Speaker 1: Hello, and welcome to the Votes in Verdicts podcast hosted
Speaker 1: by Bloomberg Intelligence, Bloomberg LPA's investment research platform. In this
Speaker 1: podcast series, we talk about the intersection of business policy
Speaker 1: and law. My name is Brandon Barnes and I'm a
Speaker 1: senior analyst with Bloomberg Intelligence covering energy policy, regulatory and litigation.
Speaker 1: Today we are welcoming to the show Katie Bays, who
Speaker 1: is currently the Director of Sustainable Investment with Adamantine Energy,
Speaker 1: where she provides political and regulatory analysis regarding risks related
Speaker 1: to investments in energy projects and companies. We're going to
Speaker 1: get deeper into what Katie's currently doing Previously, she's been
Speaker 1: in a number of different places and it's a kind
Speaker 1: of a fascinating background when you think of energy policy,
Speaker 1: and so we're going to touch on some of those
Speaker 1: as well. But I'd like to kick it off by
Speaker 1: reminder Katie that we met during the healcyon days of
Speaker 1: the Dakota Access Pipeline litigation in District Court in DC.
Speaker 1: What days those were? Amazingly that's still dragging on somehow,
Speaker 1: And that time you were at Height Capital Markets and
Speaker 1: you're writing an analysis for clients from d C with
Speaker 1: sort of a DC perspective. I'd love to hear how
Speaker 1: you went from height to sort of the role you're
Speaker 1: on now at is it adamantin.
Speaker 2: Adam and Tein, Yeah, you've got it. Well, those were
Speaker 2: fun times, absolutely for some people at least, and if
Speaker 2: nothing else good came out of that litigation, it was
Speaker 2: good to meet you, Brandon. And Yeah, So to your point,
Speaker 2: I've done a couple of different things in my career.
Speaker 2: I mostly worked as an advisor to financial institutions, providing
Speaker 2: political and regulatory analysis related to investment, but I've also
Speaker 2: a couple of times in my career served as an
Speaker 2: economic consultant. I worked for the Energy Information Administration at
Speaker 2: the beginning of my career and then done a couple
Speaker 2: of Census economic analyst and consultant. And I think that
Speaker 2: that perspective of both finance economics and then with the
Speaker 2: policy overlayer has given me a bit of a unique
Speaker 2: point of view. And while I'm not an attorney, I've
Speaker 2: certainly had a number of opportunities to listen into those
Speaker 2: kind of litigation settings, and I think in the way
Speaker 2: in which I'm trying to sort of bring this background
Speaker 2: into a useful sort of application with Adam and Teine
Speaker 2: and with the capital markets today is that we're at
Speaker 2: the precipice of this big energy transition thing, and we
Speaker 2: don't necessarily know exactly how it's going to go, but
Speaker 2: we know that there's a lot of project developed meant
Speaker 2: that has to occur, and there's you know, there are financial, economic,
Speaker 2: and political overlayers to that. Plus there's obviously, you know,
Speaker 2: this risk of litigation that I think everyone is very
Speaker 2: sensitive to. So we try to kind of anticipate how
Speaker 2: that confluence of risk can come together and how that's
Speaker 2: likely to affect different projects and different companies, and do
Speaker 2: that in a way that hopefully is helpful to people
Speaker 2: trying to make investment decisions.
Speaker 1: So that's I mean, and that's that's some of what
Speaker 1: we do as well. But I think it's your approach
Speaker 1: in this in this position is interesting. I think, you know,
Speaker 1: even even though I am that bad word lawyer, you know,
Speaker 1: previous life, I think I think about sustainable investing and
Speaker 1: I wonder, you know, I should know what that means.
Speaker 1: That's but it's not it's not just it's not a
Speaker 1: touchy feely thing at all. Right, It's not sort of
Speaker 1: the days of old where we're talking about, you know,
Speaker 1: this is a better thing than that, just because we
Speaker 1: said so, tell me if you can a little bit
Speaker 1: more about what that is and how you view it,
Speaker 1: and we can maybe talk about some of the specifics.
Speaker 2: Yeah. Well, and I think it's important to acknowledge that
Speaker 2: sustainable investment is not one thing, and it's not a
Speaker 2: static thing, and it's evolving. I mean, I think a
Speaker 2: lot of folks would incorporate, you know, principles like esg.
