Billion Dollar Bets: Navigating Offshore Energy Project Finance

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What happens when you bring a billion dollars to the high-stakes world of offshore energy development? According to Allan Marks, one of the world's foremost experts on project finance, success depends on navigating a complex web of technical challenges, regulatory frameworks, and financial structures tailored to fundamentally different risk profiles.

Offshore energy development—whether wind turbines or oil platforms—faces universal challenges. Projects must withstand harsh marine environments, secure federal permits across multiple agencies, use specialized vessels, and construct elaborate transmission networks to bring energy ashore. Yet beneath these similarities lie striking differences in financial approach.

Oil and gas developers typically maintain tight control over technology and operations, keeping risks on their balance sheets while riding the volatile waves of commodity markets. When prices surge, these projects generate extraordinary profits. When markets crash, they weather the storm through diversified portfolios. The opposite holds true for offshore wind, where developers aggressively shed risk through contracts with equipment manufacturers and other partners. With fixed-price power contracts providing stable revenue, wind projects can support highly-leveraged capital stacks—often 60-70% debt—maximizing returns through financial engineering rather than commodity speculation.

The current political climate creates particular challenges for U.S. offshore wind. While projects with existing leases continue development, regulatory uncertainty affects the entire supply chain. Each delay increases exposure to inflation, interest rate fluctuations, and supply chain disruptions. Meanwhile, America faces growing competition from both Europe's mature offshore wind sector and China's explosive growth, which has added more capacity in 18 months than Europe built in two decades.

Government support remains crucial across all energy sectors. Long-standing oil and gas tax benefits like the intangible drilling cost deduction (established 1916) helped enable America's shale revolution, while the Inflation Reduction Act's decade-long tax credits aim to provide similar certainty for renewables investors. Allan emphasizes that effective energy policy must transcend political cycles, allowing companies to make confident long-term investments in America's energy future.

Episode Transcript

Speaker 1 (00:11):
Hey listeners, if you had a billion dollars burning a
hole in your pocket, wherewould you invest it?
Would you invest in offshoreenergy development, for example,
with its long lead times,technical complexity, high cost
and massive scale?
Or maybe you'd rather put yourmoney in NFTs?
Just kidding, to tackle thesekinds of formidable decisions,

(00:31):
one needs a masterful view onrisks and potential rewards,
along with commercial andcontract strategies to improve
value and protect investments,and Jim and I are thrilled to
have Alan Marks, one of theworld's experts on energy
project finance, come join us toshare his view on the current
state of the markets andchallenges in front of us.
Let's go.

Speaker 3 (01:01):
I'm Jim Bennett and I have over 40 years of
experience developing energy inthe ocean.

Speaker 1 (01:08):
I'm Ian Vopero and I've spent the last 20 years
developing offshore energyprojects around the world.
And this is the Offshore EnergyPodcast.
Hey, jim, good to see you, goodmorning.

Speaker 3 (01:22):
Good to see you too, Ian.

Speaker 1 (01:24):
How's your week going ?

Speaker 3 (01:27):
Busy.
I commuted up from Virginiatoday and put up a whole new
setup here, but it seems to beworking, so we're ready to go.

Speaker 1 (01:34):
You look and sound great, jim.
It's good to have you.
I've had a really fun beginningof the week.
My son is on a reverse springbreak my oldest son and so he
goes to school somewhere warmand sunny and he returned here
for spring break to the cold,dreary, gray New England weather
.
So somehow that's fun for me.

(01:55):
I have a feeling he's nothaving quite the time he would
if he was down somewhere else,but it's great to see him.
Shall we get into it.
We've got a great podcast torecord today.

Speaker 3 (02:06):
Great podcast, great guest, great subject in finance
because, despite all of thebusiness arrangements and all of
the technical aspects, if youcan't show me the money, it
ain't going to happen.

Speaker 1 (02:21):
We're thrilled to have Alan Marks joining us today
.
Alan, great to see you.
Hello, I hope it's warmer whereyou are.

Speaker 2 (02:29):
Hi Ian, hi Jim, oh, I'm in sunny California, it's
always nice here.

Speaker 1 (02:34):
I recall, I recall, Alan, you know for some of our
listeners.
Would you mind giving a briefintroduction to yourself?

Speaker 2 (02:41):
Sure Happy to.
I'm a senior fellow at theColumbia Center on Sustainable
Investment and I also teach atthe law schools at UCLA and
Berkeley.
I, for 34 years, was a lawyerand partner at Milbank, working
in our global project financegroup, representing both
developers and lenders forcomplex projects all around the

(03:02):
world, mainly in energy, butalso in other sectors water,
digital infrastructure,transportation and so forth and
then also did related M&A andcorporate transactions around
those kinds of assets.

Speaker 1 (03:15):
And you also didn't mention, but many of our
listeners may know, you're oneof the OGs of energy and
infrastructure podcasting.
I know you were hosting yourown podcast, law, policy and
Markets, for maybe the last fiveyears and you're certainly a
frequent guest on many of thepodcasts around our topic and
the broader energy markets.

(03:37):
So it's great to have you andwe're glad we can take some time
together.
Well, thank you, ian, it's apleasure.
Yeah thanks, Alan.
I'll start off.
We have you here on theOffshore Energy podcast and so
can you help some of ourlisteners with the key elements
of the framework for projectfinance.

(03:57):
We want to try to keep ourdiscussion focused on the
offshore part.
I know that you have vastexperience with other types of
projects, but because ourlisteners have this passion for
stuff that's offshore and hardto do, we thought maybe we could
focus in there.
So what are some of those keylevers in the framework that you
see for offshore projects?

Speaker 2 (04:17):
Sure happy to do that .
I mean, first off, offshoreenergy, whether that's oil and
gas development offshore oroffshore wind, or maybe the more
experimental technologies thatpeople have talked about in the
future, all of them are facingsome of the same challenges.
The first one that, of course,is obvious is that you're in a
marine environment and marineenvironments are harsh.

(04:40):
You have to do with saltwaterand any kid who's ever built a
sandcastle on the shore.

Speaker 1 (04:46):
And then watch the waves come and wash it and you
start over again.

Speaker 2 (04:51):
If you're digging into the ground and you're
underwater, you already havechallenges, but in a more
complex way, there are othersystems that you're going to
bump up against.
In developing an offshoreproject, you probably have to
get your energy whatever you'redeveloping to shore.
So you need a pipeline or youneed a transmission cable of
some sort.
So you're not just dealing withthe location where the energy

(05:14):
resources are being exploited,but you're also dealing with
that transportation issuegetting it to shore and where
you're going to land it and allof that requires port facilities
to be developed.
Shore and where you're going toland it and all of that
requires port facilities to bedeveloped.
It requires vessels, usuallyvery specialized vessels, to go,
both during construction andoperation, from sea to shore.
Communications has to bedeveloped.

(05:35):
Impacts on marine systems,marine wildlife, for example,
marine mammals in particular,but also, in the case of
offshore wind, avian species inthe marine environment.
All of these things have to betaken into account with a level
of complexity that issignificantly greater than if
you were developing an energyfacility onshore.

(05:57):
And then, lastly, I'd saythere's a regulatory overlay to
these things that is differentIn the United States relate to
these things.
That is different.
In the United States, the nearshore waters are state waters,
but as soon as you get furtheroffshore you're dealing with the
federal government.
The Bureau of Ocean EnergyManagement or BOEM, within the
US Department of the Interior,is the agency that regulates and

(06:20):
I would say, historically verywell regulates offshore energy.
That includes leases for oiland gas exploration and
production.
It also includes offshore leasesfor offshore wind which
obviously have had morepolitical flip-flops, I'd say
over the last, say, dozen yearshere in the US, so that

(06:40):
regulatory and now, evenpolitical overlay is important.
So, since you're in federalwaters, regardless again of the
type of energy project you'redeveloping, that subjects you to
a higher level of scrutiny onenvironmental compliance as a
condition for the federal leases.
And that means that BOEM willbe the lead agency, but there

(07:00):
could be many others.
Department of Defense, coastGuard, but there could be many
others.
Department of Defense, coastGuard, agencies responsible for
marine fish and wildlife.
Myriad approvals that areneeded, and that process has to
be shepherded and coordinated ina way that allows stakeholders
to have a say, that allows forthe appropriate scientific
studies of the impacts orpotential impacts from a project

(07:22):
and then, of course, compliancewith all of those conditions or
rules once the permits areissued.

