Scott Sheffield heads Irving-based Pioneer Natural Resources, a $47 billion company that is the largest oil producer in Texas. In this episode, Sheffield discusses the challenges facing drillers in the Permian Basin, why the industry is increasing the length of its laterals, the use of “damp sand” in fracking, flaring, capital discipline, and why OPEC producers will continue to dominate the global oil sector in the years ahead. (Recorded March 29, 2023.)
Robert Bryce 0:04
Everyone, welcome to the power hungry Podcast. I'm Robert Bryce. On this podcast we talk about energy, power, innovation and politics. And I'm pleased to welcome Scott Sheffield. He is the CEO of pioneer natural resources to the power hungry podcast. Scott, welcome to the power hungry podcast.
Scott Sheffield 0:20
Thank you, Robert. Great to be with you. I am Scott Sheffield CEO and founder of pioneer natural resources.
Robert Bryce 0:27
There you go. So now I warned you before we started that guests introduce themselves on this show. And so I've given your title but give us more than your title. Imagine you've arrived somewhere you have about 30 to 60 seconds to introduce yourself. No one there knows who you are. Introduce yourself if you would.
Scott Sheffield 0:47
Yes, I'm a petroleum engineer from University of Texas. Joined Amoco back. Many many decades ago I joined a little company called Parker and parsley petroleum company was there until 1997 merged with Mesa a guy named Richard rainwater talked me into merging the two companies together Park and Parsons petroleum and Mesa, we moved to Dallas. And for Pioneer Natural Resources. Today we're a $50 billion company, one of the fifth largest fifth largest US independent oil and gas focused primarily in the Permian Basin.
Robert Bryce 1:27
And you're the biggest oil producer in Texas if memory serves.
Scott Sheffield 1:32
Yes, we're the largest producer in Texas, the second largest in the Permian Basin just just below Chevron, which has assets in New Mexico. That's why we're largest in Texas, second largest in the Permian Basin.
Robert Bryce 1:46
Gotcha. Well, I didn't realize rainwater was involved. I knew the Mesa connection and that's takes you to the Boone Pickens. There's a Boone Pickens connection here as well then so rainwater got involved and rainwater of course made made his fortune working with the hunts in Dallas, right. That's his it was it was the bass is the bass bass is forgive me, right? Yeah,
Scott Sheffield 2:07
the bass is in Fort Worth. He's the one that rated Disney back a long time ago, and they made a bunch of money of being an activist with Disney.
Robert Bryce 2:17
That's right. The bass family. That's right. Okay. Is rainwater still alive?
Scott Sheffield 2:21
No, he passed away, but they both passed away. Richard had a very serious illness and passed away probably eight, nine years ago. Gotcha. Then bone of course, recently.
Robert Bryce 2:34
Yeah. And rainwater was married to a woman who was also a top executive and financier, I forgotten her name, but she was they were quite the they were the glamor couple in Dallas Fort Worth for many years. I've forgotten her. Yes,
Scott Sheffield 2:48
it was Darla Moore. She was famous at JP Morgan.
Robert Bryce 2:52
That's right, Darla Moore. Well, so there's a lot to talk about. There's been a ton happening, obviously, in the oil and gas sector over the past couple of years. And you've had a front row seat on all of this your entire career now more than 40 years in the business and how long you've been in the oil and gas industry?
Scott Sheffield 3:09
That's right. I'm 70. Today, Robert. So 22. So what is that? 48 to 48 years?
Robert Bryce 3:19
Yes. About the bat to get the hang of it? Yes, I think so. Well, let's talk about something you said at zero week, a few weeks ago, you said oil, US oil production won't ever grow. Again, it's a direct quote. Now, we've seen big growth in oil and gas production in in the US since the shale revolution started. But what do you why do you base that? Why are you Why did you say that? We will not see oil production ever grow? Again? What What What's your basis for that?
Scott Sheffield 3:47
No, I think I was misquoted will never grow again. There's two or three media groups got it right and one, missed it. My point was, was that the first of all, the Permian Basin is still growing. It's at 5.6 million barrels of oil per day. And it's growing up to about 7 million barrels of oil per day by the end of the decade. What I indicated was US production is slowing significantly. It grew about a half a million barrels a day last year, we predicted to grow about 400,000 barrels of oil per day this year. The EIA has a growing only about 200,000 barrels a day next year in 2024. And it's slowing significantly. And it'll probably peak around 13 to 13 and a half million barrels a day in about three years. So we'll reach that peak that we had in February of 2020 at about 13 point 1 million barrels of oil per day sometime in about three years, and then stay fairly flat.
Robert Bryce 4:50
Gotcha. So let's talk about the Permian because in terms of oil fields globally, it is the one that continues to surprise I you know I've made this statement several times. I Put $100 bill on this table or anywhere and say there have been more oil and gas wells drilled in the Permian Basin than anywhere in the world. And yet it's still the hottest play in the world. Why is that? I mean, is it just the rocks there are so good, what is it about the Permian that has continued to attract such huge amounts of investment and to be such a productive oil province for so long?
Scott Sheffield 5:23
Yeah, I think it's all about the source rock, when you look at the age of our rock, and look at the fact that it did produce a significant amount back in probably early 70s. With a central basin platform, it had gotten up to about 2 million barrels of oil per day. At that point in time before it started declining, that people realized that we have a layer we call it the layer cake with several zones, we probably have about 12 zones, at least in the Delaware in the Midland basin. In those zones. We've been going after the conventional sands sandstones in those basins, and we realized about 1012 years ago that the source rock is primarily the Wolfcamp and some other zones. And then people started testing the source rock through fracture stimulation, horizontal stimulation, initially through vertical drilling, and eventually leading into horizontal drilling and horizontal tracking. And obviously leading up to longer laterals going from 5000 feet horizontal Hall, up to about 20,000 feet today. And so it was that layered cake. And right now the industry is focused on six zones, three in the Sprayberry are all on bone springs in the Delaware Sprayberry in the Midland and then the Wolfcamp, three zones in the Midland basin three zones in the Delaware basin. And so that's been a home run over the last call it decade. The initial wells were drilled back, probably in 2011. In both basins, the the discovery wells into the Wolfcamp, we knew it produced vertically, but that's been the big, the big plus the amount of zones that we have, and the amount of the thickness of the source rock.
