NEWS OF THE DAY:
Industry must find ways to survive increasingly authoritarian U.S. government
David Blackmon, World Oil, August 2021
Writing back in January about President Joe Biden’s order to kill the Keystone XL Pipeline, I warned that that action was just an opening volley in a war on the domestic oil and gas business that would only intensify over the four years of his presidency. Anyone who may have thought the President would be satisfied with killing one pipeline and holding up new federal leases for a few months did not understand the gravity of the industry’s situation, as this new government took power and began to exercise it.
Indeed, in the intervening seven months, the President and his Democrat compatriots in the U.S. Congress have now opened so many new fronts in this ongoing war that they have become too numerous to adequately document. Let’s take a look at a few of the larger and most potentially damaging ones.
IGNORING A COURT DECISION
Even adverse decisions in the U.S. courts do not appear to affect the administration’s drive to punish what it obviously sees as a disfavored industry. Secretary of Interior Deb Haaland’s ongoing enforcement of Mr. Biden’s ban on the conduct of new federal lease sales is a prime example.
Shortly after that order was issued in January 13 state attorneys general filed a suit in a Louisiana federal court, challenging its constitutionality. On June 14, U.S. District Court Judge Terry A. Doughty (Western Louisiana district) issued a decision in that case, overturning that order, applying it nationwide. In his ruling, the judge stated that the plaintiff states had established that they would suffer severe economic harm due to the leasing ban, noting that “millions, and possibly billions, of dollars are at stake.”
In a statement following the judge’s decision, an Interior Department spokesperson said the agency would issue a report that “will include initial findings on the state of the federal conventional energy programs, as well as outline next steps and recommendations for the Department and Congress to improve stewardship of public lands and waters, create jobs, and build a just and equitable energy future.”
The industry celebrated this victory, with Louisiana Attorney General Jeff Landry calling it “a victory, not only for the rule of law but also for the thousands of workers who produce affordable energy for Americans.” But the celebration was short-lived, as Interior appeared to be taking no real action in response to the judge’s order. In late July, Secretary Halland claimed the “report” would be coming soon. “We promised early summer,” Haaland said during a visit to Colorado. “It’s early summer. We’re still working on it.”
Perhaps she was biding her time, waiting for the U.S. Senate to approve Biden’s nominee to become the director of the Bureau of Land Management, a long-time anti-development radical and alleged domestic terrorist named Tracy Stone-Manning. Ms. Manning spent years working for an anti-logging group that engaged in the practice of spiking trees with metal spikes, an act that endangered the lives of loggers working in the forest. In 1989, this group inserted 500 pounds of these spikes into trees in an Idaho forest, in order to halt the operations there.
She has been unapologetic for her actions and was what one agent called an uncooperative and evasive witness during FBI investigations, providing conflicting accounts of her involvement in these acts. One retired agent told reporters that she “absolutely refused to do anything” to help in the investigations.
On the same day that Haaland issued her statement regarding the report, Stone-Manning’s nomination was advanced from the Senate Energy and Natural Resources Committee on a straight party-line vote. Coincidence? Smart people don’t believe in them.
CONGRESSIONAL DEMOCRATS GO AFTER WASTEWATER DISPOSAL
Congressional Democrats rolled out another frontal assault on the nation’s oil and gas industry in early summer, this time in the form of language contained in their massive CLEAN Future Act, sponsored by New Jersey Cong. Frank Pallone.
As detailed in a report from Rice University’s Baker Institute, the language would reclassify returned water from oilfield drilling operations as a “hazardous waste” under the provisions of the federal Resource Conservation and Recovery Act (RCRA). From the Baker Institute report:
Section 625 of the act holds particular importance, as it would task the administrator of the U.S. Environmental Protection Agency (EPA) with determining whether certain oil and gas production by-products—including produced water— “meet the criteria promulgated under this section for the identification or listing of hazardous waste” within one year of the bill’s enactment. The EPA defines produced water as “the water (brine) brought up from the hydrocarbon-bearing strata during the extraction of oil and gas.”
Such a change could do great harm to the upstream industry’s ability to get its business done. This brine—which is basically all that’s left once any solids have been removed from the returned water—has always been disposed of in Class II disposal wells, which exist in the tens of thousands across the country. Such wells are regulated by state agencies like the North Dakota Industrial Commission, the Oklahoma Corporation Commission, and the Texas Railroad Commission.