Speaker 3 (07:31):
Hey Alan, those are great points.
I appreciate what you saidabout BOEM.

Speaker 1 (07:37):
I saw you smile, Tim.

Speaker 3 (07:38):
I spent many years there.
I know BOEM has always both inthe legacy oil and gas going
back into the 70s and the 80sand as well as the relatively
new program in wind has alwaystried to be on top of things,
and they do have those twodifferent issues to deal with.

(08:00):
As a regulatory agency, theyhave to straddle the issues
surrounding the politics of oiland gas versus renewable energy,
but I think they do a great jobdoing that.
So let's focus a little bit onwind, if we could.
What are the issues developersare facing right now with regard

(08:23):
to wind?
Without going into a history,which I'd be happy to do and
take everybody's time, butwithout going too much into the
history, where are we right nowwith the developers and offshore
wind?

Speaker 2 (08:35):
So, as we're recording this right now, in
March of 2025, I would say USoffshore wind is in a very
different place, mainly due topolitics than it was before
January 20th.
So you know, just a few weeks,a couple months ago.
So if you ask yourself, well,what does that really mean, I

(08:55):
think some of the reactions toit are either overblown or
misunderstood.
So, as it stands right now, theUnited States has had for many
years a policy and it was, ofcourse, pushed more during the
Biden administration than it wasduring the first Trump
administration or than it is nowbut they've had a policy going
back even before that ofdeveloping our offshore energy

(09:18):
resources, including offshorewind, offshore wind.
Offshore wind is a very longlead time, like most offshore
energy projects are a very longlead time development cycle.
So, in order to develop aproject, the first step is to
get the lease area and BOEM hasauctions from time to time both
for wind and for oil and gasleases offshore the governing

(09:41):
statute OX, uh, forenvironmental compliance and
permitting NEPA mainly, butthere are other statutes that
are relevant, but those are themain ones, that that that
dictate that process and thelease areas, once purchased,
still have to go through anenvironmental approval process
that could take three, four orfive years, uh, before you're
ready to to do anything.
Uh, in parallel with that, uh,there's a need to determine the

(10:05):
technology and lock in contractswith vendors and technology
providers for a myriad ofequipment.
It's not just the offshore windturbine generators.
They may have differentanchoring technologies.
You have to optimize the layoutgiven the size and design of
the machines, all of which hasto be finally approved in your
permit so you can't make achange later.
Once you've made that finaldecision, you have to get a

(10:27):
transmission route for yoursubsea cables that will go from
the offshore substation fromwhich all the power is collected
from your array of offshorewind turbines, into this cable,
either one or two, sometimes inparallel, that will come from
that offshore substation to anonshore substation.
So now you need to figure outwhere that's going to be and get
the land rights for that.

(10:47):
You need interconnectionagreements with the local grid.
Typically, the onshoresubstation is located proximate
to an existing substation, butyou need grid capacity.
There's congestion, concerns,all the things to go around.
Interconnection for anyelectric power generating
facility matter, but of courseyou're more constrained as to
where those onshore landingstations could be, and you're

(11:09):
crossing not just federal butalso state waters, so you have
to deal with the state approvalsfor the transmission right away
and for the landing sites.
So all of that takes time.
The engineering, the design, theprocurement, the permitting,
the land rights, specializedvessels that can go out for
construction.
All of that takes time and, asa result, any temporary pause,
for example, in the governmentissuing new leases the pause

(11:33):
itself does not affect projectsthat already have leases that
are going forward.
Any government pause ingranting permits for example the
approval of the constructionand operating plan, the COP
permit, which is the major oneat the end of the main review
cycle under NEPA any delay ingetting those permits will
affect projects that are at anadvanced stage of development

(11:55):
but are not yet ready to startconstruction or close their
financing.
For any projects that are inearlier stages of development,
such as the offshore windprojects, say, in California
there's five of them on leaseareas.
They're very early stage.
They may not be at a point yetwhere they need that.
So I think I think the jury isout on what the impacts will be,
alan I just Alan.

Speaker 1 (12:15):
I just wanted to add to, although the project itself
may not be impacted much beyonda delay, I think what we see in
contracting both for servicesand also for equipment there's
usually a pretty long lead time.
Contractors want to book thebusiness and then build the
facilities to go create theequipment for sale.
That also gets delayed, and sowe see a little bit of a

(12:40):
compounding effect of delays atthe top level with project
authorizations and permitting.

Speaker 3 (12:47):
that transfers down the supply chain where you know
contracts to build, for example,you know equipment facilities
might also now be delayed andthat has a little bit more of a
non-linear effect also, um, Iappreciate that you mentioned
specialized vessels, because itpoints to the whole aspect of

(13:10):
ports and the like, which is, ofcourse, a very big part of
making all of these things workand come together.
Maybe you could talk a littlebit about the differences that
we're facing, the difficultieswe're facing in the US, versus
the experience over in Europewith regard to development.

(13:31):
Any thoughts on that?

Speaker 2 (13:32):
Yeah, jim, I can look at that comparison between the
US and Europe as it relates toports and other things.
And also, ian, to your point.
I want to stay with that for amoment, if I may, because it's a
long lead time.
If you add regulatoryuncertainty, or even if you add
a pause or a suspension for aperiod of time, say up to four
years, just to pick a randomnumber right to pick a, you know

(13:55):
where there won't be any newpermits, there won't be any new
leases.
That has a chilling effect oneverybody, not just because they
need those federal actions tohappen, but because any time you
have a long lead time project,you're exposed to supply chain
disruptions, you're exposed toinflation, you're exposed to
variable interest rates whichmay be different than you

(14:16):
expected.
When you come finally, to yourfinancing plan and we saw even
before January 20th, we sawwrite downs by developers of
some of their projects becausethey were more exposed to higher
, for longer, interest rates,because they were exposed to
inflation that was higher thanthey expected.
Even before that, a few yearsago, we saw some projects that
had to be rebid for theiroff-take contracts in order to

(14:39):
make sure that they had pricingthat would allow their projects
to be feasible because ofinflation, and delays increase
inflation risk, especially inthe current economic environment
.
So that's a major one.
And, as I said, supply chaindisruptions have been an issue,
not just oil and gas or offshorewind but across a number of
industries.
If you lay on top of thattariffs and kind of the

(15:01):
uncertainty around tariffs andwe're seeing them on steel and
aluminum and announcements to goback and forth that
significantly increases cost andtherefore the uncertainty about
cost will be.
So I would say it's theuncertainty about cost, the
uncertainty about timing of whenconstruction and therefore
revenues would start, theuncertainty about permits and

(15:23):
regulation all of thatsignificantly compounds the risk
of these projects.
That's why you're seeingdevelopers write down the book
value of some of the projectsthat they're still pursuing.
There's a myth that if youwrite it down you're quitting.
That's not true.
We've seen write-downs, forexample, by Shell and EDF of
Atlantic Shores of about $900million equivalent each.

(15:44):
We've seen write-downs byOrsted.
We've seen write-downs by OceanWinds, south Coast Wind.
All of those write-downs arejust accounting adjustments
because of uncertainty forvarious reasons that they've
announced, not just regulatoryuncertainty and that does not
mean they're not pursuing theprojects, they may still be
actively engaged in it.

(16:06):
Jim, to your question aboutEurope versus the US, I want to
look not just at port capacityand vessels but I think for
something very specific onvessels and then something more
general about the two markets.
So for vessels in the UnitedStates we have a law called the
Jones Act which is designed toencourage US shipbuilding and

(16:28):
also US crews for US flaggedvessels.
And the Jones Act basicallyrequires that if you have a
vessel that's moving acommercial voyage between two US
ports it must be a US vessel.
So I went to a shipyard inSouth Louisiana and Houma where
a number of the crew transfervehicles are being built for
Orsted and for Equinor for theirUS offshore wind projects.