Robert Bryce 7:14
So is it better to be lucky than to be good? I mean, that mean that you? Did you have any idea when you got these assets that these that these other pay zones? Were there? I mean, was this? Is this being in the right place at the right time? Is it the combination of technologies? And that came to the fore? What how do you account for that? Well, I mean, it will I'll ask it that way. Is it better to be lucky than good? Is pioneer just being lucky here? Was it your technology? How did how, why is your company been as successful? It is, as it has
Scott Sheffield 7:48
done? I think the backbone of the company has always been in the Midland basin and the Sprayberry will we call this February field and our success, we started picking up a significant amount of acreage in the 1980s and 90s. In the 90s, we started buying out most major oil companies. So what's interesting is that a lot of our acreage came from the major oil companies, a lot of them sold out to us in the 1990s. And that's how we built up a large position. We did it all vertically, we thought we were buying we had good returns, not as good as today with the horizontal drilling. But we had good vertical, it was all vertical drilling. And that's the reason we were buying out the majors and other independents at that point in time in the 80s and 90s.
Robert Bryce 8:33
Because they thought at that time it was played out, they thought that there was no,
Scott Sheffield 8:36
exactly it was it wasn't gonna have an impact on their company. So when you bring on a Well, that makes 50 barrels of oil per day, which is what we were doing conventionally for a long period of time, they had very little impact to the majors. And so the majors were going international. So the major started moving back international property back in the Gulf of Mexico, back in the late 80s, early 90s. And so they started selling off to people like pioneer and other independents throughout the US. So we we made the commitment to stay in the Midland basin through the ups and downs of the industry over the last 3040 years. So you can say you had some luck, obviously, it's been luck for the people in the Marcellus has been loved for people in Utica and other place, but our cost, our cost is probably the lowest cost of anybody in any oil basin. Because we bought it, we essentially paid nothing for a lot of our undeveloped rally back in the 80s and 90s. Back then you are paying basically four times cash flow for PDP at that point in time. So let's build up the inventory.
Robert Bryce 9:42
Sorry, sorry, if you don't mind. I'm gonna interrupt the NDP for people who are experts in the oil field. What does that mean?
Scott Sheffield 9:48
Yeah, PDP has proved develop producing. So existing production from existing well, so we're paying a cash flow stream on that existing production. So, for the undeveloped locations, those are the locations we haven't drilled yet. We paid little to nothing for those locations.
Robert Bryce 10:08
So, so part, some luck, some some technology, some is just being in the right place at the right time. Let me ask you about you mentioned the laterals. And this is something that I've heard from people in the oil field that they're it's axiomatic the more sand you can get down hole, the better the productivity, is it true the longer the lateral, the better the productivity, or do you is that? Are you reaching a limit for how long it makes it? How do I say this? How do I make this question work? Is there a limit to the productivity of the laterals? Or is it still axiomatic that the longer the lateral the more productive the will
Scott Sheffield 10:45
know in theory, the longer the lateral, the more productive for? Well, the question is, you're reaching limitations on drilling and fracture stimulation. And so the the Bakken is an area was the first area that went out to 20,000 feet or longer. The Permian has been a bit slower, but we're starting to drill Well, several wells, significantly over 15,000 feet. And so we have solved pretty much any fracture stimulation in any drilling issues. And so it takes time and experience. So we've been very successful, we're going to drill over 100 wells of our 500 wells this year over 15,000 feet, and it will continue to pick up over time, we have an inventory of over 1000 locations. The big benefit of two recent acquisitions, partially and double point which we acquired and almost doubled the size of the company in early 2021 was the benefit of these longer laterals. Since the acreage was mostly contiguous with pioneers were able to drill pull the acreage together in drill these longer laterals, so before we were only drilling a 7500 foot lateral, we combined it with parcels acreage, or double points acreage. And now we can drill 15,000 or 25 20,000 foot laterals, and you get about a 20% uplift Robert, in your in your production, you get about a 15% savings in drilling the completion cost with those longer laterals.
Robert Bryce 12:19
And that's because you don't well, you don't have to drill as many you don't have to drill as many wells but also you don't have to move the rigs, right you keep those exactly. You have you can operate, you can contact more rock from the same pad right? So you don't Is that where the saving is that you have more more workers on actually drilling and completing than you would and having to move them around and start a new spot a new well is that the is that the main where the main savings come from? Yes, because
Scott Sheffield 12:45
you're already down there drilling a 10,000 foot lateral. So to drill that 15,000 foot lateral, all you're doing is extending it another 5000 feet. Now 5000 feet sometimes only takes a day, maybe two days most. And so it keeps you from rigging up and drilling another 10,000 foot. So eventually, if you drill off 15,000 foot laterals, you'll drill less wells to get the same oil out of the ground in a given area.
Robert Bryce 13:13
And so was the limit on the rig itself. I know the AC top drive rig has been a big change step change in terms of the ability of the drill faster and deeper. Was the limitation on the longer laterals. The owning of the acreage or was it the mechanics of the rig? I've never even thought about this before but it was it the ability of the rig to be able to drill that far out with the drill string or what was it? Was there a physical limit or was it more above ground issues that were limiting the length of lateral?
Scott Sheffield 13:42
Yeah, it was first of all it was the acreage you had to put the acreage together you have to have a we probably had the most contiguous acreage of any oil and gas company in the Permian Basin when you look at a map and puff contiguous acreage, number one, number two, drilling contractors have been drilling up in the north slope and around the world 20,000 foot laterals already, so it wasn't as much the drilling array. It was the completions. And in plugging perf people were concerned that the further you go out, you may get stuck, you don't have the ability to do continue to frack zones out 20,000 feet. And that's pretty much been solved the last two or three years.
