Chuck Yates Needs A Job

0:19 Hey everybody, welcome to Chuck Yates needs a job. The podcast, investigative journalism today. I like that. My guest is Nathan Magu from BASA. Did you know, I mean, you and I have known each

0:32 other, got 20 years, something like that, who was literally what, three weeks ago when we had dinner that I knew what BASA actually stood for. Yeah, it's very, very technical. For sure. I

0:44 like that Now, before we jump in, because we're going to talk about actually some real stuff today, but before we do that, give a little bit of your background because you have one of the most

0:53 fascinating backgrounds of anyone I know. I think you were 12 years old running a commercial bank. Is that right? No, so I started my career at Capital One and I had the crazy opportunity to start

1:05 there when I was, actually I got my offer to start there when I was 17. And are you in high school at the time? No, I was in college. I was in my freshman year of college I graduated high school

1:15 when I was 16, started college at 16. And so it was like spring semester and a college recruiter came from Capital One. They had bought a small auto finance company and they were college recruiting

1:25 for it. And so my professor at the time gave him my name and they called me and took me to lunch. And I was like, you know, no one's ever offered to buy me lunch with my parents probably. So I

1:36 was like, wow, that's great. So I went in for testing and then I got an offer and I thought I was, you know, gonna be the king of the world when I saw the offer - But this was like a full-time

1:47 real job, right - Yeah, it was a risk position. And so once I filled out all the paperwork and they realized it was 17, I think they assumed that I was 20 or so. I didn't look at it definitely,

1:59 but I guess because of the class that I'd been recruited from. And so I got the offer and filled out the paperwork and they go, oh, wait, you're 17. We can't hire a 17 year old for this position.

2:12 So

2:14 Anyway, basically they made an agreement where they said, we want to continue, we want to hire you, we want to honor the offer, but you can start after your 18th birthday. And so I turned 18 in

2:23 September and started four days later, I guess, like October 1st. And subsequently spent four years there as they were growing this auto finance business historically capital one was all card. And

2:35 so they were under this sort of diversify out of purely being subprime card. And so they bought subprime auto. And so that's where I spent most of my time And over four years that I was there, I

2:45 think I had five or six promotions, it was pretty incredible. So just a lot of growth and a lot of opportunity to learn and take on tasks that an 18, 19 year old would have never probably been able

2:56 to take on otherwise. And just - Did you ever have to repo a car - Yeah, well, so I never directly worked in repo, but I was in loan servicing for quite a long time. And so my last title was

3:11 manager of risk operations And so risk included, you know. all these loan servicing activities. And so every once in a while, calls from repossession, accounts that were in repossession would get

3:23 circulated around for training purposes and stuff. So I heard them, I knew I was aware of them, acutely aware of interesting stories that you wouldn't believe in - Oh, that's awesome - People

3:34 trying to avoid repossession or people tying chaining dogs to their cars or hiding their cars and all kinds of stuff - So how'd you, so you're there, your loan shark car guy, how do you get an oil

3:45 and gas - So my best friend we met, his name's Brady, and we met literally our first day of college. We're in a psychology class and just kind of introduced ourselves to one another. And so we

3:59 became really good friends and we would hang out and I was, you know, doing really well at Capital One and he was continuing on in school and his father was one of the two co-founders of BASA. And

4:09 so we got to know one another And he just said, you know, I'd love to. have you come in and look at what we're doing and, you know, what my dad's company's doing and see if, you know, we've got

4:19 some ideas, maybe you come up with some ideas. And, and so I got in there and most of my career capital one was involved in analytics, pretty deep analytics. And so got in and I said, you know,

4:31 let me if you'll open things up to me and let me see them and they did in a way that I don't think outsiders had ever kind of seen what they were doing. And I just saw some opportunities that I

4:41 thought might be in rusting. And one of those was diversifying the cap stack to include some private equity. And so we did that and I hold you then when you're 21 probably. Okay. Yeah. So I was,

4:55 I was very young and I'll never forget. I called the, the attorney who built our first private equity structure for us and, you know, had done a lot of similar structures in the past. And I went

5:07 to the first meeting with him and I was like 21 years old. And is probably like who is this kid. And similar story with. some guys that you know, so our bank, lead bank at the time was being

5:18 prepared by. And so I go in and Brian and, and Gabe Elisor and these guys I'm meeting with and they're like, who's, who's kid is it? So exactly. And, and so now, you know, now we've all been

5:31 friends for 20 years, 18, 19, 20 years as well. So that's how I got in the business. And then, and then once I joined up with the guys and joined the base of team, I love the business. There's

5:42 a lot of opportunities, especially in what we do to get a hold of levers and move things that are meaningful and create value. And, and so once I joined in with them, I just over time took on more

5:55 and more that I had no experience with. But, you know, whether it be marketing or hedging or, you know, whatever the case may be electricity, some we're going to spend some time on today was one

6:05 of those things. So it didn't really fit a bucket for a geologist and engineer, a normal kind of technical oil and gas person And really it's just something that someone needed to pay attention to

6:16 and learn because it was our largest portion of our LOE. It represents 50 of our operating costs in the field. So I've got a whole soapbox that I'm gonna do something on this summer 'cause I think

6:26 one of the biggest problems we have recruiting people into this industry and you're like a poster boy for it is, we have this whole thing about tenure. I have 127 years of experience And therefore

6:40 this as opposed to what young kids can do with an iPhone and data. And you're kind of gonna be my poster boy on. Well, let's give a young smart person access to data. Look what they can go figure

6:54 out. You throw smart around loosely, but young, young, I fit the bill for it. But in the world of the blind, the one I demand King. So yeah. I mean, another great example of that would be the

7:05 Rice Brothers, you know, Danny and Toby are guys I've known for since 2012. We had the opportunity to hang out together in 2012 and get to know one another. And then I saw them after that, grow

7:16 rice and go through the EQT stuff. And then they're still doing a lot of, they're doing stuff outside of EQT as well, the family side. And that's all really interesting. And their whole approach

7:26 has just been, let's forget all that that's the way we've always done it. And that's something that I learned early in my work at Capital One, we bought this old company, this very small company

