 Welcome to another episode of the Savvion de Panur. I'm Tala Salamatee and your host. How do you like my new at-home set? Not quite the same as in the studio, but I'd really like the relaxed feel of working from home. Today we'll be discussing commodities. Commodities are something that can be interchanged with something that's basically the same. So a pound of flour can be exchanged for a pound of flour. A bushel of wheat can be exchanged for a bushel of wheat. Or in this case, a barrel of oil can be exchanged for a barrel of oil. Let's explore why options are even a thing. Perhaps you're a oil producer in Texas and you're making $70 a barrel on a thousand barrels a day production. Now let's say this is because there's a conflict in the Middle East, but you have a premonition that that conflict is going to stop. When that conflict expires, the oil price is going to drop down to let's say $30. Now let's say that your price to produce the oil is $40 a barrel. So that $30 price would mean that you're losing $10 a barrel. In this scenario, you may want to make a futures contract that would guarantee you somewhere above $40 but perhaps less than the $70. This is the purpose of these types of contracts. Let's say you're a chemical company or refinery and you need that oil to produce your product. Now let's say you also think that that war is going to expand. So that $70 per barrel price is actually a very good deal when you think about the potential price increasing to over $100. In that scenario, that company would love to buy that oil producer's oil at let's say $60 a barrel. It's all about hedging your risk. For the producer, they want to make sure that they're making more than what it costs them to produce the oil. And if you're the consumer of the oil, you want to make sure that the prices that you're purchasing the oil for is not going to wreck your margins because your finished product is probably not going to be able to change its price. Now let's say some speculator bought that contract. They may hold on to it for a while and they may sell it to someone else. But once you have that contract, that contract is then a living thing that can be exchanged on different markets. Let's say for example the Chicago mercantile exchange where most of this type of trading originated. It also occurs on markets all across the world including markets like the S&P 500. Today we'll be discussing the recent price fluctuations of oil. It recently went negative. Producers were actually paying people to take their oil, which is fascinating for a commodity that is so valuable. To help us understand this, we'll be having discussion with my lifelong family, friend and mentor and advisor, Jeff Orsenich. Jeff has done many things in his illustrious career. From being a professor at the University of Calgary to running multiple oil companies as CEO, having exited over half a billion dollars, he understands entrepreneurship. And I can't think of a better person to help us understand the commodity industry. Jeff, I obviously know a lot about you because we've known each other my entire life. But could you tell the audience about your background in the oil and energy industry? Yeah, my history goes back to 1975 when I was a land negotiator dealing with farmers for an oil pipeline being built in Western Canada. So that was an introduction I found an industry fascinating. So I ended up getting involved full time, first in land and economics and business development. And then finally got the motivation to start my first oil company in 1993. And I thought I was going to build the next Exxon that I found out made a lot of mistakes, but I'll end up fine. It's a good learning experience. We ended up making money for everyone selling the company four years later. And then proceeded to start three more oil companies all did well at different rates of return. We learned about how to make money in the oil business. And the fundamental of that is a real intimate understanding of oil prices and what drives them. And we took advantage of that knowledge to buy, low, sell high as part of our strategy, as well as reducing costs and improving production. But understanding where oil prices went is key. And since then I've diversified other startups in renewable energy and technology. But once an entrepreneur never, you never stop. Absolutely. Once you're bitten by the bug, you just are not satisfied with anything else, right? And you know that as well as anyone. So with your wealth of knowledge of the industry, can you talk about how the industry has changed as you first got into the oil energy industry? Yeah, it's fundamentally changed. I think the biggest change is that junior companies have trouble starting up in today's environment. When I first got involved in the oil business, there were thousands of junior oil companies, as small as one or two employees. And there was room for juniors to have their niche, in spite of the market being dominated by what used to be called the Seven Sisters, the seven biggest oil companies. But now, it's a big company game. Shale is dominating the landscape for new investment. Until recently, I think there's going to be collapse. It's