NEWS OF THE DAY:
The Infrastructure ‘Pay-Fors’ That Aren’t
The Editorial Board, The Wall Street Journal, August 2, 2021
The bipartisan deal is full of phantom revenue gimmicks.
West Virginia Democrat Joe Manchin and his Senate Republican friends are stressing that their infrastructure deal is “fully paid for.” Read their lips: No new deficit spending. Read their bill: It relies to a great degree on savings and revenue already baked into the fisc or that are unlikely to happen.
Deficit financing is better than increasing taxes, and Republicans at least jettisoned the taxes (until Democrats raise them in their budget reconciliation bill). They also deep-sixed President Biden’s plan to give the IRS $40 billion to harass small businesses, which Democrats claimed would raise hundreds of billions of dollars in new revenue. Their IRS stimulus was dubious, but so are most of the bill’s remaining offsets.
Start with using 10 years of savings from various programs to offset five years of spending. This includes extending by a decade a guarantee fee that government-sponsored enterprises Fannie Mae and Freddie Mac charge on mortgages they back.
Congress imposed the 10-basis point fee in 2011 to cover the cost of the government backstop on Fan and Fred. Extending the fee through 2032 is expected to raise $21 billion, but the taxpayer costs will be far greater if the housing giants start to lose money again after the Biden Administration takes steps to ease underwriting standards.
Then there’s magical Medicare accounting. The bill would extend Medicare provider payment cuts by a year through 2031, just inside the 10-year budget window. Senators are counting that as saving $9 billion, but Congress is almost certain to override this provision once hospitals squawk, as they surely will.
Senators are also counting savings from suspending a Trump Medicare anti-kickback rule through 2025. The rule bans most rebates that drug makers pay to Medicare Part D pharmaceutical benefit managers to get on plan formularies and thus would have the effect of increasing seniors’ premiums and government spending.
A federal judge this year ordered the rule’s effective date to be delayed by a year to January 2023 while the Biden Administration reviews it. Congress never “paid for” the rule. Nonetheless, Congress now plans to pocket savings from delaying its implementation even though it was never likely to take effect. This is a Washington classic that the Senators claim will save $49 billion.
The bill also claims $53 billion from lower spending on unemployment benefits. Unemployment has fallen faster than the Congressional Budget Office projected in March, and 26 mostly Republican states are cutting the $300 federal unemployment bonus early. The savings, if they happen, will come from money that would never have been spent thanks to better policies by conservative states.
Senators had originally proposed to pay for some of the deal with $205 billion from repurposed Covid relief funds. But Democrats refused to reallocate any of the hundreds of billions of the unspent money for states and schools in their pandemic spending bills. In the end, Senators could only agree to repurpose $43 billion, mostly from small business programs with leftover funds.
Senators are also claiming political credit for saving money with private-public partnerships, though they don’t offset the spending and make up a tiny share of the bill. For instance, broadband providers would be allowed to float tax-exempt “private activity” bonds to expand their networks in rural areas. But the bill separately appropriates $42 billion for state and local governments to build out broadband. Why float a bond to invest in broadband if governments will be your competition?
The bill includes some other notional pay-fors like selling oil in the Strategic Petroleum Reserve, projecting future broadband spectrum sales, and requiring manufacturers of single-dose pill containers to provide Medicare refunds for discarded drugs. By the way, CBO is obliged to score many of these as savings under current budget rules, much as it scored the federal takeover of student loans as a money-maker to finance ObamaCare in 2010. Our job is to explain the fiscal reality.
Mr. Manchin insisted again on Sunday that “our infrastructure bill is all paid for.” Only under fictional Beltway scoring. Most Americans no doubt wish they could use Congress’s accounting rules when balancing their household books. We hate to be spoilsports amid the bipartisan bonhomie. But in this bill as usual in Washington, politicians will spend now, and taxpayers will pay later.
OIL:
BP caps Big Oil’s earnings recovery
Ben Geman, Axios, August 3, 2021
BP posted a $2.8 billion Q2 profit and said it’s raising dividends and expanding share buybacks, joining several other oil majors announcing multibillion-dollar net earnings and new investor payouts.