Speaker 2: The environment, social and governance principles into the sort of
Speaker 2: category of sustainable investing. But it's when I think about where,
Speaker 2: you know, it seems like a lot of investment firms
Speaker 2: are incorporating these principles of sustainability. I think it's more
Speaker 2: from the point of view of kind of doing a
Speaker 2: couple of things. One is obviously trying to manage long
Speaker 2: term returns, and this particularly in the energy universe, this
Speaker 2: idea that we are undergoing a fundamental change and we
Speaker 2: again don't know exactly how it's going to go, but
Speaker 2: there's a I think general accept so that companies or
Speaker 2: projects that are designed for a sustainable future or maybe
Speaker 2: resilient in a sustainable future are likely to perform better
Speaker 2: over time. And so that's a sort of a core
Speaker 2: principle of what I would call sustainable investing. And then
Speaker 2: there's also there are other layers of sustainability too. There's
Speaker 2: issues like environmental justice and social justice that speak maybe
Speaker 2: more to sentiment or more to what you might call
Speaker 2: like a social license to operate. In the context of
Speaker 2: a project, you know, our consumers or other corporate partners
Speaker 2: willing to engage with a business. And I think that investors,
Speaker 2: I think, by and large and the public by and
Speaker 2: large acknowledges that you are more likely to perform well
Speaker 2: as a business or a project if you can engage
Speaker 2: and maintain support from your customers, from your employees, from
Speaker 2: your peers, from your various stakeholders. So to me, that's
Speaker 2: the cruxis sustainable investing is that we're not just going
Speaker 2: to pencil out a company on you know, in Excel
Speaker 2: and try to see if this looks like a good return.
Speaker 2: We're also going to look at the company's risk factors
Speaker 2: in a holistic sense and try to determine if this
Speaker 2: company or project is really going to be around in
Speaker 2: the long term. And I think it's a response to
Speaker 2: you know, this very large degree of social and political
Speaker 2: change that we're living through as well well.
Speaker 1: And certainly we've I mean we've this is how we met, right,
Speaker 1: this is being part of these infrastructure projects that are
Speaker 1: going through something other than just I didn't get a
Speaker 1: permit or I don't have the funding, right, so I
Speaker 1: guess have used since since to go to access since
Speaker 1: twenty sixteen, and the courts, you know, have I wonder
Speaker 1: because I'm watching, you know, which project are having trouble
Speaker 1: because of things like environmental justice or you jay, you know,
Speaker 1: how have you seen that from your role sort of
Speaker 1: evolve to become something that's more you can put not
Speaker 1: not necessarily put in Excel, but like you can actually
Speaker 1: put some metrics around and really really analyze.
Speaker 2: That's a good question. I mean, I think we have
Speaker 2: definitely seen. Here's what I would say, because I think
Speaker 2: putting it into Excel is still really hard. So that
Speaker 2: part of the maturation of you know, this idea of
Speaker 2: sustainable investing. I think it's not quite My opinion would
Speaker 2: be it's not quite there. But I'll kind of explain
Speaker 2: more about what I mean by that. The environmental justice
Speaker 2: or social justice issues or the social license to operate
Speaker 2: manifest in a negative way. And I don't think that
Speaker 2: these things are always negative, but I think that we
Speaker 2: do particularly notice when they show up in a negative way.
Speaker 2: Is when you've got mounting opposition to a project that
Speaker 2: you know may have some layers of support, like you
Speaker 2: might often see projects do a good job of cultivating
Speaker 2: very high level political support, maybe a governor or you know,
Speaker 2: even a national figure like a congress person, but that
Speaker 2: the local community does not support the project or finds
Speaker 2: or maybe they could support the project in general or
Speaker 2: in principle, but there are particular aspects of the project
Speaker 2: that they find objectionable. And that is very often sufficient
Speaker 2: to stop a project. And I think that's what we
Speaker 2: are finding is, you know, even if a project is
Speaker 2: entitled to use some tools like eminent domain, if there's
Speaker 2: local opposition that's speciferous, that's sufficient to wrap a project
Speaker 2: up in litigation for a long time or intimidate maybe
Speaker 2: some regulatory figures out of providing a permit, or providing
Speaker 2: a permit as expeditiously as the project might need. So
Speaker 2: it's just a lot of different pain points, and so
Speaker 2: what does this mean for investment, right, and where this
Speaker 2: comes in I think within the framework of, you know,
Speaker 2: how our investors dealing with this problem in this headwind.
Speaker 2: It's honestly, I think it's by removing dollars from the market.
Speaker 2: I think there is less investment in project development than
Speaker 2: there would otherwise be if projects had useful tools to
Speaker 2: navigate these challenges, and if there was a generally agreed
Speaker 2: upon playbook for how to engage with communities in a
Speaker 2: way that directly addresses that local or you know, very
Speaker 2: concentrated opposition. And then the last thing I would just
Speaker 2: say on the subject is that I think we often
Speaker 2: see this risk discussed in the context of permitting reform.
Speaker 2: But you know, one of the things we've written about
Speaker 2: a couple of different times in our work is is
Speaker 2: that permitting reform is not a panacea. You can reform
Speaker 2: the way in which federal agencies are supposed to administrate
Speaker 2: the National Environmental Policy Actor NITA, but that doesn't obfuscate
Speaker 2: the role of communities. And in fact, if we see
Speaker 2: a permitting reform bill passed this year, I think we
Speaker 2: probably should anticipate because this is a pretty bipartisan issue.