Robert Bryce 14:27
Gotcha. And so how many stages then will you do in a 15,000 foot lateral? This is the other part of the the technology here, right? How many stages how long the lateral how much sand all of these are part of the recipe for maximum production. So how many stages are you doing in that? Three mile long section?
Scott Sheffield 14:46
Yeah, we've increased the stages significantly. No on pounds, pounds per foot. We're up to about 2300 pounds per foot. So it's varied in the Permian
Robert Bryce 14:58
clear I'm just I'm sorry to interrupt but 23 100 pounds of sand per lateral, so you are using
Scott Sheffield 15:05
300 pounds times 20,000 feet. That's a lot of sand. So
Robert Bryce 15:10
a ton of foot. So that's 20,000 tons of sand. That's an enormous Yes.
Scott Sheffield 15:14
No, it's a mound of sand. And that's why the amount of sand mines that have been built in the Permian Basin is, is definitely significant. that popped up, we're using what we call damp sand now. And so damp sand is saving a significant amount of capital. We're working instead of in mining,
Robert Bryce 15:34
what is that? What is damp sand.
Scott Sheffield 15:37
It's really just going to the surface nearby, the scoop off the surface and all sudden, you can process the sand there. If you get up traveled around West Texas, there's sand all over the place. So all you do is just scrape scrape off the surface and dig down maybe 1020 feet and all sudden you find lots of sand. And so you can do that. And the benefit of that is reducing their transportation. Right diesel fairly high, you're reducing that trucking charge. I can so that's that's where you get your big savings. So there's dam sand mines that are popping up all over West Texas mean,
Robert Bryce 16:14
interesting. It's a new term for me. I know Atlas, Brigham company is going public or I saw a headline that was going public, which indicates the the importance of sand in this whole process. So let me talk about the high grading and what's happening in the Permian. I was talking to my brother Wally, who's very, you know, active investor and interested in these issues. And you know, we're from Tulsa. So you know, we, you know, we follow the industry, just as in our regular conversation is the is productivity falling on a per acre basis are the producers, they're now going to their tier two acreage is the is the best, I guess the shortest question would be if they have the best, well, sites already been drilled?
Scott Sheffield 16:56
Yes, that's a question we get all the time. If you look at the we're drilling about six to 7000 wells per year in the Permian Basin. That's everybody all together as everybody all together pioneers drilling about 500 wells here, give me an idea. We're the most active company with the largest amount of drilling activity with rigs, we have about 2526 rigs running. And we got the most frack fleets about seven frack baits that are running all year long. And but that's roughly about 10% of the activity in general. And what's happened over the last two years, a couple of things. So people have are going from tier one to tier two, the companies that have shorter inventories, there's about four or five companies that have what I consider significant tier one inventory, that's pioneer, Conoco, Phillips, oxy, Chevron, or the other primary companies with significant tier one inventory. So a lot of companies are drilling down into tier two, or tier three inventories. Second issue is
Robert Bryce 18:07
as to be clear that that tier two tier threes, that means it's a different way of saying that the rock isn't as good, it's not as productive then is that? Is that how you defer to find fewer? Tier three? Yeah,
Scott Sheffield 18:17
yeah, tier two and tier three are still very, very economical. At 75 $80 oil, it's still making the companies a lot of money, but is not as productive. So it's probably didn't have as good as geological qualities as tier one acreage. Okay, that's probably a geological definition. And secondly, as 1000s of wells are being drilled in the both the Midland and Delaware basin, the reservoir pressure is coming down. So as as you drill more wells, the reservoir pressure was lower, so you get a little less productivity for that reason. So a combination of both of those is what's lowering productivity on a per well basis in the Permian Basin. Now, Pioneer announced last year that we're increasing our hurdle rates, or REITs, or we use internal rate of return and return on invested capital. And we have increased those hurdle rates. And so since we have over 25,000 Drilling locations, we can afford to increase our hurdle rates and drill and better type curve. So we announced last November that we're actually going back in 23, all of our 23 wells will exhibit a higher productivity type curve, something comparable to 2020 and 21. There's some other companies that are doing that, that have high inventory, high amount of a large amount of inventory, but very few companies can afford to do that. But in general, it's back to the two reasons I gave you lower reservoir pressure over time. And secondly, companies running out of inventory of tier one. And going to tier two and tier three are the reasons we're seeing less productivity for Well, in general.
Robert Bryce 20:16
So what are the barriers? I looked at this? Oh, gosh, now, two years ago, I guess on what it you know, the hurdles above ground issues and in the Permian to the industry as a whole, it seemed to me you really have some mass problems. One of the key ones is availability of or is the water disposal issue. And the other is electricity availability for pumping, right. And these have been issues that I've been reading about hearing about for now for a couple of years. So let's talk about electricity. There's amazing you know, we you know, or cots been in the news now for a couple of years, for obvious reasons. But that there's is will I'll ask this question directly, is there a shortage of available grid the supply of electricity in the Permian?