(16:49):
They're being built in the USbecause they will go from
servicing.
Once the projects are operatingthey'll service those projects
from US ports.
So if just you take, forexample, equinor's Empire Wind
Project under construction nowin New York, take, for example,
equinor's Empire Wind Projectunder construction now in New
York, once it's built the crewtransfer vessel will come out of
the South Brooklyn MarineTerminal, a new port that has
been built bespoke for offshorewind.

(17:12):
It will come out in fullyelectric power, so
environmentally clean and green,until it gets outside the port
boundaries.
And it will go out back andforth over the years of
operation of that project,bringing technicians and
engineers and so forth, out tooperate and maintain the field.
Because the offshore windproject is in federal waters,

(17:33):
that vessel is going from a USpoint to a US point and has to
therefore meet the Jones Actrequirements because it's under
the jurisdiction of the JonesAct.
In Europe you don't have thatproblem.
So imagine for a second thatyou're in the North Sea or in
the Baltic and you're developingan offshore wind project and
the best and most availableships are from Italy or from

(17:58):
Singapore.
Fine, you can hire them, you cancharter them, you can lock
things up and get your pricesdown as much as possible.
If you have to build new onesand they're bespoke and they
have to be built in the UnitedStates that would of course
limit and constrain your choices.
Some of the projects in NewEngland, for example, during
construction, are actuallybasing their home ports for some

(18:19):
of the construction materialsin Canada so that they can bring
it down to US offshore watersbecause of the Jones Act,
because they don't have theavailability, we just don't have
it in our market because we'rea newer market of the vessels
that would be available.
For that, absent the Jones Act,we might see less investment in
US shipbuilding but we mightsee more US home porting and

(18:41):
more onshore manufacturingfacilities, because then you
could move things back and forthusing non-US flag vessels from
a US port to US offshore windproject.
The last thing I'll say is,Europe is a significantly more
mature market.
If you look at installedcapacity, Europe's been building
offshore wind for a very longtime and if you look around the
world, China has added moreoffshore wind capacity in the

(19:03):
last 18 months than all of whatwas already built in Europe over
the last 20 years combined.
The United States is very lateto this offshore wind party, so
we do not yet have the domesticmanufacturing base, the domestic
vessel fleet and so forth,specialized labor forces that
are able to do these projects,and I think a stall in the
market uh, in back to your pointwe'll make it harder to do that

(19:27):
and harder to compete in thefuture.

Speaker 1 (19:28):
So we'll just be left further behind and and Alan,
just to make sure I understandthe points that you hit along
the way.
There too, it's those stallsdon't only um hamper our
domestic opportunity to createenergy, hamper our domestic
opportunity to create energy,some of them make it more

(19:49):
expensive for us to potentiallycreate in the future, and the
point that I really want to hitis that it's also then very
difficult for us to export ourtechnology, our know-how, our
workforce, because we're not inthe pole position, we're not
leading in this technology spaceat this point.
That's right, and I want to, Ithink, maybe flip now to talk

(20:12):
about oil and gas offshore,because that is, in fact, one of
the technologies and one of theways of production of energy
that the US did lead in afterWorld War II and has continued
to lead in the advancement ofproduction of energy.
That the US did lead in afterWorld War II and has continued
to lead in the advancement oftechnologies that are now
deployed around the world byboth international companies but

(20:33):
also US companies and USworkforce and US specialists.
So I always want to keep inmind this economic engine around
energy that we're talking about.
But help me understand how yousee the difference in challenges
, from what offshore wind isfacing to that for offshore oil
and gas.

Speaker 2 (20:53):
Sure, I think you know there are a lot of
similarities, right?
They're both capital intensive,they need specialized equipment
, they're in marine environmentswhich are harsh, both in water
and in air, and with saltcorrosion, and all of that they
need specialized workforces andthey need onshore facilities to
which they can connect and thenexport whatever it is they're
producing.
So those things are kind ofsimilar.

(21:13):
You know, having worked manyyears ago on offshore oil and
gas facilities, on FPSOs, notjust in the United States but
also elsewhere also, uh,elsewhere in the world, um, I'm
I'm familiar with some of thespecial challenges that they
face and, to my mind, I'd breakit up between technology and

(21:34):
markets.
Those, those are different.
So, from a technology standpoint, uh, you know, if you're in
harsh Marine conditions andyou're doing oil and gas, as you
get progressively into deeperand deeper water, where the
United States, for example,along with other countries like
Brazil, you know, and some ofthe European major oil companies
had significant expertise asyou get into deeper water, that

(21:56):
gets a lot harder.
So, just to give you one example, if you're in deeper water and
you have, you know, a highertemperature, high pressure field
, and you're pulling that outand you're putting it into.
You know, whatever risertechnology you're using right
and the water deep is reallycold, you know you're going to
have issues with hydrates,you're going to have issues with

(22:17):
wax deposition.
There's things that you have tosolve.
So how do you solve it?
You solve it with materialsimprovements.
You solve it with improvementsin riser technologies.
If you're coming up to afloating platform,
semi-submersible, or an FPSO now, you have other issues with
respect to how your wet tree isgoing to function and how you're

(22:38):
going to adapt to currents andthings moving around that you
don't have.
If you're closer to shore andyou're using dry trees and you
know simpler wells Technologies.
You don't have the same extremesthat are, you know, temperature
or depth dependent.
All of these things havetechnical solutions, so the
technology requires Significantcapital investment.

(22:59):
It means early projects may notbe as successful.
I was in Brazil.
It means early projects may notbe as successful.
I was in Brazil around the timethat one of their floating
platforms I think P36, sank andthat was a repurposed platform
that had originally been usedelsewhere in the world and was
then brought down to Brazil.
They redid the top sides andblew out a pressure gauge and

(23:22):
the thing started listing.
It was very dramatic, I'm sure.

Speaker 1 (23:26):
There's some pictures .

Speaker 2 (23:27):
There's some good pictures of this and then it
tipped and sadly some people diddie.
You know there are real risksto being out there.
I think another difference intotechnology, of course, is
you're dealing.
If you're dealing withhydrocarbons, things can spill.
Deepwater Horizon will blowout,for example, in the Gulf of
Mexico is a very well-known inthe US example.

(23:48):
And then there's differentimpacts on the environment when
you have that kind of a massiveoil or gas leak.
As I mentioned, I'm inCalifornia and grew up with the
memories of Santa Barbara andalso Unical, you know.
Further up the coast, you know,with some of those spills, that
attracts a lot of attentionfrom people, appropriately,

(24:09):
because of the toxicity of it.
Offshore wind doesn't have thesame issues with respect to that
, although we have seen with youknow, during the construction
stage, a blade failure invineyard wind which resulted in
some fiberglass washing up on abeach.
Ok, that's an environmentalimpact, and if that's your beach
, that's a real problem.
So none of these things areimmune, but they do have very

(24:30):
different, I think, scales ofpotential impact that matter.
Potential risk profile, yeah,yep.
And then, lastly, the market.
You're selling a commodity withoil and gas, so you're subject
to the boom and bust cycles.
You know, some of the projectsthat are done with these long
lead times are assuming acertain production curve and
they're assuming a certainresource that's available.
That may be a little morespeculative in oil and gas you

(24:51):
know, for example, than it ismeasuring a wind resource for an
offshore wind project.
But assume that what you thinkis underground is there once you
go down through the water andthen below the seabed and assume
you can get it outed, andassume you can get it out, and
you assume you can get it out ata price which isn't, you know,
extraordinarily expensive by thetime it comes to the surface
and then gets to shore, uh, whatare you selling it for?

(25:12):
Well, that depends what oilprices are, and oil prices could
be higher than you thoughtthey'd be, and great, now you're
rich.
Or they could be lower.
And now maybe shut down and notproduce because you don't want
to produce at a loss, or maybejust produce at a loss because
some of them have to, becauseonce you've tapped into a well
and changed, you know you mayhave to continue production.
It's not so easy to shut it offand now you're selling at a
loss.
So that's.

(25:32):
You know, that's a verydifferent set of economics.
Offshore wind projectstypically, by the way, mitigate
that by having fixed pricecontracts, contracts for
differences, whether that's trueof a power purchase agreement
with utility, a corporate PPA.
We're seeing different trendsin contracts between the US and
Europe, for example in offshorewind.

