008: Oil Prices vs. Rig Counts, bp's Board Shakeup, Eni Offshore, Microsoft's AI Tour

This is Behind the Data, where I take you behind the energy market analysis I'm publishing online.

I open with a Foundations of Energy piece on why oil prices aren't a reliable predictor of future rig counts. The simple model you'd want—oil up, rigs up—just doesn't hold when you test it against history, and I walk through why some nuance is unavoidable when the capital decisions you're making today carry return horizons years, even decades, out.

From there I turn to bp ousting its board chairman. The parlor-game version is easy to write, but what caught my attention was the governance angle: the line between governance and management, and why the returns to good governance only grow as energy companies get more complex across power, renewables, nuclear, and geothermal.

Next I share a short clip from our most recent Oil & Gas Market Mastery session on why natural gas prices are so volatile. It's about the interplay of short-term weather, seasonality, and structural forces like electrification, AI and data centers, and LNG exports, all sitting on a supply story muddied by associated gas.

I then get into Eni pulling forward a $4 billion investment in its Baleine project off the Ivory Coast. There's a lot of hand-waving enthusiasm about offshore right now, and this is the kind of tangible, multi-billion-dollar proof point I'd rather anchor to than the talking points.

I close with Microsoft's AI Tour event here in Houston, and the mix of excitement and frustration I feel about the broader AI conversation. So much of it lives at the theoretical level, but the specific demonstrations at the event grounded it in what we can actually do today.

Finally, Oil & Gas Market Mastery is the 12-week program I built to help energy professionals develop executive-level market fluency. If you want to build that fluency alongside a cohort of peers taking it as seriously as you are, you can learn more at https://krimmelsg.com/ogmm