Scott Sheffield 20:56
No, there is not a shortage, but there could be a shortage over time. Okay. So in fact, the third item we need to talk about is natural gas. Okay, there's lack of pipeline capacity, which is why so I'll say natural gas, water and electricity are your three biggest issues in the Permian Basin
Robert Bryce 21:15
and introduce taking it's off take for the gas right that you take take away capacity. But
Scott Sheffield 21:20
let's start with electricity sure, that we are all moving to what we call E fleets, electrical fleets, to reduce emissions for the industry in the Permian Basin. In fact, all basins are trying to move to E fleets. The best way to move to E fleets, is far if you go from diesel, to compressed natural gas. So over half of our fleets today are running off compressed natural gas, we're getting a significant savings. But because diesel is very, very high price right now and has been for the last several months. It also puts out more emissions diesel than natural gas. Eventually, we're going to move to the grid. So Pioneer is going to move, we're going to frack off the grid, our first well, sometime starting in August or September of this year, eventually, by 2030, we expect all of our frack fleets to be fracking off the grid. And so we've done studies with all the other operators, and we need to increase the size of the grid, three to four fold by 2030. So if we all decide to move to fracking off of the grid, for all of our fracking horsepower, and same with drilling, all of our drilling rigs will eventually be off the grid, and eventually our compression. So we use natural gas compressors, gas lift, to produce a lot of our wells. And we need to move those over time, from diesel, to gas to to the grid also. So when you bring everything you do in the Permian Basin to the grid, it needs to increase three to four times. And so we've been working with encore Arcot, as Pioneer has on here has been also working with a group of industry leaders in regard to doing it saying we need a lot more power generation. And in fact, we're trying to advocate for natural gas, we have so much natural gas in the Permian Basin, why don't we build natural gas generation plants? Right. So the answer your question, it's an issue that Texas is not just the Permian Basin is the entire state as the population grows and the need for more electricity. It's an issue that the state has to figure out.
Robert Bryce 23:56
Sure. So three or 4x is a big number, a big multiple, what do you have a megawatt number? How much? How many? How much capacity you're going to need in terms of megawatts?
Scott Sheffield 24:07
I don't have it all top my head at megawatt number, but it's the frack horsepower that is, is the biggest megawatts. It's the it's the highest need that we need. Right? And
Robert Bryce 24:19
so it's going to be hundreds of megawatts. I mean, I'm just your mental calculation here. It's going to be because frack fleets are using it. It's about 12 or 15 horsepower. This is an enormous amount of power.
Scott Sheffield 24:30
That's right. And so we're making our own. We're educating the state and educating encore at the same time. The state's trying to solve this problem that developed about two years ago. So we're going to need a combination of baseload power generation. It's got to be wind, solar and natural gas, in my opinion, in the state needs to start building that base generation. And then we got to build out the lines from We got to build out the substations. We're already working with encore to bet out substations already. So we were allowed to do our own fracking and drilling and compression from those substations. But that
Robert Bryce 25:13
is a well, I just released a podcast yesterday on transformer availability, all the costs on that all the cost on that, that that hardware is all skyrocketing. I mean, copper wire pull ups, I mean, all of it's gotten dramatically more expensive. But this is something that you're doing because of is how much of this is one of the other questions I had written down. How much of this is due to if this move towards e fleets, is due to ESG? How much of it is better economics? What's the what's the what's driving you to attach to the grid instead of using diesel or net gas on site?
Scott Sheffield 25:48
Yeah, well, it started with ESG movement, obviously, Robert, several years ago started with the ESG movement to reduce co2 emissions. But what's amazing, we're seeing now the cost of going from diesel to CNG, we're seeing significant savings per frack job, probably at least 200,000 per well, then we see another savings by going to the grid. Now my concern is we're all going to go to the grid and say by 2030, and the price of electricity may be skyrocketing. So it's going to be interesting scenario, what is the price of electricity going to be in 2030? Or 35? That's an unknown question. We're going to find out but you're right. It's going to cost the state are caught and other the utilities that serve us all in Texas, it's going to it's huge investments to solve our problem in the state of Texas. And so the price right now we're seeing significant savings. So we're reducing co2 emissions. And we're seeing significant savings by going from diesel to natural gas through the grid. Let's get to the interesting in 2030, what's going to happen?
Robert Bryce 26:59
Well, or even if that much capacity can be built and at what price, but that's that's a different discussion. So we've talked about electricity. So what about water? Well, this has been the seismicity issue has been front and center course in Oklahoma, it's been a big issue here in Texas as well. The seismicity correlates with injection wells. And it seems to me and you know, looking at this industry for you know, several years that this is one of the biggest problems that you have in terms of just the it's a mass problem, you've got a bunch of water that you're bringing out of the ground, and you got to force it. After you use it for these frack jobs. You have to force it back down. What is what is the pioneer doing? And what's the and more broadly, what's what's the what's the approach in the Permian? Because it has to be kind of this issue has to be addressed by the industry as a whole, does it not?
Scott Sheffield 27:44
Yes. Going back to Oklahoma, the mistake was made, in hindsight is that a lot of the people started going deeper, to deeper zones to inject water. And when they started going into deeper zones, they did not look at any seismic maps. And so they were drilling some of these deeper zones, injection wells, very close to fractured to a fracture, unknown fracture. And that fracture went down into the basement. And that's what generated some of the seismicity issues in Oklahoma. So the commission got involved, eventually in the state of Oklahoma, and we haven't heard of any issues. Since that point in time, it moved. What happened here in the Midland basin, in the Delaware, people started drilling deeper. Same thing as in Oklahoma, to put away the water, they were going into the Ellenberger. A lot of people did not look at seismic maps. So pioneer did not drill that many deep wells, we were fortunate enough not to drill many deep wells, but several operators drilled several deep wells. And they started generating some seismic anomalies over the last call it three years, the best way to solve the problem is to use to treat your water and reuse it. So that's where pioneers focus. Secondly, any injections
Robert Bryce 29:15
if I can interrupt there, Scott, because I think this is important in the treatment of so is that is the key challenge there. Obviously it's economics you more you have more you treat them the cost and waters heavy, you gotta move it around. Is it the the dissolved solids in the water that you have to remove when you treat it? What are the what's the what's the challenge in the treating of the water? What are the what are the things you're treating to make it so you can reuse it for another frack job. Yeah, that's why you're doing you're reusing the water if I understand what you're doing in the treatment process that allows you to reuse it.
Scott Sheffield 29:48
Yeah, your goal is to obviously reduce the ejection of amount of water that we're all injecting. So the best, best way to solve is to reuse it. And you're like you said you're removing the solids and so Uh, the cost of treaty has come down significantly when it first started, it was probably $5 a gallon, it's probably down significantly into the pennies now in retreating. And so that's been the big savings. And it's mostly getting the solids out before you use it again.
