The Future of Global Energy Markets with Christyan Malek

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This transcript is from a CSIS podcast published on September 18, 2023. Listen to the podcast here.

Christyan Malek: If energy prices go up, you have more inflation, you have more inflation, you have higher interest rates, you have higher interest rates, the government's under pressure, their own cost of debt is going up and therefore, how do they subsidize the transition?

Lisa Hyland: Hello and welcome to Energy 360, the podcast from the Energy Security and Climate Change Program at CSIS. I’m your host, Lisa Hyland.

This week we turn to energy security and energy markets with leading expert, Christyan Malek.

Christyan is a Managing Director and Global Head of Energy Strategy for JP Morgan and Head of EMEA Oil & Gas Equity Research. 

Christyan and his team at JP Morgan have been consistently ranked by Institutional Investor in European Exploration and Production and Oilfield Services, achieving the first place rank four years in a row in in both the Developed Europe and Emerging Europe, Middle East, and Africa categories. Christyan himself is also ranked as the top-rated global energy analyst in the individual category.

Christyan is joined by Joseph Majkut, director of the CSIS Energy Security and Climate Change Program for a wide-ranging discussion on the future of energy markets, barriers and opportunities for investment, how to provide consistent energy security and grow the global energy system.

I’ll turn it over to Joseph now for the full conversation.

Joseph Majkut: Christyan, welcome to Energy 360. I'm so glad you're here, welcome.

Christyan Malek: Thank you, it's great to be here.

Joseph Majkut: I'm so excited to speak with you. I read the JPM Global Energy Outlook over the summer and you and I have talked a few times in different forums, so it's really great to have you on the podcast. I want to start at the big picture. You look at the whole energy system, as an analyst. This year over the summer, IEA announced this benchmark finding for the first-time solar investment is now larger than an investment in oil production, both hovering just under $400 billion a year according to EIA estimates. How do you think about that data point? How do you think about inflection points in energy finance as we look forward to a low carbon future, but we're trying to maintain security today?

Christyan Malek: That's a great question, Joe, and it's a good place to start, particularly with IEA and other references. You mentioned energy outlook and thank you for your kind words, we've had a lot of interest in reviewing the way we think about the energy outlook and I would say reviewing, but more like articulating it in the context of these four axes. One being energy generation, which we typically think is just the generation of oil, gas, renewables. You don't have to generate sun or wind, but you clearly have to ensure that you can process that into electrons and that's the one axes. And the second axes is energy systems, which is everything to do with getting those joules, which we'll talk about later to the consumer. It's grids, storage, pipelines, infrastructure, obviously depends on the joule or the fuel, right?

It's different for wind versus hydrocarbons. And the other two axes is policy and time, and the reason why we reference those two is because it takes a lot longer than we think to deliver or to decarbonize the energy systems and energy generation. And equally, policy is not universal by fuel or by joule, very different if you're talking wind versus oil. Now with all that in mind, and just get back to your question, investments in the solar and wind for that matter, generation capacities are important, but it's just not enough and I'll qualify what I mean. There are two main issues. Firstly, as the share of renewables and the power mix increases, you naturally face issues of intermittency. The sun doesn't shine particularly for the UK and wind doesn't blow all the time. Now, I know that's stating obvious, but the systems need alternative generation capacities when the renewable generation is low, no wind, no sun.

Now as we've outlined in the energy outlook, this role will need to be played by natural gas until viable storage capacities such as batteries are developed at scale. Secondly, and I referenced this, is the energy systems, and this is where I guess the new work we've done reveals the challenge lies in delivering rather than generating the needed joules to the end consumer. I was talking to a friend last night and they were saying, "Oh, you plug it into the socket and you think that's clean energy," that's just electricity, that literally comes from joules. Those joules can take a wide variety of fuels, but the bottom line is you need to get it to that consumer, to that socket. And I think there are a couple of key drivers behind that and I'll be brief. First of all, electrification of society requires significant investment in the storage, as I mentioned, and also grid technologies and access to materials. We need stuff to build it with.

