In this episode of Industry Focus: Wildcard, Brett Perlman, CEO of the Center for Houston's Future, joins host Nick Sciple to discuss the past, present, and future of energy production and the energy grid in Texas. Brett shares why Texas could have the potential to become a hub for clean energy technology like hydrogen and carbon capture.

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This video was recorded on April 14, 2021.

Nick Sciple: Welcome to Industry Focus. I'm Nick Sciple, my guest this week is Brett Perlman. Brett is the CEO of the Center for Houston's future and spent 20+ years in finance and policy roles in the energy industry, including four years as the Texas Public Utility Commissioner overseeing the restructuring of the State's utility system. Brett, thank you for joining me.

Brett Perlman: Nick, thanks for having me.

Sciple: Great to have you on the show. Lots to talk about this week. I mentioned in the intro you from the Center for Houston's Future. We're going to spend some time talking about the future today, but I want to start out with the past, set the stage for everybody. You've been in the energy industry in Texas for a long time. How has this industry changed since you first got involved and what would you say is still the same?

Perlman: Well, I'm going to talk a little bit about oil and gas, and I'm going to talk a little bit about the power industry. Then I may talk a little bit about how those two things come together in the energy transition, things we're dealing with at the center right now. But I thought, for your readers and listeners, that might be interesting to hear a little bit about the history of the oil and gas industry and how it's changed. It's really an interesting history and I can really talk about it in big terms, I just can't give you a quick overview. This industry is literally over 100 years old. It started in 1901 Spindletop. Texas was really the first state to become a leader in creating an oil industry. That was a leader for many years, for almost 40 years until the middle of the decade when we saw the rise of OPEC, and really the global demand increased. Texas became a player in the global market as well, but became somewhat sub-eliminated to the role of OPEC in the '70s and '80s. 

Then of course, all of us are old enough to remember the energy crisis when we saw prices go through the roof. Texas did quite well for a while, and then we saw prices fall in the mid '80s first oil crisis. Oil became less of a part of the Texas story as we started to diversify our economy. Then an interesting thing happened. We started to see the rise of natural gas as a fuel in the early 20th century. That really responded to revolution and fracking and this idea of different ways of what people call it unconventional production. What really happened in fracking, it started with natural gas, but it really became the rebirth of the oil industry in Texas. What we saw in the early part of this decade was just an explosion again and growth in the oil industry and really growth in production. While we were producing around 3.5 million barrels a day, I'd say 100 million globally, due to the fracking boom, it really made Texas a leader again. We saw national production go to 10 million barrels, in Texas go to five million barrels. Fracking really resulted in the rebirth of the oil and gas industry. That was rejuvenated, prices that had overtime deteriorated. The Permian basin, for example. The area around Maine land has now grown significantly. Then all that was rocking along until we saw, once again, inevitably prices crash again in the middle part of this decade and really the industry got through its next cycle. Just as it was starting to come out, then COVID hit. 

Of course, now we've seen the crash again. In the last decade, this brief tour through the oil industry through 100 years of history has really stepped on you that this is a very cyclical industry that has gone through many, many booms and bust cycles over the years. We're now at this pivot point once again where there's a question about where the oil industry goes next. That's a quick brief [...] through over 100 years of history for your listeners of where the Texas energy industry has gone. We at the center are trying to start to look forward to, where does this industry go next? What are the implications of climate change, of decarbonization, of resilience? Some of the things that we experienced on the power side during February, during the blackout, what are some of these trends mean for the state and for our energy sector? Those are some of the things that we've been working on at the center, and happy to talk more about what we're seeing in this area.

Sciple: It's fascinating when you look at that history. You talked spindle top, this huge new supply of oil came onto the market in Texas and really changed the world. This really changed the 21st Century. Then you look at 100 years later, we find new supply. We knew it was there, but we were able to get access to it. Fracking and really changed the road in a really significant way. How would you say Texas has changed with the rise of fracking?

Perlman: Well, it's interesting because what we've seen is we've seen that, well first, we diversified a lot in the '80s. Texas used to be an oil state. Then we became a high-tech state and a retail state. Then as we went through the crash in the '80s,we saw Texas diversify and oil become less of the Texas story, but still an important part. So we've diversified since the '80s. Oil and gas is still important. It's still a big creator of jobs in the economy. Both direct jobs and indirect jobs, but not as important as it was perhaps in the '80s. But nevertheless, it still provides a big part of the state's budget. It has contributed about $13 billion of a $128 billion budget to our budget every year. It funds about 20% of our K-12 education. The oil and gas industry is still a big contributor of GDP and jobs and the contributor to our fiscal health to our state budget. It's still a big part of the story of Texas even though. The real question is, how is that going to change going forward?

