Jordan Blum, editorial director, Hart Energy: We're here at NAPE in downtown Houston. I'm joined by Luciano Di Fiori, partner with McKinsey and Co. Thank you so much for joining us here today. I just wanted to get into some LNG talk to start a bit of a dichotomy, and recently in the news there's the Biden administrative pause on new permitting, but also you're talking about the LNG markets potentially being essentially oversupplied for the next few years. Can I get you to elaborate on the situation there?

Luciano Di Fiori, partner, McKinsey and Co.: Absolutely. Thank you. First of all. Thank you, Jordan. Yes. Let me clarify a little bit, some of that. Can't comment what the administration is doing, but if I think about the market, the market has historically been over the last two years, especially with the war in Ukraine, structurally imbalanced, that we had more demand than supply, and that has created a little bit of attention on the LNG markets globally, as well as some implications for pricing here in the U.S. That being said, there's a lot of projects that are being built over the next three to four years that are going to come online and add supply into the market, and we believe there's more supply coming into the market than demand, which will shift the market from being short to being long oversupplied for somewhere in the other five to 10 years. Then in 10 years what happens is demand continues to grow, and we're going to go back to being short supply and we need new capacity to come to that. And the reason why I bring this up is it's okay that the band today is fine because we don't expect to see a lot more projects coming online or going through FID (final investment decision) in the next few years. But we would need some of those projects to get final investment decision in say, five to six years so they can be ready when the market becomes short again.

JB: Very good. And we're talking about all the projects being built or about to be built. We're mostly focused on the U.S. Gulf Coast. I know there's some other projects elsewhere.

LF: Yeah, so when we look at the potential cost of this new supply, certainly Qatar is one of the cheapest costs, but they manage their capacity expansion and they tend to communicate that very upfront, right. In fact, they're going through one of those now. But when you look at the other projects, U.S. Gulf Coast in particular is very well positioned to serve the global market, meaning they're lower price, a lower cost capacity that could come online. There's some other North American places, so there's west coast of Mexico, which is effectively fed a lot by the U.S. gas market as well. And there's the west coast in Canada as well that has the advantage to being closer to the end markets in Asia.

JB: Very good. And I know in the U.S. production, there's some midstream constraints we’re talking about, but is there a lot of confidence on just the production supply from Permian, Appalachia, Haynesville?

LF: Yeah, there's definitely constraints. In fact, we talked a little bit about that in our presentation here. If there weren't constraints, what would happen? We'll get the cheapest possible gas, which tends to be Appalachia coming down into the U.S. Gulf and the LNG facilities. We are bottlenecked, we're constrained, and it's not easy. It's very difficult to build new pipeline capacity coming online, so you have to rely on other sources. Permian continues to grow and it's associated gas, so oil prices and oil production will drive quite a bit more gas coming in there, but you need to rely on other places. Think about Haynesville, which tend to be higher cost than Marcellus and Utica, than Appalachia, but has quite a bit of productivity and it's very well geographically located close to the U.S. Gulf Coast. But then you'll have to rely some more Midcontinent, some more Rockies, and potentially even some gas coming from Canada all the way down to replace the gas that would have come from Appalachia because of constraints cannot come all the way down. So it becomes a little bit more of an inefficient market instead of a more efficient market. Probably we have some implication on pricing for Henry Hub because you're now tapping into higher cost resources instead of the cheapest potential resource.

JB: I'm sure the producers don't mind that. Overall, and I know there's a lot of uncertainty, but with a lot of gas coming from the Permian and other more liquid rich places, does that almost make gas a little overly dependent on oil production or is that not a concern?

LF: It's a good question because we showed a chart that said that around 50% of production would come from Appalachia plus Permian. And as you said, the Permian production is really tied to oil prices. When oil prices fell the last few cycles, it does then affect the amount of associated gas coming out of that. And what that means is if we start to dry out some of that associated gas because low oil prices, you need to have more gas rigs or rigs drilling for gas to come into the system. Right. So to answer your question, partially, yes, we are relying more on oil. Gas is now relying a little bit on oil because of the amount of associated gas, but it could tap into other gas plays if you need to. If that associated gas is not there in the market, it could probably drive a little bit of pricing because again, you're going from effectively what is free or very cheap gas, associated gas to something that you need to drill for. But there is plenty of available resources on gas to actually make up for that balance if we need.

JB: Very good. Well, thank you so much for joining us here today at NAPE in Houston. Really appreciate it. To read and watch more, please visit online at hartenergy.com.

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