Now, as policy towards cleaner energy accelerates and a greater focus shifts to the electrification of society, key technologies and materials that enable these goals will faster emerge as the rate determining step. They will be on the critical path, not how much wind we have, not how much time we have, it's getting those joules to the consumer. How? Well, we need a substantial upgrade of grid capacity and technology and put simply, we need bigger grids, which require more cables and consequently more metals, especially copper, which is already in a tight supply-demand balance. So, going back to the point about the storage and intermittency, electrification and renewables requires investments in longer and shorter duration energy storage, such as batteries, and we'll talk about this later, I hope a significant increase in mining and the processing of key materials and minerals. Now, I also mentioned policy in I'll round off here.

Policy decisions are moving much faster than the evolution of the longer lead energy system. In other words, we can generate so much energy, but it's the system that's failing the generation and it's the policy that's not conducive because they're focused on one particular joule. And as I've talked, that needs to support the acceleration in growth of installed energy generation. And what you see through policies, onerous planning, approval processes, bottlenecks around grid infrastructure and access and distribution and storage of more intermittent supplies.

And lastly, I just actually remembered this because it's coming up a lot in the headlines, it's worth mentioning, supply challenges, underlying costs to prepare the energy system. We've seen a lot of the renewables companies profit warn simply because they can't deliver these projects, which were aggressively slated over a number of years. And also you look at China that's producing processing and manufacturing while the key materials and materials we're trying to move away from that. So, comparable costs of such materials and components tend to be substantially higher in the U.S. and Europe. An example, Europe and U.S. solar factories come around four times more expensive than China if you look at dollar per gigawatt terms.

Joseph Majkut: That intersection and interaction between time, policy, system, and generation is really interesting to me. So, I'm going to order what I think are the long lead times –

Christyan Malek: You're going to try to weight it.

Joseph Majkut: And you score me, okay?

Christyan Malek: Sure.

Joseph Majkut: So on the longest term, some of the stuff that we know we need for net zero just feels very far away. The example here is an international market in hydrogen or an energy carrier that's downstream clean hydrogen. We're going to need pipeline infrastructure, we're going to need maybe ships to do that, depending on what markets. We don't really know what the trade rules will be. That's a long ways away.

Christyan Malek: Agreed.

Joseph Majkut: Then, you've got the sort of decadal... You could basket it in there fusion, you could basket it in a bunch of stuff. Then, you've got the sort of decadal stuff. This is stuff we kind of know we need, but it just takes a long time to go from project ideation to production, mines, transmission lines, you could say LNG facilities, though that seems more export than import. Import seems like you can build regasification capacity really quickly, Europe just did, and then you've got the sort of the stuff that sits under a decade.

After the IRA, we're building a bunch of gigafactories in the US. If you want to develop a solar field, once you can interconnect, that's a relatively short process at this point. And so, when you think about these kind of... To return to the question, I wonder what you think about the ordering and what I may have missed, but when you think about this question, is comparing investment flows the right metric for us to think about progress amidst transition, we need to be thinking about not just investment in solar, it's like that whole upstream supply chain to some extent, no?

Christyan Malek: I totally agree, and in one of our reports we looked at the energy outlook, we called it follow the money, and having a services background, that's what I did. I had to look at the projects, which ones are being sanctioned, why they're not being sanctioned, and I think when you zoom out and take a step away from just the joules, the fuels, it's what's the cost of debt? Higher interest rates make it harder to access capital, not necessarily because you can't. It's just more expensive, and you've seen several of the clean energy companies not talking about supply chain issues of all sorts, but actually the big before and after in the clean energy world is low interest rates, high interest rates. The returns aren't that great. So, when interest rates go up, that makes a big difference in whether this makes money for you, forget whether its policy driven.

Joseph Majkut: One of the things I think about when I kind of read the economic case of transition or you're sort of switching a system that is relatively lower from a system which is relatively lower capital expenditure but has fuel costs, so it has an operational expenditure, to one that has higher capital costs than operational costs. Once you build a wind farm, maintenance is relatively easy and actually that transition is a lot more economically saleable in a low interest rate environment than a high interest rate environment.

Christyan Malek: Right.

Joseph Majkut: So, now that we seem to be exiting a decade and a half or very, very low interest rates, what kind of implications do you think that has for the outlook?