Sciple: We're talking about seeing some change in evolution in the oil and gas industry with the rise of fracking and what that's done to oil prices and those sorts of things. At the same time, we're seeing some change in the utility industry, this idea of energy transition. I want to talk about some of your experiences in that industry as well. Maybe we'll bring these two together later on as you talked about earlier. Back in the early 2000s, you played a role in restructuring Texas's utility industry. That's an industry that's been in the spotlight. Some in the past few months with the goings on with the blackout in Texas. What did you learn in that experience with the utility industry? What should people know about Texas utility in context of what's going on over the past few months?

Perlman: Now we're talking of switching to the other side. We're moving from molecules to electrons, which is the other part of the energy story in Texas. Talking about the massive changes that have gone on over the last 30 years in the power side of the business. Traditionally, the power side was a very sleepy regulated industry with stocks for what does [...] Then along came this company called Enron that had a different view of how the energy industry might be structured, that it might be deregulated. Part of this industry could be competitive. Those changes really swept the country. Texas was part of that as well. I served on the Texas Public Utility Commission in the early part of the 2000s when we were going through this massive change in the way our industry was structured. So what we did in Texas as to what many other states have done, but we did it slightly more successfully, I think is when we moved from a regulated structure where the utility controlled everything from the power plants to some of the sources of production which back then were likely coal all the way to the socket in your living room. 

We basically looked at that and said that there are parts of this that can be competitive, the generation business, the retail business, and the only thing that couldn't be competitive that needs to be regulated is [...] wires was the T&D business. We went through a process of deregulating and creating competitive markets in Texas. Other places have tried. California had done this unsuccessfully, but I think in Texas we were able to make this work. It created a huge explosion in investments. We saw wind takeoff. Texas has now surpassed California. This surprises people when I tell them that Texas is the largest wind state in the country, as well surpass California with over 20 gigawatts of wind production. That's going to probably continue. We'll talk a little bit about the blackout in a second. But we've also seen lots of changes in our grid in terms of new grid technologies. We've certainly seen retail companies come in. The deregulation of the market really created a lot of opportunities for innovation. I think this was really a positive story until February when we had the blackout. This is kind of the question that everybody is asking now is a little bit about, where does this all go given the events of last February?

Sciple: Absolutely. One of the big questions you had around the blackouts is, is it the industry not regulated enough, or is there too much wind or renewable energy in the system such that it's creating instability? What do you make of those arguments given your experience and background in this space?

Perlman: I think you have to look at a couple of different things here and start to tease apart exactly what happened. At the end of the day, I think about what we're going to find, and we're still looking at the causes of the blackout. But what we really had was a massive failure in our gas generation system. As I mentioned, when we restructured the electric market, we saw this inflow of not only renewables, but of new combined cycles of natural gas plants, which have really become the backbone over the last 20 or 25 years of our power system. What we found is we lost a little over 40% of that gas generation during Presidents' Day. This blackout really stretched from Valentine's Day early in the morning on that Sunday through President's Day, and then through the following Wednesday or Thursday. Very long time for the power to be out for people to be suffering. There were a number of deaths related to this, so a very serious situation. I think what we're learning from that is that these systems had not been sufficiently winterized. It doesn't really matter what regulatory framework you have when you lose 40% of your generation mix. It's going to be very difficult to sustain your system. 

I think the lesson that we'll learn from this is that, as we start to experience more and more of these extreme weather events, and you can call it climate change, you can call it whatever you want, but we need to invest more in making sure our infrastructure is resilient to these changes. I think that's the big lesson from this. I think you've heard a little bit about renewables, and was it the fact that the wind stopped blowing, the cause of this? I think everybody across-the-board has pretty much concluded that that was not a major cause of the problem. ERCOT during the winter does not really rely very much on wind energy, simply because the wind doesn't blow very strong during the winter. Therefore, wind was not a big factor in the blackout that we had in February. We're going to see where this heads, but I think the big issue will be, can we address the reliability issues that have been uncovered, particularly in extreme weather events. Usually, Texas has extreme weather during the summer, very hot in Texas, obviously during the summer. But now we're starting to experience that it can get very cold in Texas during the winter as well. So that's an issue that we're going to have to address.

Sciple: That brings us around to the future of energy in Texas, the future of the grid. We're on the topic of the grid right now. How do you see the grid being different 10 years into the future? Obviously it's probably going to winterize more, but as we move at energy transition and those things.