very little room now for small startups to get gain of football in today's industry. That's interesting. So when you're talking about lots of smaller players, are they all occupying the same market or are they in different niches within the market? A bit of both. Because the oil industry was driven by finding oil. Anyone who had a good idea on how to do that had room because I think Jake Palgetti first said that oil is first found in the mind of men. So good ideas were all well-kept and started. Including the majors, you go back to John D Rockefeller, who was the father of five of those Seven Sisters. He had a great idea. His idea was, well, instead of just taking crude oil and using the naphtha and throwing away the rest, let's refine it. Use a new technology to do that. It was new at the time. And because of that, he was able to be the most cost producer. And he basically just showed his bucks to his competitor, refineries, and they just gladly sold out to him because he could never compete against him. And all 90% of the industry are from that good idea. Yeah. And he was rewarded by a antitrust suit, which broke him up, correct? Well, yeah, although there's mixed things about that, it sounded bad for him. But then the day after he was bringing his standard oil trust and broken into 25 different companies, and they all started trading on the New York Stock Exchange, his net worth went up 10%. This is going to happen with that earlier. That might be what Facebook and Amazon end up seeing if they end up getting broken up. I don't know. But we have to credit Rockefeller as much as he's been vilified, but he deserves full recognition for creating the modern oil industry, foundation for that. It's essential for how efficient it is. It's a highly efficient industry and can deliver low cost energy throughout the entire world as being the main reason for our society's prosperity in the last century. Absolutely. It's a very, very efficient source of energy, right? It definitely is. It's still growing. I mean, as I showed you in all those charts, since I got in the oil business, production has grown from mid 55, 60 million barrels a day to 88, 5 million barrels a day today. So it's not defining, it's actually expanding. So that leads us to where we're currently at today, where we have our current level supply in the market. But for some reason, the demand side can't absorb the supply. And that's how there was, for a short period of time, $0 gas or sorry, oil. Do you want to tell our audience how that occurred and was it speculation part of this fluctuation in the oil price? Well, speculation always factors into oil commodity pricing, because people do make a living out of buying and selling futures. The problem for those traders is that when the end of the contract comes up, there's no room to store their oil. They don't want to take possession of those liquid barrels, because they have no place to put a meeting in your office, could only hold a few barrels. So I don't think you want that obligation. So that's why we saw some negative pricing that speculators were unloading in position. So they wouldn't have to take physical possession of the oil. And there's just no room for additional storage tank capacity and crushing in other places. Just couldn't handle it. So it was being given away. In fact, people were paying that haven't taken away. So in commodities, speculation is a whole industry. People make their living on that. Can you talk about how speculation impacts the oil industry? Well, it's always been part of it ever since we've had markets like IMAX, New York, Mercatile Exchange has been trading oil for decades. So you can buy futures contracts option. You can speculate that way. It's just like any other commodity. Where it gets overblown is what happened in around 2007, 2008, when sovereign wealth funds and other major funds were speculating with oil as a reserve against inflation. They thought having liquid assets like oil would be a good indicator of investment. So they all did that. And the combined effect was to drive oil prices up to record highs that are still never, hasn't been met since then. And then someone in that herd figured out this isn't sustainable and they wanted to unload their position. And once one member did that, everyone did that. And so they had to collapse the prices down to some of the lowest levels we've seen until recently. So that happened a very short period of time in a matter of months. Then the market went back to its normal trading patterns after that. But it can disrupt the market if it's done massively by too many speculators. That's an interesting way to think about it when there's too many. Currently, do you think that there are too many speculators and not enough people actually in the market for the commodity? That's a good question. I think the recent experience in the last couple of weeks has revealed that Chinese speculators have lost their shirt. Thinking that oil prices have been bottomed out, they didn't. And then there is the disastrous meeting of OPEC and Russia and other OPEC plus members. Back in March, when Russia refused to budge and their apparent to Saudi Arabia