(25:52):
But at the end of the day,you're really hedging your
revenue risk.
Your demand is very predictableas far as volume is concerned.
So if you've solved volume,you've solved price and you know
your resource with a highdegree of confidence.
Given your technology, there'sa lot less uncertainty.
So offshore energy is verydifferent from, I think, the
economics of what you're lookingat, as to whether it's

(26:13):
potential boom and bust, whichincludes booms, or whether it's
something which is much morelike a typical rate of return
low single digits return that autility would expect.

Speaker 1 (26:24):
Yeah, I appreciate you framing that like that.
We would call a lot of thoserevenue risk obviously reservoir
risk, field life risk,commodity price risk is very
common.
Everyone's quite familiar withit, and so setting the stage of
risk management between thedifferent sectors offshore, wind
and oil and gas Do we see thatreflected in the particular

(26:48):
financing structures that peopleare using?
Do we see it in interest ratesor in the credit worthiness of
particular partners and projects?

Speaker 2 (27:00):
Yeah, I think so.
I think you see, for example,in a project financing of a
renewables project generally butthis is also true of offshore
wind there's, generally speaking, the desire to drive costs down
, because you're selling into aregulated market where
affordability is key.
Power should not be tooexpensive anywhere.

(27:22):
So to generate power you haveto drive costs down with
established technologies not alot of experimental technology,
relatively speaking and squeezeas much risk out of the system
as you possibly can.
Sometimes that means sheddingrisk through contractual risk
allocation to third partiesoperators, contractors and so

(27:42):
forth, OEM manufacturers of keyequipment like wind turbines to
shed that risk through contractsso that they're responsible for
being on time, being on budget,for reliability, for efficiency
and so forth.
By way, in the legacy oil andgas business, you do the
opposite.
You try to control all therisks yourself Absolutely,

(28:03):
because you have averdict-making company.
You don't trust anybody else.
You maybe have proprietarytechnology of your own and you
don't shed that risk, so you'rekeeping that risk on your
balance sheet.
That's the difference.
That means cost, by the way, incost management maybe is not,
frankly, either as important orat least not as disciplined for
a company doing this on balancesheet to the degree that they

(28:23):
may be able to, to recover itwhen times are good and there's
some scarcity and commodityprices are high.
So that variability means theyhave to hold on their balance
sheet.
And that means you're incorporate finance.
You can project finance,discrete facilities, but usually
that's still going to be atsome point backstopped by
someone who's either an oil andgas company or an oil and gas

(28:44):
trader with suitable credit.
And the return is the return onthe investment, driven by
profitability, because yourproduction costs on a long-term
life of field basis, yourproduction costs are
significantly lower than whatyou're selling it for and your
as-delivered price differencecreates profit with a return on

(29:06):
assets.
In an energy situation and thisis true of any power plant, but
let's look at offshore windbecause you have to keep your
costs down, because yourrevenues are relatively fixed
and because you're sheddingcosts to third party, the profit
margin on the assets isactually almost negligible.
I mean, the return on assets isactually quite low, but because

(29:27):
you've driven the risk down,you can borrow more money.
Borrowing money requires you tode-risk.
Maximizing debt capacity thenmeans you have a return through
leverage because you've pulledyour weighted cost of capital
down.
So by making the capital cheaper, by de-risking, you not only in
fact have more predictable cashflows and less material risk

(29:49):
that your business might fail,for which you've given up the
upside of windfall profits oreven the potential for them,
you've changed the capital stackcompletely, so you've ended up
with, you know, projects thatmay have% 30% maybe, because
offshore wind is more risky thansay, onshore maybe 40% equity

(30:10):
initially, but the majority ofthe capital stack is coming from
debt and as time goes by and ifit's successfully installed and
operates and has an operatinghistory, you can refinance that
over and over.
All of that, by the way, istrue anywhere you do this in the
world.
If you throw on tax credits.
When we look at subsidies later, both for wind or for oil and

(30:31):
gas and other sources of energy,that calculus changes and the
financing structures wouldchange.
But, generally speaking, theidea is how I laid it out Back
on a technology point.

Speaker 3 (30:45):
I can't help but draw the analogy about how the
industry, the oil and gasindustry is so many decades
ahead and the technology hasdriven things into deeper waters
and enabled a lot and broughtdown some of the finance costs
and in general, the wind marketin the US is quite a ways behind

(31:06):
that, similarly in the deepwater technology aspects.
But do you anticipate that?
You mentioned the cost ofcapital just a few minutes ago.
Do you anticipate that that'sgoing to be a rapid catch up
with offshore wind as far as thetechnology is concerned and the
de-risking of activities, or isthat going to be much more

(31:31):
similar to the long term of theoil and gas industry in the Gulf
of Mexico?

Speaker 2 (31:38):
It's a good question, jim.
I'm really not sure, I think,if I look at cost curves and how
they've declined for otherrenewable technologies, like you
know, wind for example.
I mean I did my first wind farmtransaction in 1991.
And at the time the industrywas quite fragmented.
There were a lot of companiesClipper, flowin, kenetech you

(31:59):
know companies that aren'taround anymore that were
manufacturing.
They all had wildly differenttechnologies, you know, within
the constraints of building awind turbine generator and they
had gearboxes that froze andthey weren't very efficient and
they killed too many birds.
I mean there were a lot ofproblems with them.
When later you get consolidationand relatively few very large,

(32:22):
well-capitalized manufacturersare able to build very tall,
sleek steel towers not openlatticework towers when the
swept area of the blades issignificantly larger, because
you're using taller machineswith longer blades and you use
advanced aircraft design, as youwould for a jet aircraft wing,
to design those blades in waysthat not just reduce turbulence

(32:45):
and therefore the soundassociated with it, but really
increase the efficiency and howyou can capture that wind
resource.
And offshore that's especiallyimportant because there's so
much more wind and it's so muchmore consistent at higher speeds
and higher altitudes.
You know, the ability to dothat required a consolidation
among manufacturers.
It also might have benefitedfrom computer-assisted design.

(33:06):
So if you could use CAD designsand prototypes, experiment with
how different materials mightfunction or different shapes
might function, you don't haveto waste all that money building
physical prototypes.
So that was a huge savings indesign and as a result, you get
more capacity, more efficiency,more reliability and those

(33:30):
combined, you know, eventuallybring down the cost, the
installed cost and the levelizedcost of energy from projects
that are using that technology.
Solar has come down, but I thinkfor a slightly different reason
.
It's not just technologicalimprovements, especially in PV
cells, so they don't degrade asmuch as so that they have higher
capacity and efficiency, andother technologies like thin

(33:54):
films and things that I thinkwe'll see more of, but it's also
their scale right.
So and you cannot not mentionChina here, because China has
devoted so many resources toboosting manufacturing capacity
that at times it's created asurplus and that also drives
down prices globally of the hugeeconomies of scale associated

(34:26):
with the massive build out ofsolar, we've seen prices come
down to where now solar isusually the cheapest levelized
cost of energy comparator, andeven in a state like Texas,
which is trying to subsidizeonshore oil and gas or onshore
gas I should say gas-firedgeneration and having a hard
time finding a lot of takers.
Some companies have pulled out.
Solar is producing a lot of thepower during the day and that's

(34:47):
because there's a zero marginalcost of generation, so it's
pulling down average costs on agrid that still relies on
nuclear gas and coal, along withwind and solar.
So I think the cost curvecoming down for offshore wind is
going to be harder.

Speaker 3 (35:02):
Okay, okay, okay.
On the aside from thetechnology and the financing and
the risk that we talked about,is there anything you want to
add with regard to theregulatory differences before we
leave the topic?
But, ian, did you want to stayon that topic for a question?

Speaker 1 (35:22):
Well, I just, alan, you mentioned something about
the cost of solar and thecompetitiveness of solar, and I
think one of the other keythings, and a theme maybe here
that we need to continue toexplore, is onshore solar
projects are also relativelyfast to deploy, and so solar is
not only the lowest cost toproduce energy or I should say

(35:43):
electricity specifically,because you will never produce
oil and gas with solar but it'salso fast to do and often is
done not on federal lands, buton private lands or private
other infrastructure.
Lots of folks are putting solaron their homes in lots of parts
of the US, and so there's a lotof clear competitive advantages

(36:04):
for that generation source ofenergy to keep increasing its
share of US energy production.
Right, and so, just to you know, that theme of the difficulty
and the time and the durationthe long duration to deliver
offshore projects isn'tnecessarily true for other

(36:25):
technologies when deployedonshore, and I think we all keep
that in mind during ourdiscussions of our energy mix in
the US.