Speaker 2: At the end of the day. We should anticipate that
Speaker 2: the role of communities is going to be part of
Speaker 2: how we effectuate a permitting reform. I we see there's
Speaker 2: a local ban on carbon capture projects in Louisiana right now,
Speaker 2: We've got folks in Wyoming, where you've got there's state
Speaker 2: primacy over carbon capture. There's some local intimations about what
Speaker 2: people want to see from DAK or CCS projects. So
Speaker 2: it's not a red state versus blue state issue. It's
Speaker 2: a pretty bipartisan issue where folks want to have say
Speaker 2: on what goes on in their community.
Speaker 1: Does come down to local, doesn't it. I mean, you
Speaker 1: look at what you know, we think of generally should
Speaker 1: be a positive from a sustainability perspective. When we think
Speaker 1: of a project, we think of like some of these
Speaker 1: CO two pipelines. Right, let's run through Iowa. Let's take
Speaker 1: some of that f andol CO two out and we'll
Speaker 1: store it somewhere else underground. And the local opposition from
Speaker 1: the farm is real, and it's it's going to change things.
Speaker 1: It's going to slow things down. So you mentioned to playbook,
Speaker 1: do you think, I mean, we've got to be closer
Speaker 1: to a point where everybody recognizes that local is critical.
Speaker 1: Do you think I mean, do you think there's still
Speaker 1: there are still companies out there that are just let's
Speaker 1: plow through or or just get the project done then
Speaker 1: we can apologize after.
Speaker 2: Yeah, Unfortunately, I do. I do think that we are more.
Speaker 2: I mean, I think that the pendulum is a little
Speaker 2: bit because of some of the high profile conflicts that
Speaker 2: have broken out over a different infrastructure project. But I
Speaker 2: think there's a bit sometimes maybe people are not learning
Speaker 2: the right lesson. And for instance, you know, you brought
Speaker 2: up the long haul green field carbon capture pipelines that
Speaker 2: are proposed throughout the Midwest. I mean, I would say,
Speaker 2: you know, from my perspective, the wrong lesson over to
Speaker 2: take away from the last let's say half a decade
Speaker 2: or maybe it's almost a decade now, but lease the
Speaker 2: last half a decade around energy infrastructure. The wrong lesson
Speaker 2: is to say that, you know, clean projects are exempt,
Speaker 2: clean energy projects are exempt from requirements to engage with
Speaker 2: the community. That community opposition to a project like Dakota
Speaker 2: Access was entirely, entirely to do with the fact that
Speaker 2: it's an oil pipeline, and that is not true. You know,
Speaker 2: I mean, people are no more comfortable with CO two
Speaker 2: pipelines today than they are with oil pipelines. You know,
Speaker 2: maybe in a very abstract sense, but when you talking
Speaker 2: about something going through a person's property, it's you know,
Speaker 2: there's no difference, really, And I think we have to
Speaker 2: approach projects from that perspective, that everyone's everyone's suspicion is valid,
Speaker 2: and that folks need to be engaged early on in
Speaker 2: the project, in the consultative process, and that the cudgel,
Speaker 2: the sort of the stick that you've historically used to
Speaker 2: beat the community with, which is something like eminent domain,
Speaker 2: that you should not you know, the stick needs to
Speaker 2: stay in the closet, like the stick can't come out.
Speaker 2: And I do. I do get questions still about whether
Speaker 2: or not projects can avail themselves of m domain, And
Speaker 2: I'll just be honest, I think that's the wrong question
Speaker 2: to ask. Even if you can, it's not it's not
Speaker 2: a guarantee that the project is going to get all
Speaker 2: the tools, so it needs to be able to get done.
Speaker 2: So I'm a little less confident that we've learned all
Speaker 2: the lessons that there are to learn, But I think
Speaker 2: that time I feel confident that this is an issue
Speaker 2: that folks are becoming more sophisticated on also.
Speaker 1: Certainly even especially with the new clean projects that are
Speaker 1: sort of novel because we especially in places that we
Speaker 1: haven't seen them before. You would it makes sense to
Speaker 1: get out ahead with local groups as state regulators that
Speaker 1: haven't seen it before and say, look, this is a
Speaker 1: good thing for this reason, not just it's a feel
Speaker 1: good story. Yeah, because I think the laws are the same,
Speaker 1: right whether you're a natural gas pipeline or maybe a
Speaker 1: CO two pipeline, depending on where you are. But you know,
Speaker 1: whatever was used before to slow down, you know, force
Speaker 1: somebody to avoid a permit on a fossil pipe fossil
Speaker 1: infrastructure project, that law is still going to apply over
Speaker 1: to some of the newer projects too.