haven't been settlement, decided to go on a rampage and do a price war. Now, if one would want to be a bit cynical, you can think that Putin had deliberately orchestrated that so that he and his cronies could make a whole bunch of money in the future. The price dropped from the 30s down to the 50s down to the 20s. A few trades could have made billions of dollars for people who had advanced knowledge of that event. So you can speculate that may have happened. It wouldn't surprise me because Putin, as much as you disagree with his policies, has demonstrated to be a very strategic thinker and anticipates most movements like this. He doesn't need your free art. So for those who are skeptical about this, how would that hedge work? Well, if you're Putin and his cronies and you knew you were going to set up the man-child that runs Saudi Arabia, you would just do what you did. You would acquire all kinds of options on the short side. So you have buy options to sell oil at $50 a barrel for as long as you can, as many as you can, without causing too much suspicion. And then do what they did and then have oil trade at $25 or $30 and you sell those options and you make $10 or $20 a barrel. So if you had literally sell $35 billion barrels a year, even if you had a billion or two billion barrels options just for a short period of time, you could have made $20 or $30 billion in that trade. Wow. That really makes the conspiracy theorists sound somewhat rational when you put it like that. Well, there's money involved in anything's possible. So Jeff, prior to this conversation, you sent over some charts. Some of them showed US plus Canada with the opposing line being Russia plus Saudi. Can you go over those? Yeah, I think we should discuss those four countries because those are the four top producers in the world and they've been naturally connected. The Canada-United States is one block. We go out of blockstep Canada-United States on energy policy, foreign policy. We fight in each other's wars. I mean, we're strong allies. So Canada-US is really one block. And also most of the shale production from horizontal drilling comes from Canada-United States. So 9 million barrels a day added to the market from shale is almost all from Canada-United States. So that's one block. Then the other block that's an obvious combination because they've been working together is Saudi Arabia and Russia. And it's shown when Saudi Arabia did their second price war back in 2014, Russia intervened and negotiated the OPEC plus deal with Saudi as the main partner in that negotiation. So Russia and Saudi are linked like Siamese twins in Canada-United States are one block. So those two blocks competing forces in the Google market. The U.S.-Canada connection makes a lot of sense. I mean, geographically, socially, I mean, our economy is very similar. But the Russia-Saudi thing is a little bit less obvious to me. How did that relationship bud? I think it involved a necessity back in 2014 when the price crash happened because of Saudi actions or inaction really. They decided not to cut back production just let the market collapse. And their stated intention was to destroy the U.S. and the Canadian shale industries. The U.S. Canada block was a target. Russia intervened because their revenues were dropping to a level where they were uncomfortable on social programs inside their own country. They wanted to make sure they could stabilize their country. So they had a need to work with Saudi Arabia. The other reason is Iran. I mean, Iran and Saudi Arabia are at loggerheads. Russia is an ally of Iran. And they have reasonable relationship with Saudi Arabia. And they're the only honest broker that could deal with both countries because Iran was having its problems with Saudi Arabia and they couldn't agree on oil policy. But Russia was able to broker that relationship. So Russia is now a strategic partner to OPEC, especially Iran and Saudi Arabia. And to see how that all works, right? Because that is correct. Russia does have domestic relationships with both of those countries. So it probably makes Russia punch above their weight internationally because of that relationship. Definitely. And they're a strategic competitor to the Americans. So it's a natural relationship for them to ally with America's allies to try to divide and conquer. Putin's always thinking. He's a chess player. Unfortunately, some of the world leaders are chess players, or checker players, not chess players. Someone way smarter than me said that history is bound to repeat itself. So looking at the historical movement of the oil industry, where do you see things going in the future? Well, let's look at what drove the industry so far. And it's not really has ever really been a free market. There's always been competing blocks and influences on production side that tried to create at least an oligopoly to manage the market. And that work sometimes doesn't work other times. But it did work up until 1973 when the Seven Sisters collaborated to manage the markets. They kept prices low at the field or the wellhead. And they made their money in downstream refining in marketing. And the Seven Sisters were