Rusty Braziel sat down with Don Stowers, Chief Editor of Pennwell’s Oil & Gas Financial Journal, to talk about the big picture – some of the most important issues facing the oil and gas industry, the lasting impact of the Shale Revolution, and Rusty’s thoughts from 40-plus years in the energy business. It turned into the cover story of their June 2016 issue.

1. JUNE 2016
THE EXECUTIVE PUBLICATION FOR THE OIL AND GAS INDUSTRY
RUSTY
BRAZIEL’S
BASE OIL
THEORY SPECIAL FOCUS:
FINANCE &
INVESTING
SHALE UPDATE
CYBER SECURITY
INVESTING IN MEXICO

2. AN INTERVIEW WITH E. RUSSELL “RUSTY” BRAZIEL OF RBN ENERGY
DON STOWERS, CHIEF EDITOR – OGFJ
PHOTOS BY SYLVESTER GARZA
THE WINNERS ARE THOSE THAT POSITION THEMSELVES
IN THE BUST CYCLE TO RIDE THE NEXT BOOM UP.
Shale Econ 101
EDITOR’S NOTE: Rusty Braziel is president and principal consultant for RBN Energy, which
provides advisory services specializing in strategy, acquisitions, and divestures. He is an
authority in the field of energy information and markets, with an extensive background
in energy marketing, trading, and data services. Over the past 20 years he has worked in
an executive-level capacity with a major producer (Texaco), a major pipeline (Williams), a
leading software company (Altra Energy), and a leading energy analytics and information
company (Bentek Energy). A consultant, author and speaker, Braziel has written for numer-
ous publications and is a frequent speaker at industry conferences. He recently published
The Domino Effect, a best-seller on Amazon that examines the transformative effects of the
Shale Revolution. He also serves on the editorial advisory board for OGFJ.
OIL & GAS FINANCIAL JOURNAL:
What is the most important question
facing the oil and gas industry today?
RUSTY BRAZIEL: Depends on your
timeframe. Right now, the big question
is–Howwilltheindustryadapttotoday’s
price environment? Up until the crude
price crash, there was a general
expectation of sustained high prices that
would support continuing investment as

3. AN INTERVIEW WITH E. RUSSELL “RUSTY” BRAZIEL OF RBN ENERGY
far out as the eye could see. After two years in the school of hard
knocks, it is now clear that these markets will be much more
treacherous. Some companies will figure out how to thrive in
this environment. Some won’t.
Butthatisnotreallythemostimportantquestion.Ourmuch
largerchallengeisthatpublicsentimentcontinuestoshifttoward
a view that over the long term our industry should be phased
out.Momentumbehindthisviewseemstobebuilding.Whether
such a momentous shift could happen in 30 years or even 100
years is not the issue. The fact that our industry will be facing a
large movement that wants it to happen is now a permanent
fixture of oil and gas markets. We have to deal with that reality
– not assume that somehow it will go away.
Your book, The Domino Effect, examines the Shale
Revolution and how it is changing energy markets, including
the economics around that. Can you explain what you mean
by the “domino effect?”
BRAZIEL: The book is about understanding energy markets,
what has been happening to energy markets over the past few
years, and a framework for anticipating what is coming next.
The idea is that everything in these markets happens for a
reason – one event triggers another, triggering another. That’s
the dominoes. For example, 10 years ago, shale technologies
first came to gas markets, which became oversupplied, which
crushed their prices, which prompted producers to move their
rigs to drill for wet gas that contained high volumes of NGLs.
Soon those prices were crushed, too. It was inevitable that the
same thing would happen to crude oil. In the book, each one
ofthesedevelopmentsisadomino.Therehavebeen30dominoes
since the shale revolution started. And there are a lot more
getting ready to topple right now.
Ten years ago, everyone was talking about “peak oil.” It
was widely thought that we were running out of oil. National
Geographic magazine famously ran a cover with the headline
– “The End of Oil.” People in the industry said, “No, it’s not the
end of oil – it’s the end of cheap oil.” As today’s oil prices attest,
both were wrong. Will “lower for longer” be the new norm?
What is your take on oil supply and demand going forward?
BRAZIEL:Theshalerevolutionisafundamentalshifttoamarket
we have not seen before. We know where the oil is. We can
produce it, if the price is right. In other words, there is a base
level of production in North America that can come on line
within months of a sustained price signal over some level, let’s
say $55/bbl. This base level of production does not disappear
at lower prices, it is simply put on hold, waiting for a signal from
demand. Prices will increase when demand grows, but the
increases will only be temporary.
Why do you say that?
BRAZIEL: Oil markets are locked into a price trading range for
a long time to come. Sometime over the next few months,
demand may grow or production may be cut, resulting in price
increases. But those prices won’t hold up. That is because of
the economics of shale production.
At today’s prices there are a lot of shale wells that don’t
make economic sense to drill. But if prices go up, that changes.
At higher prices, then it does make economic sense to drill
those wells. So the additional wells get drilled. Production
starts growing again, and prices will come right back down.
The Peak Oil Theory has been replaced by the Base Oil Theory.
That base level of production that can come back on when
prices are right. It’s all about that base.
Will low oil (and gas) prices have a lasting impact on
the Shale Revolution?
BRAZIEL: The Shale Revolution and low oil and gas prices go
hand in hand. Because the initial production rates of most shale
wells are so much higher than conventional wells, the per-unit
cost of production is lower, even though the wells themselves
are more expensive. In other words, each barrel of crude or each
cubic foot of gas from a shale well costs less, because the volume
produced per dollar of invested capital in the well is greater.
And it is this lower cost that makes these wells profitable even
at low prices. Now that lower prices are a part of the landscape,
producers are finding ways to drop those costs even lower –
more efficient drilling, lower services costs, even higher initial
production rates. As costs continue to drop, the pressure on
prices will continue.
The petroleum industry has a history of boom and
bust. What lessons should we learn from current and past
experience?
BRAZIEL: The obvious lesson is that nothing lasts forever. This,
too, will pass. But the more important lesson is that the winners
are those that position themselves in the bust cycle to ride the
next boom up. The natural tendency in a bust cycle is to hunker
down, and to some extent all must do that. But if a company
can align its opportunities with what the next market is likely
to bring, it can be hugely successful, regardless of when that
next cycle happens.
If prices have bottomed out and we’re starting to see
the beginnings of a recovery, where will we see it first – on
the oil/liquids side of the business or on the natural gas side?
“There is no doubt that the industry will come
back stronger than ever, because the survivors will
be those companies that learn how to adapt to
today’s market realities. In fact, lower prices are
already driving a new round of creative technolog-
ical innovation that will keep the turmoil coming.
Strap on your seat belt.” – Rusty Braziel