Christyan Malek: Simply that, if we look back at how we access that capital, it's going to be banks, it's going to be the financial markets and if they're seeing a deteriorating return and then compounded by the fact that you see subsidies removed... And there's a bit of a circular here. If energy prices go up, you have more inflation, you have more inflation, you have higher interest rates, you have higher interest rates, the government's under pressure, their own cost of debt is going up and therefore, how do they subsidize the transition? That's what I call the vicious spiral in some ways.

But with that in mind, as interest rates go up through this energy inflation that we talk to, that will make it more difficult to justify the returns if they're falling. And then the risk you have, as well as then project delays and execution. In my world, when I spent 10 years looking at the services, oh my God, they're not an execution problem that you see, they're supply chain problems, that could then destroy the profit margins of these projects. So, we need to really address head on the risk to the downside of those clean joules, so to speak, both in terms of how they're generated, but equally how we then deliver it to the consumer if we're thinking full cycle, from beginning to end.

Joseph Majkut: So, that's a really interesting thing. So, what I think of as a policy entrepreneur, well, what do we do? And in the US, we were talking a lot in the post IRA world about permitting reform and there is this sort of ethereal understanding that permitting reform is a drag on capital because if you have a lot of uncertainty, your offshore wind farm and whether or not you're going to be able to build it and deliver it on time, that really does affect your finance picture. Higher financing rates make that yet worse, right? In your view, you look at permitting, you look at the upstream supply chain for clean energy, so mines and materials, can we work in these other areas such that the broader macroeconomic conditions can be smoothed out by a very permissive environment for investment otherwise?

Christyan Malek: Well, it's interesting because let's put some numbers behind this. So, we've done a lot of work trying to quantify what's needed in terms of Capex investments. Maybe just zoom out to one of the key takeaways that we do have an energy deficit going to 2030 in terms of modeling demand growth versus supply growth. So, we said, "Well, how do we close this deficit? What's it going to cost? Is it generation? Is it systems? What are the reaction functions we did from policy?" And to simplify it, we calculated that in order to close this deficit, this shortfall by 2030 energy, we're going to need roughly $1.3 trillion incrementally. And that shortfall was equivalent to around five to 6% of global energy industry Capex. Now what's interesting, Joe, is the vast majority of this, so about $1.1 trillion is in power generation, delivery, and especially in renewables power.

And this includes investments in systems like grids and storages. Now, obviously inflationary pressures don't help, whether it be underlying supply chain issues or higher interest rates because you have to borrow money, so that dollar gets more expensive. And we've estimated that inflation in '22 to '23 has been somewhere between high single digits across renewable supply chains. It might come down depending on the type of component, but this has solely contributed roughly about $100 billion increase in that Capex shortfall. In other words, a year ago it was close to 1.1 to 1.2, it's gone to 1.3. So, you see the trend here, so you have a deficit and it's getting more expensive to close that deficit. So, it sort of comes back to your earlier point. Now the remainder of the Capex shortfall is oil and gas investments and capital availability for fossil fuels have already been tight.

We've talked about higher interest rates making more expensive, but it's not just higher interest rates. Oil and gas is more difficult if you think about it from accessing financing as a whole because it's oil and gas. So, you've got a high cost of debt and equity capital, and those are the challenges in oil and gas investments. And I sort of want to highlight it's not just about the access to capital markets, but it also includes, for example, societal demands for change, pushing investment preferences for oil companies to new energies. Secondly, shareholder requirements for higher returns, the sector is returning 30% of its market cap. That's unheard of. Why? Because their cost of equity side, people want more money from these companies, either because worried about peak demand or they say, "Well, you're an energy company, I want more from you if I'm going to justify investing."

And that's what by the high cost of equity. And then thirdly, an uncertain regulatory outlet. It's very varied. Take the UK for example, the goal posts keep shifting. You don't know are they for, are they against? So, all this does, if you put this together, is limit upstream investments, which we think is still needed in this decade to close that deficit. And we have been flagging under investments in energy sector for a number of years. We initiated the supercycle thesis in 2020 that talked about oil specifically in that we're going to be in a multi-year, potentially multi-decade run in oil, which sort of sounds very bullish and promotional, but the reality is what we're saying is we could risk being short of oil before we no longer need it, and that's supply them on gap that arises from upstream investments.

