Ascent Consultants Quarterly Energy Markets Analysis, 2.0

Contents Ascent Consultants Quarterly Energy Markets Analysis, 2.0

1. 1) Introduction

2. 2) The Policy Debate, Colorado, and Pipelines

3. 3) Distribution Evolves: Tenaris & TMK

4. 4) Macro Analysis: OPEC+ & Covid-19

5. 5) Appendix A: PHMSA Data

Part 1: Introduction This edition will focus on three broad topics. First, what we’ll call “the Policy Debate”. It’s an election year, and oil and gas issues are on the ballot in a variety of ways.

Second, we’ll focus on the changing landscape for OCTG and line pipe distributors following the Tenaris acquisition of TMK’s Ipsco assets, and the agreement making Tenaris the exclusive distributor of TMK’s Russian OCTG and line pipe products for North American and Canada.

Finally, we’ll end with some macro analysis, taking a step back and looking over the “big picture” around energy1 in light of the coronavirus and the collapse of the OPEC+ alliance.

1 You’ll notice there is almost no raw data in this edition. Many companies are publishing these metrics now, so you probably have them. This will be analysis and lots of footnotes. Copyright Ascent Consultants, 2020, all rights reserved

Part 2: The Policy Debate, Colorado, and Pipelines Readers of Edition 1 will recall Bob Dudley’s call to action at 2019 CERAWeek, asking the industry to step up and get involved in the debate over the future of fossil fuels. That call was highly relevant then, and even more so now.

While most of the 2020 candidates who openly supported a frac ban have ended their pursuit of the Democratic nomination, those that remain are still holding onto strong anti-oil and gas sentiment. Sen. Sanders has called for the criminal prosecution of oil execs, so we know where he stands.

Vice President Biden’s position is not quite as cut and dry, though perhaps it is.

Surely, he can appreciate the economic and security benefits brought on by shale, having witnessed it firsthand as Vice President. Yet, his campaign website mentions the Green New Deal2 and in the most recent debate he echoed the same anti-fracing sentiments we’ve heard from other candidates.

So, is “keep it in the ground” now the Democratic Party’s position or is the former Vice President simply hedging his bets during the primary?

While these extreme views likely represent a small percentage of voters, the concept has nevertheless gained sufficient traction to prompt numerous op-eds and position pieces from major industry groups like the API.

In pursuit of “keep it in the ground” efforts at the state level, activists in Colorado are working on another round of ballot initiatives aimed at effectively shutting down oil and gas operations in the state.

This year, up to six new initiatives may find their way on to Colorado ballots, and they will look very familiar. Each proposition contains language that is similar to that of Prop. 112, which 3 failed 55-45% in 2018 .

So here we are again, staring down the opportunity to see huge parcels of non-federal drilling lands in Colorado deemed off limits to operators. Estimates from the 2018 version were that up to 85% of non-federal land in the state could have been impacted by the setback requirements that are making their way to the ballot again this year.

2 https://joebiden.com/climate/

3 https://www.sos.state.co.us/pubs/elections/Initiatives/titleBoard/index.html

Copyright Ascent Consultants, 2020, all rights reserved 2 Meanwhile, the Colorado Oil and Gas Conservation Commission is working to update its rules governing the industry following the passage of SB-181 in 2019. In addition to a new mandate and new rules, SB-181 also empowered local governments to enact stricter rules for oil and gas. These ballot initiatives create a very uncertain landscape for fossil fuel exploration and

4 production in the state . But wait... wasn’t SB 181 was supposed to end this constant back and forth over oil and gas regulation? Yes, it was. However, Colorado Rising, the main group behind Prop 112 and this year’s versions,

5 makes it clear that their goal is not to strike a compromise with oil and gas, but to eliminate it .

Since that is highly unlikely to occur via traditional legislative channels, these ballot initiatives provide a workaround, albeit a dangerous one.

6 The trouble is, seemingly innocuous ballot initiatives can carry devastating effects . The consequences can be both intended (shutting down drilling) and unintended (potentially devastating the state’s economy).

As an example, take Houston’s Prop B from 2018. That ballot initiative called for firefighters to receive pay equal to police officers. That seems fair enough on its face, right?