4. RBN’s School of Energy is a genuine classroom situation with students
learning the fundamentals of the natural gas, crude oil, and NGL mar-
kets,and the interrelationships between those markets. The course-
work is characterized by an extensive series of hands-on model exer-
cises, with Excel analytical models students learn and then take with
them. RBN holds two or three School of Energy sessions each year.
RBN photo
AN INTERVIEW WITH E. RUSSELL “RUSTY” BRAZIEL OF RBN ENERGY
BRAZIEL: Well, whether we are seeing beginnings of a recovery
or not depends on your definition of recovery. If recovery means
back to $100/bbl oil, I think that is a long way down the road.
If it means that prices below $30/bbl are behind us for a while,
probably so. Perhaps not forever if you buy my Base Oil Theory.
But, regardless, recovery however you define it is much more
likely on the oil side than gas. Oil is a global market, influenced
by global conflict, currency values, chaos in certain producer
countries, and of course – global demand, which over the long
run will increase. For now, gas in North America is still isolated,
and the continent has the capacity to produce far more supply
than can be consumed here. It will take a few more years before
more gas-fired power generation, LNG exports, and exports to
Mexico increase to the point where supply and demand move
more closely into balance.
What impact do you think LNG exports will have on
the natural gas industry? Will the US eventually export
enough LNG to make a difference for producers?
BRAZIEL: LNG exports will definitely be good for natural gas
producers. Anything that increases demand for your product by
10%orsohasgottobegoodforprices.Andthatdemandislikely
to be somewhat less spikey than the weather-driven demand
cycles experienced by markets in North America today. There is
agoodchancethatenoughexportfacilitieswillbecompletedso
thatLNGexportswillmakeadifferenceforproducers,particularly
if crude oil prices move higher relative to gas prices – which, as
wejustdiscussed,isprettylikely.Theproblemisthatthedifference
for producers is still a few years away. The supply surplus that
we are living with today will continue to be around for a while
until those facilities are completed.
The US was on the verge of rebuilding a lot of aging
midstream and transportation infrastructure when the
downturn hit. Where are we now? Do we still need to build
and replace a lot of pipe?
BRAZIEL: Actually we did rebuild a lot of aging midstream and
transportation infrastructure. Scores of new gathering systems,
processingplants,pipelines,storagefacilities,railterminals,docks,
younameit–havebeenbuiltoutoverthepastfewyears.Consider
just the rail terminals. Our company has tracked 99 new or
expandedloadingterminalsand79unloadingterminalsbuiltsince
2009. That’s huge. And projects are still coming on. Even after the
completion of several new and reversed crude pipeline projects,
another seven major projects are in the works right now. On the
gasside,34naturalgaspipelineprojectstobringonabout27Bcf/d
of incremental capacity are either under construction or on the
drawingboards–mostlytohandleMarcellus/Uticavolumes.The