Robert Bryce 30:21
But you're still having to inject it. So does pioneer own its own injection wells? Yes, we did. And how much are you how much how much of your wastewater you injecting, then on a on a daily or annual basis? How many you're measuring barrels?
Scott Sheffield 30:34
I know, I know, we're, we reusing about half of our water that's gone from zero to about half over the last, probably seven, eight years. And our goal is to even get it higher and higher over time. I know we're producing probably about 1.4 million barrels of water per day. And so I'm guessing we're injecting about half of that. If we're using about half, and we want to inject less and less over time. And then the second thing we're looking at seriously, is we're running three projects, on the desalination, the salting, taking the salt out of the water, to turn it into potable water. So if we can turn it into potable water, for the cities in the area, or for lakes are for whatever reason, for farming, agriculture, that's the ultimate solution. So a combination of reusing and turning it into potable water, I think it'd be the future, to where it's not an issue in the Permian Basin.
Robert Bryce 31:47
Well, that would be amazing. But it would cost I mean, obviously, cost is an issue. So just to make sure I'm understanding then on in terms of the water production, so I'm looking at your q4 numbers, your predictions about 600,000 barrels a day. So you're producing more than two barrels of water for every barrel of oil you produce.
Scott Sheffield 32:01
That's right. That's right.
Robert Bryce 32:03
That's a lot. I mean, it's so Is that true? Well, let's talk about that. I mean, you know, but as in the Permian as a whole, then is this the other key? obstacle that has to be over? We talked about electricity, we'll talk about natural gas, as well. But I mean, these are massive volumes and a very arid area. And so you know, critics of the industry will say, Well, look, they're just wasting the water there didn't you know, you're familiar with all the criticisms that would come around the water issue? And if I'm looking at this, and don't know anything about the industry and say, Damn, you're producing two bottles, two barrels, twice as much water as you are oil? How do you how do you deal with the public perception on this and button work? And also, how do you deal with it as an industry over the longer term because you're operating in a desert?
Scott Sheffield 32:48
Well, if you look at the Delaware numbers, they're about five, five to one ratio, find the Delaware Water for oil, oil, so it's even higher than Delaware. So Delaware, Delaware has a, we've been drilling the Midland basin, probably since the 1940s. pretty aggressively. And so we've been working on this issue. And so the the early issue was to re inject back into the ground into the St. Andrews, great Burg around 4000 feet. So we noticed we were pressuring up that formation over time, it was causing some drilling issues. And then with the ESG movement, we started moving to retreating water. And that's the best issue, as you know, you probably read, we have the two largest projects in the world, we're using a fluid water. It's also where do you get your water? So there's been an argument, don't use fresh water to drill with. You're draining the freshwater aquifers. Right. So that's been an issue. And so we're the first ones, to strike a deal with the cities of Midland and Odessa and actually treat their effluent water. So we take the flow of water, treat it and that's what we frack with. And so that's been a big plus for Pioneer. And then the last step, as I said, is the the reusing of water moving that number up significantly over time, continue to reuse that water, and secondly, to eventually take the salt out and turn it into potable water. So I don't think it's going to be an issue. I think the seismic anomalies will, they've already slowed down significantly. We've been working with the Texas Railroad Commission, they brought on some geophysicist on staff. So a lot of wells. Now there's been a cutback on drilling deep wells, near the cities of Midland. Those were were the issues going into the Ellenberger. So everybody has to show their seismic now has been cut back on drilling deep wells. So I really think the problems are gonna get solved long term.
Robert Bryce 34:51
Gotcha. So last, then let's just cover this briefly the offtake for natural gas. This has been, you know, of course, the issue of flaring has been front and center for a long time. I'm and you know, historically and in a lot of countries still in around the world Iraq or Russia, there's a lot of gases being flared, big push on to, to eliminate all flaring. And I know, tell me about what parrot Pioneer is doing with regard to flaring. And also, more broadly, you mentioned the issue of offtake for gas in the Permian in general, what's going on with flaring? And first, let's take that first. What's what's what's pioneer doing on the flaring front?
Scott Sheffield 35:24
Yeah, Robert, when I return in 2019, I didn't mention earlier but I did retire in 2016. I came back in early 2019 as CEO. And one of the things that I focused on was the called the black guy in the Permian Basin. We were flaring over one BCF a day in the Permian Basin, and a company called rice stead of Norway. They started going into the Commission's in New Mexico and Texas and started publishing everybody's flaring. It was it was took a while to get those reports from the Commission's but they started publishing a quarterly guide to the largest flares in the Permian Basin. And patented Pioneer has always been well below 1%. And so we started publishing that data to highlight the largest players in the Permian Basin, we had a lot of negative feedback in regard to some other companies. That pioneer was basically being the company that called them out. We had our IR department and a lot of phone calls, from majors and from our other other large independents commenting on the fact that we were calling out about the flaring in the Permian Basin. So what pioneers did early, we started to reduce our flaring activity, inventing activity, we started what we call flyovers. We started hiring planes that fly about 3000 feet with detection devices with methane detection, and started monitoring our own our entire Midland basin, we have about a million acres in the Midland basin. And we started doing that once a year. We started doing twice a year, and now we're up to four times a year. So that's probably one of the early things that Pioneer is doing. And now almost every company, the larger companies are all doing flyovers. We've done satellites, use satellite data. We've worked with EDF and in regard to setting new rules for the Permian Basin, working with the EPA, been very supportive of the EPA.
Robert Bryce 37:39
And just to interject, EDF has Environmental Defense Fund and then and they've they've launched their own satellite for methane tracking. And that's right, that $100 million, they got $100 million from Jeff Bezos and I think they launched that satellite. Last year if I'm memory serves something like that. But EDF has been very involved in the methane tracking issue.