But this reclassification would require the water to be disposed of in Class I wells governed by the U.S. EPA and its delegees, like the Texas Council on Environmental Quality. As the Baker Institute points out, only a few hundred such wells exist in isolated pockets currently, most along the Gulf Coasts of Texas and Louisiana.
If your goal is to damage the U.S. domestic oil and gas industry, this is a fairly ingenious approach. As the report’s authors point out, the language in the bill envisions a short timeline for implementation that would afford the industry little time to adjust. One industry executive I contacted said the change would be “potentially disastrous” for the business.
While it all sounds quite dire, one elected official in Texas is not so sure. Given his background in the waste disposal business and his current status as one of the state’s three members of the Railroad Commission, I contacted Commissioner Jim Wright to get his thoughts on the subject. Though he acknowledged the seriousness of this proposed change, he was a little more sanguine about the industry’s ability to cope with anything that comes down from Washington over the next few years.
“I think we are in for a crazy four years. There is going to be a lot of stuff thrown at the wall – what sticks, I’m not real sure,” he said. “If this does come to reality in whatever fashion, I think that our industry will adapt.” Not an unreasonable presumption, given the industry’s long history of successfully adapting to a constantly changing regulatory environment.
Wright pointed out that advances in technology in this century have enable the industry to create uses for the returned water that are viable and scalable. He focused on two in particular: “One is for re-fracing, and the second is to utilize it for irrigation. We have seen a lot of development of technology related to both,” he said. “We are going to be looking very hard at trying to simplify the process of encouraging recycling of that water.”
While Commissioner Wright’s optimistic outlook has as strong basis in fact for many companies, there is no question that if passed, this provision would have a significant impact on some operators’ ability to get their business done. Which, of course, is the reason why it is being pursued by Biden and congressional Democrats.
DEMAGOGUING THE INDUSTRY ON MYTHICAL TAX “SUBSIDIES”
Nowhere has the intensification of this war on oil and gas become clearer than in Democrats’ current efforts to raise taxes on the industry. In its “Green Book” related to the administration’s gargantuan omnibus budget bill, the Treasury Department uses this coded language to describe one of the overarching goals of the program: “Replacing fossil fuel subsidies with incentives for clean energy production.” This, of course, is nonsense, as I have written many times over the past decade.
It is a simple fact that the oil and gas industry does not receive “subsidies” of the type that wind, solar and electric vehicles enjoy, i.e., direct transfer payments from the government to enormous corporations like Tesla, General Motors, and Ford totaling billions of dollars every year. Some in the industry—mainly small producers and royalty owners—do benefit from the expensing of intangible drilling costs, which is similar to appliance manufacturers or pharmaceutical companies expensing their own costs of goods sold every year. Small independents and royalty owners also benefit from percentage depletion, a provision that is similar to depreciation of inventory in other industries.
Despite these realities, Biden proposes to single out oil and gas by repealing those provisions, which have existed in the tax code for more than a century, along with every other tax treatment in the IRS tax code specific to the industry today. In all, the Green Book contains a whopping total of $147 billion in new industry taxes, which would negatively impact mainly the red states where oil and gas is produced in the U.S.: Texas, Alaska, Wyoming, Montana, Louisiana, North Dakota, Ohio, and Pennsylvania.
In most respects, it is the same nakedly political move that was attempted during all eight years of the Obama/Biden administration without success. We’ve seen it all before; most of it, anyway.
One clever new means of attacking America’s oil and gas industry is the proposal by the administration and many congressional Democrats to double the rate of taxation from a little-known tax provision called the Global Intangible Low-Taxed Income (GILTI) tax. Created as part of the 2017 tax reforms, GILTI was originally intended as a way to tax companies that move their intangible assets—like intellectual properties—overseas to lower tax havens. The tax was specifically intended to target industries like pharmaceuticals and technologies, in which companies have easily moveable, intangible assets.
International producers in the energy industry have become unintentional collateral damage of the tax. The industry is capital-intensive and has tangible assets. Companies have to operate where the resources exist in the ground, often in far-away countries like Niger, Guyana, The Gambia, and Suriname. They are not operating overseas as a way to game the tax system.
Responding to the GILTI proposal, Jessica Boulanger, a spokeswoman for the Business Roundtable, said, “The potential international tax increase is as large as any corporate rate increase and at least as damaging for the competitiveness of U.S. companies, because it hurts their ability to compete in foreign markets head-to-head with foreign companies, whose countries don’t impose such a tax.”