Transcript

SPEAKER_00 0:00

Welcome to Behind the Data. I'm Jeff Kremmel, founder of Kreml Strategy Group. Each week I take you behind the energy market analysis that I'm publishing online. I talk about what surprised me, what I left out, and what I'm still thinking about. So let's get into it. My first post this week was about how oil prices are not a reliable predictor of future rig counts. And this is something I'm thinking a lot about because I'm getting more and more into the forecasting side of things. There's a big project that I'm working on right now. It's something that I anticipate that I'll be more involved, more routinely involved with going forward. And this idea of when you try to create forward-looking views of oil prices, gas prices, rig counts, both oil directed, gas directed, try to break that down into basin-level resolutions. You have to think through what we know about the market today and what we can carry forward from what we know about the market today that will inform us about how the market should evolve in the future. Once we have that mechanism in place, then we can take today's state of the market, use it to build up a predicted state of the market for tomorrow, and then do the same thing. Use that same understanding to take tomorrow's state of the market and predict the day after that. So forecasting is something I think a lot about. I've explored the mechanics of forecasting a bunch when it comes to rig counts, oil prices, that sort of thing. And a great place to start is just to assume that oil prices are basically going to dictate what rig counts do. That if oil prices go up, we should expect rig counts to go up. Or if oil prices live in a certain band of a certain range of prices, then we should expect rig counts to stay steady. And if oil falls below that band, we should expect rig counts to come down. If oil prices get above that band, we should expect rig counts to go up. Those are two different views, right? The first view being where wherever oil prices go directionally, we should expect rig counts to move in the same direction. The other view is there are bands of prices, some bands where rig counts remain stable, some bands where rig counts decline, some bands where rig counts increase. And the long story short version is that none of that happens. That oil prices, while to some general uh level of understanding, yes, they they are an important part of what happens to rig counts. They alone don't tell us a whole bunch about what rig counts will or won't do. I tried, that's how I started out with the forecasting. And I've done forecasting work for the past 20 years at this point. And that's always how I started out was okay, how what's the simplest model we can build? Just use Occam's razor. And let's just assume that commodity prices today will tell us about rig counts tomorrow. And when you start building out these simple models, then run back into history and test those models, you quickly realize that that doesn't go anywhere. And while I've known this, I'm diving back into the forecasting side, and I had realized I had never really written much about that. So I did a deep dive foundations of energy piece on that, where I pulled a bunch of charts and showed the history and explained why these simple uh connections between oil prices and recounts break down, what we've seen historically, um, and how that informs us about this. Is one of those cases where while we would like to have super simple models as much as we possibly can, uh, we have to build in some complexity. There has to be some nuance, there has to be some multidimensionality here because the commodity prices alone just aren't telling us everything that we need such that we can carry, again, the state of the market today into the state of the market tomorrow and continue to evolve it from there. We can always just wave our hands and come up with real rough estimates of what we'd expect prices to do or re accounts to do. And um, there's nothing necessarily wrong with that. My approach to all of my market analysis is to be deeply data driven. And so I spend a lot more time and effort trying to understand what is the data-driven machinery that will allow us to reliably carry states of market forward in time rather than just saying, hey, I expect oil prices to drift up over time for these handful of reasons. And because oil prices are going to be drifting up, I expect rig counts to drift up similarly or at least to have a higher floor underneath them. And you can pull together some anecdotes and conjure a narrative around it and write it all down and be done with it. Uh, the clients that I work with, and frankly, just my own intellectual curiosity around it, I continue to drive towards something that's more rigorous, more defensible, um, more repeatable, so that if we take that model and run it backward in time, we get something like what the market had actually done. Because we're not just creating these forecasts in a vacuum. What we're trying to do is use these forecasts to better inform uh capital allocation decisions that we're gonna make today that have returns horizons years, uh, possibly in some cases decades into the future. We need some theory of the case about how these oil markets are going to evolve over the next one, three, five, seven years. Uh, and that's the focus of my forecasting. So these near-term, say, rolling four-quarter uh forecasts are great. And that's part of what I do in order to build up to the longer-term forecast. What I'm really focused on right now is a rolling five-year forecast. And if I can have some measure of confidence in that five-year outlook while recognizing there's an enormous amount of uncertainty, my crystal ball is just as cloudy as everyone else's. But we can't punt on this exercise. Uh, many of us are making capital allocation decisions today that do have years-long return horizons. And we can say, hey, we did this stuff's unpredictable. We we can't ever know it, so why even bother? Well, if we're still deploying this capital in this direction, then uh at least implicitly, we have some theory of the case. We have some understanding of why uh allocating capital in this way is attractive and why we're going to generate sufficient returns. So I've always been a fan of creating the rigorous view that allows us to take these implicit hypotheses that we have and ground them in data as best we can. That was largely the motivation for writing that post at Foundations of Energy the way that I did. My next post was about BP ousting its board chairman. And there's a parlor game element to this where BP has been through a lot of troubles and they're a massive company, and uh they leaned heavily in the renewable energy, and that provokes an emotional response, particularly out of oil and gas people. And so you get a conversation here that that makes a lot of sense and captures headlines. And I didn't really want to write about all of that. I what I did want to write about