AUSTRALIA’S MOST POPULAR BUSINESS PODCAST

Fear & Greed, Fear and Greed

It’s one of the most important commodities in the world – but how much do you actually know about how oil is produced?

Sean Aylmer talks to David Prentice, MD of Brookside Energy, about how the industry works, and how junior producers like Brookside fit into a sector dominated by global giants.

Find out more: https://fearandgreed.com.au

See omnystudio.com/listener for privacy information.

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Sean Aylmer: Welcome to the Fear and Greed Business Interview. I’m Sean Aylmer.

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Sean Aylmer: We talk a lot about oil prices on this podcast,

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Sean Aylmer: but we’ve never really talked to an oil producer about

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Sean Aylmer: how the industry actually works. Brookside Energy is an ASX

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Sean Aylmer: listed oil and gas producer, but its operations are very

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Sean Aylmer: much focused in the U. S. David Prentice is the

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Sean Aylmer: Managing Director of Brookside Energy and the perfect person to

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Sean Aylmer: give us a 101 on the industry. David, welcome to

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Sean Aylmer: Fear and Greed.

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David Prentice: Nice to be with you.

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Sean Aylmer: Now, I want to get into Brookside, but can we

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Sean Aylmer: just take a step back? We talk about oil and

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Sean Aylmer: gas together, obviously very different commodities, though, energy commodities, but

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Sean Aylmer: different things. Why is it that we talk about oil

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Sean Aylmer: and gas?

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David Prentice: So I guess, specific to Brookside and specific to the

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David Prentice: onshore U. S. patch that we operate in, typically the

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David Prentice: oil and gas comes out of the formation together. So,

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David Prentice: explaining it in very, very simple terms, if you’ve got

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David Prentice: liquid with the gas suspended in the liquid and you

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David Prentice: start to bring that to surface, the gas bubbles expand

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David Prentice: and help to bring the liquid to the surface. And

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David Prentice: so there’s a nice symbiotic relationship there between the two.

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David Prentice: And then what we do and what most onshore U.

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David Prentice: S. oil and gas producers do is separate the gas

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David Prentice: from the liquids on the location. The oil gets trucked

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David Prentice: to a refinery that’s usually very nearby, and the raw

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David Prentice: gas goes into a pipeline, and usually the natural gas

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David Prentice: liquids, which are a high value product in that stream,

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David Prentice: gets stripped out at that point and the gas goes,

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David Prentice: in the U. S., into the national grid to be

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David Prentice: used and the liquids get sold. So, that’s a very

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David Prentice: high level description of it.

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Sean Aylmer: Yeah. No, no, that’s perfect. So, an operation like Brookside,

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Sean Aylmer: the costs are in… There seems to be lots of

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Sean Aylmer: costs there, but is it mostly in finding the oil

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Sean Aylmer: and gas? Is it in extracting it? Is it in

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Sean Aylmer: distribution? How do the economics of an oil company work?

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David Prentice: Yeah, so if you look at it, the most costly

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David Prentice: part really is in what I call the engineering part of the business,

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David Prentice: so drilling the wells to extract the oil and gas

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David Prentice: is the most capital intensive part of the business. The

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David Prentice: prospecting side of the business, which I think is arguably

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David Prentice: the most rewarding, particularly for the small EMP companies, you

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David Prentice: can do that on a relatively modest budget. That’s really

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David Prentice: about good science, good people, good ideas and testing all

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David Prentice: of those things. But once you get into production, drilling

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David Prentice: these wells, they’re typically $ 8 to $ 10 million each to

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David Prentice: drill. So, you’re starting to spend big licks of capital,

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David Prentice: but once the wells are down, if you’re in the right play,

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David Prentice: which we are in a good area where the reservoir

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David Prentice: quality is high and you’re not producing any impurities, you’ve

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David Prentice: got a good high value stream, then the operating costs

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David Prentice: are actually very low. So once the well’s down and

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David Prentice: producing, the operating costs are very low. So, in our

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David Prentice: case, we’re talking significantly less than $ 10 per barrel of

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David Prentice: oil equivalent would be our ongoing, sustaining operating cost. So

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David Prentice: there’s a lot of margin there once you get there.

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Sean Aylmer: Yeah. Okay. So Brookside Energy, where are you? Where are you

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Sean Aylmer: operating? What mine or mines do you have?