In some ways, if you can zoom out, if you have an energy deficit, you can't close those joules because you can't get those joules to the consumer no matter how much wind and renewables is available. You then have higher interest rates, harder to access capital. Then, with all the best intentions in the world, you're still unfortunately left with a deficit, but if we can't close that with the traditional fuels, the old economy fuels because we've sort of abandoned it, the analysis tells us that we could see severe price inflation and it clearly a lot of volatility because policy keeps changing and therefore people don't invest and they invest and so on.

Joseph Majkut: So, this brings me actually to a refinement question that I'd love your thoughts on and it's a question about thinking about things in the units of joules.

Christyan Malek: Right.

Joseph Majkut: You're looking at this big global picture. How substitutable are these joules. It's like the economic case, the price sensitivity of driving a car around London is very different from turning a light on in Malawi or running a heat pump in Scandinavia. So, what is your view on distribution. I totally take the point. I think because there's massive uncertainty, we're sort of investing a little bit everywhere.

Christyan Malek: But you're saying it's easy to charge your EV car in let's say Boston as opposed to the middle of Congo. It's hard. How do you access the energy?

Joseph Majkut: And when you think about, "Well, we're going to fix this with investments in distribution or in generation," what's the distribution of those investments between developed markets, emerging markets? Where do you expect that to see that demand growth and what can policymakers think about doing it about it?

Christyan Malek: Well, what's interesting, when we did the work on energy demand growth, what we found is that EM is a very important driver of energy demand growth for this decade. In fact, in our outlook, we estimate that energy demand and OECD, and I don't like to call it OECD, but just to keep it easy in buckets, OEC economy actually decreases by about 2% by 2030, but this is offset way more by the 2020 2% increase in emerging markets. What you have here is that rising energy demand in EM is driving both clearly by rising populations and rising energy used per capita, but we have to also appreciate that some people don't have any access to energy at all. 80% of the world hasn't been on a plane.

So, as they're looking to have lights on the streets when they go to work every day or be able to go further out in terms of travel, this is all going to take energy consumption from if you like, a zero to one. And that for a comparison, energy use per capita in India is about 11 times less than U.S. and four times less than China. And of course that gap will narrow energy use per capita that was referenced to 2022. And from an absolute term that's worth mentioning, China's consuming 112 gigajoules, U.S. 284 gigajoules, India 26 gigajoules.

So, you can see that there's still a huge amount of potential upside in terms of these countries with consumption. And so, if I then think about that in the context of a question around distributions, my concern is we're over penetrating, we're going very long energy systems in the West, which is great. My concern is that whereas all the demand growth of energy or the majority is coming from the East, and we haven't delivered those systems. So, it's sort of horses for courses. So, we can end up potentially in equilibrium in energy supply demand on the West, but with a huge deficit in the East simply because they're short systems, they don't have the capital, the investments, et cetera, et cetera. And they're going through a massive penetration of energy consumption that was equivalent to the West 50 years ago.

Joseph Majkut: Right, not asking –

Christyan Malek: It's sort out of sync in some ways and then what will happen, and that's sort of essentially where those deficits and energy come from.

Joseph Majkut: No, it's really interesting. This is also a place where it seems like this is a problem a lot of people identify using slightly different language. So, IEA has talked a lot about the cost of capital in emerging markets and –

Christyan Malek: That's right.

Joseph Majkut: That's slowing investment. You talk to economic development people from the Global South and they say, "We need bulk investment," and part of bulk investment is just like power systems or energy generally. And so, it's interesting to me that the climate people, the economic development people on both sides of the Global North and Global South see this problem, and yet it is quite vexing, it seems, to solve, right?

