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Shareholder, public demands have oil and gas industry at crossroads

Oil and gas producers are changing their business practices in response to social pressures.
Support for innovation has more potential than regulation to spur technological improvement and environmental sustainability.
The supermajors' interest in the Permian Basin is "a marriage made in heaven."

Rice University professor Kenneth Medlock has developed a reputation as one of the world's leading oil and gas analysts. He has spoken to OPEC, discussed key issues with leaders of industry, and testified before the U.S. Congress. He talked with S&P Global Market Intelligence during CERAWeek by IHS Markit about some of the sector's most pressing challenges and developing opportunities.

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Kenneth Medlock, fellow in energy and resource economics at Rice University's Baker Institute and senior director of the institute's center for energy studies

Source: Rice University

S&P Global Market Intelligence: What do you see as the biggest issues being raised at this year's CERAWeek event?

Kenneth Medlock: I think the issues around environmental sustainability. [It] is kind of hard to believe, because it's been a major subject of discussion in energy circles, but there's less debate about it now. It's not about whether something needs to be done. It's now a matter of what can be done in an economically feasible way.

It seems like technology has become a very big deal for the oil and gas industry. Does that go hand-in-hand with sustainability, or are those unrelated developments?

Technology is critical to addressing any issue. Innovation is critical. I always like to say that when you go back to the world of [late-18th-century thinker Thomas] Malthus predicting the end of days because we would have overpopulation and starvation — well, that didn't happen, [not] because we regulated our way out of it. It didn't happen because we innovated with agricultural practices and avoided the issue. That's a great example of how innovation can placate the concerns of the day, and it's critical that we continue to be forward-looking with innovation, have policies that promote it, rather than arbitrarily picking winners and putting others on the sideline.

Has the industry become more responsive in the last few years when it comes to technology and sustainability?

Absolutely. What's interesting is, I don't think that's a policy-motivated response. It's a response related to corporate social responsibility. The world of social media means that the Twittersphere is filled with commentary about oil and gas companies, about fossil fuel companies, about other energy companies. What this means is that they have to be responsive. They have to be more reactive to those social pressures. And this isn't just related to shareholder-motivated actions; it's deeper than that. It's really about the social license to operate.

It also seems that shareholders now are more interested in free cash flow than they are growth.

That's certainly true. That's the backdrop to all of this: you have to make money. No matter how we want to paint the canvas ... if something doesn't make money, shareholders will eventually bolt. It's critical that any business model that addresses the energy needs of the future has to be a money maker.

What do you make of the Permian — something that has been on the radar for independent producers for several years — starting to get the attention of the supermajors?

They bring scale efficiencies to the field, and it's a big field. It's sort of like a marriage made in heaven, because when you have companies that can bring that kind of scale to that kind of complex environment — because you're talking [not just] about drilling a whole bunch of wells, connecting them all, developing, gathering, takeaway capacity but also coordinating all the elements of the supply chain at the lowest cost possible. That's where the majors have a distinct advantage, and that's why they're pushing so hard out there.