5. AN INTERVIEW WITH E. RUSSELL “RUSTY” BRAZIEL OF RBN ENERGY
big question now is whether we built too much infrastructure.
Manyofthefacilitieswerebuiltundertheassumptionofcontinued
growth in production. Now production is falling, and that could
be a problem for midstream developers.
The petrochemical industry seems to be a beneficiary
oflowfuelprices.HowsignificantisthisforUSmanufacturing?
Is this a long-term trend? What other industries have
benefitted from low fuel prices?
BRAZIEL:Thepetrochemicalindustryisbenefitingfromlowfuel
prices,butevenmoresofromlowfeedstockprices–cheapethane,
propane, and butane relative to where things were before the
Shale Revolution. As gas production ramped up, so did the
production of natural gas liquids. And when NGL supply finally
exceeded demand, prices crashed. The catch is that the
petrochemicalindustrylookedatthoselowpricesandsaid–“Let’s
build more plants to use those cheap NGLs.” Lots more plants.
Thosenewplantsareunderconstructionrightnow.Atthesame
time, several international petrochemical companies looked at
cheapUSethaneandwantedtogetapieceoftheaction.Sothey
have contracted for new export facilities and ships to export
barrels to Europe and Asia. Put all that together and you’ve got
a huge increase in demand coming in the next couple of years.
There is no doubt that NGL prices will be on the rise. That will
not be good news for any of those petrochemical companies.
Last year, about 150 US oil and gas companies filed for
bankruptcy under Chapter 11. More are expected in 2016.
This includes E&P companies, oilfield service companies,
and midstream companies. Is this nature’s way of culling out
the herd, sort of petroleum Darwinism? Will the industry
come back stronger and leaner than ever?
BRAZIEL: I would not characterize what is happening as nature’s
way.Instead,wearewitnessingtheimpactofcreativedestruction,
right out of Econ 101. The Shale Revolution shifted the cost
curve, making the per-unit cost of producing oil and gas cheaper.
The impact on prices was right out of the textbook. And the
impact on companies that were unprepared for the shift was
also right out of the textbook – economic destruction. There
is no doubt that the industry will come back stronger than ever,
because the survivors will be those companies that learn how
to adapt to today’s market realities. In fact, lower prices are
already driving a new round of creative technological innovation
that will keep the turmoil coming. Strap on your seat belt.
Getting back to LNG, the reason that companies like

6. AN INTERVIEW WITH E. RUSSELL “RUSTY” BRAZIEL OF RBN ENERGY
Cheniere decided to convert their import terminals into
exportfacilitieswasthehugepricedifferentialbetweencheap
natural gas prices in the US and the price utilities and end-
users were willing to pay in Asia and Europe. Will this huge
price gap continue indefinitely? If so, won’t that prompt US
companies to continue to find a way to export shale gas?
BRAZIEL: That gap between cheap US gas and LNG prices in
Asia and Europe has already eroded significantly. So much so
that after the cost of liquefaction, terminaling, shipping, and
regasification,itwouldnotmakemucheconomicsensetoexport
much LNG from the US today. That price differential shrunk
mostly due to the collapse in crude oil prices, which are a big
influence on international LNG prices. Assuming crude prices
move up faster than US gas prices – which is a pretty good bet
– then LNG export economics will start looking better again,
hopefullyassomeofthenewterminalsarecompleted.Butdon’t
forget that there are other LNG
producersoutthere–Australiafor
instance. US LNG plus more
volumesfromothercountrieswill
keep supply growing. So it is no
slam dunk that LNG exports will
ever realize the highly attractive
economicsthatmanyoftheexport
terminal developers expected
three years ago.
Following up on the pre-
vious question, do you expect
“gas plays” like the Haynesville,
Barnett, Fayetteville, etc. to
make a comeback?
BRAZIEL: There are huge gas reserves in all three of those basins.
All have breakeven prices that will not encourage much drilling
until prices get back above $3.50/MMbtu or so on a sustained
basis. That will happen someday. But when it will happen is
unknown. And when it does happen, then supplies from those
basins will rush back into the market, potentially driving prices
back down. It is one more example of my Base Oil and Gas
Theory – the overhang of potential productivity will act to keep
prices capped.
Long term, if you are an investor in the US, do you put
your money in oil or gas? Or is it not that simple?
BRAZIEL: As a general statement, oil prices are more likely to
increase in the near term than are gas prices. For that reason,
if you are investing today, oil is a better bet. But several gas
producers in the Marcellus/Utica plays are developing wells
with huge initial production rates, that can be incredibly
profitable – especially if all those pipeline projects we discussed
earlier get built and LNG exports, Mexico exports, and new
gas-firedpowergenerationhappensonque. Fromaninvestment
perspective, I tend to favor diversification. Don’t put all your
eggs in one basket. Because no one really knows what is going
to happen. An investment portfolio that includes both oil and
gas is the best bet, no matter what the market conditions.
We have witnessed the effect that an oil cartel (OPEC)
can have when it decides to ramp up or withhold production
from the world market. We first saw this in the oil embargo
of 1973, and we’re seeing it now. Yet there are a lot of major
non-OPEC producers, including the US and Russia. Some
people say that OPEC’s influence is waning, yet that doesn’t
seem to be true just yet. What role do you think OPEC will
play in the future – the same or a diminished role?
BRAZIEL: I believe that OPEC has, for the most part, lost its
control of the market. Let’s say the OPEC countries reduce their
production. What’s going to
happen next? No doubt, prices
would increase. But then what?
Base Oil Theory, right? US
producers would jump back in
there,drillingwouldrampup,and
US production would start
growing again. And when that
happens, prices drop right back
down. So, OPEC would end up
with less market share and low
prices. Why would they do that?
Of course, they wouldn’t. Now the
market is in control. That is a
radically different world than
most governments of the world
expected, including our own.
If an oil cartel can be successful, how about a gas cartel?
LNG is a global commodity. Do you see LNG expanding
significantlyinglobalmarketsifshaledevelopmentcontinues
in the US, Canada, and elsewhere?
BRAZIEL: Well, as we’ve been discussing, I think the days of a
successful oil cartel are behind us. A future LNG cartel is even
less likely to be successful for two reasons. First, because most
of the supply growth will be coming from countries unlikely to
joinacartel–US,Australia,maybeCanada.Andsecondbecause
the LNG market is so much more dependent on long-term
commitmentsbecauseliquefactioninfrastructureissoexpensive.
In your view, what role will renewable energy play in
the global energy scene? Although we’re seeing increased
used of wind, solar, and biofuels to generate electricity,
hydrocarbonsarestillthemajorfuelsourcefortransportation.
Do you see this coming to an end? Any battery breakthroughs
on the horizon?

