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Special Report: Energy and Natural Resources

PARTICIPANTS:
Josh Brown, Rio Tinto Kennecott
Lindsay Brown, Jones Lang LaSalle
Ryan Clerico, Enefit American Oil
Cindy Crane, Rocky Mountain Power
Ryan Davis, Brahma Group, Inc.
Randy Evans, Industrial Supply
Angela Franklin, Holland & Hart, LLP
Jerry Lockie, Silver Eagle Refining
Dave McMullin, CS Mining
Amanda Smith, Holland & Hart, LLP
Wick Udy, Jones Lang LaSalle
Mark Walker, EnergySolutions

A special thank you to Rob Simmons, energy policy and law manager for the Governor’s Office of Energy Development, for moderating the discussion.

Let’s begin by getting a sense of what’s happening in each of your sectors. What’s the overall outlook for your industry?

J. BROWN: In the copper industry, we have had prices hit 15-, 20-year lows. What we are being told is the majority of copper producers have either ceased or slowed operations. Kennecott produces roughly 20 to 25 percent of the U.S. copper, and we are still maintaining what we do. But as a result of that, we have had to cut prices, cut costs, become more efficient, become a leaner, better operating facility to remain in business. So our path forward is looking at every way we can to reduce cost and optimize efficiencies.

FRANKLIN: It’s definitely not good in the oil and gas industry. We have gone from a high of $150 a barrel down to lows of the $20s, and right now we are sitting at the mid-$30s. We have gone from 1,200 wells drilled in Utah in 2008 to last year there was 150. Currently there are zero wells being drilled in Utah—for the first time in a 70-year history of the industry.

People are curious about how the refining industry is doing. But in particular, what is the refining industry doing or what can they do to help with air quality?

SMITH: The emissions inventory in this valley—what causes the air pollution during our winter and ozone season—really a very small portion comes from large industry. It’s like 11 to 15 percent. It is changing as the inventory changes. And the refineries are even a smaller part of that. They are like 3 or 4 percent.

But there’s a lot of pressure, obviously, in the media all the time for them to do more. You hear a lot about Tier 3 gasoline. And that would make one of the largest differences in that sector, both changing out the fuel but also changing out the vehicles that use it. Obviously the refineries only have control over one part of that. Tesoro has said it will make Tier 3 gasoline here at this refinery, but I’m not sure about the others.

One interesting thing, though, as they move forward is we need to take more silver out of the gasoline. It has to go somewhere, so their point emissions will actually increase. But modeling shows that’s still a net gain for air quality with fewer emissions. But that means they’ll have to open up their permits. And there’s no room in this area for additional emissions. So that is the real conundrum that will have to be looked at by the Feds and the state.

How is the utilities sector looking?

CRANE: Utah’s economy is strong and it’s growing. But a large number of our customers are facing cost pressures due to the low commodity prices. These are decades-low levels of commodity prices. All of our energy extraction and mining companies are struggling from those cost pressures and those low commodity prices. That makes it imperative that we remain focused on keeping the electricity prices here in Utah low. We do have some of the lowest rates in the nation here in Utah. And that helps grow our economy.

At the same time, we are facing pretty significant environmental compliance pressures with expanding environmental regulations. And that is putting significant cost pressure on our generating portfolio. It is putting on not just our coal fleet, but also our large hydro fleet, as well as our large wind generation fleet. So balancing those is imperative.

And we, too, are focused on efficiencies and cost containment, while at the same time our customer base is wanting to increase their focus around renewable energy, both existing customers as well as customers looking to expand and bring business in to Utah. So we are really focused on trying to find and maintain that balance. But ultimately it’s got to come down to keeping our rates as low as possible in order to help our customers and the economy of Utah.

With the downturn in oil and gas production, as well as some of the other downturns we have experienced in commodity prices, how is that affecting the service sector?

L. BROWN: Cost-cutting is at a level most people in my generation have never seen. We are seeing just intense pressure to cut costs from private equity investors, from the public markets. This current environment, the way things are financed, the way debt is utilized, it is all going to change. It doesn’t matter if you are midstream, upstream, downstream—it is cost-cutting mode to an extreme level. We don’t anticipate things getting any easier any time soon. It’s not good and it is going to get worse, in our opinion. But there are opportunities out there to save money and do things a little differently, and that’s what we are seeing.

DAVIS: Mining and petro-chem has taken a big beating. We are fortunate enough to be fairly diverse. We started about four years ago in solar. So I guess we haven’t taken as big of a beating as some that have strictly been focused on mining and petro-chem. Over the last two years we are probably down 50 percent over what we would traditionally be in those two sectors.

EVANS: In the mining industry, we cover from coal to hard rock mining to copper. And those markets are each different. Coal, of course, is in trouble right now. But we do have some companies that are exporting coal. We have some that are feeding our other customers in the power industry. Some are acquiring others. So we try to take market share within those areas and help them find cost-cutting and try to be the lowest provider of our products, because we need their business, and so we need them to survive.