Speaker 2: Yeah, if not even in a more onerous way, because
Speaker 2: the newer projects may not have that you know, large
Speaker 2: statutory or sort of the pool of precedent that helps
Speaker 2: a company feel confident about what it's entitled to and
Speaker 2: the path that needs to follow in order to get
Speaker 2: the regulatory milestones that needs to hit. One of the
Speaker 2: things we kind of try to emphasize that I've learned
Speaker 2: a lot about from the folks that I'm in teen
Speaker 2: and I find really compelling. Is this idea? You know,
Speaker 2: what does meaningful engagement look like? And I think Canada
Speaker 2: actually provides a really interesting model to that where we've
Speaker 2: really seen First Nations communities join projects as equity partners
Speaker 2: or as project partners and their engagement as a owner
Speaker 2: in the project. Obviously there's financial benefits that accrue to
Speaker 2: them as part of that function, just like there would
Speaker 2: be to any other partner in a project, and that
Speaker 2: that entitles or that earns the support of this community,
Speaker 2: so that the sort of the political powers that be,
Speaker 2: you know, Prime Minister Trudeau, et cetera, are not anymore
Speaker 2: responsible for standing up for the First nation. So the
Speaker 2: First Nations are able to advocate for themselves. Their interests
Speaker 2: are aligned with the project, and that has led to
Speaker 2: I mean those quite I think put really simply, those
Speaker 2: are the projects that are getting done. And so what
Speaker 2: does a model like that look like in the US?
Speaker 2: You know, how can you, as a project developer explore
Speaker 2: ways of really bringing communities on as partners and whether
Speaker 2: that's an equity partner or a different kind of partner.
Speaker 2: You know, I'm not espousing the necessarily opinion, but like,
Speaker 2: how do you bring a community on as a partner,
Speaker 2: and with that partnership, you know, I think comes greater
Speaker 2: regulatory certainty.
Speaker 1: Yeah, I think you know some of that. We talked
Speaker 1: about this before. But some of the examples, I mean,
Speaker 1: when we talked about early days of fracking, you know,
Speaker 1: twenty ten, then there was such a community pushback, mostly
Speaker 1: because people didn't know right. It just was it was
Speaker 1: asymmetrical in terms of the information out there on the
Speaker 1: dangers or the risks or the benefits. But I remember
Speaker 1: seeing some of the better operators get community agreements in
Speaker 1: place where they went before they did anything, and they
Speaker 1: got people to come to the table and say, you know,
Speaker 1: we agree, here the restrictions, here's the setbacks, here's what
Speaker 1: we're going to do, and you know, they were able
Speaker 1: to do the project. They weren't sitting there, you know,
Speaker 1: reliigating Dimmick Water or I think it was Pavilion in California.
Speaker 1: Those are blasts from the past. So yeah, I think
Speaker 1: I totally agree that it just seems like stakeholder engagement
Speaker 1: at a local level would circumvent so much of the
Speaker 1: issues that a lot of these projects see now.
Speaker 2: Yeah, I think that I think that's the right answer.
Speaker 2: You know, I know that folks are doing it, and
Speaker 2: so it's not to say that, you know, go from
Speaker 2: zero to some engagement, but there are I think there
Speaker 2: are really good, diligent practices that make a real difference
Speaker 2: in terms of how productive that engagement.
Speaker 1: Ultimately, you touched on permit reform. What do you think
Speaker 1: is it happening? You said, I know bipartisan support because
Speaker 1: particular his mansions on board to some to a big extent.
Speaker 2: But yeah, and I think you know, Senator Carper also
Speaker 2: put out a version of a plan, So I mean
Speaker 2: there's some it's more certainly more bipartisan in the Senate
Speaker 2: than it is in the House, but that counts for
Speaker 2: a lot, you know. My I think my base case
Speaker 2: assumption right now is that, yes, I think permitting reform
Speaker 2: does happen. You know, the timeline of maybe July going
Speaker 2: into the August recess is probably a good I here's
Speaker 2: what I would I would feel pretty confidencing that I
Speaker 2: think we'll get a push in July, and ultimately I
Speaker 2: think see if we see something come together, it's probably
Speaker 2: you know, eighty percent Republican support. Twenty percent democratic support
Speaker 2: in the Senate and then maybe close to a party
Speaker 2: line in the House, just because that seems to be
Speaker 2: the way that that seems to be how things are
Speaker 2: kind of going down right now that there's not if
Speaker 2: there's not an incentive for House Democrats to vote for something,
Speaker 2: then they don't really need to. But that more bipartisan
Speaker 2: progress on the Senate side is how things are going
Speaker 2: to get done, so you know, I'll be looking forward
Speaker 2: to that. I think some of the provisions in permitting
Speaker 2: reform that will matter to companies would be the limit
Speaker 2: on the duration of the environmental assessment environmental impact statements.