BP, Shell, Exxon, Mobile, Texaco, Chevron, and Amaco. And those last five were actually descendants of some of the Rockefeller and Stanger Oil companies. But then there was a fateful meeting between the Seven Sisters and OPEC, which up until 1973 was rather a conservative and non-controversial group that didn't really care about production's weight. And they basically told the Seven Sisters, we need to renegotiate our oil contracts. We don't like the low price we're getting in the field. Because that's where Saudi Arabia and others like them in part OPEC got their revenue. But the Seven Sisters basically said, it deals, it deals, it deals so soft. And OPEC took note of that and decided that, well, we're not going to have this offer. We're actually going to take some action. There's the Yom Kippur War, which was basically an OPEC country alliance against Israel. And then shortly after that, there was the Arab oil embargo, which clearly showed the vulnerability of the West to the oil supply chain. And from that point on, OPEC controlled the market until the mid-80s. The Iranian Revolution happened in between, and pricing increased again to heights that OPEC only dreamed of before. Saudi Arabia was trying to manage that price by being the swing producer, so they kept cutting back until they reached a point in 1985 where they dropped their production from something like 10 million barrels to 2.7 million barrels today. And they said, enough's enough, we won't do this anymore. So that was the first price where they flooded the market. December 1985 and 1986, the price collapsed to levels over somewhere since they, in real terms. And that price war didn't work because the industry didn't go out of business. And they realized the Saudi Arabia, that was a futile effort. And so they eventually went back to normal production levels and trying to stabilize the price, which it did. But over the next couple of decades, it was choppy. It was difficult to manage the markets so they could have a stable price. And then you had things like the Asian economic flu that destroyed demand, just at the time that OPEC thought it was safe to increase output, and then that was a price collapse. The dot-com bubble burst. That was a recession caused demand destruction. We had a couple wars in the Middle East and the Gulf that caused prices to spike. So it was a choppy period and OPEC was trying to keep the price in the $40 barrel range into these dollars. And then the peak oil experience happened. And peak oil is a theory that was brought forward by a geophysicist in the 1950s called King Hubbard. And he accurately predicted using this statistical analysis technique that US oil production would peak in the mid to early 70s, and he was right, it did. And it was starting to decline significantly. And using that formula, the world was supposed to be having peak oil by 2005. And so pricing started to really climb. And that's when the bubble speculators got involved and drove prices even higher until that bubble burst. And then the shale revolution happened. This is not predicted by Hubbard's peak oil calculation because it's a new technology. It radically changed the oil industry. Shale is an almost impermeable rock that has oil in it, but it can't really move very well. And no one ever thought you could produce oil from shale until someone in Texas had this crazy idea to do a horse while drilling and then fracture it. His name is George Mitchell and his board even was against the idea, but he owned the majority of the company, so he overruled his board. And he experimented with the horizontal multi-stage fracking and it worked. And it totally revolutionized natural gas and crude oil. And you look at the world oil reserves of 2.2 trillion barrels currently is probably a similar amount of shale reserves, you know, candy hide states of the producing shale regions, but there are at least 19 other equally sized basins around the world. And what keeps the OPEC members up at night is price being so high that all these shale basins decide to invest in drilling and they flood the market. Because of the 80 some odd million barrels a day of production today, we can easily add 50 million barrels a day from new shale deposits. That is a game changer for the oil market. We no longer have this peak oil fear that supply is going to be limited. Technology is radicalized in the future for where crude oil is going to go. Now, I could add to where I think the future is going. First of all, the short term, let's start with that. The COVID pandemic and the isolation reduced demand dramatically. So the demand is down by about 10 million barrels a day from where it was before the pandemic. It might even be larger than that in the 15 million barrel day range. So demand dropped from 83 to 65 million barrels a day. OPEC plus eventually got an agreement broken by Russia and the United States to reduce their production by 10 million barrels a day, but that's not enough. So there's more production than demand. And when that happens, it's only a matter of time before storage gets full. When storage gets full to the brim, then oil goes into a freefall. Oil is very inelastic in terms of pricing. Economists