Scott Sheffield 37:58
Yes, probably one of the world's largest firms that are mm monitoring, flaring around the world. And then, like you said, they got their own satellite now. And we've been working closely with the Environmental Protection Agency, the EPA, a federal agency in regard to setting new rules in regard to the to the operators. The next thing that we're doing is leading the charge in regard to setting our own methane sensors. And so we'll have almost all of our horizontal tank batteries at the site. So the important thing is a satellite or a flyover only measures one point in time. So they take, they run their devices over. So it's only one point in time, you need a continuous monitoring of gas leaks. And that involves surface monitors, methane monitors that are on site, you know, similar to running a floor camera. You're familiar with the floor cameras, FLIR cameras
Robert Bryce 38:58
for taking and forward looking infrared, right? That's exactly cameras. Yeah,
Scott Sheffield 39:02
no, exactly. It's like running one of those continuously all day, 24 hours a day. And so I've always talked to our field people, we're gonna have to treat gas leaks, just like oil leaks. So all leaks have been repaired immediately, the last 50 years out in West Texas, when you have a gas leak, you got to repair it, you got to detect it and repair it. And that's really the key to removing it as a black guy. And we need to push it all the way down throughout the Permian base. So we're down to only flaring about 200 to 250 million a day. The latest data is down from one BCF a day and 19 to about 200 250 million a day recently, through the same rice dam reporting of all the operators in the Permian Basin, so it's getting soft, it's gonna get better over time, in my opinion, in regard to the gas takeaway. What's happening is that more gas is coming out of solution. And that gas As we produce more oil over time, the Gasol ratios increasing both in the Midland basin and more deliberately in the Delaware basin. And so we're up to about 16 BCF a day. We're the second largest producing basin in natural gas. Believe it or not, even though we're the largest oil were the second largest gas producing basin in the United States. Right behind the Marcellus
Robert Bryce 40:27
Marcellus now is about 3030 30 to
Scott Sheffield 40:29
33 BCF a day, right. Okay, so we're just above the Haynesville. Now, Haynesville is poaching 15 BCF a day. And so we're adding even through normal oil and gas drilling or really old drilling. It's called associated gas. And we're adding about one BCF a day per year. And so we need a typical natural gas pipeline, from the Permian Basin to the Gulf Coast is about two BCF a day in size. So we need a new gas pipeline every two years. So what's happened is that, even though we've gone through the downturn, we've gone through the COVID, an activity has come back, not as strong as it was in 1890. But it's come back strong. And we're producing a lot of gas. And we're not building the gas pipelines quick enough. And that's why wah wah pricing today is $1 or below $1. Recently, and the problem will get solved in the next two years.
Robert Bryce 41:30
I'm just going to add this was one of the trading basins in in West Texas, similar to Henry Hub in Louisiana or TTF. In Holland, it's one of the major trading hubs around which prices are set in for gas across the country. So just want to make sure people are coming along with us as we know, I understand. No, there's no there there terminology. So we'll come the existing I know, Kinder Morgan built a gas pipeline to the Gulf Coast, can that be looped? Can you can you add more capacity to the existing rights of way? Or they're going to have to be? Because, you know, pipelines are very unpopular, right, and the condemnation issues around pipelines. But this is not a popular thing to do it can the existing pipelines be expanded or looped to move more gas out?
Scott Sheffield 42:14
Yes, the first thing has been done, there's three existing pipelines that are being expanded with additional compression. So the easiest way to get additional gas, about a half a BCF a day and some of the existing pipelines is add additional compression. The next pipeline is called Mater horn. Mater horn will be on it to two BCF a day line. Because it's the same group of people that built Whistler that came on about three years ago. So Matterhorn will be on late 24. So we'll be adding about three and a half BCF a day through both expansions and through Matterhorn by late 2024.
Robert Bryce 42:55
Gotcha. One of the other things you were quoted on recently, you said this backing up here and kind of backing up the zooming out from the Permian. You said something to the effect of quote, OPEC was back in can is back in control of global oil markets and will be for the next 25 years. So the shale revolution was seismic I'll use that word event that seismic, use that word in terms of global oil. But now you're saying that OPEC is back in control? Why is that? Is that because of what's happened in Russia? What do you mean, what do you see? You've also been bullish on oil prices, I'll bring this up. You've predicted oil by the end of the year. So let's take that first. You still think oil is going to be at 100 by Christmas? And and then tell me what your view is on OPEC, and why you believe they are in have more leverage now?