Speaker 2 (36:31):
I think it's true, but, ian, I think it's also
important to look at scale.
Offshore wind gives you justbucket loads of power real quick
once it's on it just takes youa long time to get there, right,
indeed, but I think the otheris, you know, locational
specificity.
So if, for example, you said tome, well, what's better, should
I build solar or should I builda natural gas power plant, the

(36:54):
first thing I have to ask you iswhere you are.
Because if you're in a placewhere there's no sun, you know,
if you're near the Arctic Circlehalf the year, that's probably
not the best place to maximizethe use of solar power.
If you're in New England, wherethere's no gas pipelines, the
sufficient capacity coming in,probably not the best place for
a gas fire power plant, right?
So look, how do you connect?

(37:14):
Are you using solar for CNI orfor residential or for smaller
microgrids where it'sdistributed?
Are you building a big utilityscale solar plant that requires
transmission capacity?
And what does storage do to that?
Because storage is another onewhere there's massive investment
, where the cost is fallingrapidly, where there are
operational improvements notjust in the batteries themselves

(37:35):
but also in the software thatmanages them.
And AI-enabled grids that takeadvantage of storage, coupled
with intermittent resources, arevery reliable and very
inexpensive marginal cost ofpower.
I think offshore wind still hasa role to play in that,
especially in areas like the USNortheast where you have large
population centers that canbenefit from that type of

(37:58):
reliable resource to supplementthe grid and because offshore
wind often blows at night, thatactually does a very good job
supplementing what otherwisemight be more solar penetration
as an intermittent resourceduring the day.

Speaker 1 (38:10):
You know, alan, we're we're definitely on the same
page around the need and theopportunities of offshore wind
for the US.
Fully agree, alan.
Do you see?
What's your take on the otherinherent risks between the
sectors?
We've talked a little bit aboutoperational risk.
We've talked a little bit aboutregulatory risk and actually

(38:33):
operational risk you brought up.
Are there other key risks thatwe want to make sure the public
is aware of and the differences,and maybe sometimes those risks
aren't as significant as wethink.

Speaker 2 (38:50):
You know, other than the operational risk around both
commodity pricing andenvironmental impacts, or you
know possible catastrophicevents, which those I think are
the major ones once theseprojects are up and running.
One of the things I'd look at,with offshore oil and gas too,
is the mix of what's coming outof the field, because a lot of

(39:10):
the gas is associated gas reallyfor oil development, and it'll
be interesting to see whathappens over the next, say, two
decades with oil demand and oildemand destruction and natural
gas, because we're in a pointright now where oil demand
growth is either going to falland be negative or at least go

(39:32):
up at a slower rate and it'sbeen sort of flat for the last
15 years already and with theincreased electrification of
transportation, with otherliquid fuel alternatives and
with not using oil as much forpower generation as we did, say,
before the 1970s, oil demandgrowth will be slower than
natural gas demand growth andnatural gas demand growth is

(39:55):
high and projected to remainthere, not just for power
generation but also for hard toabate sectors like industrial
heat generation, but also forhard to abate sectors like
industrial heat, whether that'scoupled with better methane
monitoring and capture, whetherit's coupled with carbon capture
and storage.
The jury's out on where that'sgoing to go, at least in the
United States, but I thinkglobally those trends are
certainly apparent.

(40:15):
But I see gas demand continuingto rise.
The mix of what's actuallybeing produced when gas and oil
are in the same place causes achallenge for that.
Let's look, for example, at thePermian Basin, just onshore for
a moment in Texas.
If you wanted to sell that gas,what's it worth?
What's the cost?

(40:36):
What's the value today?
Well, you could look at theHenry Hubb price for gas and
that tells you something.
You could look at whether theglobalization of gas prices
because of increased LNG exportsinto Europe especially, but not
only into Europe, will affectUS domestic prices of gas.
At the moment it's too small todo that.
But if you're at the Permian,you might also be selling it to

(40:57):
California and the Californiagate price on gas is high and
it's higher.
It's one reason why Californiapower prices are higher, not the
major one, but a contributingone.
But at the source, in thePermian, there are times
recently where the gas price isnegative, and it's negative
because there isn't sufficientpipeline capacity to move it out

(41:17):
, but it still has to beproduced because it's associated
gas from oil production andthat oil is profitably produced.
And so now, what do you do withall that gas?
So midstream investment inpipelines and in gas storage you
know the risk of negativepricing because of under under
capacity or congestion ontransportation for gas mirrors
exactly the the power sectorissues of well, where do you put

(41:39):
your storage if you haveintermittent resources?
And what about transmissionconstraints?
And you have negative pricingon wind coming from West Texas,
sometimes, especially at night,because you're producing it to
get your production tax creditbut there's not a sufficient.
You know demand for it becauseit's nighttime or there's a high
demand for it, but can you knowcongestion on the transmission
lines?
You know, during the day.
I think all of these thingsbecome a real challenge, but the

(42:02):
mix of oil and gas and how thateconomics feed into future
offshore developments in thatarea is another one that I think
bears some examination.
And it's different between oiland gas than it is in wind.

Speaker 1 (42:14):
It's one of the fascinating parts of the
complexities of the differentmarkets.
There's always opportunitiessomewhere for something, which
is one of the reasons why I findit fascinating to work in
energy.

Speaker 2 (42:24):
I remember taking a visit to an offshore platform in
Brazil that we'd financed, uh,our clients had financed, and,
uh, you know, flying in on thehelicopter to the, the beautiful
Petrobras, you know, uh, yellowand and and green platform,
brightly painted because it'sbrand new.
Uh, the sky was beautiful blue,the water was beautiful blue.

(42:45):
Uh, they were very excitedabout opening this new platform,
and that's all well and good, Isuppose.
But what was not so well andgood is the heat that we felt
physically inside thehelicopters.
They landed on the landing padcoming off of a flare because
all of that oil production wasgenerating associated gas.
That offshore had exactly zerovalue because there was no

(43:06):
pipeline.
There was no way to get it toshore.
Later they did build one, butat the time you couldn't, and so
that wasted flared gas, asidefrom the disastrous
environmental consequences of it, economically was also a huge
waste of value because the gasin that location, middle of the
ocean, was worthless because thegas in that location, middle of
the ocean, was worthless andhistorically just for our

(43:28):
listeners.

Speaker 1 (43:29):
Oil and gas exploration and development
offshore usually picks one andfocuses on one because of the
complexities of the system thathave to develop in order to get
it to somewhere, either forrefining or for market.
So of course, in the Gulf ofMexico we do also have there are
oil and gas pipeline systemsconnecting different assets, and
so Absolutely.

Speaker 2 (43:48):
And the nice thing about.

Speaker 1 (43:49):
You have to make your connection.

Speaker 2 (43:51):
Yeah, and become, you know, because you know crude
crude oil is a liquid.
I mean it's viscous and yucky,right, but it's a liquid.
You, there's different ways youcan get that to shore.
You can offload it, you know,from an FPS, a floating
production storage and anoffloading platform and FPS, so
you could put that into a ship,take the ship to shore short
haul and then they put into thesystem.

(44:12):
You can build a pipelinecollector system.
There's a lot of things you cando with.
Liquids are pretty easyphysically.
With gas, if you don't have apipeline, you're a source of
production and you have toliquefy it before you can then
regas, if I it that's.
You know, the LNG project chain.
That may be economic for largeLNG cargoes.

(44:32):
It is not economic for, youknow, field production kill
production facility, associatedgas production.

Speaker 3 (44:37):
Right Great point Well, I'd like to shift to a hot
topic these days althoughalmost there's hardly a topic
that isn't hot these days butand I have to use the S word
subsidies in order to do so-that's a better S word than I
thought you were going to do.
Yeah, but I think it's importantto point out that the term

(45:00):
subsidies and we debated overthe use of the term because
sometimes it's pejorative andderogatory, but it's not
necessarily a four-letter word,it is one of the it captures the
overall legitimate fiscalpolicy and tax code that may be
surrounding some of theseprojects, both in oil and gas

(45:22):
and wind.
But I do think that, as best Icould tell, not a lot of people,
including a lot of the peoplethat are making decisions, have
a really good handle on whatthese subsidies are.
So, alan, could you comment anddescribe the subsidies of
offshore wind and oil and gas,insofar as it's possible, and

(45:48):
I'd like to discuss that alittle bit.