Prop B passed, and the new mandate promptly blew a Texas-sized hole in the Houston budget, not to mention the apples to oranges comparisons in determining what constitutes “equal pay” for two utterly different departments.

In response, proposed solutions included layoffs, demotions, and new taxes in order to close

7 the budget gap while fulfilling the ballot initiative’s mandate . There were lawsuits and lots of acrimonious feelings that have yet to fully subside – making a lasting solution now more difficult. 4 Not to mention even more resources spent fighting these ballot issues, and more yet should one of these ballot initiatives pass this fall. 5 https://corising.org/protect_bill/ and https://www.denverpost.com/2019/10/09/colorado-rising-complaint-oil- gas-development-sb-181/ 6 A short background on ballot initiatives. These are citizen-led efforts that appear simply by virtue of signatures and approved ballot language. Accompanying fiscal notes are often vague and speculative, meaning that the full cost is only truly apparent after the measure passes, and enabling legislation is presented and passed. 7 https://www.houstonchronicle.com/news/houston-texas/houston/article/Judge-rules-Prop-B-unconstitutional- firefighters-13847326.php Copyright Ascent Consultants, 2020, all rights reserved 3

The city was bailed out by a successful legal challenge, but this illustrates the high stakes of ballot initiatives that attempt to convey the details around highly complex issues in a single 8 short paragraph of legalese and vague fiscal estimates . Decisions of this magnitude, that will materially impact people’s careers, investments, and livelihood – not to mention state and local coffers - should be decided at the most appropriate (preferably local) legislative level, with robust open debate, analysis of the expected (and possibly unintended) consequences, and ultimately voted upon by elected officials so that there 9 is transparency and accountability . Where ballot initiatives fail or are the wrong vehicle, the courts are still available and becoming 10 a major battleground for the industry Penn East Pipelines. . To illustrate, look no further than the Constitution and Due to delays and changes in project economics, Williams was forced to abandon the 11 Constitution Pipeline this February . Part of the problem lies with a permit process that moves painfully slowly, but now it seems that nearly every permit FERC issues is met with litigation and appeals that further delay projects, add layers of complexity, cost small fortunes, and provide far less certain outcomes. The Constitution project began in 2012 and, after 8 years, Williams has little to show beyond 8 During my time in MO politics, we encountered similar activism from Rex Sinquefield. He repeatedly filed ballot initiatives for his pet projects. One such project sought, but failed, to eliminate the 1% earnings taxes in STL and KC. This tax makes up about 1/3 of the STL general fund, and the ballot initiative provided no means of recovering those funds – meaning higher taxes would have ultimately been passed on to residents, likely resulting in their flight from the region due to fewer public services and higher taxes that would have been the likely outcome. More here: https://www.stltoday.com/news/local/govt-and-politics/sinquefield-not-discouraged-with-return-on- his-political-efforts/article_44c2f81e-dad3-5ff0-b60d-c3ab0c278d6a.html 9 The same goes for the proposed frac bans that would be imposed by executive order. Put it to a vote. Let Congress do its job and allow the American people a voice. 10 For example: https://insideclimatenews.org/news/03012020/pipeline-lawsuits-2020-supreme-court-appalachian-trail-eminent- domain-natural-gas https://www.reuters.com/article/us-usa-trump-pipelines-insight/trumps-fast-tracking-of-oil-pipelines-hits-legal- roadblocks-idUSKBN1WO12L https://news.bloombergenvironment.com/environment-and-energy/texas-city-sues-to-stop-2-billion-pipeline- construction 11 https://constitutionpipeline.com/ 12 https://whyy.org/articles/constitution-pipeline-project-ends-as-builder-cites-diminished-return-on-investment/ 13 NY – $0.149 / kwh, 42% higher than national average NJ - $0.133 / kwh, 26.7% higher CA - $0.167 / kwh, 59.4% higher Copyright Ascent Consultants, 2020, all rights reserved 4 12 comparatively high energy costs13 which are in many ways a direct result of his policy initiatives. wasted resources. Sadly, Governor Cuomo cheered the pipeline’s failure , despite his state’s