7:39 that was family owned. And everyone was kind of setting their way as doing stuff. And so you had all these new folks come in from Capital One and go, why are we doing it that way? And based on

7:51 some opportunities like that too. And we find those opportunities every day. And so - Hang on real quick, 'cause I have to do this every time. I'll look at the camera - Toby, I love you, but

8:00 Ryan is my favorite rice brother - You know, Ryan - I didn't even mention Ryan - Right, right - So the Danny's daughter is in my daughter's greatest. same school. So they moved from Pennsylvania

8:12 down to Dallas. And so we see each other football games and stuff like that. Big fan of the Rice Brothers. I've got great stories that will tell offline. Perfect. Perfect. But no, so tell me

8:24 about kind of base and what kind of asset you'll buy and stuff because I think that's important to the story we're about to talk through. Sure Well, are consistently looking for acquiring and

8:37 operating mature, primarily oil weighted, primarily water flood type assets. So if you said, what does your average well look like, I would say it was drilled in 1950 and makes three barrels of

8:48 oil a day and 300 barrels of water and it's in a water flood and it's 3600 feet deep, you know, something along those lines. So just for reference, you know, old famously, Texas field, we own

8:60 them, but we're the largest owner operator in the old East Texas field today. And then we have several of the water floods scattered across Texas. Historically, we've operated and Oklahoma, New

9:10 Mexico, Louisiana, and Texas, and we've divested of all of the other states over the last several years. And today we're solely in Texas, we operate, own and operate 6, 000 wells here. The

9:21 majority of what we own and operate, we own and operate on the company's own account. But we do have a couple of private equity partnerships that invest alongside us as well. So I know your lawyers

9:31 will freak out if you talked about that and all. So I'll brag about you. You guys kicked ass. I mean, I don't even know if I can confirm that. Yeah, exactly. You just sit there. You sit there.

9:42 Don't don't move, don't nod or whatever. But you guys did a really good job because on, I think three fronts, one, it seems like y'all always bought right to operational y'all do as well as

9:55 anyone out there on stuff. And you guys haven't been shy to sell something when you need to, you know, yeah, yeah. And we, you know, basis stands for you alluded to this - That's right - The

10:05 highly technical basis. stands for buy and sell anything, or some people say buy anything, sell anything. So, you know, but historically, I would say we're primarily buyers. We spend, you

10:16 know, most of our time trying to figure out, you know, what the next asset we wanna go after is. And it's, you know, so I've been sitting in the seat for 18, 19 years, and so many of the

10:28 assets that we have bought, it's kind of funny how things work out that we've eventually bought, where assets that maybe we looked at it some time long ago, and then, you know, we missed it. And

10:39 one of our other buddies like Len Energy or somebody like that wanted, and then later we ended up with it. Or, you know, that we made 17 unseless. One particular asset, I think we made 17

10:50 unseless that it offers on, and we ended up finally acquiring it in 2020, 2021. So, you know, we just stay, you know, consistent. We never chase the shale, we never chase the resource plays

11:03 wasn't, you know, we kind of. kept it simple, stupid effectively. So, you know, stuck with what we knew and what we did well, and we typically follow and have had our best successes, probably

11:14 following behind the majors. So we buy old mature assets from Exxon, Chevron. I think we bought from each of them at least eight or nine times. And so, you know, just buy stuff that's really not

11:27 critical - I get that question a lot on a management team. What makes a good management team? And the thing I saw from my 20 years of finance and folks, it's like people that stick to their

11:39 knitting, that understand what they do well, and just focus on that. 'Cause it's always when you get outside of what you know, that you're kind of just falling into unknown land, you know -

11:51 Absolutely. I mean, there's so many nuances to our business, and you get people all the time, obviously, in the boom times. You get your buddies in real estate that say, Hey, I want to get in

11:59 oil and gas, there's like I'm And stuff this all and,

12:02 so many nuances to our business. We're going to talk about electricity today for crying out loud. Most people when they think about oil and gas don't think about electricity, but it's for a group

12:10 like us that's moving a ton of fluid a day every day.

12:15 Electricity is our largest cost. Somebody needs to know about electricity and spend the time to do that. That's just one small facet and then regulatory changes that are constantly happening and

12:26 some of them very quickly and with breadth of impact effectively to the work that we do every day or the way that it's been done historically. There's a lot to it and the business, I think if you're

12:41 trying to do all of those things and learn a new aspect of it or do something different, we have tons of friends who've made a ton of money and been very successful in resource plays.

12:54 I look at buddies like Gabe Elisor. They're three rivers. It's filled a couple of three times in a row Sometimes you sit

13:02 in your seat and go, gosh, we should have done that. And some of those deals we had opportunities on. And we've seen deals that we passed on because they were resource driven opportunities. And

13:12 then somebody else bought them for X and sold it for 4X three years later. And we're like, you know, dang, we should have done that. But - You see that in the casino a lot too - Exactly - I

13:22 should have gone to play flag jagger, shoot craps with them. So yeah - Right. So at the end of the day, you know, for us, it's everything we do is to try to, you know, buy assets that we know

13:33 and understand. And then we try to manage out as many of the variables as possible. So we have a very active hedging strategy that starts with every time we acquire an asset, we hedge at least 50

13:45 through our forecasted payout plus some return. So we have a rate of return target. And so, you know, we're often buying an asset and hedging 50 of the production for five years, six years. We

13:58 do think sometimes like, will buy out of the money calls above our swaps. because, and it's one of those things, I say this about a lot of stuff that we do. You know, most of what we do that

14:11 really works well, we didn't do right the first time, and it wasn't, we were sitting around, we had some brilliant idea, but it was, we fell, scraped our knees, and said we're not gonna do

14:18 that again, and that was 2008, it was 147 in July, and we have 30 hedges from a deal that we bought in 2003. And so our settlements are through the roof every month, and we got, you know, if we

14:30 had just bought some 80 calls, one of them was 30, they would have cost zero at all - Five cents - Yeah, and so, you know, we would, and what ends up happening obviously, is field costs start