specifically was the governance angle that underlies this story of BP's board discharging its chairman. And the a lot of the stories here is interesting for a number of reasons. One is how forthright the board was about why they were uh dismissing the chairman, what at least the broad nature of the accusations here that immediately made me think that the board is aware they have some legal exposure. And one approach to trying to mitigate that exposure is to be forthright and clear about what they know and why they're making the decisions that they're making. As part of that disclosure, we learned that uh at least the board received what it believed to be credible accusations, that the board chairman was abusive toward uh junior level BP employees. And that immediately uh captured my interest in the sense that the the board chairman, the board in general. The broader role of the board is to set guidelines for the executive team to give the executive team the rules of engagement so the executives can immerse themselves fully in the day-to-day running of the business and have a sense of what's allowed and what's not allowed. Typically, boards are not deeply involved in the day-to-day running of the business while they have some exposure to uh members of the employee base. Um it's surprising to me that a board chairman would have so much exposure uh that the chairman would be able to abuse uh the employees if we to believe if we're to believe what the board said in its release. I have no independent information about what did or didn't happen there. So even if you take the particulars around this this one case, uh this challenge, even if you were to suspect that a board chairman is getting involved in this way, that creates real questions about the line that exists between governance and management. If you want to get involved and make day-to-day management decisions uh and steer the course of direction in that way, that's why there are executive roles. Uh the governance roles are much more about uh offering guidance, perspective, rules of engagement, like I said, to the executive team. So the executive team knows what's allowable and what's not allowable, what's been authorized and what's not authorized. And the executives are the ones who roll up their sleeves and go into the business and make it happen day to day. Then they report back with some frequency back to the board. The board can perform its governance duties better when it's not as deeply immersed in the day-to-day running of the business. Some distance, some perspective is very useful. That's why you typically find board members that come from outside the organization. They sometimes come to different industries entirely. Even if they come from the same industry, often they'll come from a different part of that industry or they'll bring a unique perspective into the conversation because you are developing so much momentum and inertia inside the business based on the realities, the politics, the culture that exists in that business. The board can bring this outside perspective, this challenge, these fresh eyes. And just everything about the BP story to me really attacked this notion that BP's line between governance and management was clear and was being fully protected. So I wrote about it because of all the BP specific interests, but I also wrote about it because energy companies, as we go forward in time, are going to become more complex. They're energy companies that have dealt legacy in the oil and gas, and now they're getting much more involved in power. And legacy power companies maybe had one or two, you know, maybe they got heavily involved in natural gas, maybe they were heavily involved in coal, but now they're getting involved more with renewables, or now they're getting involved more with nuclear, or they're starting to speculate around what's happening on the advanced nuclear side, or maybe they're considering how to get involved in geothermal. These energy questions are becoming more involved, more complex, more nuanced, again, more multidimensional. And that creates more burden, but more opportunity for individual energy professionals. It creates more challenge, more opportunity for energy companies in particular, but it also creates more challenge and opportunity for boards. The returns to good governance are only going to grow because the governance challenge is growing. These executive teams need to understand what's in bounds, what's out of bounds, what is our remit, what is what really is our differentiating proposition? What do uh investors really expect when they take an ownership stake in this company? Uh, what paths really are most likely to generate long-term health and vibrancy for our organization? These are questions that boards and executive teams as partners collaborate with deeply. And again, the board brings a unique perspective around all of this. These governance challenges are gonna become more, they're gonna grow in scale, they're gonna grow in complexity as time goes on. And I wanted to highlight this BP story, not just because of the BP specific elements of it, but I think a lot of energy companies are gonna struggle with making sure that their governance apparatus evolves at the speed that they need to meet these evolving energy challenges. The BP story just happened to be a really interesting, uh, specific example of that. Another post that I wrote about was I just shared a short video clip from our most recent session of Oil and Gas Market Mastery. Oil and Gas Market Mastery is the 12-week program that I built to help energy professionals build executive level market fluency. These energy professionals that are in the course have considerable domain knowledge across a variety of domains where they've come from. Now they're developing this executive-level market fluency so they can step into bigger roles, they can interact more uh meaningfully with their executive teams. If they want to get involved in governance at some point in the future, they have a deeper, more profound, more rigorous read on the market. So we get together once a week for 12 weeks and talk through different elements of oil and gas markets. The most recent session was all about natural gas markets. And I shared a very short clip, something 30, 45 seconds, of me talking about why natural gas prices are so volatile. That if you've um spent a lot of time paying attention to oil prices, less so about gas prices. There are some really important differences between the two. And on the gas price side, you see a lot more volatility in part because there's this competition between short-term factors that are largely weather related. And then you have this seasonality more in the middle term. Then you have these structural elements that are also uh that also exist in the medium term, the longer term. For today, natural gas, you have uh electrification, where specifically you have AI and uh data centers involved in the electrification conversation. You have