Speaker 2: Limiting those to a year or two years would be
Speaker 2: very material. Back to our favorite topic of litigation, providing
Speaker 2: some sort of a limit on litigation one hundred and
Speaker 2: twenty days one hundred and fifty days after final order
Speaker 2: has been proposed. Those are the two timelines that folks
Speaker 2: are kind of standing around. There are other things that
Speaker 2: I think are less headline grabbing, but I definitely have
Speaker 2: fielded questions from investors on things like, you know, whether
Speaker 2: Mansion's proposal to staff furk better is going to go
Speaker 2: through because that people have come to understand that you know,
Speaker 2: an understaffed FURK is a major headwind. So there there
Speaker 2: are other factors that or other elements of the permitting
Speaker 2: reform proposals that I think will matter to people, but
Speaker 2: the big ones limiting those reviews and limiting litigation that
Speaker 2: will probably that those seem to show up in basically
Speaker 2: every version of a permitting reform package, So I think
Speaker 2: that's we should expect that, And then the some of
Speaker 2: the accessories a little less clear. But I think it
Speaker 2: does sound like there's a decent chance of something coming
Speaker 2: together this summer. It's amazing to me because we are
Speaker 2: in this bizarrely partisan time that more often than not
Speaker 2: it seems like the Senate can just get its head
Speaker 2: down and works.
Speaker 1: Yeah, yeah, we would agree. I think that we were
Speaker 1: always thinking summer summer was the best shot. I think
Speaker 1: I'm suspicious of it actually being materials for project times generally,
Speaker 1: but you know part of that, clearly, the courts have
Speaker 1: a huge role they've been playing in this, because it's
Speaker 1: not like the agencies haven't been issuing permits, it's just
Speaker 1: they've been getting kicked back to the agency two or
Speaker 1: more times. So yeah, I think we're a suspect on
Speaker 1: materiality there, But putting caps on times is a good
Speaker 1: start for sure, right.
Speaker 2: And I think you're right to look past that a
Speaker 2: bit and say who enforces those times? Right? Yes, yes,
Speaker 2: you know. And I definitely again putting on my pretending
Speaker 2: to be a lawyer hat. I've had folks ask me
Speaker 2: in the past if companies or projects can file a
Speaker 2: rid of mandamus to try to get a permit at
Speaker 2: their own and it's like, well, if you want to
Speaker 2: get your permit denied, you absolutely could do.
Speaker 1: I like when when they dig up the they really
Speaker 1: dig into the civil procedure, that's critical to know you're
Speaker 1: rid of mandamus petitions.
Speaker 2: Yeah, so, I mean you've probably not seen that happen,
Speaker 2: though I actually think it has happened not so long ago.
Speaker 2: But it's not the best, not the best strategy perhaps.
Speaker 1: But look, I mean they're for some of these project
Speaker 1: they're up against it, right, Like to think at them
Speaker 1: out Mountain Valley, like they have said that their best
Speaker 1: hope is legislation, which is not been the best pathway
Speaker 1: for anyone to get anything done on any topic for years.
Speaker 1: But here we are, they just keep running into the
Speaker 1: fourth circuit wall I know.
Speaker 2: Well, that's an interesting thing in terms of you know,
Speaker 2: these sort of sleeper provisions and the permitting reform process,
Speaker 2: that connection at being pretty material. There's one I think
Speaker 2: it's in Sholling more capitals language, that would require that
Speaker 2: the panel, like the circuit court judge panel, to be
Speaker 2: drawn at random for each project. So one of the
Speaker 2: challenges for MVP, right is that they've been continuously assigned
Speaker 2: the same panel. And I don't I don't ever wish to,
Speaker 2: you know, assume anyone's intent, right, but I think that
Speaker 2: the panel has become fatigued with the government. It seems
Speaker 2: in a lot of cases there's maybe a presumption that
Speaker 2: the government has made errors in its work. And so
Speaker 2: obviously with pretty high degree of regularity, that circuit's coming
Speaker 2: back with, you know, with with real problems with these
Speaker 2: permits that MVP is earning, and that is, uh, it's
Speaker 2: been a real challenge. So I wonder, I wonder if that,
Speaker 2: you know, getting fresh eyes on each round of litigation,
Speaker 2: if that could end up actually being kind of helpful
Speaker 2: for future projects. But I think, you know, if I'm
Speaker 2: a project developer, I'm going to try to avoid by
Speaker 2: hooker by Kruk going through the same series of problems
Speaker 2: that that MVP has had to deal with.
Speaker 1: Yeah, I'm thinking about where I'm going to build, and
Speaker 1: it's not it's not going to be through the through
Speaker 1: the red Wall of New York that I say read
Speaker 1: because in my heat map of how many days it
Speaker 1: takes to get approved New York is it's either infinity
Speaker 1: or zero because you're not getting improved. And then right,
Speaker 1: you know, the mid Atlantic has sort of moved in
Speaker 1: that direction. But yeah, I think I I MVP could
Speaker 1: be its told its own podcasts several times over. It
Speaker 1: has kept me relevant for years, so I can't smirch
Speaker 1: it too much. But I will go further and say
Speaker 1: that I do think the four Circuit has gone beyond
Speaker 1: where I would think from a legal perspective they should
Speaker 1: go in sort of second guessing agency work. But that's
Speaker 1: showing my stripes a little bit too much.