The Biden/Democrat proposal to double the rate from 10.5% to 21% would make U.S. companies less competitive in the global marketplace, likely raising little real, new tax revenues to the government, as companies sell off international assets. It’s a fool’s game entirely designed as a punitive measure on a disfavored industry, the sort of policy move one would expect to see from authoritarian governments in Third-World countries.
But this is not some Third-World country. It is the United States of America, and the domestic oil and gas industry must find ways to survive this increasingly authoritarian government for at least another 31/2 years. As Commissioner Wright told me, “These years truly are going to be crazy.”
OIL:
In climate reversal, Biden okays new oil and gas mega auction
News.Com.Au, September 1, 2021
The court decision to ban a pause in leasing area in the Gulf of Mexico for oil exploration represents a significant step back for the White House’s ambitious climate agenda and was quickly challenged by a coalition of environmental groups
US President Joe Biden’s administration on Tuesday announced plans to open more than 80 million acres in the Gulf of Mexico for oil and gas exploration after a court ruled against the administration’s pause in leasing.
But in June, a Louisiana judge appointed by former president Donald Trump stepped in to rule that the administration required approval from Congress for its pause.
GAS:
AMERICAS: CROWLEY AND SHELL TO BUILD AND CHARTER 12,000 CBM-CAPACITY LNG BUNKER BARGE
Rhys Berry, Bunkerspot, September 1, 2021
Crowley Maritime Corporation has signed a long-term time charter with Shell NA LNG for the construction and operation of a new, US-built, LNG bunker barge.
On completion, the barge will be the largest Jones Act-compliant vessel of its kind.
‘The new bunker barge will extend Crowley’s commitment to deliver cleaner, innovative solutions to help the shipping industry continue on the path to decarbonisation,’ said Tucker Gilliam, vice president, Crowley Shipping. ‘Orders for ships fuelled by liquefied natural gas continue to rise, and the vessel will provide Shell an innovative and reliable service to meet demands for more sustainable energy sources.’
According to Jacksonville-headquartered Crowley, the 416-foot-long barge will feature advanced technologies in cargo handling capabilities and increased transfer rates, including a ‘state-of-the-art solution’ from Shell and Crowley Engineering Services to flexibly deliver LNG to various types of LNG containment systems.
The design will offer capacity for 12,000 cubic metres (3.17 million gallons) and product supply equipment to serve ocean carriers.
The vessel will be the second Jones Act-compliant bunker barge Shell has under long-term charter in the US, following the Q-LNG 4000. It is expected to be deployed to serve LNG-fuelled ships that call on ports on the US East Coast starting in 2024.
‘Shell is dedicated to growing our LNG bunkering network across key trade routes, and this barge supports our commitment to helping provide our customers with the energy solution they are looking for,’ said Tahir Faruqui, general manager, Global DLNG for Shell.
‘The shipping sector is making progress toward decarbonisation, and LNG offers immediate emissions reduction with the potential to become a net zero emission marine fuel given the possible roles of bio-LNG and synthetic LNG.’
The vessel will be constructed at Fincantieri Bay Shipbuilding of Sturgeon Bay, Wisconsin.
‘This additional LNG barge will serve as another demonstration of our commitment to building and servicing sustainable maritime endeavours, both in the United States and globally,’ said Dario Deste, president and CEO of Fincantieri Marine Group.
As previously reported, Fincantieri Bay Shipbuilding is poised to deliver a 5,400 cbm-capacity LNG barge for NorthStar Midstream later this year.
MINING:
Contango ORE buys Lucky Shot gold mine
Shane Lasley, North of 60 Mining News, August 26, 2021
Contango ORE Inc. Aug. 25 announced that it has acquired full ownership of the historic Lucky Shot gold mine project in the Willow Mining District of Southcentral Alaska.
A road-accessible project about 75 miles north of Anchorage, the 8,590-acre Lucky Shot property blankets a large portion of the Willow Creek Mining District, including the pre-World War II Lucky Shot and War Baby mines. It is estimated that from 1918 until being shut down by the federal War Production Board in 1942, these two underground operations produced some 252,000 ounces of gold from 169,000 tons of ore, indicating an average head grade of around 1.6 oz (50 grams) of gold per metric ton.
All told, the various mines on the Willow Creek property produced roughly 500,000 ounces of gold from ore with an average grade north of 1 oz/t (31 g/t) prior to being closed during World War II.