Scott Sheffield 43:46
Yeah, sure. You sort of have to go back as to what's changed over the last 10 years to get to answer those two questions, Robert. So first of all, we've under invested about a trillion dollars in the upstream side of the industry since 2014. So if you look at the previous period from 2000, and call it 10, to 14, as compared to 15 to 22, we've under invested about a trillion dollars, for several reasons for that. One, we've had two major downturns, so we've had lower oil prices. Secondly, the ESG movement, you get examples like the BP and Shell even though they're slowly changing back based on recent discussions with their CEO and announcements, but they you know, they started to sell off either 40% of their oil and gas reserves, or sell or reduce their production significantly by the end of this decade. So investing a lot of their capital instead of new oil and gas exploration. They're invested in the ESG movement, alternative energy, wind, solar batteries, so on. So and then thirdly is the change of capital framework from the shale industry. So the shale industry is what caused a lot last in price wars today. 1014 and also in early 2020, I call it late 19, early 2020, we were going to have a price war anyway, if even if we didn't have COVID-19 in early 2020, because the US shale industry was growing too much too fast. We were adding about a million barrels a day competing with OPEC and OPEC plus. So as you know, our industry was the worst performing industry from 2010 to 2020. In the s&p 500, our return on capital employed was only about 2%. So something had to change. And so the oil and gas independence changed their mindset. Instead of growing 15 to 20% a year, we decided to grow zero to 5% a year. And that's been going on now for about two years. And so we're returning 70 to 80% of our free cash flow back to the investor. And if you look at every other s&p 500 industry, they returned somewhere between 70 and 80% of their free cash flow back to the investor in forms of dividends are in form of a stock stock buybacks. And so when you look at all those reasons why the only extra capacity in the world today is Saudi, who is in UAE, all three countries have announced expansions. Saudi has a million barrels a day expecting going on from 12 to 13 million barrels a day, by 2027. UAE has about a million and a half birthday expansion by 2027. And Kuwait has about a half a million barrels a day expansion by 2027. So we're still plenty of all left in the world. The rest of it is any wrong Iraq, Russia, they're in countries with significant political issues that are going on today. But he just looked at the extra capacity in the world. It's only those three countries. And so we're gonna hit and
Robert Bryce 46:57
that's roughly and that's roughly three and a half million a day, something like that coming on. That's right. And the next four years versus what maybe 2 million a day here in the US at the top out there, use your numbers by 13 million by 2025. And then you think it's going to start to decline again domestically. So most domestic production starts to decline. As OPEC starts to increase. And the Delta there's going to be, you know, for four or 5 million barrels a day, maybe something like that by 2027. Is that your am I doing? I'm doing this math in my head, but as and then Russia appears to be off on the decline off the table for a long time, because they're not gonna have Western technology, Western labor. Exactly. So then that, well, you're an oil guy. So I'm not surprised to hear your boil price. But, but you're basing this on what you're seeing in terms of investment and the basic math of what's happening globally,
Scott Sheffield 47:51
you will be on the supply side. So to me, it's always been a supply issue that has caused our downturns over the last 40 years. And you got to look at the demand side. So the question is where's demand going? So China, we got a recession. In the US, we got a banking crisis going on, hopefully it's stabilized, then we have China starting to pick up significantly, and we're seeing even in our own exports, we export most of our crude last year. We're exporting most of our crude this year. And we're seeing a significant pickup in Chinese demand in there, so China, is probably going to lead us to hitting a record demand for oil at 102 million barrels a day by the end of this year. So you can bind 102 million barrels a day, a record demand number by the end of the year, with lack of supply is the reason why I'm predicting that we'll see $100 oil, um, sometime by the end of the year.
Robert Bryce 48:48
Okay, so let's talk about pioneer. You've talked about share buybacks and return of capital to shareholders. I recently interviewed one investor who said that well, the the investors have taken the credit card away, you know, something like $300 billion in shale in capital was destroyed during the shale revolution. Investors seen that movie they don't want to watch it again. But as I looked at Pioneer your your price to earnings ratio is about six and your dividend payout is close to 12%. I mean, I I'm not an expert investor I don't claim to be but those are how is it possible that a company like yours or any company if your company I'll put it this way if your company were in another industry, would you have more investors buying your stock it with Yes, give exactly given those metrics, which are common, you know, common ways to value stocks? If you're if you were producing some widget or you know, tires or something would investors lease buying pioneer if you were doing that and instead they're staying away? Because you're in the oil and gas industry? How do you explain those numbers?
Scott Sheffield 49:48
Yeah, we we've had a significant increase in the the different type of investors that are focused on income coming in upon your stock the last two years, so we've been paying a strong base dividend and a variable dividend. Now for two years, several other companies have copied what pioneers doing doTERRA, Devin diamond back and others. And but we're only up to about you remember we bottomed out at 2% of the s&p 500. Our industry during COVID. Were only up to 5%. Just 10 years ago, we're at 15% of the s&p 500. So the question is, how do we break through that 5%. Now, in talking with investors, we need more than two years of history. So we Burnden for 10 years, from 2010 to 2020. So we've had we lead s&p 500, in 2021, and 22. We started off this year with a little setback, you're,
Robert Bryce 50:50
you're you're getting slammed so far this
Scott Sheffield 50:53
year. And so we need probably three to four years of consistent framework, that they'll believe that we won't go back to accelerating drilling, and then returning of that 70 to 80%, or free cash flow. So my guess is Robert, we need another one to two years. Also, we need somehow to reduce the volatility, when of all the industries in the s&p 500 We have the most volatile industry in regard to how commodity prices move around, especially oil from minus 37. As you know, almost three years ago, 135 last year, back to $70. Here recently, because of the banking crisis, we got to somehow have more stability, less volatile. In the commodity price cycle.
Robert Bryce 51:42
Well, okay. Fair enough. I'll grant you that. But this is a business that is defined by boom and bust. I mean, you know, I just challenge him on that a little bit, because I agree with you. But this is this is something that is the oil and gas industry, it's always been either fat times or lean times. Right. And it can you've seen this in your own career. Let me let me instead of arguing that point, let me ask you this since so you've been in the business 48 years, what's changed the most? What's changed the most in now? almost 50 years in the business? You know, starting in the 80s, or 70s, what would have been the biggest change over your lifetime in the business?
Scott Sheffield 52:22
Yeah, there's probably a couple others I'll answer. But there's one thing critical thing that left out our previous conversation. Yeah, the balance sheets among all companies are better off than I've seen in 50 years, less, less debt. So I don't think you'll ever have a bust. Again, if we have a bust. There will be very few bankruptcies in this industry. People have learned their lesson, they change their profile, the capital, discipline has definitely changed. And balance sheets have definitely improved. Better than I've seen it in regard to your global question, what I've seen, number one, we're still using 80 85% fossil fuels in the world, it's still probably the cheapest and most reliable energy source to expand the world's population. That's definitely has been consistent. Even though we've had the ESG movement. We've had the war in Ukraine. We've had energy security finally, come about the importance of energy security. That's the reason pioneer led the effort in regard to getting the export ban, we got the Obama administration to lift the export ban on crude because of energy security. So those are probably that's probably the biggest thing that has changed in my 40 to 50 years, is that we're still using as a world at 85%. Fossil fuels continuously, it's still the cheapest and most reliable energy source that we can use as a country and in the world.
Robert Bryce 53:57
So the thing that's changed is what hasn't changed, if I'm going to paraphrase, which
Scott Sheffield 54:01
Robert Bryce 54:03
Well. So let me ask I looked up your biography here. I didn't realize until I did a little homework here. Your dad was in the oil industry, and you went to high school in Tehran. So what was that? Like? I mean, this is a long time ago. Now obviously, we've since we're looking back at your history. What was that like? And would you like to go back to Iran?