Perlman: Well, we're starting to see these big trends on both sides of the industry. This is where the story starts to come together. I think starting to come together around this idea of the need to decarbonize our energy sector. We're going to see these big shifts that I've been talking about both on the oil and gas side and on the power side, start to converge. We're going to see more electrification. Because one of the strategies for addressing climate change is to move basically from oil and gas to renewables, and to lower carbon sources of energy. Now, some of those lower carbon sources of energy might be natural gas plants [...] with carbon capture. That may be a technology that allows you to still use some of the traditional fossil fuel infrastructure that we've built in Texas. Or you might see new sources of energy and we'll talk about this, I suppose in a few minutes, like hydrogen coming to the fore. But I think what you're going to start to see is this convergence around decarbonization. The challenge for the state is can we both decarbonize and maintain reliability? We're going to have to build a lot more renewables, whether it's wind or solar, or energy storage, as well as start to capture some of the carbon from our existing gas plants in order to meet our goals, if we're going to decarbonize our grid, if that's where we're headed. 

I think that's where we're headed over the next 10 years. That doesn't mean by any stretch of the imagination that the oil and gas industry is going away. In fact, what you may see is a very robust oil and gas sector in Texas. Oil and gas demand globally is still going to be quite robust for the next 20-30 years, if you look at any of the forecasts by the Federal government or by the International Energy Agency. Texas as a low-cost state, will probably be providing a lot of that supply. I think in some ways, while the story changes, it's just the next chapter in the energy story that I've been describing. But again the energy industry is going to go through this transition and we need to start adapting to these changes.

Sciple: Brett, one of the things you mentioned was this idea that some of the existing infrastructure in place from the oil and gas industry maybe puts some of these energy businesses in a position where they can move somewhat smoothly over to some of these new industries. Can you talk about that infrastructure and how that would work?

Perlman: We at the center for a decent future, have been looking at this issue of how do we make this transition from a fossil fuel-based economy to a low carbon economy. What's the role of the oil and gas industry in this energy transition. Like I've been describing when we started this conversation, the idea of energy transition is not a new one, the energy industry has been transitioning for well over 120 years now, and so this is just the next-generation. What we've been talking about today, this long history of transition through the energy industry. I think one of the opportunities that we have in Texas to facilitate this transition is the existing asset base that we have. We're really asset rich in a lot of different ways, and those are both physical assets in terms of some of the storage capabilities we have, in terms of the geologic formations that we have, which can perhaps store CO2, used to be places where you could store oil, now you can put some of the CO2 back in, in terms of geological storage.

Sciple: Explain injecting it into the ground just for folks. You have a reservoir that maybe you would have put oil in, now you're going to pump CO2 into that reservoir.

Perlman: You are supposed to take things out of it, you're not going to be taking oil out of it, now you're going to be putting CO2 back into it. That is known in the industry as carbon capture utilization and storage. We're really talking about the storage piece. It can be used too, it can be used to basically recover from oil as well. That's called the enhanced oil recovery. We'll see carbon dioxide used in lots of these applications. We really have those assets in Texas. Both the physical assets, the natural assets, and then the pipeline, and MedAssets as well to start to facilitate that energy transition.

Sciple: Yeah, another area that I know you've written about at the center and have gotten a lot of attention over the past year is hydrogen technology fuel-cells has been an area that has gotten some particular interests. Where does the hydrogen opportunity lie in Texas?

Perlman: Well, this is one of the more interesting things that I think our research has covered is that hydrogen today is used primarily as a feedstock, is used in the refining process for oil and gas and for petrochemicals. It produces a lot of CO2. The way you produce hydrogen today is through a process called steam methane reforming, and you produce it from natural gas. When you do that, you create basically hydrogen and CO2. But what we have found is if you can marry that with these carbon capture technologies and capture the CO2, you can create basically a low carbon intensity product that some people call blue hydrogen, and this hydrogen cannot only be used as a feedstock, but can be used as a fuel in lots of different applications. You can envision. This technology exists today. Hydrogen buses, hydrogen trucks, hydrogen shifts, hydrogen boats, and even people are thinking about hydrogen powered aircraft. These are all transportation technologies that could be facilitated using blue hydrogen and then maybe in the future what people are, green hydrogen, which would use some of the renewables that we have through a process called electrolysis, effectively turning water into hydrogen and oxygen, and that green hydrogen, which would be zero carbon is perhaps the fuel, the future, literally would be the thing that would be transformational. 

The real question is, how do we create this new industry, take the existing hydrogen that we're using as the feedstock and start to use it as a fuel in these different applications? We at the center have been studying this. A number of companies, obviously, some of the ones that you guys follow-up at Motley Fool like Plug Power, and Ballard have gone through many iterations. This is not a new idea, some of these companies have been around for quite a few years and their business plans have now gone through many iterations and are starting to be rejuvenated by this idea of using hydrogen as a low carbon energy source of the future. I think that's what we see as an opportunity, and we really see Houston as the one place where we can start to create these clean energy infrastructure hubs in the short run. We really view that, as we've been talking about this afternoon, as the next iteration of what we started to discuss way back when we started the discussion that's bundle top. Some people have called this idea of investing in hydrogen the next bundle top. I don't know if that's true or not, but we'll certainly be exploring that at the center. I know many of your listeners and investors will be exploring that in terms of the companies that they look to invest over the next five to 10 years.