Christyan Malek: I totally agree, and I think the discussion, for example, how to finance energy transition remains directly related to discussions around ability for developing countries to simply access climate finance for both mitigation and adaption. So, in order to ensure that their future economic development can be based on low carbon energy sources and made more resilient to climate change, it's also directed the ability to scale up existing clean investments, while ensuring that these investments can be competitive versus fossil fuel based alternatives. And I think this is where the issue is, it's not the availability of capital per se. There's plenty of capital for renewable projects, there's plenty, but the issue is where we think visualizing the lack of local bankable or investible projects versus uninvestible projects, especially in the developing economies. So, I think that's probably where there's a disconnect. The other disconnect worth mentioning is we see a gap in project preparation.

The years of work required to develop and de-risk a project to bring it to the stage of, again, bankability, and this requires tackling a host of project implementation hurdles like meeting environmental, social economic needs, then that's even before construction can begin. And so, one program capable of bringing scale to project development is... You may think it's been discussed before, the global infrastructure facilities, the GIF, an effort of the World Bank backed by countries like Canada, Germany, Japan, and what it does is provide advisory and funding support to emerging markets and developing economies, governments, through this sort of multilateral schemes. Now, funding from the GIF has led to $340 of private sector financing for every dollar spent on project development, underscoring the significant multiply effect of its impact. And programs like this, I personally think can be hugely scaled up on the road to COP 28 and beyond for greater impact.

Joseph Majkut: And as a person who's in the private capital world and thinking about how that big pool of capital is going to get steered, those mechanisms to you, do we need to see more of them? Do they need to work better? Or is it simply a matter of we're going to go up and into the right as we make progress and we can kind of meet the challenges instead of a wholesale re-imagining of international finance as an example?

Christyan Malek: You're absolutely right to highlight. At the end of the day, it's got to make money. I hate to sound like a capitalist, but ultimately people invest, they want a return, and that return has been diminished by higher rates, and then project costs issues. We then have to think about the comparable pricing of all the joules. Again, so we look at every joule, every energy source, whether it's oil, gas, LNG, coal, and when you start doing a comparison, what could end up emerging is then you start to think about, well, if the marginal buyer of that joule, so to speak is coming from the EM world, they're going to look for who's got the marginal supply of that right now? If the marginal supply of that joule cannot be funded with an economic return, then they're going to go hunting joules, whatever they are, because you don't want power cuts.

You don't want economic where there's total regime changes. So I'm hunting joules, I'm going to price it. So, how much does coal cost? How much does oil cost? How much does gas cost? How much does renewables cost? And I think ultimately with a private sector hat on, the question then becomes, what's the relative competition in terms of pricing of the entire slate of energies? And my concern is that if ultimately oil becomes cheaper than renewables in the sense that it's available A, and B, it's there, it's physical, I can get it, versus the comparable in renewables or other sources, then you may find that out of necessity, all these countries who are trying to grow their economies and grow their energy consumption, choose the most available, cheapest fuel, whatever it may be. And that's sort of, I think, really important in the context of thinking about the economics of all these projects, regardless of even if we're wrong and there's trillions more dollars around and it's all going to be low interest rates, is it just physically possible to actually implement that?

Joseph Majkut: Right, I do actually want to talk about particularly the oil market, gas too. I know that's kind of your background, so I'm really interested to hear your thoughts on the point you just made. People are going to... Demand will follow relatively inexpensive joules with some other considerations in mind and its interaction with your supercycle hypothesis. So one, maybe a brief description of the hypothesis and then how you think about it affecting that decision over the coming decade, but also just consumption of oil and gas is still growing and the supply picture has really changed over the last year post the invasion of Ukraine. So, your sense of market conditions and outlook would be really helpful for our listeners to hear, given everything we've already talked about.

Christyan Malek: You're absolutely right and I think when we think about the quadrilemma, which how I referenced this policy time systems and generation and we've done all this bottom-up work to with again, the best intentions to see how much clean energy we can provide and then delivers to the consumer. When we did that work, one of the most very clear takeaways was that we're short energy, how do we close that energy? And then we think, "Well, what fuel, what joule is there plenty of in terms of generation?" Well, all of them, but the key point was, well, what fuel is available from a systems perspective, as in we can deliver it, we can ship it, existing infrastructure is actually pipelines, it's fungible, it's got a high energy density. For example, oil barrels, 14 times the energy intensity of a comparable clean energy fuel.