14:43 to go up, and they creep up with oil prices, and so you can, in effect, get margin squeeze some, you know, or your margin does get squeezed as a result of your, your LOE going up, and your

14:55 revenue being fixed by the hedges. So we do stuff like that, and we hedge all our electricity - What I always said when I was in the. the seed is, I can't tell you what to do, but I can tell you

15:08 what not to do 'cause of things we screwed up, you know? I mean, your mistakes are your biggest teachers - Absolutely - So let's do this,

15:16 'cause you and I went and ate dinner what, about three weeks ago, four weeks ago, and you told me a story, and I haven't seen anything in the press on this. I really haven't heard it talked about

15:26 in the industry, and so I was kind of sitting there at dinner, shocked about it, that it hasn't been a bigger deal So walk me through kind of what happened during winter storm, Yuri, and for

15:38 those out there listening, that's when Urkot almost went down, we had whatever, the week and a half, of where, you know, all hell broke loose. Was that February of '21 - It was February of '21,

15:51 yeah - February - So it started Valentine's Day all day enough, so February 14th was a Sunday, and, you know, all of a sudden, as the day, and we knew this. earlier the week before we knew that

16:04 this was coming. Everyone knew it was coming. To what extent, obviously, we didn't really know. But electricity companies that we, their counterparties to us were talking about it the week

16:14 before they were going out and procuring reserves and things like that, knowing that it was going to be a pretty bad week. But the night of the 14th is when it really started to get bad and folks

16:25 started to experience loss of power just with grid issues as temperatures, I mean, sustained temperatures over that week of sub 10 degrees in a lot of places across the state. And so anyway,

16:39 Urcott in their normal emergency response protocol called an EA one.

16:47 So an electricity emergency or energy emergency level. That's good for shit hitting the fan That's the first level of the shit is hitting the fan. So that's like when you see, Hey, change the

17:00 temperature on your thermostats and

17:03 conserve individual messages to folks to conserve power. It's on the news. Use a blanket. Put on a sweater. Exactly. Then, EEA2 is the next level. EEA2 got called Monday morning at 1am, call

17:19 it

17:21 EEA2 is when what are called responsive reserves or load acting as a reserve. It's large and acronym that's used a lot load acting as a reserve

17:35 when those assets get deployed. So effectively, we have all these assets that

17:42 huge oil and gas leases and units that produce tons of fluid, lots of horsepower running. Big huge plumbing operations that need a lot of power to run pumps and. Exactly. Pumps with 500 horsepower

17:54 motors on the surface, re-injecting the water that we've produced, and then.

18:00 copious amounts of pumps, downhole pumps, and beam pumping units that are producing the oil. So

18:07 we're enrolled in the system called LAR, or Responsive Reserve, with Urkot, where we have mechanical devices on the grid effectively coming into our properties. So you have what's called an

18:22 under-frequency relay. And that when the frequency of the grid starts to drop, it will cut our power. And it's just when the frequency that the grid is operating on is falling, that's a failure

18:34 effectively within the grid. So we're assigned that there's trouble on the grid. And so that can cut our power. And then we have these remote operated reclosures, which is basically like a big

18:45 circuit breaker that you would have in your house, but much, much larger that's remote controlled. And so they send a control signal to our sites to shut them down. So it opens the breakers and no

18:55 power flows to our assets. And so we have. on any given day about 36 and a half megawatts of power

19:06 in that system and available for ERCOT to call on if they need it. And so, and we're one of thousands of folks who participate in this program. Oxy, for example, I can't prove it, but I hear

19:20 that their number's about 600 megawatts that they have in the system. Again, ours is 36 and a half or so. I've heard of patches around 20 and they've had more in the past before asset sales and

19:31 things, but lots of oil and gas operators who are operating mature properties that have a significant load like ours do are in the system. And so, Monday morning, that EEA2 got called, which

19:46 means Laura gets deployed, which means all of our assets got shut down. So, everything's shut down - And just real quick, so Laura is a voluntary program - It's a voluntary program. when the

20:01 Winter Storm Yuri hit its voluntary program and does our cop pay you to shut down or pay you for the right to shut you down whenever they want? That's right. So you bid in a volume of some quantity

20:14 of power that you have available and that you have this appropriate telemetry and control on. So when you, if you're going to get into the system, you go and acquire all of this equipment

20:28 effectively And you set it at each of your sites that you're going to enroll and you test it and then you enroll it with our cop. And then you bid that power in each day for in a day head market for

20:39 the following day. And then you get paid a market rate for that. So generators are buying replacement reserves and a reserve power. And so they're buying from you, but it's all coordinated through

20:52 our cop. So there's a market price for it. And that market price fluctuates and so on. in the shoulder months in the spring and fall, it may be worth 5 a megawatt hour. And in

21:08 the heat of the summer, it could be 1, 000 a megawatt hour. There's no cap on it. Like there has been on electricity at prices in the past. And so during Winter Storm Fury, we saw it trading at

21:20 like 18 to 20, 000 an hour per megawatt hour So obviously pretty expensive and the reason why it was so expensive is there was none available, none to be bought. And historically we've had - So

21:35 just to make sure I understand and my mom listens to this, every once in a while, we've got to do the simple down punchline for mom. This is the airline's full and they're giving you a first class

21:49 seat and 300 to take the next flight basically. That's what our cart's doing. That's a great way to think about it Yeah, it's effectively, you're getting paid. to give them the ability to take

21:59 your power offline. And what that does in effect for the grid is it's the same as firing a generation - Right, yeah - But immediate - Right, unlike, you gotta go out and you gotta do all this

22:10 stuff. It's literally flip a switch and there's 30, in our case, just with our assets, there's 36 and a half megawatts in the market immediately available for households and whoever else needs it.