Speaker 2: No, I mean, I think I don't think you're alone,
Speaker 2: but I don't think you're alone in that conclusion at all.
Speaker 1: That's I appreciate that I've heard from certain clients many
Speaker 1: times over the in different language that I am on
Speaker 1: the right track. So I think let's get back to
Speaker 1: a little bit more on the sustainable although obviously this
Speaker 1: all plays into that sort of analysis and that assessment
Speaker 1: because one of the things we think about a lot,
Speaker 1: obviously is for our clients. You know, how is policy
Speaker 1: pushing around or nudging markets? And whether it's specific companies
Speaker 1: or industries or sectors, you know, that's what we're all
Speaker 1: trying to figure out. So I'm wondering, you know, when
Speaker 1: you guys look at something like the IRA, right, and
Speaker 1: or you know, how are you communicating your thoughts to
Speaker 1: clients on that? What are you what's what's most interesting
Speaker 1: to you in there? And what are you getting most
Speaker 1: asked about off that topic?
Speaker 2: I think, well, I mean, I think the transition from
Speaker 2: the previous conversation, which is basically all of the sticks
Speaker 2: that have driven investment firms to try to incorporate principles
Speaker 2: of sustainability, that attempt, I think, in a really general way,
Speaker 2: attempt to anticipate some of those regulatory and political and
Speaker 2: social sticks. So that's what we think sustainable investing is,
Speaker 2: is trying to be responsive to less obvious forms of
Speaker 2: social pressure when making investment decisions. The IRA is the carots,
Speaker 2: So why pursue sustainable investing. Why incorporate sustainable investing into
Speaker 2: your investment strategy. There's a lot of reasons, you know,
Speaker 2: your investors might be telling you to, but one of
Speaker 2: the big sort of overarching ideas here is that you're
Speaker 2: trying to respond to those regulatory and social sticks and
Speaker 2: you're also trying to take advantage of some of these
Speaker 2: carrots and incentives. And the state of play for the IRA,
Speaker 2: I think is very interesting right now in the sense
Speaker 2: that we're i think waiting collectively, we're waiting for the
Speaker 2: other shoe to drop. You're waiting for additional guidance from
Speaker 2: the IRS on how companies will be able to apply
Speaker 2: some of the really big ticket IRA incentives, like the
Speaker 2: hydrogen tax credit, and you can hear from companies, I think,
Speaker 2: how their strategies are. They're priming their strategy to try
Speaker 2: to take advantage of those tax credits once the certainty
Speaker 2: is there. But folks are I think being very conservative
Speaker 2: generally in their strategy right now, assuming that you know,
Speaker 2: we're we're not going to presume that IRS is giving
Speaker 2: us the full value of this tax credit until we
Speaker 2: see that they are, and so that's a critical that's
Speaker 2: a critical kind of place that we're in. There's a
Speaker 2: huge amount of what I as, this is putting an
Speaker 2: economist out on the huge amount of I think economic
Speaker 2: misinformation that's going out. It's being put to the irs
Speaker 2: on the cost competitiveness of green hydrogen, particularly green hydrogen
Speaker 2: with all of these requirements layered onto it, things like
Speaker 2: additionality for the renewable energy and matching temporal matching, or
Speaker 2: lining up the energy use of the electrolyzer with the
Speaker 2: renewable energy. You know, I'm seeing some more less leaning
Speaker 2: or progressive organizations, you know, putting out economic analysis saying
Speaker 2: that green hydrogen facilities with all of those requirements strapped
Speaker 2: on top of them are cost competitive, and really the
Speaker 2: reality is that they're not, and they're assuming way too
Speaker 2: high up capacity factor for those electoralizers. That's impractical. And
Speaker 2: if you really talk to anyone who's actually looking at
Speaker 2: developing those electoralizers, these things are not they're they're not
Speaker 2: economic with the with like the most strict interpretation of
Speaker 2: the forty five V tax credit. So that's my little spiel,
Speaker 2: and I won't I won't become too much of a
Speaker 2: nerd here, But it was looking at some of that yesterday,
Speaker 2: it was really surprising to me what the assumptions.
Speaker 1: Were that were going in, so surprising that people are
Speaker 1: talking their book.
Speaker 2: Surprising to me that that somebody would assume that an
Speaker 2: electric very specifically that an electrializer with hourly temporal matching
Speaker 2: and the requirement of additionality for all of its electric generations.
Speaker 2: So you've got all the capex associated with that renewable
Speaker 2: generation that's associated now that's also planted with the with
Speaker 2: the capex for the electrolyizer, all of these things, and
Speaker 2: that the electrolyizer is running at an eighty five percent
Speaker 2: or eighty eight percent capacity factor like this is not realistic.
Speaker 2: The amount of capital, the return on capital is being projected,
Speaker 2: the price that they were modeling that the excess power
Speaker 2: could be sold for all of these things are like
Speaker 2: the rosiest possible assumptions that you're using to generate a
Speaker 2: conclusion that green hydrogen is three dollars a kilogram, which
Speaker 2: is still, by the way, something like twenty four dollars
Speaker 2: a million BTUs, so wildly expensive relative to natural gas.
