Our energy future is complicated (and exciting!) - Enverus EVOLVE
I want to share some takeaways from the recent two-day Enverus EVOLVE digital conference.
The EVOLVE conference isn’t an oil and gas conference. It’s a true energy conference–That was obvious this year, as there was as much talk about renewable and nuclear energy as there was oil and gas.
Our energy needs are complicated, and so will be our energy future. But, as some conference speakers pointed out, challenges bring opportunity. And so, our energy future is also exciting.
Necessity is the mother of invention. History has shown that people as a whole get awfully innovative when they have no other choice. And we may have reached that point due to dwindling oil supply, pressure from investors and stakeholders, and government regulations, among other factors.
Over the last few years, we’ve seen major players in the oil and gas industry moving away from petroleum and instead leaning into energy, as evidenced by some notable name changes:
- Statoil changed its name to Equinor.
- British Petroleum changed its name to BP.
- Laredo Petroleum changed its name to Vital Energy.
- And let’s not forget about Enverus, formerly known as DrillingInfo.
The message is clear: Oil and gas no longer exists on its own island, in its own vacuum. It’s simply a part of the whole.
With that said, let’s take a high-level view of what’s likely ahead for the future of energy.
Oil and gas
- Production is expected to peak by 2030.
- We are entering the twilight of the Permian Basin, as well degradation is increasing and initial production rates are decreasing. The play’s top-tier acreage will soon be drilled up.
- Fossil fuels are expected to become a smaller part of our energy portfolio.
Oil and gas isn’t going away. But its market share will most likely fall.
Even if we could replace immediate energy needs with wind and solar, we would still need oil and gas for at least a couple reasons:
- We haven’t yet figured out how to store wind and solar efficiently at scale, so we’ll still need oil and gas in reserve (unless we replace oil and gas with nuclear energy).
- We rely on oil and gas for so many byproducts, including plastics and fertilizer. We may be able to rely on nuclear energy instead, but until we’ve built the infrastructure to do it at scale, we’ll likely still need oil and gas.
Something to keep in mind: Past reports of oil’s death were greatly exaggerated. When we acknowledge that necessity is the mother of innovation, we have to accept that we may see innovation in oil and gas. Could something as revolutionary as fracking be waiting around the corner? Who knows. But desperation was the leading motivator in the discovery of fracking. So it’s always possible.
- We should expect a bigger push into renewables, as they are getting cheaper and more efficient.
- Renewable energy is expected to become a bigger part of our energy portfolio.
- Renewables cannot be our primary energy source so long as storage is an issue.
- Increasing renewable energy will require significant increase in the mining of precious metals, many of which will come from governments with questionable practices.
A lot of money and effort will be spent to make renewable energy work. The support is there. But what about the business case?
Renewable energy isn’t as capable as some would like it to be. Storing renewable energy at scale is a challenge. And renewable energy requires a lot of space–It’s not energy dense, compared to oil and gas and nuclear energy.
While these limitations are true today, that doesn’t mean they’ll be true tomorrow. And as we progress in these areas, maybe renewable energy will become an even better option.
- Significant growth is not expected.
- But the tide may be changing, as more people are warming up to the idea of nuclear energy.
We are doing a great disservice by neglecting nuclear energy.
Nuclear is clean, efficient, and far safer than the public gives credit.
No energy option is perfect. We must be honest and pragmatic about the costs of the energy we use.
“There are no solutions, only tradeoffs.” But nuclear’s tradeoffs are, like the death of oil, greatly exaggerated.
If we’re serious about reducing carbon emissions without damning the world to low energy usage, nuclear must be part of the conversation.
But most speakers were looking through the lens of 2030, when oil production is expected to peak. Even if we started moving today, nuclear won’t be ready to make much of a difference by the end of this decade.
I appreciated the opportunity to get insight into where the energy industry is headed as I’m leaning back into my oil and gas experience.
Going forward, I expect the landscape to be less oil and gas vs. renewables and nuclear, and more oil and gas plus renewables and nuclear. If we really believe that our energy and climate challenges are so important, then we owe it to the world to use all the tools and solutions at our disposal.
Energy affects every part of our lives. So let’s get it right.
Thank you to Enverus for putting on the EVOLVE conference.
How well does ChatGPT know land work?
I’m returning to the oil and gas world after a 15-month detour into marketing.
I’m pretty sure I’ve mostly still got it, but I’ll no doubt be a bit rusty right out the gate. So I recently decided to review some basic concepts and then realized this was a great opportunity to test ChatGPT’s oil and gas land work knowledge.
ChatGPT did well with basic facts and concepts.
But it didn’t do so hot when it came to calculations.
This discrepancy shows the challenge of using ChatGPT: It’s fine for some things but then gets others completely wrong. Someone with experience can spot some of these red flags. But what about someone inexperienced relying on ChatGPT to teach him or her something new?
Without further delay, let’s dig into the prompts.
First, let’s start with what ChatGPT got right:
Prompt: What is a Mother Hubbard clause?
Image of ChatGPT’s Mother Hubbard response
A Mother Hubbard clause is a provision in an oil and gas lease agreement that allows the lessee to include additional lands within the leased premises that were not specifically described in the original lease. The clause is named after a well-known nursery rhyme character who owned a cupboard that was “bare” except for a bone for her dog. The clause is also sometimes referred to as an “open-ended” or “blanket” clause.
The Mother Hubbard clause typically includes language that states that the lease covers not only the specifically described lands but also any adjacent, contiguous, or appurtenant lands owned by the lessor. This language can give the lessee the flexibility to expand the leased premises as necessary to include additional lands that may become available in the future.