With Kinross Gold Corp. taking the lead on the feasibility-level studies at Manh Choh, a gold mine project near the village of Tetlin in eastern Alaska that is being advanced under a joint venture between Kinross (70%) and CORE (30%), Lucky Shot offers CORE another accessible gold mine project.
“Although it is full steam ahead for the Manh Choh project based on the latest Kinross guidance, the Lucky Shot project represents an exciting opportunity to add significant additional value for Contango shareholders and marks a new focus for the Company,” said Contango ORE President and CEO Rick Van Nieuwenhuyse.
After the Willow district mines were shut down due to the war effort, little happened on the property until the 1980s when Enserch Exploration conducted an extensive exploration program, which included the development of a 457-meter exploration adit below the Lucky Shot Mine. In 1984, Enserch completed 11 underground core holes and seven surface core holes in the Coleman zone at Lucky Shot.
From 2005-2009 Full Metals Minerals completed an additional 34,103 meters of drilling in 173 core holes from surface along a more than one-mile trend of high-grade gold mineralization that encompasses four zones – Coleman, Lucky Shot, War Baby, and Murphy. Each of these zones is a section of a continuous vein that has been segmented by high-angle faults. Coleman, Lucky Shot and War Baby were historically mined; Murphy is a potential eastern extension of the vein system that was later discovered.
Looking to reestablish a mine at Lucky Shot, Miranda Gold Corp. acquired the project in 2013 and brought in Alaska Gold Torrent Inc., a private company led by a mine engineer, to move the project forward.
In 2016, Miranda and Gold Torrent published an updated resource estimate for Lucky Shot that encompasses 206,500 metric tons of measured and indicated resources averaging 18.3 grams per metric ton (121,500 oz) gold; and 59 thousand metric tons of inferred resource averaging 18.5 g/t (35,150 oz) gold. These resources are found in the Coleman and Lucky Shot areas, both near historic mine workings.
Based on the initial resource, Gold Torrent commissioned a preliminary feasibility study that outlined a 200-metric-ton-per-day operation that would produce around 25,000 oz of gold per year once the mine is up to full production.
Gold Torrent planned to use a gravity system to recover the gold, a method that has historically liberated more than 85% of the gold and is expected to be boosted to 90% with modern recovery equipment and techniques.
The company, however, was not able to repay a loan forwarded by Cartesian Royalty Holdings and Gold Torrent (70%), and Miranda’s (30%) interests in Lucky Shot were signed over to the Singapore-based financier in 2018.
CORE has agreed to pay up to $30 million in cash and shares to acquire these interests in the Lucky Shot project, which includes 725 acres of patented mining claims over the historically mined area; 7,825 acres of state claims surrounding the patented land; and a processing site located about 30 road miles to the west.
The overall purchase price for this compelling high-grade gold mine asset includes an initial payment of $5 million in cash and a $6.25 million promissory note payable by CORE with a maturity date of Feb. 28, 2022; an additional payment of $5 million in cash and $3.75 million in CORE shares if a resource equivalent to 500,000 oz of gold is established or 30,000 oz of gold is produced at Lucky Shot; and an additional payment of $5 million in cash and $5 million CORE shares if the resource reaches 1 million oz or 60,000 oz of gold is produced.
CORE has also committed to invest $10 million on exploration at Lucky Shot within three years of the closing date of the transaction, including $5 million in the first 18 months.
Further, after CORE has made additional exploration, mining, and development expenditures on the Lucky Shot prospect of at least $5 million above the $10 million of required exploration spending, the additional spending will go toward any outstanding payments due for Lucky Shot.
CORE plans to reestablish underground access to drill the down-dip extension of the Lucky Shot and Coleman mines.
Once access is established, the company plans to refurbish the underground workings, where the granodiorite host rock generally needs little support and develop 600 meters drift paralleling the vein, followed by roughly 2,400 meters of underground diamond drilling to define a new resource.
The Lucky Shot and Coleman veins have only been mined for about 200 meters down dip. CORE says these types of mesothermal vein systems typically extend for kilometers down dip and the company sees the potential to develop significant high-grade gold resources by drilling down dip of the vein system that extends more than 1,600 meters east from Coleman, through Lucky Shot and to War Baby.
Furthermore, Full Metals Minerals’ drilling at Murphy, which lies roughly 600 meters to the east of War Baby, cut a one-meter vein sample averaging 54.6 g/t, suggesting that mineralization may continue beyond the three historic mines.