Speaker 2: So this this formula is not a realistic set of assumptions.
Speaker 2: And when IRS is getting information like that. You know,
Speaker 2: I think there's a realistic concern in the industry that
Speaker 2: they're going to see that and say, oh great, you know,
Speaker 2: let's make the let's make the forty five E text
Speaker 2: credit as restrictive as possible because someone put together a
Speaker 2: really misinformed economic model saying that this will work. So
Speaker 2: this is the nerdy part of the discussion. Everyone will
Speaker 2: be tested later on what you've learned. But I think
Speaker 2: I think all these things make folks generally feel very,
Speaker 2: you know, a little bit uncertain about how some of
Speaker 2: the provisions of the IRA will be implemented. It's obviously
Speaker 2: very political, and we've seen Senator Mansion come out critically
Speaker 2: against some of the ways that IRS is interpreted those provisions.
Speaker 2: So it's by no means it's choppy waters. Absolutely, it's
Speaker 2: not a smooth sailing part of the process for anyone
Speaker 2: trying to develop infrastructure under the IRA. But at the
Speaker 2: same time, there are other there are other challenges, and
Speaker 2: I do hear too from companies and from project developers
Speaker 2: that are looking at developing let's say, carbon capture uh
Speaker 2: and would normally I think want to you know, like
Speaker 2: a project would normally want to develop that project using
Speaker 2: you know, non recourse project finance and over you know,
Speaker 2: over a twenty year life for the asset or something
Speaker 2: like that. Have you know this twenty year debt associated
Speaker 2: with it, And instead of the market really being open
Speaker 2: to that, they're hearing more often that companies that might
Speaker 2: be seeking to develop these projects are looking at doing
Speaker 2: it on the balance sheet, so using shorter term, more
Speaker 2: expensive corporate debt to finance and those those things raise
Speaker 2: the costs for clean energy development too. So I think
Speaker 2: there's a level of maturation of the project finance side
Speaker 2: that's going to happen at US. These IRA backed projects
Speaker 2: become more common, but there are there's it's more than
Speaker 2: just the I R S is I guess all. I
Speaker 2: was trying to say that that uncertainty is creating other
Speaker 2: headwinds to investment, uh for the kinds of projects of
Speaker 2: the IRIS, and then to incentivize.
Speaker 1: That's I mean, that's a great perspective, I think, because
Speaker 1: you don't hear that very often. But you know, what
Speaker 1: we see is just a bunch of projects being proposed
Speaker 1: and everybody's snapping up smaller you know, competitors or people
Speaker 1: in the project space and full steam ahead. We've got pneumonia.
Speaker 1: Plants tend to build some hydrogen, build some carbon capture,
Speaker 1: So that's that's interesting to hear. Is there what do
Speaker 1: you think, I mean, apart from you know, real guidance
Speaker 1: out of the federal government, is there? You know, does
Speaker 1: it keep marching forward? Is it? Is there some sort
Speaker 1: of breaking point where people say, yes, we've got it,
Speaker 1: let's plow all the investment into it.
Speaker 2: Yeah. I mean, it's a good question, and I'm not
Speaker 2: sure what I think. You're absolutely right. You know, there's
Speaker 2: always there's a status quo until there's not. This is
Speaker 2: the status quo today, and eventually it's going to change
Speaker 2: and will change in six months or twelve months. It's
Speaker 2: hard to say. But one of the issues I think
Speaker 2: that the market is grappling with right now is what's
Speaker 2: the role of energy? What is the role of the
Speaker 2: conventional energy complex in the transition? And the things that
Speaker 2: we tend to hear is that companies are simultaneously coached
Speaker 2: by their investors that they need to be transitioned ready,
Speaker 2: so they should have credible plans to reduce their emissions.
Speaker 2: You know, if they can obtain certification for their gas,
Speaker 2: they should pursue that, but that they also but the
Speaker 2: investors generally also want these companies to stay in lanes
Speaker 2: and you know, not reach too far outside of their
Speaker 2: core business pursuing transition strategies. And it's probably not bad
Speaker 2: advice because folks tend to you know, you tend to
Speaker 2: make mistakes if you go outside of your area of expertise.
Speaker 2: But that I think of obvious skates the reality that
Speaker 2: a lot of the transition projects are well within the
Speaker 2: oil and gas industries or the midstream industries area of expertise.