It's important if you're going to the desert, you'd want to have the most energy you can provide, if that makes sense. So, then we realized that the way this deficit will be closed, most likely, is through greater consumption of oil. Again, not because people want to, it's just, "Well, I need to close this deficit. How do I do it?" I just don't have the systems ready to penetrate a clean energy framework. And then you sort of think, well, from that perspective, having taken an ecosystem view on energy rather than going down one particular fuel, we then arrived at our supercycle analysis which shows, well, if the lowest common denominator, if we're effectively having to consume oil because there is no other option in terms of closing the energy deficit and consumption of energy will continue, we don't have the available supply of that oil, particularly given the under investments and the points I made earlier.

Last year, we saw China's oil demand shrink in a year for the first time since 1990 and when China was actually net exporter and China is a very important economy, which we didn't see demand decrease ever, even in 2020. So in response to that, what's happening at the moment is that we are now looking at who's got the barrels. So I have coined this phrase, show me the barrels. If you try and look for them, where are they? So we're looking for joules, hunting joules, recognize that we can't get enough in clean.

Let's go to the higher carbon joules and ultimately oil barrels and ultimately the main source, and it's interesting when you look at OPEC and its key members, they've had to make a number of production export cuts, and these cuts have been partly offset by release of U.S. SPRs rising production from Iran, Libya, and Venezuela, but what's important is we see that these supply sources are reaching their limits, which essentially sort of firing all the bullets and these inventories over the moment, they are being drawn down. So, I think society has been very successful in helping reduce the excess, which was the primary goal of these cuts.

And at the same time, production in the sanctioned countries are reaching their maximum capacities. So, we don't see much upside without additional investments. We're exhausting all those options, and I think that's the key point then as well. Then, what does that translate to in terms of how to deliver future production against future demand growth without risking oil prices moving significantly higher? Now historically, and I think this is a major point, if you think on a 50-year view or maybe that's too much of a horizon, 30-year view, the before and after over the last 30 years is shale.

Shale has been a key component to ultimately cheap money, plus productivity gains that I've never seen in my career on oil basins meant that U.S. production is expected to reach about 12.8 million barrels this year. This is about 850,000 barrels higher than last year and next year is forecast to increase however by 330. So, my biggest concern is that U.S. shale growth is slowing down.

Joseph Majkut: Interesting.

Christyan Malek: And clearly when you then compound that with a high cost of debt, higher interest rates, and also quite frankly, a lot of banks are not underwriting shale like they used to because that's not where they want to be.

Joseph Majkut: Fiscal discipline and-

Christyan Malek: And it's also oil. I'm sorry, I'm helping finance clean energy. You're a shale company.

Joseph Majkut: Right.

Christyan Malek: And all that put together means that we're seeing potentially significant slow down in shale growth, and the reason I call that a before and after is when you start seeing a slowdown in shale growth, which effectively is the marginal supplier of oil, what they call the marginal cost. The concern for me is then all roads lead back to where the spare capacity is, which clearly isn't OPEC, but the bigger concern is that OPEC spec capacity is low, roughly four to 4.2 million barrels, and it's mainly consolidated in Saudi at 3.2 million barrels and obviously some in the UAE.

So, OPEC and particularly Saudi is going to be ultimately the driving seat in the second half of this decade as we predicted in our supercycle thesis. And Saudi will ultimately want to ensure that they tighten the grip around all price volatility and take a greater share of demand growth, but you can see where we started with an energy supply demand outlook. We then drilled down to where are the joules. We then drilled down even further to, well, we're short joules, where are the fuels that are available to fill that deficit? And we landed in oil, but the reality is that we are very tight in terms of supply demand for oil over the medium term, which we'll then see potentially much higher prices and exacerbate energy inflation even more.

Joseph Majkut: I want to delve into this a little bit. One question I have for you is, do you think that these dynamics of lots of future uncertainty and demand, a slightly different financial picture just means prices are going to be higher, maybe even outside of a supercycle dynamic, but it's just going to cost more to produce oil because there's a lot of risk in that game and OPEC really wants revenue to fund economic diversification and other things? What's your sense of future market conditions under the near term outlook? Sorry, not a closed question.

