Consolidation Driving US Oil & Gas Productivity Gains as COP28 Demands Transition

• COP28 climate conference shows tension between reducing emissions by limiting fossil fuel supply vs reducing demand
• Oil & Gas demand is highly inelastic; limiting supply often just shifts production around, fails to reduce emissions
• US shale supply continues to grow dynamically, consolidating to drive productivity gains
• Lack of investment in juniors has created a gap in the ecosystem that should attract more capital over time
• Geopolitical threats around Guyana oil reserves appear to just be political posturing without impact on actual production

The recent COP28 climate conference in the fossil fuel-producing nation UAE highlighted key tensions around reducing emissions by attempting to curb Oil & Gas supply versus tackling underlying energy demand. Neil Young, CEO of Oil & Gas explorer Elixir Energy, provides an insider's perspective on market dynamics playing out on the global stage.

Inelastic Demand Means Limiting Supply Shifts Rather than Reduces Emissions

As Young explains, "The key tension that is very visibly illustrated here is that a lot of people hope that by retarding supply, demand will naturally fall and that then carbon emissions will fall." However, he cautions that "Supply follows demand in oil and gas." Efforts by Western nations to restrict supply are likely to simply shift production elsewhere without impacting consumption or emissions:

"If you stop Supply, say by Western companies, then OPEC will increase its Supply so you don't change a thing. The other thing is that you drive prices up exactly and at some point, and maybe this is the intention, Oil & Gas demand is very inelastic, but it's not infinitely inelastic. So if you stopped all supply then you stop all demand."

Germany's energy transition provides a case in point. Despite rising electricity costs and dirtier supply, underlying industrial and manufacturing energy demand has not disappeared but rather shifted production overseas to coal-intensive China.

For Young, the underlying driver remains human nature and aspirations for economic growth, which are "antithetical to the origin of species almost." Curbing Oil & Gas supply through "absolutist" phrases like "phasing out" fossil fuels fail to recognize ongoing demand realities and need for incremental pragmatic solutions to manage the transition.

US Shale Dynamism Drives Productivity Gains and Consolidation

Even as shorter-cycle shale basins mature, Young highlights underestimating the ability of US producers to drive further productivity enhancements would be a "Fool's game." The "continuing consolidation that is centered around the premium but not driven entirely" in top shale regions like the Permian Basin illustrates the sector's dynamism.

The US has hit "more than 13 million barrels a day is the highest in the world and that reflects the dynamism of the American economy and the Oil & Gas sector specifically." Young sees the sector as "so energizing" and "deep and enterprising." While such productivity gains cannot continue indefinitely, he believes forecasting an imminent peak would prove misguided.

"People were saying that the shale curve is going to decline in 2011 or in 2012. And now it's 2023. When you can't keep putting wells in forever, but to underestimate the productivity Improvement capability in places like the Permian Basin has proven to be a Fool's Game."

Market Gap Creating Junior Investment Opportunities

At the same time, a lack of recent investment in junior Oil & Gas companies has created "a bit of a gap" in the industry ecosystem. However, Young believes this gap will inevitably attract new capital.

"When something can't go on forever, it won't. That's a quote from Nixon's treasury secretary...this is the only thing he's known for. There are lots of things that will happen, not necessarily next week, but certainly in the next few years. And that will fill up that space and provide opportunities for consolidation, for farm-ins and for capital to flow down."

He points to several potential catalysts, including spin-outs of non-core assets as merged entities like Woodside and Santos consolidate. Private equity investors seeking returns could also target the sector. Ultimately for junior companies, those that can consolidate and "swallow up peers" may grow into that mid-tier space. And despite talk of stranded assets, Young emphasizes that "money flows where we'll get returns."

Guyana Reserves Secure Despite Political Threats

Venezuela's recent threats to claim oil resources off Guyana's coast appear nothing more than political posturing without real substance. Given Venezuela's dependence on Western expertise to extract even its reserves after years of economic mismanagement, Young sees no genuine ability for it to seize Guyana's offshore production. Such "Folly and distraction" has managed to negatively impact some junior stock prices.

But ultimately, he believes "even if it did happen they don't get the off-shore anyway so 'big deal', you're going to get a bit more jungle."

COP28 brought into focus demand-side challenges in transitioning away from Oil & Gas quickly, even as climate consciousness pushes against fossil fuel dependence. US shale continues outpacing predictions, driving productivity upside through consolidation. And juniors stand to benefit from spin-outs and new capital in filling investment gaps. With posturing threats failing to shift actual offshore production fundamentals, market dynamics may overpower politics as usual.

Investment Thesis for Oil & Gas

• Consolidation driving productivity gains means supply likely continues outpacing expectations
• Inelastic underlying demand leaves room for steady investment upside, especially with demand growth from developing nations
• Lack of junior investment has created gap in targeting discounted assets with consolidation/productivity turnaround potential
• Politics more noise than signal - no real impacted change from threats over offshore reserves etc.

COP28 highlighted structural tensions around reducing emissions by limiting oil and gas supply rather than focusing on demand realities and pragmatic transition paths. Market consolidation and productivity upside driven by US shale players likely persist despite political posturing. And a current gap in junior investment leaves open longer-term opportunities. While polarization pushes absolutist views, incrementally filling gaps across the ecosystem may offer more realistic paths to navigating the complex transition underway.