The gold market is down, but fortunately we have some contracts there and they are still trying to produce what they can.

Oil and gas is really tough up in the Uintah County, Vernal, Roosevelt area, and it’s really struggled. We have had to downsize a little bit there with employees and do everything we can to keep our expenses down and hope that we can survive that area. But the only area that’s really up there right now is power and the coal that feeds those plants.

What are you seeing in the nuclear energy service sector?

WALKER: Six, eight years ago there was a nuclear renaissance taking place. Then natural gas became readily available. Building those plants is a lot cheaper than a nuclear power plant, which is roughly $8 billion to build. So the shift in nuclear right now is decommissioning. You have a lot of these nuclear power plants that are 50, 60 years old that are ending their life cycle. It’s just not profitable for them to continue to generate power. We are currently decommissioning a plant in Chicago. It’s a long, 10-year process to knock one of these plants down. You have to manage the waste. While we believe in nuclear power, these plants need to be responsibly decommissioned and knocked down and the land preserved, and it’s a business opportunity for us.

Enefit American Oil is trying to start a whole new industry with oil shale production here in Utah. What are you seeing in your realm?

CLERICO: Obviously oil prices have some effect on us. Much of what we are doing now is still on paper and in test rooms. And so this new oil price environment is really forcing some reconsiderations of the potential scale of this facility.

David, a lot of your mining operations are in rural Utah. How is your industry faring in rural Utah?

McMILLIN: There’s a lot of momentum around our project. Access to capital is probably our largest struggle because of the decline across the sector. We have even had committed financing that went away. Luckily our owners were able to come in and contribute equity to take care of that. But along with everyone else, we have a lot of scale here. We have implemented significant cost control measures. We laid off 21 percent of our staff about two-and-a-half months ago, nonproduction or developmental folks, to see if we can get more efficient.

One of the struggles we have in rural Utah is converting farm hands to operators. There’s just not a lot of people that have done what we are doing in Milford in North America. As a matter of fact, we’re the first one in the northern hemisphere as far as we know. There’s about 150 of them in central Africa.

This year and next year there are plans to install about 1,000 megawatts of utility-scale solar in Utah. But the outlook going forward may be a little bit more clouded. Cindy, what are you seeing with renewable energy development?

CRANE: We are seeing an increasing desire from our existing customers in Utah for renewable energy, but also from prospective customers that want to bring business into Utah. So we are continuing to see the cost competitive curve dropping on renewable energy; and not just renewables but also other emerging technologies, although storage and things still have quite a bit further to go.

The challenge we have right now is incorporating the renewable energy sources while we are also transitioning the portfolio and the pressure that it puts on rates. We are the second largest rate regulated owner and operator utility of wind generation in the U.S. We also have a large hydro fleet. And we are the one bringing the 1,000 megawatts of solar into our portfolio. We have been able to accomplish that with minimal cost impact on customers, but that’s because we have had load growth. We have had the benefit of growing load growth demand primarily driven by Utah and Wyoming in the Rocky Mountain Power territory.

The growing energy demand is almost entirely being offset with our strong energy efficiency programs. And so that buffer of being able to bring in the renewable for that transition because of facilitating demand has really almost entirely diminished. So that puts a significant amount of pressure on the rate structure as we continue to evolve the portfolio.

With these market conditions, what opportunities do exist?

J. BROWN: Ours is not an immediate upside. It’s more of a long-term. Copper mines take years to decades to bring on line. Kennecott has roughly half the ore left in the ground that it has taken out to date. We still have a lot of ore left. To weather out the next couple years would be beneficial because there is a deficiency of copper mines over the globe. And staying in business is a good thing for the state, as well as Rio Tinto.

DAVIS: On the construction side of things, obviously these alternate energy sources have to be installed. So we are definitely involved now and hopeful to be involved in the installation of those alternate energy sources coming in.

CRANE: There’s opportunities right now around air quality. We talked about Tier 3 fuel, but it’s also the evolution of converting to electric vehicles and how we can facilitate that. It’s a good opportunity to contribute to air quality, especially here in the Salt Lake Valley.

What are some of the big regulatory changes or proposals that might impact energy and mining?

SMITH: The EPA hasn’t finalized the state’s regional haze plan, but that could have major impact on facilities that generate power, and the power plan which is currently stayed at the Supreme Court. But we just need to see if that moves forward or what the next step is there. That obviously could have impacts on how energy is produced.

In the water world, we have seen Waters of the U.S. also succumb to legal challenge and be placed on hold. But if it goes into effect, or if that is re-proposed by EPA, that will have implications on different industries. And then finally the CCR, coal commercial residual rule, definitely impacted certainly the coal mining industry.