Speaker 2: Transporting hydrogen, certainly, carbon capture, sequestration, geothermal, all of these
Speaker 2: things are well within the area of expertise. I mean,
Speaker 2: you can look at our you know, refining sector obviously
Speaker 2: is a great example of profound capital deployment, safe capital deployment,
Speaker 2: efficient operation of complex infrastructure. And so there's clearly a
Speaker 2: role to play for our existing industry. But it's we're
Speaker 2: in a little bit of a I think a waiting
Speaker 2: space where the market is sending maybe not quite mixed
Speaker 2: messages but somewhat tentative messages to the oil and gas
Speaker 2: industry about how outsides of a role it ought to
Speaker 2: play in the transition. So one of the things I
Speaker 2: think we really try to help companies do is to
Speaker 2: look at what is an authentic and very practical way
Speaker 2: for you to push the envelope on engagement in the
Speaker 2: transition or whatever you want to call it, but investment
Speaker 2: in a responsible way that's consistent with the company's larger
Speaker 2: financial objectives.
Speaker 1: Yeah, it's got to be tough, especially in the upstream space,
Speaker 1: because you're the messaging on investment, particularly the federal griment,
Speaker 1: has not been positive, and then sometimes it's confusing, so
Speaker 1: you know to then turn and try and figure out
Speaker 1: what the investment looks like for the transition. At the
Speaker 1: same time, it's probably a difficult build a swallow for
Speaker 1: some of the teams. But you've been looking at some
Speaker 1: of that in Colorado, haven't you.
Speaker 2: Yes, So adamantein the firm is based and was started
Speaker 2: in Colorado, and so while it's a national firm and
Speaker 2: there are folks all over the country, there's a good
Speaker 2: Colorado presence. And Colorado is actually really interesting example of
Speaker 2: a place where you've had a very high level of
Speaker 2: community engagement and how that has led to an evolution
Speaker 2: and sort of the regulatory regime so that companies now
Speaker 2: really do engage with the communities early and often and
Speaker 2: are able to earn community support for project development programs,
Speaker 2: and I was pretty proud to see that. Recently, some
Speaker 2: of our good friends at ARB and Energy did a
Speaker 2: nice piece discussing how the regulators regime in Colorado has
Speaker 2: gone from almost unmanageable to very certain and clear and
Speaker 2: navigable for companies, and so I think that's a great
Speaker 2: example of how you can effectively evolve this sort of
Speaker 2: adversarial relationship into one that's supportive of development as long
Speaker 2: as the development's occurring on community terms. So Colorado is
Speaker 2: a great example of this. It's also a great example
Speaker 2: of a space where companies are very eager to engage
Speaker 2: constructively in the transition or in the efforts to decarbonize
Speaker 2: the economy. Colorado has passed legislation seeking to decarbonize the economy,
Speaker 2: and so now the industry is working to optimize the
Speaker 2: role that it can play in that process. And you know,
Speaker 2: I think one of the one of the important political
Speaker 2: goals if I could kind of speak to that side,
Speaker 2: which is not where investors usually go, but one of
Speaker 2: the real important political goals, I think would be that
Speaker 2: we can pivot away from this goal of how do
Speaker 2: we eliminate fossil fuels to how do we eliminate greenhouse
Speaker 2: gas emissions and acknowledge that whether and to whatever extent
Speaker 2: the fossil fuel industry has a role to play in that.
Speaker 2: If we've eliminated emissions, then I think we've accomplished the goal, right,
Speaker 2: We've we've hit the mark. So I think, you know,
Speaker 2: taking a bigger tent approach to how do we effectively
Speaker 2: meet all of our energy needs while eliminating emissions is
Speaker 2: really the big hard challenge that I think we're going
Speaker 2: to have to face in the twenty twenties.
Speaker 1: Well, I don't think I can. I'm up any better
Speaker 1: than that, So I think, you know, I'll just try
Speaker 1: and close it out with a trivia question about Nebraska
Speaker 1: if I can. Oh, sure, yeah, why not? Because you
Speaker 1: are currently Nebraska.
Speaker 2: That's right.
Speaker 1: What powdered drink mix is the official state offt drink
Speaker 1: of Nebraska. So I thought it was.
Speaker 2: A hard one. I think I would lose my residency
Speaker 2: if I could not answer this question. It is fool a,
Speaker 2: you're kidding me.
Speaker 1: You knew that.
Speaker 2: Of course I'm Carnie.
Speaker 1: Wow, that's more information than I have from the internet,
Speaker 1: so obviously I can't back check you on that. That's impressive.
Speaker 2: Well, thank you.
Speaker 1: You get to keep your corn.
Speaker 2: Corn hat and my Husker football ticket the good.
Speaker 1: Well listen, Katie, I wanted to thank you so much
Speaker 1: for joining us today. Really appreciate the informant conversation. I
Speaker 1: think it's valuable for all of our clients to hear
Speaker 1: what you have to say on the topic of sustainable
Speaker 1: investing and energy policy. Generally, that will be it for
Speaker 1: US and Boats and Briticks podcasts. It's hosted by Bloomberg Intelligence. Again,
Speaker 1: I'm Brandon Barnes. I'm an analyst to Bloomberg Intelligence. You
Speaker 1: can find us on the terminal anytime you need any
Speaker 1: of our critical research for your investment, thesis or anything else.
Speaker 1: Thanks so much.