22:22 And so that morning it got called, it's been, we've had a lower event almost every year We'll have one, even maybe two. Typically they last a couple of hours. So it's a hot July, August evening,

22:37 five o'clock in the afternoon, the hottest part of the day, whatever. And we'll go down for a couple of hours is what's happened historically. There's never been a time that I know of in the 20

22:47 years that we've been involved in this, where an Urca or a lower event crossed a calendar day boundary. Well, in this case, it was 43 days I called it 130. Monday morning and then they recalled

22:60 it, so they deployed it and then they recalled it Friday morning at like 930. So for that, for over four day period, everybody that was enrolled in law was off. How big is that market, the law

23:15 market back then? Back then it was like three gigawatts, so 3, 000 megawatts or 3 million kilowatts in power that was getting bit in. Okay, and

23:28 so I've never been a power guy, but I read this somewhere. I think the biggest draw, this bottle's been messed up and I literally sat it down and it spilled water all over, but fortunately it

23:38 didn't hit any of the equipment. But, yeah, so I was reading someplace and does this sound right that the biggest raw Urquot's ever had on the system was I think 75 gigawatts and that was I think

23:53 August of 2019. So you've got. three gigawatts participating in this program and Biggest Drawer 75. What's the average gigawatt on the ERCOT system? It's like 40. If you pulled it up right now,

24:09 it's probably 40-ish. Okay. So I think for March, the average was right around 40 gigawatts of load around the clock. Okay. Yeah. So three out of 40, I mean, you're what, 7, 8, something

24:22 like that. So it's a meaningful amount. And at the end of the day, what we heard consistently, and it was all over the news and everything else, and all the reports UT put out a report,

24:34 University of Houston put out a report, Comptroller's office has a report. There's lots of reports on what happened during winter start and year. And pretty much everyone points to that the grid

24:44 was minutes away from complete and utter disaster that might have taken a very long time to recover from. You hear weeks, months, whatever and so we can't fathom what it would like what it would

24:54 what that would like for our grid to be down for months. Right. What do you do?

25:03 So this is in my mind and I think historically the pricing, people are willing to pay for this, right? So it's worth something. It's valuable. It's at the end of the day the Hurkot's job and as

25:15 indicated by the R and Hurkot is reliability of the grid, right? And so this is a tool that helps enhance the reliability of the grid. It gives you, you know, all these folks that are running

25:27 consistently are load the shape of our load is flat, right? These pumps run 247. They don't they don't care whether it's hot or cold. They run, right? They don't care if it's not an awful sweat.

25:37 The lights are on or whatever. Yeah. Exactly. So it's perfect. It's like base load generation effectively. It's always there. It's always available. They flip a switch and they have our load

25:47 into the grid to give to somebody else who needs it more. And I think we would all agree that during winter storm year, there were plenty of people that needed more than oil producers right at the

25:58 end of the day. And so, I mean, look, it cost us a ton to have all of these assets down for four and a half days. And it's not just the cost of the lost production. It's the cost of the failure

26:09 of the equipment from being down. The equipment wants to run. It runs best when it's running consistently. And so, well, what does the temperature do? Because, I mean, at the end of the day,

26:19 stuff comes out of the ground hot. But, I mean, I knew at my house, I turned on a faucet to keep the water running during a freeze. Right. So, similarly, in our case, you would want things to

26:34 run. So, if you're not running, as you have mentioned, the water's coming out of the ground. In our case, let's say it's 105 degrees. It's moving through the system pretty quickly. So, in a

26:46 lot of cases, we're moving a hundred times the amount of fluid that we're actually relative to the oil production that And so we have fields that are producing hundreds of thousands of barrels of

26:58 water a day. 1 of water, okay. 1 of water, yeah. A little cut, yeah. So if it was 1 of water,

27:06 we could be shooting this on the back of a yacht somewhere. But anyway, so we're moving lots of fluid and the fluid is moving to the system very quickly. It's not sitting in any one place very long

27:15 and it's salt water. So obviously, well, maybe not obviously, but salt water has a much lower freezing point than freshwater. And so we always think, like we all learned in school, standard 32

27:28 degrees for freezing water, but most of the salt water that exists in the oil patch is probably around 12 to 15 degrees would be the freezing point. And so to get from 105 degrees that's coming out

27:41 of the ground at sub 12, it's going to have to sit somewhere for a while. But just flowing through pipes for a few hundred yards here and there, through a pump and right back out into the ground.

27:53 or sitting in a tank that turns over five, six times a day with fresh hot water coming in all day.

28:03 If everything is running, everything works. And then the areas, so we have production outside of Barakat in Texas. Barakat covers about 90 of Texas, and then you've got areas in East Texas, and

28:15 then the panhandle and El Paso that are not part of Barakat. And so our properties that aren't part of Barakat aren't enrolled in law And ran the entire time, and nothing broke. You know? But the

28:28 properties that are involved in law are enrolled in law that were shut down. You know, all this water sits in these pipes, freezes, obviously. We were definitely sub 12 and 15 degrees for some

28:38 period of time. And as it's freezing, then you get into the same issues that you'd have in your home. Pipes break, headers, you know, all of the equipment has the potential to fail as a result

28:50 of this water freezing process and then thought later. And so we didn't, I mean, we were very fortunate. We didn't lose a ton of equipment, but we're, we're almost guaranteed to lose a couple of

29:01 pumps every time we go down. When I say pumps, I'm talking like electric smershable pumps. So down hole pumps that, you know, 30, 40, 50, 000 a shot plus labor rig time, etc, to replace them

29:14 and then lost production. And that just happens because the pumps don't want to be shut off abruptly and then fired back up after sitting there And if you have any kind of suspended solids in the

29:24 fluid column that settle down the fluid column is it sitting there back into the pump and then you fire it up and just doesn't doesn't work out always the best. So, so we want to run. But there's a,

29:36 the economic value of being enrolled in large offsets the, the opportunity that that we could lose some equipment here and there. And it's typically never been more than for a couple of hours. So

29:48 the loss production hasn't really ever been that great. In this case, obviously or 43 days it was, it was a different deal. But so we go down and stay down. But our cut needed the power then.