7. Electronic and single printed copies for distribution with permission to RBN Energy from Oil & Gas Financial Journal
June © 2016 PennWell Corporation
Oil & Gas Financial Journal
rbnenergy.com
AN INTERVIEW WITH E. RUSSELL “RUSTY” BRAZIEL OF RBN ENERGY
BRAZIEL: As we discussed in your first question, a lot of folks
look forward to the day when wind energy, solar energy, and
other renewables become cheap enough – and ubiquitous
enough – to wean the world off hydrocarbons. That could take
a very long time and is certainly fraught with a lot of uncertainty.
A technology breakthrough could change things – whether it
is batteries or something else. If and when such breakthroughs
happen are in the realm of the unknowable.
Finally, Rusty, what conclusions have you drawn after
40 some odd years of involvement in nearly all sectors of the
energy industry?
BRAZIEL:Hmm,that’satallorder.Let’sgoforthreebigconclusions.
First, all our markets are connected. Back when I was trading
oil,gas,andNGLs,youcouldreallyunderstandoneofthosemarkets
without knowing much about the others. Those days are gone
forever.Forexample,theonlywaytomakesenseofthegasmarket
nowistounderstandcrude.TheonlywaytounderstandtheNGL
marketistounderstandgas.Andsoon.ThatpremiseiswhatThe
DominoEffectisallabout,andhastocountasoneofmyconclusions.
That’s really why I wrote the book.
Second, this industry may seem from the outside to be
about technology and infrastructure. To some extent it is, but
the real industry is about people. This is a great industry with
good people trying to do the right thing. It is the talent,
innovation, and team spirit of the industry that can make
something like a Shale Revolution happen, in an industry that
many had written off as dead. That is our true strength and
will be with us as far into the future as any of us can imagine.
Third, and somewhat more philosophically, don’t take
yourself too seriously. This is a serious business, but it can
also be exciting, dynamic – even fun. Years ago, we adopted
a rock-and-roll theme for our Daily Energy Post – what a lot
of people call the RBN blog – and found out that tens of
thousands of folks enjoy learning about energy markets with
an upbeat, conversational and entertaining spin. What this
industry does is important, challenging, and difficult work.
Butitdoesn’thavetobeboring.Wehavefabulousopportunities
ahead. If there was ever a time to go for it, the time is now.
On that cheery note, thanks for talking with us, Rusty.
Standing L to R: Heather Wallace, Sandy Fielden, Jeremy Meier, Noel Copeland, Rusty Braziel, Rick Smead, Scott Potter, David Braziel, Omilla
SinghAhamad; Sitting L to R: Paige Hambric, Ashley Braziel, Christine Groenewold, Brenda Brown, Sheetal Nasta, Kelly Van Hull, Callie Mitchell