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David Prentice: Yeah, so we are located in a place called the Anadarko

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David Prentice: Basin, which is in Oklahoma. We’re about a two hours

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David Prentice: drive south of Oklahoma City, quite close to the Oklahoma-

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David Prentice: Texas state line. And this is an area that’s had

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David Prentice: 100 years of oil and gas exploration. It’s a very

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David Prentice: geologically well understood area, and really what companies like us

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David Prentice: and some of the other bigger players that are active

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David Prentice: in the area are really doing is sifting through 100

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David Prentice: years of old data to look for areas that have

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David Prentice: been under exploited, so where we can go in with

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David Prentice: new technology and really recover oil and gas that previously

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David Prentice: wouldn’t have been recovered by the old timers.

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Sean Aylmer: Stay with me, David. We’ll be back in a minute.

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Sean Aylmer: I’m speaking to David Prentice, Managing Director of Brookside Energy.

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Sean Aylmer: The oil and gas we talk about, Shell, ExxonMobil, Total,

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Sean Aylmer: some of these massive companies, we talk about the big

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Sean Aylmer: guys here, Woodside, Santos. How do juniors, like yourselves, compete

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Sean Aylmer: in that? Is it about what you just described, going

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Sean Aylmer: through data and finding oil and gas that may have

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Sean Aylmer: been left behind? I’m just interested in why there are

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Sean Aylmer: so many companies.

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David Prentice: Yeah, look, I think it’s the similar story to what

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David Prentice: you would see in the West Australian hard rock business.

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David Prentice: I guess the typical role of the small, junior companies

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David Prentice: has been really to do the work around that prospecting

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David Prentice: and proving upside of things. And that’s typically smaller, more

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David Prentice: nimble companies are better at doing that than the bigger

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David Prentice: companies.
So, the flip side of that of course is

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David Prentice: that once you do make a large discovery and you’re

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David Prentice: going into more of the manufacturing part of the business,

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David Prentice: then obviously these big companies bring to the table some

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David Prentice: capital efficiencies around their cost of capital, their access to

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David Prentice: equipment, their buying power, all those things. So, there’s a

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David Prentice: place for everybody in the market, and there’s often crossover

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David Prentice: between the two. But generally speaking, it’s a lot easier

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David Prentice: for a small company to have an idea, quietly go

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David Prentice: about acquiring the rights to the land that you need

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David Prentice: to test that idea without inflating asset prices too quickly.

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David Prentice: You can imagine if you’re a farmer in Oklahoma and

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David Prentice: a truck pulls up in your driveway and it’s got

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David Prentice: Exxon written on the door, you’re going to think that

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David Prentice: you’ve won lotto and prices jump up very quickly, whereas

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David Prentice: a little white truck turns up with Brookside on the

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David Prentice: door, then people are like, ” Okay, well these guys are

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David Prentice: having a go and let’s have a conversation.” So I think that’s the

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David Prentice: general description of how that all works.

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Sean Aylmer: Okay. So, in terms of the challenges, and I’m coming

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Sean Aylmer: towards ESG and environmental challenges, just park how long oil

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Sean Aylmer: and gas is going to be around for, that’s a

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Sean Aylmer: debate for others to have, that’s fine, but just in

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Sean Aylmer: terms of getting the oil and gas out, separating it,

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Sean Aylmer: shifting it, all that, how much better is the industry

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Sean Aylmer: at that than it was, in environmental terms?

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David Prentice: So, look, enormously better is the answer to that. And

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David Prentice: it’s frustrating for me sometimes when I talk about this

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David Prentice: subject, because I don’t think the industry does a particularly

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David Prentice: good job at explaining how we go about our business

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David Prentice: and the safeguards that we put in place. And it’s

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David Prentice: really useful to tell a story about the way we

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David Prentice: operate in Oklahoma. And this is the same for people

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David Prentice: operating in Texas or Colorado, wherever you might operate. Typically,

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David Prentice: you are operating on privately owned land, where the farmer

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David Prentice: owns the rights to the oil and gas. In other

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David Prentice: words, they’re the beneficiaries of the royalties that come from

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David Prentice: the production of oil and gas. And you don’t get

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David Prentice: to go and explore on his land without negotiating with

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David Prentice: him a lease to do that. And the terms of

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David Prentice: that lease are negotiated typically, what I call, the kitchen

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David Prentice: table leasing.
So, you’re sitting down at their kitchen table

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David Prentice: and you’re discussing how you might go about exploring, how

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David Prentice: you might go about drilling, what kind of safeguards you’re

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David Prentice: going to put in place. And ultimately, these people live

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David Prentice: there and they’ve probably got sons and daughters, or relatives

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David Prentice: that work in the oil and gas industry. They understand

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David Prentice: the industry very well. And so if you have a

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David Prentice: poor reputation for your environmental, social and governance, if you’ve

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David Prentice: got a poor reputation in that area, everybody knows. And

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David Prentice: so you just simply don’t get a lease, because they

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David Prentice: won’t let you in their front gate. So, it’s hardwired

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David Prentice: into the system to say, ” Well, you need to protect

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David Prentice: the environment. You need to have safe operating conditions for

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David Prentice: your workers. You need to do all of these, and

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David Prentice: you need to look after your local community,” because you’re

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David Prentice: going to be working with those people. Chances are you

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David Prentice: know some of them. So it’s hardwired into the industry

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David Prentice: that we have to really protect the environment, protect our

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David Prentice: people, and behave responsibly in producing what is a very

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David Prentice: important energy source for the local community.