29:60 Absolutely. They really did. And so do you have any idea kind of magnitude wise, whether it's you going down or everybody in the law or program going down what that kind of meant in terms of other

30:14 people that got to use the power, whether that's, I don't even know what we'd talk about. Household or something like that Yeah, so there's some metrics that are widely accepted, I suppose. So

30:24 when you think about, when I think about our load, 35, 36, 36 and a half megawatts of power,

30:33 it's probably approaching 30, 000 households. Somewhere in the order of 30, 000 households. And then for 36 megawatts and the entire market is three gigawatts then multiply that by eight town or

30:50 yeah whatever oh yeah yeah yeah yeah Exactly. So now we're talking, I mean, even just like, let's say someone like Oxy who, let's say they're 600, or let's say the 700 megawatts that are missing

31:03 today from war, that went from about three gigs down to about 23 gigs. So that's 700 is missing, it's over half a million rooftops. Based on kind of widely accepted standard average utilization

31:16 for electricity. So that's a good size town. Right I could have stayed on because of this quantity. To run their heating, all the stuff that electricity does. Exactly. And so,

31:32 I don't know that I want shots fired at me for saying what happened, but I think some facts. Because I went on the websites, and basically, they record wind speeds during periods of time So while

31:50 that mess was going on. I was looking through that and what I don't think people appreciate necessarily about wind power and like last month wind power made what 50 of the electricity on the grid. I

32:02 mean, it's not insignificant. Texas is a wind state. Absolutely. You know, whenever they talk about the generating capacity wind, it's the name plate. And name plate means like 25 miles per

32:14 hour wind, 25 to 30. Consistently. Consistology. Yeah. Yeah And you can't go above certain, you know, you can't get certain miles per hour else. It doesn't work. And I think to even produce a

32:30 little bit of electricity, it's got to be at least 10 or 12 miles per hour. So you kind of have this spot. So one of the things I did is I went and looked at Amarillo, Abilene, I'm forgetting the

32:41 name of the county that's kind of just west of college station that has all the wind power in it. And then the largest wind power.

32:53 developments in South Texas. And so I looked at all that. And if you look at kind of, 'cause I give you eight hour blocks of wind average speed, there was only one or two eight hour blocks in any

33:06 of those areas where the wind speed was above 12 miles per hour. So you had kind of the shutdown of wind. And I'm not trash, I promise, I'm not trashing wind on this. I'm just saying that was a

33:19 fact So wind didn't show up. I think another big measure that happened is natural gas has water in it and it froze. So we just didn't have the natural gas production that we normally have. And so a

33:33 lot of our, what is it, a third of our electricity is generated from natural gas, something like that. So when you don't have the delivery there, as well as natural gas, I believe, gets

33:44 prioritized to houses, to heat houses as opposed to power generation So you did have that as a. as an issue there. Although one quick side note, I don't know if I told you this at dinner the other

33:56 night, you know, a nuclear power plant shut down during that whole mess because a sensor that measured the water temperature of the wastewater coming out failed. And so they have to shut down

34:11 because of that. Supposedly one of the engineers in there was like, Hey guys, I'll just stick my hand in the water. It's pretty freaking cold. When it warms up, I'll tell you, we'll shut in

34:20 then Yeah, anyway, can't do that. So I saw that stat actually. I was just going through what had failed and you don't expect nuclear to go down, right? Right. It's pretty stable power. So when

34:33 I saw that, I didn't dig as deep as you did. I didn't see what the exact root of the issue was. But no, it's fine. Yeah, it's cold. Now we're good. Yeah, no meltdown happening here. So, you

34:43 know, when I think in March, it was like 40 or so of 35 of

34:49 the power generation for the state of Texas and natural gases call it 30, right? We all had problems. It was the perfect storm, so to speak, and it was very uncomfortable for everyone, and it

35:02 caused a lot of damage, and it was a lot of. If it could go wrong, it did go wrong. And we just haven't seen that in. That I recall. I mean, I don't ever remember a time when it stayed that

35:11 cold that long. The roads, you know, we got hit with sleet, and then we got hit with snow, and it was just bad. And

35:19 so at the end of the day, everything that could have possibly failed seemed to have failed, and the natural gas. So the natural gas supply chain, effectively. In my opinion, I mean, I saw very

35:32 little in terms of news about the wind side, right? I knew what had happened, because I see Urkot has an app that's pretty great, and it shows real time. You can see

35:43 pretty localized where

35:47 real time power prices are, and it's an indication of. congestion on the grid and demand and load and all of that. And so I was watching that real time all the way through the storm. So I knew

35:56 what was going on, but the news that I heard after the fact was the natural gas supply chain failed. It wasn't these windmills were covered in ice and not wind, wind, and blowing. Well, it's

36:09 that they weren't winterized. That was the problem with wind. It's those greedy energy companies didn't winterize. And it was just like, no, there's really no wind. There's no wind I don't know

36:19 how you adapt for that. But so what we saw very, very quickly, within 120 days, there was legislation passed. So the state, all of the regulators all got together very, very quickly and acted

36:36 in response. I think within 10 days or so, you had half of the board of Urkha resigned. Right. So it was a very, the reaction was quick and it was forceful and strong and rightfully So this was

36:50 funny, I was tweeting out jokes about each one of the members of the Urkot board while it was going on, and they shut down the website so that I couldn't access who the board was anymore. Now, I

37:03 think they were just doing that as a matter of fact, but I like to say my tweet - You're drawn down

37:10 the Urkot website - Yeah, to the Urkotcomboardofdirectors - Board of directors went away - But yeah, no, it was a, so I went to the new chairman and I'm blanking on her name, actually a week

37:20 before had been named chairman and she had posted on LinkedIn. I'm so grateful to join a world-class organization. I was tweeting stuff like this age dwell and - Yeah - Yeah, and everything, but

37:32 no, so Senate Bill 3, I think was the legislation that came out, and this is the guts, this is the punchline of what we're talking about today, 'cause like I said, I have not heard much of a

37:46 story about this. But what did Senate Bill 3 do? And then let's talk about the unintended consequence because I think this is really important. Yeah. So as I mentioned, this happened very quickly.