Penn East similarly pre-filed with FERC in 2014 to “fast-track” their permitting. The “fast track” took four years, and FERC issued permits in 2018. The court challenges followed immediately, delaying the project and driving up costs. Penn East filed for permit extensions and recently announced a new two-phase process to try 14 and complete the line by 2023 , so the project may yet survive. Sometimes the courts need to play a role, but other times it is little more than a delay tactic. When it is the latter, there is a tremendous amount of wasted resources, both public and private, as well as increasing the chance that badly reasoned law becomes precedent. Left unchecked, this becomes a de facto usurpation of legislative power by the courts. These difficulties in permitting, laying, and operating a single pipeline are indicative of a broken system that demands reform. This is a serious market inefficiency. Opponents claim that these projects are unnecessary, but how we utilize our natural resources makes a difference. Refer again to footnote 13, and compare what Pennsylvania pays on average for energy compared to New York. Assuming a national average of $3,500 on energy spending, that’s a $1,592.50 spread after taxes! Both New York and Pennsylvania are sitting atop the Marcellus. One state is taking advantage of that, the other is not. What could you do with an extra $1,600 in your pocket each year? 15 These projects are not just necessary, they are vital energy infrastructure . Much of our existing pipeline infrastructure pre-dates the shale revolution. If not beyond its useful life already, it almost certainly does not carry sufficient capacity to handle the volumes that 16 operators can unlock . The Permian Basin is a prime example. PA - $0.101 / kwh, 3.5% below CO - $0.10 / kwh, 4.7% below TX - $0.087 / kwh, 17.3% below Data from https://www.globalenergyinstitute.org/in-the-states 14 https://penneastpipeline.com/penneast-files-new-phased-approach-with-federal-regulators-to-meet-growing- customer-demand/ 15 Pipelines are safer and less carbon intensive than truck and rail – the only other options to move these products. Moreover, forcing the industry to resort to truck and rail means higher transportation costs for other items which would normally use those modalities (supply & demand). The most economical way of slowing or stopping flaring in the Permian will be by installing the necessary infrastructure. 16 Once again, for evidence of this, Google “Con Edison gas hook up moratorium” and tell me we don’t need more pipelines and that policies don’t matter. Copyright Ascent Consultants, 2020, all rights reserved 5

Some readers will recall Russian LNG being unloaded in Boston in 2018 to make up for the lack 17 of gas needed to provide heat in the winter . Regions of the country are still burning heating oil as if it were the turn of the 1920’s and not the 2020’s. And the cause? “[A] shortage of pipeline capacity.” While fossil fuel opponents occasionally describe this as a “moral” issue, that ignores the fact that the shale revolution has helped the US reduce its overall carbon footprint. Moreover, this line of thinking ignores the incredibly powerful moral argument FOR fossil fuels, as they have 18 lifted literally billions out of poverty and helped the world advance technologically . To further illustrate the need for a massive infrastructure overhaul, you can refer to the charts in Appendix A. According to the PHMSA’s data, we have thousands and thousands of miles of gas mains and distribution lines that are past their beneficial life. As part of “getting active,” the energy industry needs to push back against “keep it in the ground” efforts and rhetoric, demand comprehensive policy reform to help fix these inefficiencies, and demand the opportunity to update and upgrade our outdated, inefficient and inadequate national infrastructure. Part 3: Distribution Evolves: Tenaris & TMK Tenaris’ acquisition of TMK’s Ipsco assets and the six-year master distribution agreement naming Tenaris as the exclusive distributor of TMK’s Russian OCTG and line pipe for N. America are, without a doubt, the biggest events in prime OCTG distribution, ever. Past consolidation efforts, new mills, trade cases, the 232. None of these will have the transformative impact on the pipe and tube industry that Tenaris’ IPSCO purchase and 19 subsequent distribution agreement with TMK Russia will have . Recall that Tenaris’ goal with Rig Direct is to eliminate the need for distribution. Their Q3 2019 investor presentation touted a new era of consolidation and growth. Their Q4 call only reinforced that position, announcing their intent to immediately roll the IPSCO assets into the Rig Direct program (feeding the Ambridge and Bay City mills), while “right sizing” the North 20 American asset base (read: closing superfluous mills) . 17 https://www.washingtonpost.com/business/economy/tanker-carrying-liquefied-natural-gas-from-russias-arctic- arrives-in-boston/2018/01/28/08d3894c-0497-11e8-8777-2a059f168dd2_story.html 18 https://www.bakerinstitute.org/media/files/files/6ffe68f7/ces-finley-climate-energyfinancialrisk-022720.pdf 19 Consider Tenaris’ contract with ADNOC. 5 years, roughly $1.3 billion. Can any distributor handle the risk that comes with a five-year contract? 20 https://ir.tenaris.com/events-and-presentations Copyright Ascent Consultants, 2020, all rights reserved 6