talk about inelastic demand and elastic supply. It's true for oil. You only need a small change in production and demand to have dramatic change in price. So with the Saudi price war number three and demand destruction from the COVID pandemic, it was the perfect storm to have a total collapse in oil prices. And it's magnified by reaching full storage. That eventually will clear itself out because higher cost producers are going to have to shut in because they're negative cash flow right now. And so production will level out. And shale is very short life production declines very quickly. And if there's no new investment shale, that 9 million barrels a day will rapidly drop to 5 million, 4 million in the next year. And eventually the supply will sort itself out with demand. Long term, cheap oil means demand will eventually increase again. And we may get back up to our 83 million barrel a day consumption. Pricing, I think, is unlikely to get back to that $50 to $60 range in the next five years. And the reason I say that is that there's so much pent up production capacity from non shale sources that it could ill take care of any demand growth. And also it can make money below $50 a barrel, which is the minimum price shale needs to be economic. So when you look back at history, $40 a barrel in today's dollars was a reasonable price for oil for many decades. People can make money at that price level. Shale is a lot more expensive. Oil sands is also expensive. You'll see less investment there too. So with a dramatic drop in investment in competing supply in the United States, then the Saudi Russia block will take more market share because they're lower cost. So long term, I'm talking 5 to 10 years, we will be about $50 a barrel or less. And it might be the odd war that spikes it up briefly, but we're unlikely to see the $70 barrel pricing we had before the pandemic. And certainly, we're not going to see $100 a barrel oil ever again. So this might be an obvious question, but seeing that most of the US Canada reserves are at a higher production cost, does that mean that there's going to be a big change in the US production rates? Yes, I guess I know. I mean, the sunk costs for current oil sands are done. Investors have written those off. So as long as there's an operating margin and at $40 a well US, oil sands can make an operating margin. So the existing production will continue. Shale, same thing that most of the existing production is being hedged for a year, which is where most of the payout happens. But new investment in shale is already dried up and it's unlikely we'll see massive new investment in shale in the next few years because they can't afford this volatility. This is too risky for them and the costs are too high. So shale will be curtailed, investment that production will drop. Oil sands will flatten out. There will be very few new projects if any. So eventually, Canada US oil production will drop down from its current levels. And I predict at least a $5 million barrel a day drop next year and possibly more because if we have sub $30 price, then even conventional oil is challenged. And you'll see shut-ins because the operating margin still exists at that price level. So the future is a downward production from North America, stable production from Saudi Arabia, Russia. And it's not going to be a very rosy price picture for the oil industry. But there will be winners and losers. Those who are the low-cost producers will be the winners. High-cost producers will be the losers. But seeing that you made those predictions, it makes a lot of sense that you're doing what you're doing now. Jeff, you want to talk about some of the new technologies that you're working on and how that can dramatically impact the way we deal with energy? There's a growing niche in the petroleum business, what we call biofuels, or alternative energy. And it's basically how do you make gasoline, diesel, fuels, jet fuel from non-fossil fuel materials? And ethanol, for example, is largely produced from corn in the United States and wheat in Canada. Biodiesel is largely made from canola oil and soy oil, as well as animal fat. And those are alternative materials to create hydrocarbon fuels. And the problem with those food for fuel technologies, which have been around a long time, several decades, is that the food inputs sometimes have a much different price cycle than your output does. The problem with food versus fuel also is that you're competing uses for these food crops. And that's been the big problem for our first generation of biofuels, which uses food inputs. Second generation biofuels uses waste biomass, materials that have no other use, and definitely not food. And do not compete with the food market. In our case, our technology can use wood residue from sawmills or logging forced slash miles from after the logging has been done. You can also use the organic part of municipal solid waste. We can use plant residue from agricultural sector. For example, hemp processing leaves a lot of residue. We can use all that. We can even use methane produced from fermenting animal here. So having those waste inputs available gives us a big advantage