Speaker 2 (45:51):
Sure, I mean not all subsidies are economic either.
So let me look at the economicones.
For wind energy, offshore orotherwise, the subsidy systems
around the world are different.
In the United States we tend tobury our subsidies in the tax
code, so we create tax creditsinvestment tax credits,

(46:13):
production tax credits.
Because of the expense thatwe've talked about of offshore
and complexity of offshore wind,usually the investment tax
credit right is almost alwaysthe way to go.
More than a production taxcredit is worth more and
depending on a variety offactors under the Inflation
Reduction Act, which of coursemay be changed by Congress,
we'll see.

(46:34):
But right now, if you'reproducing any kind of clean
energy and wind falls into thiscategory, you can benefit from
those tax credits at varyingdegrees depending on if you
comply also with labor standards, for example on apprentices and
paying prevailing wage, whetheryou're located in an

(46:55):
energy-impacted community, bythe way, you might say well, how
can an offshore wind project bein an impacted community or a
community where you can benefitfrom the maximum credits?
And the answer is it has anonshore component and so where
that onshore landing station orsubstation is located, that's
the test as to whether that's animpacted community, because
obviously not too many peopleare living 25 miles offshore.

(47:16):
So those credits are in the taxcode and they require to be.
If the developers cannot usethose credits themselves, they
need to find a way to monetizethem, either by transferring
them to somebody else, where youthen have to take a discount,
or by inviting in otherinvestors called tax equity

(47:36):
investors.
Typically they're financialinstitutions that have the tax
capacity to take those creditsand use them to offset other
unrelated income that they mayhave.
So that's the major one thatgets a lot of the attention.
I think you know if you lookoutside the United States,
usually the subsidies areprobably a little more
transparently put on the revenueside.

(47:57):
As a revenue support sometimeswhat's called, for example, a
feed-in tariff you may also findstate support, not federal
support, here.
And analogously, among Europeanutilities for contracts or
differences.
In New York State, for example,nyserda enters into contracts
to provide for ORECs and areessentially, through a

(48:19):
combination of tax credits andprice adjustment mechanisms,
guaranteeing a floor price forthe offtake.
That gives the state then, andits utilities that are actually
taking the power some certaintythat that supply will be
available.
But it's different than acapacity payment.
It's simply a way of makingsure that the energy payment is

(48:41):
predictable and either fixed orfixed and indexed or fixed and
escalating with inflation, orwhatever the particular contract
might require, depending onwhere you are.
We'll see, by the way, inCalifornia whether there's a
centralized procurement foroffshore wind which provides
similar stability or somethingelse more like.
You know the traditional powercontracting regimes for onshore
facilities, but overseas thefeed-in tariff for revenue

(49:04):
support would be more common.
Oil and gas subsidies exist aswell, so you so, especially if
you're in the offshoreenvironment.
The first thing that happens isyou have to get your lease area
and when you get it you have topay a royalty rate for your
production.
So if you're bidding to getyour lease and paying whatever
that is, and then you're payinga royalty on your production,
which only happens if youactually produce, if the royalty

(49:27):
rates are very low and have notbeen increased meaningfully for
decades, or if you look at, forexample, an onshore oil and gas
on federal lands they wereincreased it might come back
down because the administrationhas talked about that.
You know, royalty rates are areal good subsidy because you're
not really paying much forwhat's in the ground.
You're paying for the cost ofexploring and the cost of

(49:50):
producing, but you're not payingfor the commodity itself.
That's a gift of what in othercountries would be patrimony,
and in other countries theroyalty rates might be
significantly higher.
If you're looking for a marketcomparator, what would the
market pricing really be?
Compare royalty rates acrosscountries.
They vary widely.
You could also look, forexample, at the cost for the
leases themselves that are bidinto auctions when the Bureau of

(50:13):
Ocean Energy Management as I'msure you well know from when you
were there, when they wouldcome up with their periodic
auctions.
Most of the lease lots that areput up for auction are
identified by industryparticipants, most of them over
time there's been no one biddingon because no one wants them.
Or there's been a single bidderfor each lot.
Guess who wins right?

(50:35):
Or the bidder, maybe thatsingle bidder that takes the
lease and doesn't pay very muchfor it because there's not much
competition in the auction.
They may not develop it becausevery few of them actually are
economic to develop.
So over time, you know, a lot ofpeople argue back and forth
about should we be guaranteeingmore lease areas?
Should we, you know, to drillbaby drills, we put out more
areas for lease.

(50:56):
It's not clear the industrywants them or that if they got
them they'd be paying much forthem, if they got them, even for
very little money, that they'dactually develop them.
Those things are all dependenton market economics, and the
market economics, you know,don't suggest that we should be
developing everywhere wepossibly could, because it
probably is not economic to doso.
But by hedging the downsiderisk and and making the barrier

(51:16):
to entry very low and making theroyalty rates very low, it's a
massive subsidy for the fossilfuel producers.

Speaker 1 (51:30):
Alan, I think, and it's it's important to state to
you that the US government isserious about energy production
and has been for more than ahundred years, and so the
policies that potentiallyindustrial policy and also
including tax policies helpincentivize continued investment
in the upstream side of thebusiness, and we could say the

(51:51):
same for offshore wind, you know, in the generation of energy.
They're really good incentivesthere in the, in the particular
tax breaks that you mentioned,as well as in a number of others
, and that's okay.
You know the energy development.
There's this trade-off, there'sthis balance that policymakers
have to make around the securityof domestic sources of energy,

(52:14):
energy production to meet needdomestically, et cetera, et
cetera.
You know economic opportunityand how do you drive employment
and other tax basis revenuegenerated off of payroll taxes,
other tax basis revenuegenerated off of payroll taxes.
So we're not saying either isbad, oh no, you're right.
It's just important to be clearthat these frameworks exist.
Let me be clear.

Speaker 2 (52:36):
When I talked about, for example, the declining cost
curve in wind energy over thelast 15, 20 years, that was
mainly because we had strongincentives, not just federal tax
credits but also staterenewable portfolio standards
and other things that drove that, basically created a market and
then allowed that market tobring down costs and increase

(52:56):
reliability and efficiency.
I think energy security hugelyimportant.
You know, if you look at I liketo look at the 1970s you know
we had oil price shocks.
If you look at I like to lookat the 1970s, we had oil price
shocks.
We had oil scarcity in theUnited States.
We had a perception, whichturned out to be wrong, that
globally we were close to peakoil and we're going to run out
of oil anywhere to develop.

(53:17):
That turned out not to be trueand we weren't so confident
about oil and gas generally, notjust oil but the gas piece.
But there was a thought that ifyou increased gas production
and under Jimmy Carter, even ifyou increased coal production,
people forget that you mightincrease US energy security
because of the lack of oil.
So we shifted from oil toincreased reliance on coal we

(53:39):
already had it, but much morereliance on gas as a cleaner,
more efficient resource.
We had federal subsidies forcogeneration of gas and process
heat, all of which designed andactually successfully designed
to create US energy security, sowe didn't have to repeat the
impacts of the oil crisis thatwe'd had.
And at the exact same time 1978,we enacted PURPA, which

(54:02):
demilopolized power generation,especially for small generators,
co-generators and renewableenergy so early wind and solar
projects here and that created amarket.
It also created tremendousdiversity of supply, and that
resource diversity increased thereliability of the grid at the
same time as it was drivingcosts down and it gave utilities

(54:23):
much more flexibility, althoughsome of them still fought it.
But in places where wederegulated the utilities in the
wake of those legislativechanges, texas and California
are the best and biggestexamples, because they account
for half of our additionalcapacity.
You know just those two states.
You know we've seen tremendousimprovements in both energy

(54:46):
security, energy affordability,energy reliability, because of
those policies.
So you're absolutely right.
I think these public policiessubsidies, tax credits, other
drivers of regulatory design andmarket design have been hugely
beneficial.
Yeah.