Why it matters: The company’s report caps off a Big Oil earnings season that shows how large producers are recovering from the pandemic that hammered prices and demand last year.
- BP said the result was “driven by higher oil prices and margins offset by a lower result in gas marketing and trading.”
- The company is raising dividends by 4% and plans to buy back $1.4 billion in shares during Q3.
The big picture: It’s the latest in a string of multibillion-dollar Q2 hauls from majors including Chevron, Shell, Exxon and TotalEnergies.
- Those reports, aside from Exxon’s, came with various announcements of higher dividends and share repurchases.
- “Their goal is to woo investors who are becoming increasingly wary about the future of the fossil fuels in a changing climate,” Bloomberg reports.
GAS:
Rising gasoline prices signal trouble for climate change action – Axios
Amy Harder, Axios, August 2, 2021
Cutting oil production before we cut our demand for oil could undermine much of the progress that needs to be made on climate change.
Why it matters: If companies cut back on producing oil but consumers don’t cut back on consuming it, demand will exceed supply and prices will shoot up. That’s bad for our pocketbooks and risks the transition to cleaner energy.
Driving the news: This appears to be the track we’re on. Lurking in the shadows of the pandemic-induced roller coaster of oil prices we’re on now is a deeper, systemic shift within the oil industry and its investors.
- Buoyed largely by politics and growing activism, Wall Street is demanding that oil companies invest less in new oil discoveries and more in cleaner energy (and pay off debts).
- In response to that pressure and the collapse in oil prices starting in 2014, overall industry investments in new oil and gas resources have collapsed in recent years, according to Bob McNally, president of consulting firm Rapidan Energy Group.
Yes, but: Despite ambitious goals to reduce heat-trapping emissions, most countries have actually not passed laws that significantly reduce oil demand by targeting consumers through taxes or mandates.
- Instead, most countries are pursuing less politically toxic options, like regulations that indirectly (and slowly and unevenly) reduce oil consumption.
- “If we curb supply but not demand, oil prices will spike well into the hundred-dollar range,” said McNally. “Gasoline prices would follow. Such an oil price spike would harm the economy, the political careers of elected officials, and the energy transition.”
- He projects that such a scenario is likely to start unfolding within the next five years.
By the numbers: The average price of a gallon of U.S. gasoline is $3.17 as of July 30, according to AAA. That’s the highest in seven years, though prices are fluctuating as the pandemic stamps down oil demand again with the Delta variant.
Where it stands: The International Energy Agency, an intergovernmental group launched in 1974 to ensure global oil security, issued one of its most impactful reports in May. It declared that no new oil and gas discoveries would be needed in a future that reaches net-zero greenhouse gas emissions by 2050.
What they’re saying: “Needing no more oil and gas is only true if previous actions by governments happen and demand follows that trajectory,” Laura Cozzi, the IEA’s chief energy modeler and lead author of the report, told me. “The sequencing is important.”
- In its report, the IEA identified 400 milestones that need to occur to achieve the net-zero goal, and 95% of those should be driven by policy changes affecting demand, not supply, said IEA executive director Fatih Birol, per Reuters.
- This includes imposing carbon pricing and phasing out fossil-fuel subsidies, both which have direct impact on consumers’ demand for those fuels.
How it works: Public sentiment generally skews toward concern about energy affordability during periods of economic recessions and instabilities. A recent Gallup survey shows that playing out in the wake of the pandemic.
- That sentiment creates headwinds for any type of policy that could be even perceived as raising the cost of energy — a key reason President Biden and other administration officials insist they’re not going to support a gasoline tax increase or any other tax on energy.
“If there is increased oil demand and if we don’t have technological innovation and policy driving a transition to clean energy, you will get higher prices for oil and gas, and that will create all kind of dynamics, including political ones.”
— Richard Newell, former administrator of the U.S. Energy Information Administration under Barack Obama and current president of think tank Resources for the Future
The other side: Environmentalists have helped propel a social movement around climate change by fighting projects producing and moving fossil fuels around (remember the Keystone XL pipeline?). In other words, they have focused on supply, not demand of those fuels.