because those are very low cost and they're predictable. We can negotiate a contract that locks in the feedstock price. You can't do that for crude oil. You can't. It is a futures curve. But we have a low input cost. So having very low cost inputs gives us a huge advantage in producing gasoline. In our case, if we're looking at crude oil prices as the benchmark for where we sell our gasoline, we can still make a reasonable rate of return if West Texas immediate is 25 to $33 barrel range. And that puts us among the low cost producers of any of these fossil fuel, conventional fossil fuel producers. If you look at the futures curve, which is the market bet on what they think the futures price is, and it's a good bet because if I wanted to lock in a price for when I started out my bio refinery, I could do that. Right now I can lock in in the mid thirties, dollars WTI for barrel for when I started out to 2023. And then it grows to the mid forties following eight years. So you can lock in these prices and guarantee a margin and my potential investors like that. So being low cost producer, using an alternative feedstock is just a good idea, irrespective of greenhouse gas credits that come with that. I'd rather have something economic without any THG support, because then I know I don't have to depend on government regulations and the whims of future governments and their budgets. We'll make a lot more money from the THG credits than we will from the gasoline. We can almost give away our gasoline and still make money. But I don't want to promise that because that's not my control. My costs are in our control and I can show a good margin in today's price environment. And what was the company name again? Well, my company is inspired by the Rainforest Collective in Alberta, which is a group of 2000 professionals that want to create an ecosystem of innovation. So our company is called Rainforest Energy Corp. Our website is www.RainforestEnergy.ca So Jeff, I'm assuming you've gotten some really great feedback on the market. I mean, something like what you're working on could be very disruptive. Yes, it is. The biofield market, though, has been crowded with a lot of train wrecks. There are many ethanol plants that are being shut down now. And this is the first time that's happened to them where corn prices and ethanol prices went in opposite directions. And so the ethanol business, standalone business, has a bad rap. And that's hurt us because we're also biofuels. But what's helped us is showing why we're different, why our approach makes a lot of sense and have a stable return. And from the investors I've talked to and the governments I've spoken to, they're quite excited about this. It just takes time to disrupt a market and it doesn't happen overnight. Absolutely. You've got to educate your stakeholders when you're bringing in a new product and a new disruptive product at that. So for the people who are watching this, if they want to get in contact with you or be involved with your technology, how can they do that? Well, first I recommend checking out our website. We have a corporate presentation that describes the considerable detail of what we do and where our projects are. We have far more projects than we can handle. So what I'm looking for is partners. If you have a project that you've got some capital that you invest in it, then contact me and we can talk about how we can work together. So you already have some projects going on in Canada and the U.S., correct? That's correct. One in Alberta, actually two, but one that's progressed to the state where we're able to be shovel ready, what are called shovel ready. And that's the partnership of the rural community that wants to attract a number of agricultural ventures to connect with us because we produce gasoline, but we also have several valuable co-products. We produce surplus power. We have clean water. It's a byproduct. We have residual heat. We also produce greenhouse grades, carbon dioxide, which greenhouses love to use to enhance their yield. So there are four or five ag ventures that want to connect to us in this rural community to use those co-products. It gives them a huge advantage in their markets. And then we have a project in Maine with a community that's depended on the forestry industry. We have the pulp and paper mill shut down 10 years ago. And again, we can use wood residue from the logging industry, which is very large in Maine. And the byproducts we produce are going to support several co-ventures inside that community to diversify their economy and create what I consider a community circular economy, which is really the way of the future to try to have interdependent businesses that at the end of the process have no waste. We totally repurpose waste so that we don't have any waste. And that's the secret for the future, the future circular economy. Well, I've got to commend you on your work. You've done some great things in the film theropic area for both the environment and humanity. So you are a gentleman and a scholar, Mr. Arsenecz. Thank you very much for your time today. And thank you so much. I hope this was enlightening. Until I see you again, stay savvy.