37:58 Senate Bill 3 and House Bill 3648 were passed within four months of Winter Storm Yuri and actually I think June 18th is when the governor signed those two bills And so they directed that effectively

38:14 all of these state agencies who have some interplay here, whether it be the Public Utilities Commission of Texas, Rural Commission, etc, that they were directed effectively to do things to ensure

38:27 that the reliability of the grid was improved. And that included ensuring that the natural gas supply chain was intact and winterized and things that we've never really talked about or thought about

38:38 as natural gas producers anyway And so that came out. The Rural Commission had its marching orders effectively from the legislature now.

38:49 And so then they acted fairly quickly to try to accommodate with rulemaking that would prove out to that end effectively or that desired objective. And so they went to work and they wrote some rules

39:04 to do so. And so

39:07 effectively you had the Rotokomission saying, with quite a bit of pressure from the legislative bodies to say, hey, we've got to do something here to ensure that natural gas flows. It gets through

39:20 process, it gets from the wellhead through processing and two generators effectively regardless of temperature. And so there's this supply chain map, there's a critical infrastructure map. And one

39:32 of the things that came out of it, well, there's a few things, but one was that natural gas producing properties, whether it be a natural gas well that makes more than 15 MCF a day or an oil

39:44 property and oil lease that makes more than 50 MCF a day. they are now deemed critical. So that was the effective result. And part of that process is that if you are an operator of a property that

39:59 meets those tests, then you have to file semiannually, you have to file a form with a Roto commission designating those assets as critical. And so it's called a form CID. And so the first of those

40:12 forms was due a couple of months back. And then I think the next one's due in September So right now we don't have this critical designation, critical supply chain map to know if our assets are on

40:23 it. That's forthcoming. And we don't have the rules necessarily for what does winterization mean. But we do know that our assets are critical or they qualify for an exemption. And the exemption

40:36 would be that they are a natural gas well that makes less than 15 MCF a day or at least it makes less than 50 MCF a day Let's real quick for mom's sake, you know, eight. typical brand new

40:48 horizontal well, a third or 40 of an oil well production is associated natural gas. Right. So it's not binary, mom. You have natural gas and oil coming out of the same, well, water floods,

41:04 even though we're talking 1 oil cuts and you're moving a ton of water, you've got your skin in effect, skimming the oil out of it, they still make natural gas They still make a little associated

41:16 natural gas. So we're not, you know, our wells are making a couple MCF a day here and there, you know, and that sort of thing. So, and the reason why they brought in the oil lease designation

41:27 was to recognize that especially out, you know, in the resource, or resource plays, you've got these huge wells that are making a million cubic feet of gas a day, right? And they're making a

41:36 bunch of oil, but they are making, you know, a significant amount of natural gas. So they're designated oil wells on oil leases by the rotor commission So that's why they lumped or they brought in

41:46 this bucket. makes total sense. Everyone's cool with that. It's the threshold that becomes problematic and then that there's no other test. And so that's kind of where we'll go. So you look at

41:57 our properties, ton of electricity demand require load required to move all of this fluid. The natural gas production is very, very small. We have we have single, singular oil leases that make

42:10 that have 500 wells on them. So you have 500 wells and you're making a little bit of natural gas here and there. You use a ton of electricity to run the 500 wells and then the two or three big

42:24 horizontal pumps on the surface to put away the water to re-inject the water, the produced water. And so, you know, really in my mind, and this was the conversation that we were having at dinner,

42:35 is the best test is an asset should be critical if the value of the natural gas when converted to electricity is greater than the load. that the asset has or effectively the load that the asset

42:51 creates in terms of electricity usage. And so at the end of the day, if our asset can make one megawatt of natural gas value and when converted to electricity, it can make one megawatt a day or one

43:09 megawatt hour, let's say, of electricity, but we're using 30 megawatt hours, you would think that you would want - That's minus 29 - I learned that, I learned that in third grade. So the grid's

43:19 down 29 megawatts in that situation - Right. And so you would think that you would not want that asset to be critical - And what - And does critical mean, so does critical mean that it has to be

43:32 producing in effect when the shit hits the fan - Right. And the intent is to say, if an asset is deemed critical, then all of the utilities, the grid will ensure that those critical meters

43:45 effectively continue to receive. power when others don't. So when you get to, I mentioned EEA1 and EEA2, EEA3 is rolling blackout. So that's what we got to very quickly at the beginning of Winter

43:56 Storm Fury. And so in an EEA3 environment, historically it was kind of indiscriminate, right? You just, you know, this leg of, you know, power supply lines turns off. Everyone on it turns off.

44:12 Um, today it's, it's far more targeted. I mean, you know, you saw a lot of hospitals continue to maintain power, police stations, fire stations, stuff like that, maintain power because of the

44:23 use of smart meters and better technology on the grid today than what we had, you know, 20 years ago, let's say. Um, but the idea is that long term that every asset that's deemed critical would

44:34 continue to run and would be prioritized in terms of receiving electricity from the grid over everyone that's not deemed critical. Well, your house is never going to be deemed critical, right? I

44:46 mean, healthy demand. So you're going to get, and when there is a rolling blackout, you're going to get displaced effectively. You're going to lose power. And at least that we have in West Texas

45:01 is going to continue to receive power, even though in effect, it could be negative to the grid for us to receive power relative to the natural gas that could be created. So the goal is, let's

45:13 generate as much natural gas as we can. Let's ensure that it's all not generated as much as we can, but ensure that it stays on so that it gets through the supply chain, gets to the generator so

45:22 that we can make as much electricity as we can or need. And at the same time, the net effect of the way the rule is written today is you stay running and you're using a ton of electricity and you're

45:36 generating very little natural gas, but it's in excess of 50 MCF a day. And the grid would be would greatly benefit from you being down. I mean, in our case. we've done that math and we submitted

45:48 that math in connection with our application for exemption. So we're applying for our assets to be exempt from critical status. We don't - So basically the legislation said, hey, if you got more

46:00 than 50 MCF, you're deemed critical unless the railroad commission says otherwise.