Adding to the challenges, “Drill baby drill” is no more. Financing has dried up as investors demand ROI, global oil demand is being rocked, and OPEC+ just imploded in extraordinary fashion. The upshot of all of this? The pie is shrinking, rapidly, but the number of hungry OCTG distributors isn’t. As the Rig Direct model grows, competition for customers among distribution will be even more fierce. This means companies like Borusan and Axis, as domestic ERW alternatives, should benefit. Though you have to wonder when they, and other mills, will consider adopting a direct sales model as well. While the Rig Direct program’s impact on OCTG is likely to be immense, the IPSCO acquisition will have less of an impact on the midstream space, especially in larger OD material. Tenaris’ focus is on seamless material, and ERW material is widely accepted for all variety of lines and is a less expensive means of production. In some sizes welded pipe (ERW, spiral, LSAW, DSAW) is the only option available. But for smaller OD seamless projects like refineries and petrochemical, the seamless line pipe distributors are likely to face stiffer competition from the new Tenaris behemoth. Trade policy will make the situation more challenging. Importers will continue to face 21 challenges finding consistent, reliable sources of supply on account of the 232 , the S. Korean quotas, and a protectionist administration wielding tariffs as both sword and shield. While this “new Tenaris” will have the greatest impact on pipe and tube, it should serve as a warning sign to distributors of other products as well. The rules of the game are changing, and others will follow Tenaris’ lead. Part: 4 Macro Analysis: OPEC+ and COVID-19 These past weeks would probably be considered a “perfect storm” of bad news for energy. Coronavirus on its own is having a devastating effect on the global economy. The OPEC+ implosion had been brewing for some time, but... goodness, what miserable timing. Starting with the coronavirus, more and more communities are taking steps to increase “social distancing” voluntarily, while others are making it mandatory. The question remains how 21 As distributors continue to seek out new sources of supply both to avoid tariffs and adapt to a changing commercial landscape, it is imperative that good quality control and risk management procedures are in place and followed to the letter. This is something where distribution has failed in many respects in my own experience. These failures mean lost customers which is not something you can afford in this environment. Copyright Ascent Consultants, 2020, all rights reserved 7

effective this will be in slowing the spread of new infections, and when will life return to “normal”? One thing is already certain. Coronavirus will continue to exert downward pressure on oil prices, oil demand, travel, and non-essential consumer consumption until governments are confident that we’ve sufficiently “flattened the curve”, or a vaccine breakthrough occurs, to let 22 people return to their normal lives . All of that being the case, how does this unprecedented one-two punch impact the industry? First, the US energy industry has proven that it’s not going anywhere without a fight. 2014 taught us that the free market combined with brilliant engineering and management makes the US energy industry highly resourceful and very resilient. Second, these prices are not sustainable for any economy that relies on oil and gas income as a chief source of revenue. Estimates peg Russian break even at $40-50 per barrel, whereas the expansive government programs and subsidies in Saudi Arabia make their number much higher. So, there will be pressure to “right size” production. Some producers have already begun attempts at brokering a new deal and surely arguments are moving beyond simply the price of oil and are instead focusing on helping to restore some confidence to global markets. That being the case, Russia has used the last several years to build a sizeable sovereign wealth fund, basically a rainy-day fund, to weather the storm while the oil markets adjust to what 23 Adding to the complexity of all of this, the two main protagonists in this drama are in unique, yet potentially fragile, positions of power. Vladimir Putin appears to have cleared a path to two more terms, so that suggests more of the same from Russia in terms of global relations. In Saudi, Crown Prince MBS has shown a willingness to go to great lengths to consolidate and secure his own power. So, it is unclear what arguments could prompt a strategy change for either man, especially if capitulation would endanger their hold on power. That leaves us with questions about resilience and creativity, and probably hoping for a little bit of luck. 22 Hopefully, this will inform the economic measures currently being debated. Britain’s supply-side intervention was strong and recognizes that consumer demand isn’t the issue – we want to be out spending, traveling. But quarantines and lock downs suppress that demand. Help businesses survive, and help the workers who are harmed. 23 https://www.ft.com/content/1bf1f7fa-5a41-11ea-a528-dd0f971febbc Copyright Ascent Consultants, 2020, all rights reserved 8 could be the effective end of OPEC cushions will be tested not only by low oil prices, but by the economic impact of the coronavirus as well. . The Saudis have sizable reserves as well. But these cash