Speaker 1 (55:03):
And Jim knows I'm the one who is always a little bit
I don't know what is the rightword for current day triggered
by the use of subsidies, becauseI think it's.
You know, we want to make surethat we recognize that we use
these different subsidies forgood purpose, you know, in the
common good, in the nationalgood.
We just have to be clear abouthow they're used.

(55:29):
But all of those benefits we'retalking about have come from
different types of energydevelopment that has been
incentivized by these differentsubsidies and, in some cases,
tax policies.

Speaker 2 (55:35):
yeah, so let me stand that for a second, because I
think you're hitting somethingreally important.
Not all subsidies are bad, notall subsidies are good, yes, you
know, right.
So if a government is doingthings by the way, I mentioned
non-economic subsidies, right.
So liability for oil spills,how is that handled?
Well, differently thanliabilities for a nuclear

(55:55):
accident at a nuclear powerplant, because there's a,
there's a liability shield underfederal law for owners of
nuclear power plants, also verydifferent than, for example,
wildfires triggered by utilityequipment, you know.
And ignition, you know, inCalifornia the utility is on the
hook for that under the inversecondemnation laws.
That's another reason, by theway, why power prices are higher

(56:16):
.
It's not because ofintermittent resources for
stranded assets, for wildfirerisks and wildfire hardening,
for imported gas being expensive.
I mean, there's other thingsgoing on.

(56:37):
If the subsidy or thegovernment policy is enabling
economies of scale andinnovation in a market that
create market opportunities atappropriate cost, that's a good
one.
If, instead, it's impedingprivate investment, impeding
choice in ways that otherwisewould be, beneficial, that's bad

(57:01):
.

Speaker 3 (57:01):
Yeah, that's a very, very good point, and certainly
subsidies can be either good orbad.
In cases where they advance thetechnology, in cases where the
market in a sense, they can bevery, very good.
I guess I'm getting to a morefundamental level as to really
knowing what they are, becauseyou talk about cross subsidies
and everything else, and I don'tthink we have a good handle on

(57:22):
that.
I frankly think that we oughtto have some kind of GAO or CBO
study on exactly what thesubsidies are for the various
industries and, in that way,engage in intelligent dialogue,
as opposed to simply saying onone side none whatsoever and the
other anything and everything,and I think that's a problem,

(57:45):
jim, I couldn.
Problem.

Speaker 2 (57:46):
You know, jim, I couldn't agree more.
The other thing I think is isimportant and it's nuanced.
I know nuance is maybe fallingout of fashion, but you know how
do things impact each other.
So what is the intersectionbetween energy policy, subsidies
or other things and tradepolicy?
You know, if a tariff is goingto increase the costs across the

(58:07):
board oil and gas, gasgeneration, renewables, wind and
solar, whatever it is, and howthat ripples through then who's
going to bear that cost?
Is it going to be rate payersfor power?
Is it going to be people at thegas pump?
How is that going to affectinvestment?
What about demographics?

(58:27):
What about immigration and theeffect on labor policy and the
availability of skilled labor?
I mean, all of these thingsimpact each other and also exist
in a broader context.
You know someone was asking mewill the Inflation Reduction Act
, tax credits, be repealed bythis current Congress?
We have a big tax bill comingup, but I can't predict what

(58:47):
they're going to do.
What I can tell you is, if thecorporate tax rate drops to 15%,
tax credits aren't worth asmuch.
I can also tell you if there'sa recession, no one needs to buy
credits because they're goingto generate their own losses.
Thank you very much.
They don't need tax credits.
So the broader macroeconomic,demographic and policy
frameworks, I think, matter morethan the nuanced little

(59:09):
arguments that a lot of us andsay energy deeply are focusing
on, as if we were in some kindof an isolated bubble of ideal
public policy which we justaren't.

Speaker 1 (59:18):
We haven't got to yet , but we continue to strive
Right, yeah, and what that maybe kind of a more fundamental
question For offshore, for oiland gas, for offshore wind can
any of it survive withoutgovernment support?
What would you want to see fromgovernment support?

Speaker 2 (59:44):
Let me look at it.
I think the tax credit piece isthe first thing that comes to
mind for that.

Speaker 1 (59:51):
And.

Speaker 2 (59:51):
I think, as technologies mature, as they
come down that cost curve,especially if there's
consolidation amongmanufacturers, you know, I think
the need for the subsidy shouldroll off right.
They're not meant to bepermanent.
They're not meant to bepermanent.
By the same token, I think someof the market design, some of
the rules, for example, thatFERC is coming up with for

(01:00:13):
interconnection and interstatetransmission, and easing the
pathway to get projects on, Ithink some of the permitting
reform that's been talked abouton both sides of the aisle in
the US and that's also, frankly,an issue in other countries I
was dealing with a Europeanproject Permitting reform was on
top of people's minds, becausethey were dealing with all of
these cumbersome regulations andhaving a hard time figuring out
how to get their project donebecause of it All meritorious

(01:00:36):
public policy goals, but theoverlay of these it was, like
you know, like barnacles on thehull of a boat.
They were accretive and not ina good way.
They were accretive and not ina good way.
So I think there's a questionof how these things work
together.
I've still come back to theidea, though, that subsidies
should not be permanent.
They should have a definedpolicy goal and once that goal

(01:00:58):
has been met.
They should roll off, but theyshouldn't also be too short term
.
We ran into that for 15, 20years with, for example, the
production tax credit and theinvestment tax credits kind of
coming and going or being aboutto expire, and that ends up with
very lumpy investment decisions.
Allowing them to go out atleast five years gives you some

(01:01:19):
runway to build manufacturingcapacity.
I think one of the mostimportant parts of the Inflation
Reduction Act, as it related tocredits, was not the credits
themselves.
Those are important.
Inflation Reduction Act, as itrelated to credits, was not the
credits themselves.
Those are important.
And we haven't talked abouthydrogen or other things nuclear
, which also benefited carboncapture and storage, which then
can lead to blue hydrogen.
There's other things in the billthat were also popular among

(01:01:41):
non-renewable energy developers,but if you look at all of those
and how they function, you weregiven a 10-year runway at a
minimum, when you knew withconfidence as an investor those
credits would be available ifyou qualified and all you had to
do was do the right things toqualify to maximize those
credits.
And then you're off and running, knowing you had 10 years,

(01:02:02):
combined with the industrialpolicy behind onshoring
manufacturing embedded in theIRA, combined to build or would
have had it continued buildconfidence in the market that
justified long-term investmentsin manufacturing capacity and
that would also then havereduced cost over time.
And then, 10 years from now,you see if you need it, maybe

(01:02:23):
you don't.
So again, they're not meant tobe permanent, but they are meant
to have defined goals and thenhave some consistency and
certainty, or at leastpredictability, that investors
and lenders and technologistscan use and rely on to make
long-term business plans.

Speaker 1 (01:02:40):
That sure seems to be a common theme of discussion
currently.
Right Predictability, stabilityand the opportunity to develop
projects that take longer thanan administration is a theme
that we just keep coming back to, and we keep finding ourselves
in complex situations here inthe US.
Absolutely.

Speaker 3 (01:03:01):
Yeah, and not to belabor the point, but the
predictability and reliabilityis certainly something that is

(01:03:22):
good or the like.
That does providepredictability when these
subsidies or tax incentives aregoing to expire, enables
industry to be making decisionsin an informed way, as opposed
to the last minute changes anddecisions that come out of

(01:03:43):
Congress.

Speaker 1 (01:03:45):
Hey, jim, you know I'm thinking of an example and I
was actually reading somethingthis morning that really was
insightful and I posted it onlinkedin for folks.
Um, I just wanted to zoom infor one little case study.
Um, the intangible drillingcost tax deduction that's
applicable for oil and gas hasbeen on the books federally

(01:04:09):
since 1916.
That seems like a long time ago, if you ask me.
That specific drilling credit.
By the way, intangible drillingcosts onshore are often about
70 to 80 percent of the totalcosts of drilling, exploration
and or development wells, and sothat's a very significant tax
benefit right for explorationproduction companies.