“Contango is well positioned, with experienced personnel and capital, to explore and expand the historic high-grade resource at Lucky Shot,” said Van Nieuwenhuyse. “We feel the exploration potential of the Willow district is excellent, albeit perhaps under-appreciated.”
POLITICS :
Alaska House votes for $1,100 PFD but it’s not a done deal
Andrew Kitchenman, KTOO, August 31, 2021
The Alaska House of Representatives approved a funding bill on Tuesday that is intended to pay $1,100 permanent fund dividends this year.
But it’s not a done deal.
The bill still has to pass the Senate, and the amount could be much lower, since Gov. Mike Dunleavy’s administration has said one of the accounts to be used to pay dividends in the bill is empty.
The Legislature has passed the deadline for on-time PFD payments, meaning this year’s dividend will be later than usual.
The Permanent Fund Dividend Division said lawmakers had to agree to a PFD amount by Tuesday for dividends to go out in early October. The division said PFDs would be paid roughly 30 days after the amount is set.
House members who supported the bill on Tuesday, House Bill 3003, said it was needed to ensure there is a PFD this year at an amount that protects permanent fund earnings from being drawn down. They point to the state spending other savings accounts — including the Constitutional Budget Reserve — down from nearly $18 billion in early 2014 to roughly $1 billion by mid-2020.
“We had so much money in the Constitutional Budget Reserve — we had so much saved up,” said Rep. Calvin Schrage, an Anchorage independent.
He later added: “We will not allow the earnings reserve to be used as that next pool of money.”
But members of the Republican minority caucus opposed the bill, saying that the state should pay either the full dividend under the formula in a 1982 law, which would equal roughly $3,800, or the $2,350 level proposed by Dunleavy as part of his plan to put the PFD in the constitution. The state hasn’t followed the 1982 formula since 2015, after oil prices fell.
“There’s a lot wrong with this unbalanced budget and I can’t vote for it at this time,” said Rep. George Rauscher, R-Sutton.
The Legislature passed a law in 2018 intended to limit the annual draw from the total value of the permanent fund and its earnings reserve. But it hasn’t been able to agree on changing the PFD formula, due to differences over whether the budget should be balanced using taxes, cuts to government services or smaller dividends.
On Tuesday, each side criticized the other for their positions during the third special session, which is more than halfway over. The majority said minority members have not supported policy changes that would balance the budget in the long term, while the minority focused on how the majority hasn’t held hearings on Dunleavy’s proposals.
The House bill approved Tuesday now goes to the Senate, which is next scheduled to meet on Wednesday. But even if the Senate approves the PFD amount in the bill, it’s not certain what Alaskans will be paid in dividends.
The $1,100 is funded from two sources: $400 million from the general fund that pays for the rest of the budget and $330 million from an account known as the Statutory Budget Reserve, or SBR.
Dunleavy’s administration considers the SBR account to be empty. That’s because it says three-quarters of both legislative chambers had to vote to maintain the money in the account. And that vote failed in both chambers in June.
So, the PFD would be roughly $600 if the SBR money isn’t available. And Dunleavy vetoed a somewhat smaller PFD amount in an earlier bill, saying that the amount was an insult to Alaskans.
Supporters of the bill have noted that Superior Court Judge Josie Garton identified the SBR in a recent ruling as being one of the accounts that is separate from those subject to the three-quarter votes. It’s not clear if there could be a legal battle overpaying the roughly $500 worth of dividends in the SBR.
The bill the House passed on Tuesday also was written to pay $114 million in oil and gas tax credits. But $60 million of that wasn’t funded since it also required three-quarters of the House members to support it. And that vote failed, receiving only 21 in favor.
Committees are scheduled to hear other bills this week. The special session must end by Sept. 14.
CLIMATE CHANGE :
From the Washington Examiner, Daily on Energy:
TREASURY LOOKS TO ADDRESS CLIMATE RISKS TO INSURANCE MARKETS: The Treasury Department launched a new effort yesterday to assess the potential for disruptions of private insurance coverage in areas of the U.S. that are particularly vulnerable to climate change.
Treasury is soliciting public comment on topics like data needed to measure and assess the insurance sector’s exposure to climate risks and “climate-related issues or gaps in the supervision and regulation of insurers.”
“Ensuring that consumers have adequate information, and that the insurance industry is appropriately assessing climate-related financial risk is essential as we work to address the climate crisis,” said Treasury Secretary Janet Yellen.