46:08 Is that kind of an oversimplification? They can give exemptions to it - I think the 50 and 15 are railroad commission rules purely - Okay - Right, so the direction from the legislature was ensure

46:17 the supply chain stays intact and reliability happens. And then the then the railroad commission had to go through this rulemaking and they worked with the PCT and they worked with their cotton,

46:25 everyone else. And they came up with a perfectly well-intended plan. Right? And as most things are, I think, I don't think anyone was sitting around going, a whatever. So they rolled out the

46:39 rules. We all see them. There are plenty of similarly situated operators like us who said, whoa, wait. We participate in VAR, which is a huge resource to the grid and support reliability in a

46:51 significant way. And the value of our natural gas when converted to electricity is minimal. Pails in comparison. Exactly. And so, but the rule was kind of, by the time the proposed rule came out,

47:05 it was so far down the road, I think, that it wasn't open for interpretation. There were a couple of exemptions. You could file for an exemption There's a form that you file that's a CIX with a

47:16 row of commission, and you list out the assets and then you have to supply

47:23 with that. It literally says in the rule, like, justification for your exception, objective justification for your exception. Well, the rules say, don't say only these couple things will get

47:34 you an exception. They do say, here are a couple of examples. Okay. And one of those examples is the natural gas never leaves the lease. So if the natural gas is used on lease for some purpose or

47:45 whatever the case may be, it never would make it in a supply chain anyway. Well, that's a pretty black and white we get that. Makes sense, perfect. Plus we wanna shut you down if you're drawing

47:54 any electricity in that case anyway. So, exactly. Yeah, yeah, yeah. I totally agree with that. So we submit

48:03 our form CIX, our request for exemptions that we can continue to participate in law and serve that purpose. And we supply the math And the math is, you know, it's at least six, if not eight to 10

48:18 times, more valuable for us to be off than it is for us to be on. The maximum value that you can get from the natural gas that we produce would be a fraction, a sixth, an eighth, whatever that

48:30 number is. Depending on how you look at it, there's lots of ways to look at it. But, you know, we're not factoring shrink and line loss processing and it's got to be compressed, which takes

48:42 energy getting to market - Every MCF is probably unique and ultimately where it is on how much electricity, but back of the envelope, if we make estimates and it's six to eight times the amount of

48:54 power you're using, or less six to eight times the amount of power you're using versus what you could produce even theoretically that high - Yeah, let's shut them in - And you know, Mike, so our

49:07 CEO, Mike Foster, he's got this great habit of when he's trying to make a point clear, just taking it to hyperbole. And so, you know, in this case, he would be the guy that says something like,

49:19 okay, so let's say you're using eight gigawatts of power and you're making 51 MCF. You still think we should run eight gigawatts of load - Half to run - Half to run - Or a cop can't even shut us off

49:32 if they want to - Right, the grid operator can't shut you off. So I think that makes the point. And then I think the reality of the situation is it probably needs to be 11 to one or one to one or

49:44 something like that. So I think the right thing for reliability, I think the right thing for the intended outcome here for the grid and for operators and everyone involved, but mainly the people of

49:54 the great state of Texas is to say, you know, if it is more valuable to shut you off than it is to get to receive your gas into the supply chain, we're gonna shut you off You know, and so that's

50:09 kind of where this whole thing is today - That surprised me, 'cause I've killed a few brain cells thinking through this, 'cause normally when any industry wants out of regulation, at the end of the

50:22 day, it's 'cause it costs a lot of money. This really isn't a money grab. This is pure and unintended consequence because as we discussed earlier, It actually costs you money if you get shut down.

50:37 Now, if you can participate in large, you get paid back and all, but over 43 days, that's not enough of everything for you to want to be fighting against this. It really is just one of the things

50:51 that I don't think the railroad commission sat down and thought through, Okay, there are some assets out there that just use a lot more power than they could generate. Right. And I'm sure we talk

51:02 about this all the time in different things We try to paint the brush to get the objective met, and there's always going to be nuances that are missed, I think. And this is definitely one of them.

51:12 But because I don't think one laid in front of them, I mean, we filed for a hearing. I guess I can disclose that. But we filed for a hearing with the railroad commission

51:24 to object effectively to their denial of our, so, play that forward, we applied for the exemption from critical status, and we were denied what we heard in the denial was effectively, you know,

51:36 your does leave the lease. So these couple little exemption that were kind of stated, known example exemptions, we didn't meet one of those two. And so our objective evidence that we put forth,

51:50 which was the math to say the electricity value is far greater than the natural gas converted to electricity value. I just don't know that it was even considered. There were hundreds of these

52:02 applications filed. And so, and from what I've heard, I'm not familiar with anyone who's had theirs approved for exemption yet. So lots of hearings will be filed for, we'll go through the process.

52:14 And I hope that the result of that process is just, not just that we get our exemption, but that the Rotter Commission is able to rule make around that to say, hey, here's a standard that makes

52:26 sense. If you're using a ton of electricity in your natural gas, the electricity value of your natural gas significantly less than that or any any factor less than that. then you should be able to

52:37 apply for and receive exemption from critical status. At the end of the day, if people are dying and we lost 210 or so people during winter storm, Yuri and tons and tons of people displaced in all

52:50 kinds of very uncomfortable ways and billions of dollars worth of damage in the state, I think the numbers like 80 to 120 billion worth of damage is the estimate. It was caused by winter storm,

53:01 Yuri And we're out there producing oil that is dilutive to the grid effectively. It just, it doesn't make sense. So. Yeah. And the thing that worries me and why I really appreciate you coming on

53:14 the podcast. Like I said, I hadn't seen stories about this and I want to make sure the word gets out. Um, the thing that gets me is, okay, we're going to have these hearings and, and the

53:25 railroad commission will figure it out and do the right thing But it's April and August is when this shit hits the fan, you know? And so you, you kind of wish that the presumption had been. If you

53:37 have more power usage than your natural gas does, we're gonna give you your, we're gonna assign the exemption to you or deem you not critical unless we study and come back and tell you otherwise.