(01:04:33):
That credit was one of thedriving economic wheels behind
the shale gas revolution in theUnited States in the mid-20
teens and ultimately, you know,has now led to the US being the
world's largest producer of oiland gas since about 2018.

(01:04:53):
I'm quite sure the legislatorswho put that on the books in
1916 didn't foresee thisopportunity to deploy it, but I
do think that what they probablythought about was the way that
this kind of incentive can helpspeed technology improvement,
can speed redeployment ofcapital towards, you know,

(01:05:16):
specifically towards drillingand exploration in the United
States.
And so here we are a hundredyears later, having found really
the opportunity that unlockedthe next leap in US energy
production.
I find it fascinating.

Speaker 2 (01:05:34):
It seems like based on the right fundamentals.
It was Also the Energy PolicyAct of 2005, creating the
exemption from the Clean WaterAct for subsurface gastrulling.
That also helped.

Speaker 1 (01:05:46):
These are all timely, right.
These have all come together incertain ways, and I hope that
our policymakers are nowthinking about putting the right
incentives in place and notjust picking and choosing sides.

Speaker 2 (01:05:57):
Yeah, by the way, that shale fracking technology
now is also holding some promisefor advanced geothermal
something that the new Secretaryof Energy, chris Wright, is
familiar with and has talkedabout.
Just as a footnote, myfather-in-law was a
mathematician and developed withhis team a software called
Seismic Unix which allowed forsubsurface 3D modeling in ways

(01:06:21):
you know.
I talked before about theadvances of computer design and
wind turbines, you know, for gasoil and gas subsurface
development and now we'reactually, frankly, for anything
subsurface.
You know the availability ofthose technology and computer
tools.
You know, 20 years before AI isbeing deployed, those were
really important innovations anda lot of the funding for those
things, including what led togas fracking, came from federal

(01:06:43):
government grants, including towhat became NREL and some of the
other national labs.
That is hugely beneficialacross the energy spectrum.

Speaker 3 (01:06:55):
Hey, Alan, are there any technologies that we haven't
touched on that you wanted tomention?

Speaker 2 (01:07:00):
Well, look, I think, onshore or anywhere.
I'm pretty excited about batterytechnologies, no question, and
also making grids smarter,making industrial heat smarter.
There's improved nozzletechnologies, for example, that
you know turbine manufacturersare coming up with to make
combustion more efficient andtherefore reduce emissions as
well energy space.

(01:07:29):
So you know we've looked atother technologies like tidal
stream technology that you knowconverts the very slow but very
strong tidal movements and verypredictable tidal movements
coming in and out Hard to maybedo that at scale without
jeopardizing marine life.
Or, you know, dealing with someof the corrosive impacts,
especially in estuaries wherethe water quality may be and

(01:07:50):
maybe saltwater inundation is anissue We've looked at.
Many years ago I was doing aproject and this is on a remote
island where it made some senseto look at tidal, not just tidal
energy, but wave action.
So if you look at waves goingup and down and you could
imagine, by co-locating thatwith existing offshore energy
facilities and taking advantage,if you're already connected on

(01:08:14):
shore, to the marginaladditional power generation you
might get from wave action.
There are some moreexperimental technologies
dealing with thermal planes withsaltwater, freshwater
interfaces, but I think thoseare still, you know, more in the
research stage for sure, and along way away from being
commercially deployed.

Speaker 1 (01:08:36):
Alan, it's been great to have you.
Um, you know, in thinking aboutour conversation, we've really
covered a lot of space.
You you covered the, the, thekey elements of project finance
and frameworks around projectfinance covered some of the
trade-offs between theopportunity for external versus
internal funding, especially forlarge companies like the one I

(01:08:58):
used to work for.
That makes a lot of sense to meto understand a little of that
perspective better, and wetalked an awful lot about the
different incentives fordifferent types of offshore
energy development and why it'snecessary and desirable for our
government to do that in waysthat allows the market to really
unleash.
Do you have any other pointsthat you'd want to communicate

(01:09:20):
to our listeners in ourconversation here?

Speaker 2 (01:09:24):
The only thing I'd say is keep your eye on the
long-term goals, keep your eyeon the long-term market trends
and try to distinguish signalfrom noise, because a lot of the
things we see you know day today.
I don't know about you.

Speaker 1 (01:09:37):
My phone keeps lighting up with headlines and
you know we all react to the oneway or the other.
You know.

Speaker 2 (01:09:42):
Try to avoid overreacting to short-term flux.
And nowhere is that long-termorientation more true than
offshore energy, For sure.

Speaker 3 (01:09:52):
That's such a great point.
I mean separating the signalfrom the noise in order to be
moving forward.
I think is an excellent point,yeah.

Speaker 1 (01:10:01):
And Alan, every podcast episode we do a last
drop in the ocean for the weekand that's our opportunity just
to mention anything else that'stopical around offshore energy
in our podcast but that wehaven't talked about.
Is there anything that you'veseen lately that you would like
to flag for our listeners to gotake a look at?

Speaker 2 (01:10:21):
Yeah, I mean, look, I think, globally, bear in mind,
this is a global industry and ifyou look at where the
investments are being made,where the technology is coming
from, who's deploying capital, Ithink it's important for people
to also take off the blindersand look at what's happening in
other countries and otherregions.
It's critically important.
And that's my drop in the oceanafter our deep dive.

Speaker 1 (01:10:43):
Yeah, well, and you did mention the rise of China
into the offshore wind space, inparticular over the last few
years too.
Yeah, jim, how about you?
Any last drops?

Speaker 3 (01:10:52):
No, I really don't have anything beyond what we've
talked about.
It's been a very richconversation and, of course, I'm
taking away the things aboutsubsidies the good and bad
subsidies and I think we justneed more and more specific
information to be makingintelligent choices.

Speaker 1 (01:11:11):
Well, and I've got one last drop in the ocean for
this week too.
You guys know, and listenersknow, my own personal passion
around the blue economy, andMarch 18th I'm participating in
Possibility Ocean, which is avirtual summit to discuss some
of the shared opportunitiesbetween sectors for the next

(01:11:32):
generation of ocean development.
This includes defense andenergy, and fishing and
aquaculture and transportation.
It's a broad view of the blueeconomy and how we can all work
best together.
For those interested,possibilityoceancom broad view
of the blue economy and how wecan all work best together.

(01:11:52):
For those interested,possibilityoceancom.

Speaker 3 (01:11:54):
You can go, check out the agenda and register and
come listen.
We've got more events coming upover the course of the summer
that are going to be greatopportunities for participation
and expansion of what thepossibilities are.
Indeed, I think we need to askall our listeners again to post
anything, any suggestions thatyou have about the podcast, and
please feel free to send intopics and identify special

(01:12:18):
guests.

Speaker 1 (01:12:19):
Yeah, alan, you came up to us through a
recommendation, and so we reallywanted to thank you for joining
us today, too, well, Ian andJim, thank you very much.

Speaker 2 (01:12:26):
It's been a real pleasure.

Speaker 1 (01:12:28):
We've had over 1,200 downloads, which I think is not
bad for a podcast that westarted less than six months ago
.
Thinking about those othertopics, jim, that might be
really popular.
What if we do like offshoreenergy, ultimate fighting
championships, or offshoreenergy and beer?
I'm not sure.
Do we have?

Speaker 3 (01:12:46):
a good combination in there.
That's exactly what I wasthinking of, Ian.
That's incredible.

Speaker 1 (01:12:52):
We're going to have to start recording in the
evenings, Jim, so we can dooffshore energy and beer and
whiskey sampling podcasts.

Speaker 2 (01:12:59):
I think that'll change the kinds of last drops
that you get from your guests.

Speaker 1 (01:13:02):
There you go.
Maybe we just stick foroffshore energy for now, and
thanks to you guys.

Speaker 3 (01:13:08):
We can figure something out.

Speaker 2 (01:13:10):
Yes, your cup runneth over.

Speaker 1 (01:13:13):
It sure will.

Speaker 3 (01:13:19):
Okay, Well, thanks everybody.

Speaker 2 (01:13:21):
Yeah, thank you very much.

Speaker 3 (01:13:22):
And also to our listeners as well.

Speaker 1 (01:13:26):
And until we meet again on the next Offshore
Energy podcast.