LNG exports here in the U.S. So you have these medium-term, longer term structural forces that are pushing demand in a particular direction. You have these shorter-term uh forces that are also nudging demand around. You have the supply story where there's plenty of activities focused directly at natural gas, but we get a lot of natural gas production as associated gas from liquids-focused production. And so that muddies the water between oil and gas. That gas, the supply side of gas is implicated in the production story that we have in oil and with liquids more broadly. There's a lot of moving parts here. And uh the important thing I do, one of the many important things that we do collectively inside of oil and gas market mastery, is just take this all down one level lower. When you read headlines about natural gas prices, you're not likely to get sufficient nuance to really build up a mental model the way you need. At the same time, you don't need to become a deep-rooted market analyst. You don't have to become a trader and develop the day-to-day uh awareness of how these markets bob and weave with every development of the news cycle. Um, you can develop a robust mental model that exists at a more granular level than we see at, say, the headlines within the business press, but that where we're not having to spend a bunch of time each week evolving, iterating, improving our mental models. We can do a little bit of work up front, maintain that acumen, that fluency over time. That's part of what oil and gas market mastery is designed to do. So I shared that clip because I know there's a lot of people that are involved in the broader hydrocarbon space that haven't immersed themselves super deeply in natural gas markets. And we spent the whole uh hour that we were together last week going through all that, the full range of oil and gas markets, the supply, the demand, the geography, the basis differentials, the seasonality. Uh, and so I wanted to share that one clip because natural gas markets are incredibly interesting, always have been. They're becoming more interesting over time with the electrification piece, with the LNG piece. And so I felt like it was a good video worth sharing a bit more broadly. I also wrote about ANI, the big Italian oil and gas producer, and their Balin project in the Ivory Coast, and that Any announced they were, uh they and their partners are pulling forward a $4 billion investment in that project. Uh, it's an offshore project. Um, it's I I wrote a bit about the specifics of the project, but here I want to talk about why I wrote about that. And it's because uh, if you follow Ernie's calls the way that I do, you know that the industry is building a lot of enthusiasm around what's happening offshore. Investors are also building enthusiasm there, capital's flowing there. So I like to track specific developments because this is a case where we can wave our hands and talk about the enthusiasm that's happening offshore. And then that cycle kind of feeds on itself. People talk about it on stage, people talk about it in podcasts, people write about it on LinkedIn, um, but it divorces itself from what's actually happening on the ground and just becomes a talking point that we share repeatedly back and forth, and it just dilutes and loses some of its potency. So this was a tangible example of a multi-billion dollar investment that's getting pulled forward in time because of the energy security advantages and the uh price, the forward strip, um, that there's some real price and revenue uh tailwinds that are making this project even more attractive. It's an expansion of an existing project. So I wanted to highlight all of that. It's something I like to do routinely on LinkedIn when I find some of these energy conversations living too much in the clouds and too much in um hand-waving, uh conjectured speculation and assertion that isn't really tied back to data, to tangible examples, to uh specific proof points that demonstrate uh the broader claim that we're trying to make here. And I just really liked that any announcement because it was um very clear and tangible, and uh it's a useful point to support this claim about the momentum that's building around offshore. Finally, I attended um Microsoft's AI tour event here in Houston last week and had a lot of fun doing it. And while I was there, it was it just brings to my mind the this, I don't know, mix of emotions that I feel in the broader AI conversation. That uh that it's a very exciting conversation, but I also get very frustrated with it because uh this is a classic example where we're talking so much at an aspirational, hypothetical, theoretical uh level, all the ways that AI could conceivably change the world as we know it, change the energy industry as we know it. We get a lot of lectures about what people should be doing or shouldn't be doing, and we're not being sufficiently thoughtful, or we're not being sufficiently careful, or we're not being sufficiently honest. And uh that stuff frankly frustrates me over time because it just quickly gets into whining type territory, is my read on um some meaningful fraction of the AI conversation, and I just don't find a lot of value in that. But AI is an incredibly important conversation to engage with. So the Microsoft AI Tour event was really cool because you got to see some specific demonstrations of ways that AI is being used, and it was industries beyond just energy. Um there were a couple healthcare examples that I remember off the top of my head that were very powerful. So I found the event very nice in that way is that yes, we can talk about the grandiose vision of what AI could conceivably be and talk about all the rapid progress that's that's um being pursued and and accumulated across the AI space. These tangible examples were really powerful. It just grounds the conversation. I it feels like that we we can have something that's uh an engagement that's more productive and we get some more clarity and perspective. And I really appreciated that event. So knowing the reaction that I had to it and uh the incremental clarity that I think I gained as a result of participating in it, that's why I wanted to share a little bit about it on LinkedIn, hopefully in a small way to contribute toward nudging the AI conversation in a way that's a little more tangible, a little more granular, a little more rooted in what we could actually do today and what's different and what a near-term path looks like. Um it's exciting at a high level, I get it, but but it's um it just becomes a little loosey goosey there. And uh the uh Microsoft's AI tour event grounded it in a helpful way. So that was it for this week. Those are the posts that I wrote about, and I wanted to explain a little bit about why I wrote about it and what my motivation was and and what I learned putting some of those pieces together. So, as always, thanks so much for listening to it. Really appreciate it, and I will see you in the next episode.