- Tzeporah Berman, international program director at group Stand.earth, says some countries are now beginning to impose demand-side policies, like pledges to ban internal combustion engines cars within the next 15 years.
- But she is cognizant of the risks our world faces if demand reduction doesn’t follow soon after.
The bottom line: “Without political leadership and courage, a lot of this could be at risk,” said Berman. “The challenge for policymakers is to move quickly putting in infrastructure for electrification and efficiency.”
MINING:
Exploring larger Alaska Range potential
Shane Lasley, North of 60 Mining News, July 29, 2021
High-grade deposits rich in copper, gold, and silver to bulk tonnage porphyry targets sought after by many of the world’s major copper producers, Australia-based PolarX Ltd. has no shortage of targets to explore across its 22-mile- (35 kilometers) long Alaska Range property.
As its name suggests, this property lies within the majestic and mineral-rich mountain range that arcs across the middle of the Far North state.
PolarX’ 2021 program is focused on two high-grade copper deposits already identified at Alaska Range.
This includes scoping-level study and further exploration of Zackly, a high-grade gold-copper-silver skarn deposit that lies at the center of a 7.5-mile- (12 kilometers) long mineralized corridor that runs across the Alaska Range property.
Based on drilling by PolarX and previous explorers, Zackly Main hosts 3.4 million metric tons of inferred resource averaging 1.2% (90.4 million pounds) copper, 2 grams per metric ton (213,000 oz) gold, and 14 g/t (1.5 million oz) silver.
Looking to expand this resource, PolarX focused its 2020 exploration on Zackly East, a particularly robust skarn discovery made by the company in 2018.
Highlights from drilling at Zackly East include:
• 54.6 meters averaging 2.8 g/t gold and 0.6% copper in hole ZX‐18020.
• 46.7 meters averaging 3.1 g/t gold and 0.6% copper in ZX‐18024.
• 11.6 meters averaging 1.86 g/t gold and 0.38% copper in ZX20035.
• 68.6 meters averaging 0.6 g/t gold and 0.3% copper in ZX20040.
PolarX says drilling has traced mineralization at Zackly East for more than 1,500 meters along strike and high-resolution magnetic data shows the structural system may extend for another 2,500 meters.
Based on the results of the 2020 program, PolarX has decided to initiate a scoping study that will evaluate an operation that includes Zackly Main, Zackly East, and the Caribou Dome copper deposit.
Ahead of this study, PolarX is carrying out a planned 3,000 meters of resource expansion drilling at Zackly East and Zackly Main.
Adding Caribou copper
Lying about 15 miles southwest of Zackly, Caribou Dome hosts 2.8 million metric tons of JORC-compliant resource averaging 3.1% (189.6 million lb) copper in nine lenses of volcanic sediment-hosted mineralization.
“We have always thought that Caribou had the potential to be a highly profitable open pit, what it doesn’t yet have is the scale necessary to justify that size of investment,” PolarX Managing Director Fraser Tabeart said during an interview on Proactive Investors.
To rectify this, PolarX is carrying out 1,500 meters of drilling focused on targets that would demonstrate the expansion potential of Caribou as well as metallurgical drilling to see if the ore there could be processed in the same facility as ore mined from Zackly. Either or both would increase the available tonnage for a centralized mill at Alaska Range.
PolarX says historical exploration revealed the lenses copper mineralization at Caribou Dome correlate with strong copper anomalism in surface soil sample assays and can also be broadly mapped and precited with induced polarization geophysical surveys that show the lenses as chargeability highs.
After a thorough review of geochemical and IP data, PolarX says it has prioritized three new undrilled targets to test this year.
All these targets are less than 500 meters from known mineralization and have the potential to host one or more lenses of massive sulfide copper mineralization.
PolarX also plans to drill four holes into the known high-grade lenses at Caribou Dome to provide fresh samples for metallurgical testing to assess the potential of processing ore from this massive sulfide deposit in combination with ore from a future mine at the Zackly skarn deposit to the northeast.
The scoping study being considered for later this year will help determine the minimum resource size required for a viable mining operation at Zackly, Caribou, or both.
