right. So we can invest in a lot of different things. We're not publicly traded. We are going to be around for decades. We're a large, privately owned company. We're going to stay private.
- [54:14]
A
Fantastic. Well, we actually didn't get onto the talent aspect of this and both of our desires to be advocate to get fresh young talent into this sector because it's needed and the opportunities are phenomenal, the careers are phenomenal. But maybe we can have you back on in a in a few months and tackle that aspect as well. But for the moment, Mike, it's been an absolute pleasure having you on. Probably lots of, lots of food for thought and questions, you know, asked as well, and ones that are applicable around the world. Indeed. But I really appreciate your time.
- [54:46]
B
Thank you, Paul.
- [54:49]
A
Thank you for listening. To find out more about HC Group, our global offices and our expertise in search within the commodities sector, please visit www.hcgroup.global.