Scott Sheffield 54:21
That's a good question. In fact, you're one of the few people I've come across it says it right Tehran. Most people say to Iran or Iran. So you've learned how to pronounce it correctly. I think the American and Iranian people have always loved each other. I would love to go back at some point in time. We have to figure out a way how to change the people that are willing Iran. The IRG, as you know, is a is one of the biggest issues and they're pretty much run pretty much all businesses,
Robert Bryce 54:56
geranium County and a Revolutionary Guard. Yeah, exactly.
Scott Sheffield 54:59
I am somehow we got to change. I mean, this this country decided a long time ago, in the 77 in the 1770s, to separate church and state. And somehow other countries, we gotta learn how to separate church and state. So we are hoping at some point in time that they will have a revolution of it's a peaceful revolution. And they can restore democracy in Iran. And yes, I would love to go back for some of the places Persepolis, Shiraz and other famous sites that I was not able to get to when I was there, a teenager. And so it's an exciting country. I think what's interesting is what MBS is doing in Saudi Arabia now. He's opening in that country. And I hope someday that Iran will be opened up. It's also interesting that, that China is the peacemaker. Now, as announced in the last few weeks, right, so China has brought Iran and Saudi back together, that's gonna be interesting Shiites. And Sunnis have been fighting since six, roughly 650 ad. And it's gonna be interesting to see how long it will last a little bit last a long time. But it's back to the IRG and how much they are spreading their their goals in regard to the cross all the way to Lebanon. I mean, Iran wanted to the rock. The recent articles about the 20 year Iraq War, are pointing toward and the fact that all we did was moved shifted Iraqis over to the rock. And so it's a puppet state of Iran. So it's very interesting history, watching what's happening in the Middle East today.
Robert Bryce 56:44
Yeah. Well, I'm not going to pretend to be an expert yet, but but I've been in Beirut and Hezbollah has influence in Beirut and over the Lebanese Government has been in effect for decades now. And there are whole sections in Beirut that that are controlled by Hezbollah, where the locals don't pay for electricity, which is one of the many problems in Lebanon. But that's a whole nother set of dinos. So we'll just one quick question. And we kind of covered this before. But so is Russian oil, then on permanent, permanent decline then because of what's going on in terms with the Ukraine war? And what what is it? Are you are you bearish on Russian production? And therefore, that contributes to your belief in OpEx? increasing strength?
Scott Sheffield 57:25
Yes, I've been very surprised how much Russia and oil has been delivered to China and to India, and through other sources, other countries, right. Secondly, Russia has announced a 5% cut, that's gonna be interesting to see if that cut really comes about. They really cut 5%, which is probably due to the fact that their products are being sanctioned now. And so it's really a cutback on the refining, which eventually goes back to the producing all the gas production in the country. Right, definitely lack of technology, lack of Western technology and lasting lack of capital. Most people predict that Russia production by 2030, probably somewhere in that seven to 9 million barrels a day down. That's down from 11. So 11, down to seven to nine by 2030. If it continues, I think the only way it can be restored Putin, there is peace ever again. Putin has to be removed. And a true democracy has to be restored inside Russia to reinstate any chance of any gas exports to Europe, or all oral exports to Europe, in my opinion.
Robert Bryce 58:39
Gotcha. So last two questions, Scott. And I and by the by the way, my guest is Scott Sheffield. He's the CEO of pioneer natural resources, you can find out more about email@example.com. It's psd.com. Two questions. I always ask my guests. What are you reading? What books are on the top of your, your lists these days?
Scott Sheffield 58:57
I just finished the map by Dan Yergin.
Robert Bryce 58:59
No, right? Yeah. The new map, right? Yeah, the Yeah,
Scott Sheffield 59:03
the new map. So there's a new book written by him. And that's probably already too much oil and gas material. So I have not read an outside oil and gas book, probably in a while. So I'm embarrassed to say that. So I'll stick with the new map by Dan Yergin.
Robert Bryce 59:25
I had him on the podcast. I liked it. I thought the book was interesting. But the most interesting chapter was the one on the nine dash map that went about China and why China considers the South China Sea, its territory and going back to that history of the map from the 1930s. I thought that was the
Scott Sheffield 59:40
which is going on, which is going on now. It's an issue with all the countries in Southeast Asia are building their own little islands to control that whole area.
Robert Bryce 59:50
Right. So last question, Scott. What there a lot of challenges. You've seen a lot of things in your career, what gives you hope
Scott Sheffield 1:00:02
What gives me hope, I'm Hope, what I hope that most people realize in the world, well, let me back up. We've done a, a poor job of educating people. I call it our industry, our associations, we've done a very poor job of educating the people. The reasons why our oil and gas industry should exist, and produce the products. Most people don't realize that 75% of the products in their home come from our industry. 75% of the medical products we use in our home come from our industry. And it's taken us years to get our act together to convince people that we need the oil and gas industry for a long period of time. And so I hope that the extremists will eventually come around and realize that our industry is needed for the next two or 3 billion people that are being born in this world as our population moves toward that nine 10 billion number. And that we can have a administration that realizes that we need all sources of energy in this country, a combination of wind, solar, nuclear, and the oil and gas industry. That's what I hope happens. That's what I wish for Robert.
Robert Bryce 1:01:25
Well, we'll stop there then. We've been talking for about an hour and I like to keep him at that link. So my guest has been Scott Sheffield. He's the CEO of pioneer Natural Resources, a Dallas based oil and gas firm. You can find out more about him and the firstname.lastname@example.org Scott, thanks a million for being on the power hungry podcast been fun.
Scott Sheffield 1:01:43
Thanks, Robert. It was very good. Thank you. And thanks to
Robert Bryce 1:01:46
all of you in podcast land, tune in for the next episode of the power hungry podcast. It might be as good as this one. Until then. See ya.