Christyan Malek: Well, no, I see what you mean, well, the risk that we have is prices go up but in every cycle and it is a cycle, prices go up and they stay higher and not back into the curve. When it's high and everyone goes, "Great, industry's back, let's invest." And Capex goes up and it's a bonanza again, and the key risk here is that the elasticity to high price in plain English, people's investment appetite to get involved in oil is muted.

Because they say, "Well, I've already told my shareholders that I'm going to invest in clean energy, or I've told my shareholders and we return 30% of my market cap and they love it, so I can't. I'm just constrained or I'm trying to raise the money, but I can't because the banks are all shut." It comes back to that axes policy. What is policies approach to investing in hydrocarbon?

So, what you end up with is a cycle that's sort of effectively broken. The laws of supply demand, the best answer to high prices is high prices because people invest in high prices. And the issue here is that you have compounding higher prices because ultimately there's no economic impetus to see that supply response as we transition away from that supply. And that then potentially creates very large deficits in energy, which create very volatile prices, particularly in oil. And we sort of lose control of those prices simply because we just don't have enough supply elasticity. And just to be really clear, Joe, we don't have a shortage of oil in the ground. There's plenty. The shortage is the capital to get that oil above the ground and flowing.

Joseph Majkut: This is really interesting, and as you know, it's like for all policymakers, this is a really sensitive issue. Oil prices are a key indicator of success for presidents here in the United States. Like it or not, they don't have a lot of control over it. One thing we did see over the last couple of years is the U.S. deployed the SPR in a totally unprecedented way to help manage, 1 million barrels a day for months on end to try and stabilize markets and keep prices down. Do you see the U.S. or other consuming countries as playing a larger market influence role, if there is going to be for in this future of higher volatility? They don't have the volumes to last forever, but is there sort of a high frequency smoothing that can be done using these strategic reserves?

Christyan Malek: US has done a great job mitigating some of this price inflation as it rolls out the IRA and delivers on the energy transition and obviously leads on the energy transition in many ways. Having said that, the U.S. SPR is a finite resource and they release a significant volume of barrels over the course of 18 months. Well, what's tricky is, how do you rebuild those SPRs? And clearly it's going to take several years to do so, which then leaves it in a slightly precarious position in the context of, "Well, how do you put a lid on price, particularly the petrol pump price, what you guys call the gas price in US, when you've sort of exhausted a significant component of your major mitigating factor?" And clearly, historically that would've been shale, go drill more. And I think there's a sort of... One question I get a lot, Joe, is, if we're sort of running relatively low on U.S. SPRs, obviously they can release more.

But again, it's a finite resource, it's just not going to run out, then what about if you were to say, "Well, let's just tell all the shale companies, you know what, you've got to open season, you can drill as much as you want, we're not going to stop you." Now, the issue is two things. One is productivity, the second is access to money. Both of those things in the last 10 years were much easier. So productivity, when shale was growing in the late part of 2007, '08, you had productivity per well that are significantly higher than where they are today, and that's a normal natural course of a basin in productivity slows, ultimately these reserves are growing up in layman terms and what I think people often forget is they also did a lot of fracking and a lot of damage to these wells.

So, we overlook this point that reserves need to be optimized very carefully and in my career, I've never seen a situation where oil prices go up and the amount of production that was coming from this was nothing unseen before across any well or barrel in the world. Why? Because they were aggressively drilling and fracking, but the consequence of that is that productivity has come down significantly. You've actually affected your long-term productivity. The trick is to manage your reserves over multiple years, rather than just drill, drill, drill, produce, produce, and then see what happens later. So, that's had a major knock on effect, which is so important because with all the money in the world, a change in policy, you can't throw magic dust on these barrels to produce higher productivity. It's coming down, and so the marginal cost is going up, the price needed to actually develop these barrels.

Joseph Majkut: And that compounds the same investment problems that we've been talking about.