In addition to the work at Zackly and Caribou Dome, the company also plans to deepen the discovery hole at Mars, a porphyry target between these deposits.
The Mars discovery hole, 19MAR001, cut 102 meters averaging 0.22% copper and 0.1 g/t gold. This hole, however, was terminated in porphyry mineralization due to difficult drilling and heavy snows bringing an end to the 2019 exploration season.
Further demonstrating the porphyry potential at Mars could attract a much larger mining company to investigate the bulk tonnage copper potential at this highly mineralized stretch of the Alaska Range.
POLITICS:
Fiscal working group readies for policy proposals
Peter Segall, Juneau Empire, August 2, 2021
Lawmakers spent what would have been the first day of a third special session of the Alaska State Legislature taking public testimony from Alaskans in Juneau and elsewhere.
A special session was initially scheduled to convene on Monday, but lawmakers asked for a delay to allow a bipartisan, bicameral working group to discuss policy solutions to the state’s financial woes, and Gov. Mike Dunleavy pushed back the start of the session by two weeks. The group has so far spent most of its time on informational hearings, but Sen. Jesse Kiehl said Monday the group is ready to discuss proposals for resolving the state’s fiscal deficit.
“It’s time to have those conversations out in public,” said Kiehl, a Juneau Democrat. “We’re pretty determined to get something out ahead of the special session.”
While giving testimony, Alaskans urged lawmakers to alternately cut the state government down in favor of larger Permanent Fund Dividends and to ensure that critical programs continue to be funded. In Anchorage, students from the Washington, Wyoming, Alaska, Montana, and Idaho program at the University of Washington School of Medicine asked lawmakers to continue funding the program as it is Alaska’s only doctor training program. In Wasilla, one woman said she was frustrated smaller PFDs were being distributed despite the Alaska Permanent Fund’s record earnings.
“When I hear government say we can’t possibly cut government, it falls flat for me,” said Jennifer Graham. “It’s actually really frustrating, and I feel like government is kind of looking at the private sector and saying you don’t matter to us.”
Several state residents suggested that by not following the previously used statutory formula lawmakers were stealing Alaskan’s PFD money. One person said if he were governor, he would have lawmakers jailed.
“There’s a number of myths about Alaska’s fiscal system, in particular the PFD,” said Cliff Groh, a lawyer and one of the legislative staff members who helped draft the original legislation creating the PFD.
The Alaska Supreme Court has ruled the PFD is an appropriation, Groh said, which makes that the law.
“The Alaska Supreme Court is the supreme arbiter of Alaska law,” Groh said. “There’s no way that I know of to change that unless you change the constitution.”
Groh has worked in and around the Alaska state government for decades and on Tuesday will moderate a Zoom presentation and discussion with Senate President Peter Micciche, R-Soldotna, and Speaker of the House Lousie Stutes, R-Kodiak. According to Groh, the presentation is meant to give a neutral explanation of the state’s fiscal problems and lay out a range of possible options.
Establishing agreement on the state’s financial situation is a challenge the working group itself has had to face. The group spent many of its early meetings hearing presentations from the state’s financial experts and only recently started to hear ideas for resolving the situation. Groh works for nonpartisan think tank Alaska Common Ground, which he said is trying to draw as many people with differing views together as possible.
“Having listened to all that testimony, the kind of people who come out to testify for three minutes may be a skewed sample,” Groh said. “You’re going to have more extreme voices and passionate people.”
The group met every day last week after members of the Republican House Minority complained about the slow pace of the meeting calendar, but currently the group has only four meetings scheduled before the start of the next session.
Ahead of the Monday evening public testimony session Kiehl said that despite the sometimes-extreme rhetoric heard in the sessions, public testimony is always useful.
“Sometimes it adds insights, sometimes it makes people angry, but listening to the public always has value,” Kiehl said.
CLIMATE CHANGE:
Report details blistering pace of renewables needed for net-zero
Peter Behr, ENERGYWIRE, August 3, 2021
Replacing the U.S. grid’s fossil fuel foundation with clean energy in three decades will require societal transformations on an equally daunting scale, a new report by an Australian energy and engineering company concludes.