The use of a Mother Hubbard clause can be beneficial for both the lessor and the lessee. For the lessor, it can help to ensure that all potential oil and gas resources on their property are fully developed. For the lessee, it can provide greater flexibility in their operations and can help to avoid the need to negotiate a new lease for each additional parcel of land that they wish to include in the leased premises.
However, the use of a Mother Hubbard clause can also be controversial, as it can result in the inclusion of lands that the lessor may not have intended to lease. As such, it is important for both parties to carefully consider the language of the clause and to negotiate its terms in good faith to ensure that it is fair and reasonable for all parties involved.
Feedback: This answer covers the basics, though it does so wordily. ChatGPT explains the concept of the Mother Hubbard clause, gives some background, and then explains why it’s controversial.
Prompt: What is a habendum clause?
Image of ChatGPT’s habendum response
A habendum clause is a provision in an oil and gas lease agreement that defines the duration of the leasehold interest granted to the lessee. The clause is typically located near the beginning of the lease agreement, after the granting clause that conveys the leasehold interest to the lessee.
The habendum clause can be written in a variety of ways, but it typically consists of two parts: the primary term and the secondary term. The primary term is the initial fixed period during which the lessee has the right to explore for and produce oil and gas on the leased premises. This period is typically measured in years, and can range from a few years to several decades, depending on the specific terms of the lease.
At the end of the primary term, the leasehold interest will either expire or continue into the secondary term, depending on whether certain conditions have been met. These conditions can include the payment of rental or delay rental payments, the drilling of a well, or the production of oil and gas from the leased premises.
The habendum clause can also include other provisions that modify or qualify the duration of the leasehold interest. For example, it may include shut-in royalty clauses that allow the lessee to maintain the lease in force even if no production is occurring, or depth clauses that limit the lease to a specific depth below the surface of the land.
The habendum clause is an important part of the oil and gas lease agreement, as it defines the duration of the lessee’s rights to explore for and produce oil and gas on the leased premises. As such, it is important for both parties to carefully consider the language of the clause and to negotiate its terms in good faith to ensure that it is fair and reasonable for all parties involved.
Feedback: ChatGPT explains the concept and details its significance. No problems here.
As I’ve already hinted, ChatGPT floundered when it came to describing some crucial calculations (which I find funny, because artificial intelligence is just a bunch of math).
Prompt: Convert 45 net mineral acres subject to a 25% royalty to net royalty acres.
Image of ChatGPT’s conversation of net mineral acres to net royalty acres
To convert 45 net mineral acres (NMA) subject to a 25% royalty interest to net royalty acres (NRA), we need to know the total acreage of the tract. Let’s assume that the total acreage of the tract is 320 acres.
First, we need to calculate the decimal acres:
Decimal Acres = 45 / 320 = 0.140625
Next, we can use the formula:
NRA = NMA x (royalty interest / decimal acres)
NRA = 45 x (25% / 0.140625)
NRA = 45 x 178.5714286
NRA = 8035.7142857 acres (rounded to 2 decimal places)
Therefore, 45 net mineral acres subject to a 25% royalty interest on a 320-acre tract is equal to approximately 8035.71 net royalty acres.
Feedback: Woo boy. ChatGPT is way off base here.
The total acreage of the tract is irrelevant if you’ve already calculated net mineral acres.
There are two methods I know of for converting net mineral acres (NMA) to net royalty acres (NRA).
Net mineral acres x 8 x Lease royalty
So in this case:
45 x 8 x 25% = 90 net royalty acres
Net mineral acres x (Lease royalty / 0.125)
So in this case:
45 x (0.25/0.125) = 90 net royalty acres
Prompt: How do you calculate net revenue interest?
Image of ChatGPT’s net revenue interest explanation
Net revenue interest (NRI) is the percentage of revenue from oil and gas production that is payable to the owner of the mineral rights after deducting the share of revenue that is allocated to royalty owners and other interests. The formula to calculate NRI is as follows:
NRI = (Net Mineral Acres / Gross Acres) x (Decimal Interest - Royalty)
- Net Mineral Acres is the number of mineral acres owned by the mineral rights owner
- Gross Acres is the total acreage of the property that is subject to the lease
- Decimal Interest is the percentage of ownership interest in the minerals, expressed as a decimal (e.g., 0.25 for 25% ownership)
- Royalty is the percentage of revenue allocated to the royalty owner, expressed as a decimal (e.g., 0.20 for 20% royalty)
For example, let’s say a mineral rights owner owns 10 net mineral acres out of 100 gross acres and has a 25% decimal interest, subject to a 20% royalty. The calculation would be:
NRI = (10 / 100) x (0.25 - 0.20) = 0.005 or 0.5%
Therefore, the mineral rights owner would be entitled to 0.5% of the revenue generated from oil and gas production on the leased property, after deducting the royalty owner’s share.
Feedback: What the flip, ChatGPT!
While real-world net revenue interest (NRI) calculations are often complicated, the textbook formula is simple:
NRI = (Net mineral acres / Unit acres) x Lease royalty
The gross acres of the property don’t matter, because you’ve already considered those in your net mineral acreage calculation. But the acres of the unit/well would be crucial. Yet ChatGPT didn’t mention the unit acreage.
Also, the owner’s decimal interest isn’t needed, because that also should have been considered in the net mineral calculation.
ChatGPT got some things right while completely failing at others.
This exercise was good for me, because it showed that I do still have that oil and gas mojo. But I’m worried for anyone taking ChatGPT’s word in blind faith.
If you’re using ChatGPT to learn something unfamiliar, please act like an investigative journalist: Dig deeper into ChatGPT’s claims and research anything it tells you as if it’s the least reliable source you’ve ever met.
Because in some ways, it is.