53:50 That's what worries me 'cause how long do these hearings take before we figure it out? And this is a shared kind of problem we're gonna have. Can you imagine if people damage, people die all this

54:06 because we're out producing oil? I mean, yeah. It's not a good look. It's just not, we've got plenty of other, you know. And I can see the headlines right now in the New York Times, damn

54:16 Texans produce oil and let people die. And it's, yeah. I mean, we have plenty of other things to overcome in our industry, I think in general. And I think right now people are seeing how

54:27 important our industry is for the first time in a long time. I think we got away from that. But I still think that folks, I mean, it's just, it's not the right thing to do. no matter how you

54:38 slice it, I said. And so really the issue to your point of August is coming. Everyone's been so focused on Winter Storm Yuri, I have been as well, but the majority of our law events have been

54:51 called, or maybe equally distributed, but they're either late July or early August,

54:57 January, February. That's when they happen. And the heat kills just like the cold does, I think. I don't have any stats to back that up, but I know people die when it's hot So it causes damage,

55:09 maybe not the same financial damage, but it's a bad deal. Now fortunately, the process here is to be involved in law, you have to have filed an attestation with ERCOT that you are not critical.

55:25 That came out before the, before we had received word back that we were declined our exemption from critical status. So we filed for the exemption from critical status. We filed an ad, we attested

55:40 to the fact that our assets were not critical because they have not been deemed critical yet. And then once we got the denial of our exempt status, and our COTS thing says, are you critical? And

55:52 not just under our definitions of critical, but under any other regulatory body that defines critical. And so we're over commission being one of those. And so, you know, so we go through this

56:03 process, we get denied, and then so long as you filed for a hearing, you're able to continue to participate in more until there's some definitive answer that you are critical - Ken Lay is

56:14 technically not guilty of all of the stuff 'cause he had appeals left, but go ahead - Exactly. So until there's some final, unappelable, whatever. So I mentioned earlier, you know, the universe

56:26 of law, which doesn't represent the whole picture here, but it's a significant piece I think proxy we can use it for a proxy. So it's three gigs. It's 23 gigs now. And that's just 'cause a lot of

56:38 people have gotten out 'cause they didn't wanna go through that process. I'm actually working towards an asset acquisition today where the folks who are operating that asset knew that we're selling

56:49 the asset. They weren't gonna go fight for exemption. And it's a historically large participating property. So it hasn't participated in large since the end of the year because of this process. So

57:01 there's a lot of folks out there in that boat And then you've got all the other folks out there like us who have filed for exemption, who have now filed for a hearing and are still participating. My

57:12 question is what is that three goes to 23? What does 23 go to if we all definitively hear back that we don't get the exemption? 'Cause I mean, like we were saying earlier, I think the biggest draw

57:26 ever has been 75 gigs. If it's a gig or two, that doesn't sound like a lot two or three percent, but man, when the shit hit in the man, those are real molecules that need to be part of the real

57:41 electrons that need to be on the system at that point. And so, yeah. If you were half a gig short and you had access to a gig, you know, you had access to, you know, 501 megawatt hours or 501

57:56 megawatts of low, do you pay anything for it? Yeah And the disaster that we heard almost happened back in February,

58:05 you know, I mean, what would the state have paid for that incremental unit at that point? Yeah. To avoid all of that. That's absolutely right. So, Nathan, you're really cool to come on and

58:18 tell the story. Hopefully we'll get some publicity about it and some rationality will take over kind of this process Because as I said at the time, I don't know what's more embarrassing. Is it

58:30 being the hub of the energy business? and we can't run a grid or is it, we're Texans and we can't run a grid. So let's run a grid guys - Yeah, I agree, that's the situation we're in. There's an

58:42 opportunity, there's a great opportunity here to do the right thing. I think that will result in better reliability for our state. And, you know, so we just need to work this process through.

58:52 And this is pretty technical, like kind of nerdy stuff to talk to you, there's lots of other things we could have spent our time talking about, but I feel like it's - And in defense of the railroad

59:00 commission, 'cause they do get bashed a lot, but in defense, this is second order type of facts that quite frankly, I didn't appreciate just hearing about the legislation. And you, until you

59:14 told me, hey, what about this? This is getting caught up in it. So yeah, it's a big deal. And they were, I mean, we're all under significant pressure. I think anyone that has any role to play

59:23 there is under significant pressure to do the right thing. And I don't question their intention tension in orders legislative the or legislature the question don't I. all at at all.

59:33 just one of those things that I wish that as it was going through the process that maybe industry or whoever could have provided some more guidance to say. Hey, guys. What about this? Hold on.

59:45 Yeah, because it could represent of that three gigawatts that we originally had in last year. I mean, I think it's very fair to say that it's probably half or better of that, that if this

59:57 continues on the way it's been interpreted so far would be lost from the system Yeah. So we have to end it on this. I don't know if I told you this the other night at dinner, but my dad goes out

1:00:10 and gets solar panels and Tesla batteries on the house. And this is a couple of years ago. And I'm like, dad, that's great. But how much did that cost? He goes 125, 000, but I never have to

1:00:23 pay for electricity again. And I go, okay, dad, what's the payback on that? And he goes 123 years I'm like, dude, you're 80. Nobody wants you here more to see payback than me, but you're 80.

1:00:37 And so it's extreme by ingredient. Yeah. So during winter, uh, storm, Yuri, I didn't think my house would ever get shut down because I'm in the middle of the police department, the fire

1:00:49 department and the hospital. Of course, Greg goes out, power gets shut down. I'm freezing. I shut up to my parents house. I got my cat in the cat carrier under my arm. I walk in and I sit down

1:01:01 in my parents, you know, 75 degree house because mom likes it hot and dad whispers under his breath. 123 year payback doesn't sound so bad right about now. Does it?

1:01:14 So how were they? Was it the batteries that were? Yeah. Yeah. So, so, so basically, you know, the, the sun was out those days. Okay. So dad's generating electricity. The batteries will

1:01:25 basically run the house for two days. Okay. Yeah. The sun wasn't shining in Dallas. You guys out a little bit. We had a little bit of sun out in Houston. So anyway, Nathan, thanks for coming

1:01:34 on, dude. No thanks for having us, great to hang out - Absolutely.