Jordan Blum, editorial director, Hart Energy: We are here at CERAWeek by S&P Global in Houston. I'm joined by Pat Jelinek, EY Americas’ oil and gas leader. Thank you so much for joining us. I just wanted to get into some Lower 48 shale trends. There is a lot of consolidation/M&A going on. Just to name a few, Exxon-Pioneer, Chevron-Hess, Occidental-CrownQuest, Diamondback-Endeavor. You want to see gas, Chesapeake-Southwestern. I just wanted to get your take on why the rapid consolidation and what is next.

Pat Jelinek, oil and gas leader, EY Americas: What is next will be a great question. My guess is more. But I appreciate the time, I appreciate the dialogue. I do think it goes along with a lot of themes we're hearing this week, which is that the story going forward, it's not just energy transition, it's energy transition and decarbonization. I think as you look at some of the macro themes around the need for more production and more security at a global level, then ultimately how to get to decarbonization. I think you've seen a lot of things work into this. You have more believability and the longevity of the assets themselves, and you start to get at how do you optimize all the lessons learned over the last 10 years, the COVID-19 cycle, the policy cycle and all the other pieces. I think what you're seeing is there is a willingness to do more, but scale matters. It starts to drive down your cost, you can invest in things like decarbonization at scale, you can better optimize runs of longer lengths so you can get more return on investment and then also you have the opportunity to better hedge. So I think Lower 48 for a lot of foreign money as well as local money, it's an agile resource. It's something you can spin up and spin down. It's something that you can actually intrinsically monitor performance on a more real-time basis. So the capital cycles are a lot easier to get around as well.

JB: Very good. So you touched on it a little bit with production and security in the U.S. — we're essentially at or near record highs for oil and gas— but there's fewer producers with the M&A rig count way down. So how do you see that playing production out going forward?

PJ: I think with the consolidation, there's a couple pieces of that constraint structure. I would say the asset itself allows for more market timing, so people can dial in if it's a resource concern, if there's a safety concern, if there's anything else, they can actually self-monitor a lot easier. The balance sheets are a lot stronger, so they have that ability to sit on some of this to time the market a little better. The market returns, the stronger balance sheets and ultimately it's a bit about monitoring constraints as well. With all the different policy changes happening on a real-time basis — you look at all the elections this cycle and candidly things like permitting constraints. I think you're constantly trying to assess what the infrastructure is looking like, what is the play down to the hub and how do you best time some of those things coupled with basic capex and opex targets.

JB: Right. So maybe with low natural gas prices, you're building up DUCs and waiting to pull the trigger later.

PJ: That's exactly right.

JB: Very good. Obviously one of the themes here, there's a lot of, like you said, energy transition talk, but maybe it's a little more focused on the decarbonization side. How are we on the timeline there? People aren't saying natural gas is a bridge fuel anymore.

PJ: No and honestly I think you're starting to get to decarbonized or lower intensity hydrocarbons of all kinds are actually necessary. So I think what we're starting to see is there's been a lot of drive, there's been a lot of incentives. You specifically look at the IRA to try to push more on the renewables and more on the green tech side, but the reality is there is equal investment and innovation around decarbonization. So with balancing affordability and balancing security, you're starting to realize that hydrocarbons are valued. Coal is still growing, the growth of AI, the growth of cloud consumption that drives more energy demand. And then you look at the constraints on the infrastructure, the distribution networks for all these alternatives, the capital cycles and the returns on a lot of them, investors are wanting more. It's a combination of all those macro forces that are saying decarbonization is probably every bit, if not more important in the near term than transition. We need to operate at multiple speeds. The “and” discussion that was kind of introduced last year around it's not one solution, it's the “and”.  Geothermal, hydrogen, nuclear, all of these topics are actually at scale as are the consortium of partners that are coming to the market.

JB: You hear a lot of hydrogen talk, you hear lithium talk. I know one of the things that Darren Woods from Exxon likes to say is ‘We're not going to do wind and solar, but we're going to do hydrogen, lithium, maybe other carbon capture other things in the molecule business, not the electron business.’

PJ: Everybody has different strategies, but it was interesting with that talk where he also said, ‘It's not that wind and solar are bad things, it's just not what they want to focus on.’ I think that there's an appreciation is actually accretive, and ultimately the markets will play itself out. A lot of those new startup efforts do take an immense amount of incentives. You look at some of the inflation around the world and some of the concerns around taxation. I think even policy itself is trying to govern what can be accomplished when. But the great news is that decarbonization is happening now, and I think that you look at the hydrogen hubs, you look at some of these other efforts that are really going to prove out what can happen at scale and what a localized effect it will have in terms of what do we have for infrastructure, what is able to get to market, how do we get to net zero as the ambition, balancing what we can affordably control.

JB: Looking at just end use when it comes to transportation and the debate over the timeline for rapid deployment of EVs [electric vehicles]. Sure I've seen a few Tesla cyber trucks lately, but that's not necessarily commonplace. Maybe China and Norway are taking off, but there's a lag here [U.S.]

PJ: There's lots of opportunities here and ultimately I am personally supportive of lifecycle assessments on a lot of these things because I do think data and transparency around what really is gained in any of these ventures, they're all fantastic, again, “and” is valuable. But I think building that believability and then ultimately getting into, there's a lot of infrastructure that is going to have to come with more EV adoption, and you see that in some of the markets that are more mature. Some of those markets in China that are almost exclusively EV. There was a lot of investment to build out to get the consumer comfortable with that option. So everything is a combination of what does the consumer need, what's the geographic offering, and if you're a long haul trucker, obviously the physics doesn't work in terms of how to make that work. Alternatives are going to be needed along the way as well.

JB: Yeah it seems like obviously politically there's a lot of debate over the LNG pause and different partisan things, but everybody seems to at least be embracing all of the above approach. Does that seem accurate?

PJ: I think the Secretary of Energy covered it in her opening remarks on her lunch panel, which was the pause, was a pause of assessment. I think everybody believes, in Europe specifically, that LNG is a green vehicle. It's better than coal, it's better than a lot of other options. All the infrastructure that is happening now due to the war in Ukraine and others, all the disruptions that are happening in Europe and the Red Sea, there's more infrastructure going into regas terminals than the others. So again, that optionality is going to be out there. It's an abundant resource. It's cleaner than a lot of the options that are still being grown today, so it makes a lot of sense.

JB: Thank you so much for joining us here at CERAWeek. I really appreciate it. To read and watch more, please visit online at hartenergy.com.

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