Sciple: Yeah, to follow that up, Brett, when we think about Houston and Texas being an important state and some of the security infrastructure. Do you see companies we think of as traditional oil and gas companies, Exxons and Chevrons of the world being meaningful players in this industry or is it more of those pure companies like the fuel-sell players you mentioned?

Perlman: One of the interesting things about energy is scale is so important. I think everybody has something to contribute to this new energy landscape that we're talking about today. It's just a question of where they contribute? I think the large integrated oil companies bring that scale to the table and have something to contribute. The smaller start-up companies, private equity companies can contribute ideas and new technology. There's really room for everybody to play. Who the ultimate winners and losers are, I think it's really too soon to tell. You're starting to see companies differentiate their strategy. Certainly the large companies have, and you're starting to see how that's starting to play out in terms of the market's reaction to them. It's hard to say where this is going to end up. I think there's room for everybody and creating a very interesting new energy landscape, and we think that Houston in particular, has a role to play as this new energy, low-carbon energy hub. Those are the things that we're working on at the Center for Houston's Future.

Sciple: Awesome. We talked about how big this opportunity is, maybe we want to follow up. What do you think are the biggest barriers to achieving this vision? What do you think are the biggest obstacles to forming this future for Houston and for the energy industry more broadly?

Perlman: I think there are two, one is a soft one and then one is more tangible. The first one is vision, I think people changes hard and creating a common vision where people can understand that we're not saying our existing energy is going away overnight, but they can buy into this new vision and they can see that there are these opportunities to be green are not only about reducing carbon intensity, but they are out making money. That story needs to be told. That's the soft one, the vision one. Then I think the more tangible one is really about the set of policies that need to be out there to support these markets as they start to grow. Each of these newer technologies in energy, as I mentioned, scale is important, time-to-market is important, and these all traditionally have had a policy support and a policy framework that makes it work. That's what we've found in Texas when we restructured the market. I think we're starting to develop in the U.S., but still on the state level, there will be gaps. A policy framework that supports this kind of industry, and some of our policymakers in Houston, I think, need to understand what the vision is and need to understand that this is something that will create enormous amount of wealth for the state and for our citizens going forward, and this is something they need to get behind. I think if they can grasp that vision and turn that vision into policy reality, I think Texas will become the new low-carbon energy capital of the world.

Sciple: A follow-up question, is the energy transition dependent on government involvement just because of the scale of this problem? We've seen the new Biden infrastructure plan, you talked about the role of states. You view the role of government as being key, or how do you view the role of government?

Perlman: I think it really comes down to Economics 101. CO2, which we're talking about, is an externality, and if we don't put a price on it, if we don't have policies that internalized the cost of CO2, then people are going to not treat it and they're not going to price it properly. What we really need to do at the end of the day is we need to internalize this externality. However, we do that through policy, through our carbon price. There are numerous ways of doing that, but simply we need to make it. At the end of the day. It's not so much about policy, it's about making markets work. If we can find ways to internalize the cost of pollution of CO2 as a pollutant then we can make markets do the rest of the job, and so until we can do that, we have to find second-best solutions. That's where the role of policy comes in. But just like we did in the competitive electric market, if we can create policy frameworks where competition can work, then markets will take over. I think there is a role for the government in the short term to play here. But in the long term, what you really want to do is create markets around this stuff.

Sciple: Excellent. I'm horrible at these transitions. We're going to cut this part out and I'll try again. Brett, thank you so much for spending this last half hour with us. I just got one last question for you before we let you go. If you look out the future of energy, what's the biggest question for you right now? The biggest uncertainty as you look out into the future.

Perlman: Nick, I wish I could tell you my crystal ball is a little clearer. I think the next 10 years they're going to tell the tale on whether we're successful in the energy transition because if you read any of the literature around this, you'll know that really we have 10 years to solve this problem. The biggest question for me is, can we move fast enough to start addressing climate change in a meaningful way to make a [...] in our CO2 emissions? To me, that's the big question we have to answer. How do we start moving faster to start creating this energy future sooner as opposed to later?

Sciple: Thank you so much for spending this time with us, Brett. If folks want to keep track of what you're doing or some information that the center is putting out where can they go do that?

Perlman: Yeah. Our website is futurehouston.org. They can reach out to me. My contact information is on our website.

Sciple: Thank you so much. As always, people on the program may own company as discussed on the show, and The Motley Fool may have formal recommendations for or against the stocks discussed, so don't buy or sell anything based solely on what you hear. Thanks to Anne Franks for her help with the show, for Brett Perlman, I'm Nick Sciple. Thanks for listening and Fool on!

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.