SIMMONS: Coal serves a vital role in Utah’s economy. It provides the backbone of our utility system. It provides affordable power. One thing people don’t always realize about Utah coal is that it has a lot of environmental attributes. It is low in sulfur. It has high energy content, low water content, and what that means is if you are going to burn a certain amount of coal it’s better to be burning Utah coal in most cases. Not all cases.

CRANE: We have already done a significant amount of emissions reductions on the coal plants here in Utah. In fact, if we look since 2005 through 2014 for SO2, NOx and particulate matter, our investments have reduced the overall emissions from our plants in Utah by 58 percent. And so we have achieved the requirements under the current regional haze regulations.

The risk and concern is that from a federal and a societal level, there is a desire to go beyond the regulations. And that’s really where I think we are at right now with the regional haze state implementation plan. The state achieves what the regs require, but the process has a potential to overreach. I think we, coupled with the states, have done our societal and sustainable obligations and objectives, and met those goals. We now need to make sure that the process stays fair and balanced.

The Clean Power Plan is really a longer-term issue, although everyone wants to make it a shorter-term issue. It’s a longer-term issue to manage compliance. That ship has yet to fully sail and it’s currently in abeyance. We need to use our time wisely now that we have a stay in place and make sure that we are still focused on sustainability and long-term transition, but that we do it in fiscally responsible way—not just environmentally responsible, but a balance of a fiscal and environmentally responsible way.

J. BROWN: With the recent Gold King Mine spill, post-mining closure, financial assurance has been a concern. It’s that care and attention. We just need to stay diligent and make sure that realistic and reasonable ends are obtained.

L. BROWN: We all want clean air and clean water, but the potential for overreach is certainly there. And the discussion around some of the facts is sometimes blurred. We have the best intentions with our regulations as a society, but by way of example, the new EPA methane requirements are going to be brutal on the oil and gas industry. And it’s coming at a time when these companies in the energy sector don’t have the budgets to deal with it. We could create a situation where too much regulation could literally shut down some of these companies, and then we will have a skyrocketing impact that could doom oil and gas, versus the more level growth we would like to see.

SIMMONS: The regulatory environment for energy and mining is especially tricky in Utah because 70 percent of Utah is owned by the Federal Government. Significant portions of Utah are owned or controlled by the native tribes. And so not only do you have to negotiate your standard regulations, but you have to negotiate different owners of land. When you are trying to do an infrastructure project, whether transmission or pipelines or roads, sometimes you cross multiple jurisdictions which have different regulatory requirements.

CLERICO: Regulatory uncertainty is an issue. With regulations deciding where, when and how to deploy capital, if you don’t have certainty in certain regulations it makes it very challenging to want to deploy that capital.

We submitted an application for a utility right-of-way to the BLM in November 2012. Our draft DIS has been sitting in DC since last October, and it is just not moving anywhere. That’s regulatory uncertainty. There’s no clear end to the process for us at the moment.

And as we move forward with legal challenges to the Clean Power Plan and to the Waters of U.S. ruling, it is very difficult to know what target you are trying to hit. Now there are new mitigation policies that the Department of Interior is putting out. So the rules that we started with in 2012 aren’t the same rules today. One of the real challenges we continue to face at the federal level is that it’s a moving target and a lack of certainty.

WALKER: Education plays a key role in the regulatory side of things. As rules and regulations are developed, the lack of education to the general public can create a real problem. Because you’ll have these environmental groups that are educated on the issue, but just enough to be dangerous, where the general public doesn’t have any idea. And then the general public starts to talk to their legislators and elected officials who then have to talk to the regulators. And the information is not being disseminated in a way that the general public can understand these issues and allow regulators to do their job. Because they know the industry. But then they start getting pressure from elected officials, and that really puts a cog in the wheel in allowing regulators to do their job.

J. BROWN: Mining is always a great thing for environmental groups to go after. Kennecott is a large mine near a large city. And in looking at the environmental aspects of solar or driving a hybrid car, many people don’t realize that there’s six times more copper in a hybrid car, or a large wind turbine has roughly 6,000 pounds of copper. So there’s work for us as an industry to be better at showing the synergies and how we help in some of the solutions people are looking to obtain.

LOCKIE: In working with the Utah Petroleum Association, I have noticed that the environmental groups are taking a different tack. Instead of going after regulation, which is the last big effort with cap and trade, now they are trying to say we don’t have moral legitimacy to actually have our business. I think you were seeing that in Colorado when they were going after the fracking, because what they were trying to say is, “You don’t have the right to do this, even if you meet the regulation.”

What we have decided to do is—and it goes to education—is to go to the local municipalities, so we can generate credibility there. So when we start talking about our moral ability to do work, or have a business, we have actually been able to get them on our side.

We had an incident in the spring of 2014 where we had a tank that overpressured. And our single biggest supporter when people came after us was the Woods Cross city council that stood in the gap because we had generated credibility with them. They knew we were telling the truth, and so they worked with us to overcome all the negative press.