Module 1 – Fundamentals

Presenters: Rusty Braziel & David Braziel

Module #1 combines an overview of the new realities of energy markets following the late-2014 collapse in crude oil prices with an introduction to energy market fundamentals.  We begin by introducing the framework we will be utilizing to understand interconnected market behaviors or what we here at RBN refer to as “Connecting the Dots”.  We will examine developments in the markets that we like to call “drill-bit hydrocarbons”. This term groups together the three hydrocarbons created by the business end of a drill bit and produced from a well – natural gas, natural gas liquids and crude oil. It is that drill bit, the way it is used to drill horizontally, and the hydraulic fracturing techniques applied downhole once the well has been drilled, along with other technologies facilitating the process of drilling and completing wells, that launched and continues to drive the Shale Revolution. But the revolution is not confined to the upstream.  Its effects resonate throughout the energy value chain - upstream and downstream. To illustrate the interconnections across these markets, we will go beyond the “where” and “when” the markets changed and use models to make practical sense of the “why” and “how” these changes were made.  Module #1 is included for free with the purchase of any of the other Modules.

The three sections in Module #1 are:

1.1 The Shale Revolution, Connecting the Dots, and Fundamentals of Fundamentals.  As increasing natural gas, NGL and crude oil production surged through the markets over the past few years, it has had all sorts of impacts on pricing, infrastructure, regulation, logistics, cost, demand, resource availability, etc. It is a long list and might seem to be a random hodge-podge of market developments, but nothing could be further from the truth. RBN’s thesis is that these events are anything but random. In fact, they are all linked – with each development being directly connected to one or more other events. This is the notion we call “Connecting the Dots,” and it is the theme our Virtual School of Energy is built around. 

From there, we dive into energy market fundamental analysis basics, which are all about answering two key questions: #1 What makes prices move?  and… #2 What happens in response to market price movements?  This section asserts that energy markets are not efficient, that there are huge amounts of energy fundamentals data available from government and private sources, and the catch is knowing (a) which data is important, (b) how to summarize it, and most importantly, (c) how to interpret it.  We examine the hydrocarbon value chain, market terminology and the RBN “Rosetta Stone” of energy markets. We also focus on how changing production patterns affect price differentials and the subsequent effect on pipeline flows. 

1.2 Understanding Energy Fundamentals Models. What makes School of Energy unique from other energy conferences is that attendees are taken beyond the conceptual level down into the nitty-gritty modelling aspect.  Rather than trying to keep our methods secret, we teach the students how to use our models with hands-on instruction. This section is an introduction to the twelve models that are woven throughout the course and the expectations that users should have for their depth and complexity. Together, we’ll use these models, our tools, to analyze important market aspects such as producer rates of return, pipeline flow data, displacement and rejection economics, gas processing, petchem feedstock selection and more. Our goal is to illustrate the analytical process and connect the dots within the framework of a specific business problem.

1.3 Modeling Midstream Infrastructure Projects. While models can help us understand individual aspects of the market at a given time, they provide an even greater value when the dots are connected.  Taking a wholistic approach enables market participants - from analysts up to executives – to make informed business decisions based on quantitative analysis.  To illustrate this point, RBN has integrated our twelve models into a real-world scenario centered on a midstream infrastructure project in the hottest region – the Permian.  Each of the models is incorporated into that scenario and will factor into our ultimate business decision which comes in Module 7.  In this module though, we’ll introduce the basic framework upon which we’ll model the midstream infrastructure project.  This involves developing a macro, regional, and micro perspective about the assets in question.