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Sean Aylmer: What about oil prices? So, a couple of years ago

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Sean Aylmer: they were negative, whatever that means. I suppose you’re paying

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Sean Aylmer: someone to store oil, because there’s so much of it.

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David Prentice: That’s correct. Yeah.

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Sean Aylmer: Yeah. And then you get to $ 100 plus, or $ 100 U.S.

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Sean Aylmer: plus, a barrel. They’re relatively high on a historical standard

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Sean Aylmer: now, that they have come off from where they were.

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Sean Aylmer: How does a company manage the ups and downs of

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Sean Aylmer: oil prices? Particularly, say, someone like Brookside Energy, you are

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Sean Aylmer: doing your thing, yet you don’t know whether in a

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Sean Aylmer: year’s time you’re going to get $ 30 or $ 100.

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David Prentice: No, so that’s a great question. So, I think where

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David Prentice: the industry lost its way in, what I’ll call, the twenty-

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David Prentice: teens, was people felt like growth for growth’s sake was

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David Prentice: the right way to go, and the market was rewarding companies

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David Prentice: for growth for growth’s sake, and people lost sight of

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David Prentice: the economics. If you go back to the ’80s and the ’90s when prices

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David Prentice: were more volatile perhaps, and there was a lot more

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David Prentice: privately run companies where the investment capital was a lot

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David Prentice: closer to the managers of those capital, in other words, the people who

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David Prentice: were putting the capital in were a lot closer to

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David Prentice: the managers of the capital, then I think people were

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David Prentice: really focused on returns. If I give you a dollar,

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David Prentice: what am I going to get back?
And I think

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David Prentice: we lost sight of that in the twenty- teens, but

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David Prentice: we’ve firmly got a grasp on it now. And one

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David Prentice: of the things that we did when we were doing

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David Prentice: our prospecting back in 2018, we first started taking our

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David Prentice: leases in this area in the Anadarko Basin, we said, ”

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David Prentice: Look, we want to look for rock that’s going to

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David Prentice: deliver a 10% rate of return when the oil price

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David Prentice: is $ 40 and the gas price is $2.50. And if we can do that, if we can

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David Prentice: find that kind of rock, then to some degree we

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David Prentice: will be immune from some of that volatility.” And so

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David Prentice: that’s the way to manage that. And that’s not really rocket

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David Prentice: science. It’s just something that the industry lost focus on,

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David Prentice: I guess. And we’re firmly back in that camp now,

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David Prentice: where people are looking for a return on their investment,

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David Prentice: and in order to do that, you need to have

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David Prentice: an eye on those metrics.

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Sean Aylmer: We are totally out of time, but I’m loving this,

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Sean Aylmer: because I’m learning a lot. David, are you a geologist

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Sean Aylmer: by any chance, by trade or not?

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David Prentice: No, no. I’m a finance person by trade, but I’ve

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David Prentice: been working long enough in the oil patch to have

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David Prentice: a reasonable grasp on the engineering and geology, yes.

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Sean Aylmer: No, I remember Tom Albanese, I think he was the

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Sean Aylmer: Rio Tinto boss many years ago, and I happened to

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Sean Aylmer: be at a media lunch with him, and he had

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Sean Aylmer: this term, ” the natural optimism of a geologist,” and it’s

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Sean Aylmer: always stuck with me, because I think that’s exactly what

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Sean Aylmer: you need sometimes. David, thank you very much for talking

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Sean Aylmer: to Fear and Greed.

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David Prentice: No, it was a pleasure, and thanks for the time.

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Sean Aylmer: That was David Prentice, Managing Director of Brookside Energy. This

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Sean Aylmer: is the Fear and Greed Business Interview. We’re not an

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Sean Aylmer: investing podcast. In fact, if you are thinking about investing,

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Sean Aylmer: we always recommend you go and get professional advice. Join

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Sean Aylmer: us every morning for the full episode of Fear and

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Sean Aylmer: Greed, Australia’s best business podcast. I’m Sean Aylmer, enjoy your day.