How long can each party (this includes the USA industry) tolerate these low prices? When paired with each country’s experience with and handling of the COVID-19 virus, how will that change the calculus? How long can we tolerate voluntary economic paralysis? What will government intervention look like in each country? The answers to these questions could have profound effects on the geopolitical and energy 24 hierarchies . So, what could happen? What might happen? What needs to happen? In no particular order: 1) Vertical and horizontal integration throughout the upstream, midstream and downstream industries a. See the Deloitte white papers referenced in Edition 1 for more on this

1. 2) We will likely see a new record low for the US rig count if these headwinds push into 2H 2020.

2. 3) Creativity & Agility. Reserves aren’t going anywhere, so position your company to hold onto its core assets, while evaluating as many options as possible for a path forward. Not every company is going to make it, but the US can marshal resources to restart shale very, very quickly. You need to be ready when this turns.

3. 4) Best practices & efficiency-seeking efforts at each point in the supply chain – from wellhead to consumer.

a. Adopting new technology will be part of this effort

1. 5) Demand growth. This is critical.

   1. The US and global economies need to find their growth footing again so that demand for oil recovers.

   2. In that vein, work to wind down destructive trade wars, especially the 232. No matter what tariffs are placed on foreign steel, domestic steel manufacturing jobs are not coming back to the level of 30 or 40 years ago. Technology has made those jobs obsolete. The time to upgrade the industry was decades ago. More protectionism is only going to set the US industry further behind. “Restoring” steel jobs is not feasible, it’s merely a fantasy.

1. 6) Policy reform

24 https://foreignpolicy.com/2020/03/09/opec-russia-shale-oil-price- collapse/?utm_source=Center+on+Global+Energy+Policy+Mailing+List&utm_campaign=4fbb33427b- EMAIL_CAMPAIGN_2019_09_18_12_40_COPY_01&utm_medium=email&utm_term=0_0773077aac-4fbb33427b- 102277169 Copyright Ascent Consultants, 2020, all rights reserved 9

1. Pipelines are vital infrastructure. We need the legal and regulatory framework to support new lines, and the replacement of outdated infrastructure.

2. A comprehensive energy policy aimed at updating and upgrading our national energy grid while simultaneously focusing on natural gas as a bridge to renewables.

3. Energy has to be a part of the transition to renewables – R&D – but natural gas is the bridge toward that future. We must invest in responsibly growing our industry and exporting both hydrocarbons and technology.

1. 7) Putin or MBS (or both) relent and production levels drop giving the energy industry time to heal and reorient itself

2. 8) Coronavirus cases and fears abate enough to allow a return to normal economic activity (given recent events, this is nearly a pre-condition for items 1-7)

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About the Author:

Matt Beckmann is the Founder & Managing Director of Ascent Consultants. In addition to experience as a former Chief of Staff to the Missouri Auditor and as a Corporate Vice President and General Counsel, he has advanced training and certifications in law, business, coaching, athletics, and leadership. His blog content, inspired by his deep passion for unlocking his reader's best potential, consistently equips business owners and individuals with the knowledge and resources to overcome obstacles that may be hindering growth.

Ascent Consultants provides business and strategy consulting, executive and leadership coaching, and leadership assessments. By converting client growth goals into an actionable "game plan," we help companies and individuals unlock their full potential.