“[I]t won’t be enough to incrementally improve traditional infrastructure delivery processes: we need to change the processes themselves,” the report by Worley Ltd. says. “Businesses and governments need to find solutions to address every area of the process. Unless timelines are dramatically compressed and projects are kicked off sooner, we will fail.”
Worley based its findings on a 345-page investigation of the U.S. clean energy challenge, “Net-Zero America,” issued by Princeton University researchers in December 2020.
To get on a path toward President Biden’s goal of a zero-carbon economy in 2050, the U.S. would have to invest at least $2.5 trillion in clean energy in the next decade, the Princeton report said, increasing wind and solar electricity generation capacity fourfold while getting 50 million electric vehicles on the road.
“We must imagine a transformed way of living which sustains the environment and human lifestyles. We must imagine the many technologies, techniques and resources we can bring to bear,” Worley CEO Chris Ashton stated in the latest report. “We must imagine the ways all this can be done within our social expectations.”
The new focus on the Princeton report arrives as Senate negotiators released details Sunday of a bipartisan infrastructure bill with $550 billion in new spending targets over five years, most of it for traditional construction projects, not transformational energy spending (Energywire, July 30).
While scientists and engineers have charted paths to pursue next generation storage batteries, build offshore wind farms and new nuclear reactor designs, progressive lawmakers have acknowledged there is still no road map for getting Congress to deal with the climate challenge (Climatewire, July 29).
Pivoting toward sustainability
Worley, a global engineering services firm with $8.3 billion in revenue in fiscal 2020, has begun to pivot its operations from oil and gas to sustainable energy.
“The reality is, if we develop energy infrastructure the way we always have, we won’t get to net-zero by 2050 — not even close. We need imaginative solutions that are aggressively adaptive — and we need them now,” said Clare Anderson, who heads Worley’s sustainability group.
To dramatize the challenge, the report cites how many new solar installations the U.S. would need under one of the Princeton “middle-of-the-road” scenarios. Two new 400-megawatt solar farms, each roughly the size of 130 Tokyo Olympic stadiums, would have to be built every week for the next 30 years.
It noted one recent U.S. project half that size took roughly 3½ years to build.
Worley, whose clients include oil and gas multinational companies and Middle East national oil companies, states the need for natural gas with carbon capture and sequestration as a source of ready backup for renewables.
The Worley report contrasts two of five potential development scenarios in the Princeton report. One includes large-scale investment in new nuclear power plants and gas with carbon capture and storage, or CCS. Renewables are constrained to current construction rates. In the second case, only renewable energy is permitted; there is no CCS, and no new nuclear plants are built.
Worley noted that under a renewables-only scenario, the amount of onshore wind and solar that would have to be built between 2041 and 2050 would be more than 10 times the lower “constrained” renewables scenario.
Worley is a major service provider for liquefied natural gas plants. It supports Chevron Australia’s Gorgon CO2 injection project, which intends to sequester 400 million tons of CO2 every year into an underground reservoir off Western Australia’s coast, reducing carbon emissions from the Gorgon LNG plant by 40%.
“All new nuclear and CCS facilities need to be in planning stages by 2030 if they’re to be operational by 2050. For more flexible timelines, creative solutions can shorten the process,” the report said.
“We could repurpose and repower existing sites where possible, retrofitting eligible power plants and industrial facilities with CCS solutions. And multiple projects could share pipelines and storage hubs,” it added.
In calling for transformational changes in investment and policy, the Worley report suggests this could be done without heavy government direction, relying on financial incentives and private sector initiatives.
“We need to make it more attractive to invest in low-carbon energy than high-carbon energy,” the report said.
The report comes down in the middle on one of the critical obstacles to major new energy projects —citizen opposition. On one hand, it says regulatory approvals must be accelerated.
On the other, it advocates strong outreach to communities affected by new energy projects. “We need to involve people who’ll be impacted by the infrastructure or transition in the process,” it said. “We can encourage communities to engage with projects and empower their participation in the change.”
Faster regulatory action must be transparent, “so that people keep trusting in governance processes,” the report said.