Christyan Malek: Right, and then obviously we have access to capital. Interest rates are higher, everyone has a different view where they are, but ultimately as a house, we believe that rates will stay higher for longer and therefore what you've done is compound. So, at least from a U.S. perspective in the context of energy security, the limitations, the restrictions around future supply of their own resource within the country, which then potentially makes them more dependent on other countries to provide oil supply because shale is ultimately not delivering what it had before.

Joseph Majkut: Good. Before we close, I do want to ask you about methane and emissions intensity in oil and gas markets. As we look forward to COP, this is a big issue for industry, for governments, for civil society. It seems like this is a place where the international climate cooperation can score some wins, but this is also a place where the economics do kind of need to work. So, good methane controls can reduce emissions intensity, oil and gas production. U.S. is doing a lot of good stuff in this regard. Regulations are on the way in Europe, but traders and buyers I think are still getting used to this as a concept, something they would discriminate by. What's your view on the next steps for methane and methane controls within energy markets themselves?

Christyan Malek: Well, it's a great place to close actually, because of course, where energy and climate goals often come into tension is that there's more joules of energy generally and more tons of emissions. And that's why minimizing methane emissions and flaring is a rare and huge opportunity. It's about distributing more of those joules the system generates by reducing the waste of a natural resource while simultaneously curbing those emissions to make oil and gas lower carbon. I know it sounds a little bit crazy, so lower carbon oil and gas, but there's a huge upside in reducing or decarbonizing hydrocarbons in terms of its impact. At JP Morgan, we've highlighted methane abatement as an actionable solution, for example, and one that requires more financing for the industry, not less. And this also fares quite well on the time axes that I referred to earlier of the energy quadrilemma from the NG outlook.

As technology and operational solutions not only exist but can generally be deployed rapidly, for example, leak detection and repair, so this is a really good tangible opportunity to accelerate and the sky's the limit. And this isn't just transforming the system over decades with massive Capex, it's also optimizing the system. We have proficiencies in the years ahead. So I think Joe, to increase the market's focus on methane, when I think about basic ingredients, information, incentive, and demand. And what by that is information has been a barrier, but that's changing.

As methane satellites exist, not the technologies disruptions come to market, you can end up with a Google map equivalent of methane where you could just zoom into a postcode and you can see what is the methane of that postcode anywhere in the world. That's significant technology that can be harnessed. And then the incentives. So, I'd look first to natural gas, importing regions with decarbonization commitments, those that need both the gas in the near term climate progress from reduced operational emissions in their supply chain. And then finally, because the question here is of demand, which actors step up to express a preference or requirement for low carbon gas, and how do they balance that with ensuring security of supply? That's probably where the prevailing tension is going to emerge in the future.

Joseph Majkut: Excellent, I could talk for hours, but I think we're out of time. As we dial back and we look at these factors, generation, policy, system, time, man, we're real short on time, generation needs to be unlocked, systems need to be built, and public policy has an active role to play. Any final comments on where you think marginal efforts are the most helpful or we can get in our own way?

Christyan Malek: It's a great question to round up on. I'd reiterate system, system, system. We need more joules, clear, the world's growing, but more importantly, we need the energy system to deliver those joules from where they're produced to where they're needed. And I think the rise of electrification and renewables, this means increased grids, energy storage solutions and investments across the supply chains of all the key minerals and materials, especially metals. And I think that's probably where the bottleneck exists. It's also the biggest opportunity from a private sector perspective, but it clearly also could end up becoming one of the largest oversights because we have plenty of wind, plenty of sun, we're doing all the renewables generation and we fail to really appreciate quantum, the scale of systems that are needed. And the blind spot, if you like, Joe, would be that then as a result, we see significant energy, price inflation and we're wondering why because we're investing all this stuff. How come I don't understand? Because we can't get it as the consumer and therefore they've got to find an alternative.

Joseph Majkut: Very interesting. Christyan, I really thank you for spending the time with us today. Your perspective is interesting, sometimes provocative, and I really appreciate the depth of analysis that you and your team do, so thanks again.

Christyan Malek: I appreciate that. Very kind of you, thanks.

Lisa Hyland: Thanks to Christyan for joining us this week; We really appreciate his perspective on the energy markets and the challenges policymakers and the private sector are facing.

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