Insider's Guide to Energy
The Energy Industry is uniquely evolving as traders are under increasing pressure to manage costs, cash, limits, and risks. The Insider’s Guide to Energy Podcast addresses current and emerging challenges business executives face daily through stories shared from peers and industry experts while covering topics such as innovation, disruptive technologies, and emerging trends.
Insider's Guide to Energy
187 - Future of Energy: Renewable Diesel, Hydrogen, and Sustainable Infrastructure
In this episode of the Insider's Guide to Energy, we sit down with John Skrinar, partner at Cresta, to discuss the critical role of renewable fuels in the energy transition. As the world shifts towards sustainable energy, John shares his expertise on the investment strategies that are driving the adoption of low-carbon fuels like renewable diesel and sustainable aviation fuel. Discover how Cresta is leveraging infrastructure and innovation to support a cleaner, greener future.
We delve into the complexities of the regulatory landscape, examining how policies like the Low Carbon Fuel Standard (LCFS) and tax credits are shaping the market. John provides insights into the challenges and opportunities presented by these regulations, highlighting the importance of understanding the evolving legal framework for successful investment in clean energy technologies.
Whether you're an investor looking for the next big opportunity, an entrepreneur in the clean energy space, or simply interested in the future of sustainable fuels, this episode offers valuable perspectives. Learn about the future of hydrogen, the role of carbon capture, and how private equity is driving the energy transition. Tune in to gain a deeper understanding of the forces at play in the shift towards a sustainable energy economy.
Meet our Guest: https://www.linkedin.com/in/john-skrinar/
Visit our Website: https://insidersguidetoenergy.com/
00:00:01 John Skrinar
Today, we make investments primarily tied to reducing the carbon intensity of molecules in the transportation, heavy industry, agriculture and waste industries. In many cases, those investments are directed at the supply chain around low carbon fuels and gases, fuel alternatives and carbon capture and use and sequestration.
00:00:25 Chris Sass
Your trusted source for information on the energy transition. This is the Insider's Guide to Energy podcast.
00:00:38 Chris Sass
Welcome to another edition of the Insider's Guide to Energy Podcast. I'm your host Chris Sass, with me as our co-host Jeff McCauley. Jeff, we're going to talk molecules today. How exciting is that?
00:00:46 Jeff McAulay
Green molecules excited to get into some chemistry and a little bit of finance.
00:00:53 Chris Sass
All right. Well, let's dive into.
00:00:53 Jeff McAulay
2nd.
00:00:54 Chris Sass
The show go ahead and bring our guests on.
00:00:57 Jeff McAulay
Wonderful. So today we're joined by John Schreiner, partner at Cresta, a PE firm focused on energy transition infrastructure. John, welcome to the show.
00:00:57 Chris Sass
1.
00:01:08 John Skrinar
Thanks, Jeff. Great to be here.
00:01:11 Jeff McAulay
So John, you've got a long background in conventional energy, alternative energy and project finance tell us a little bit about how you got to Cresta and your your journey to get here.
00:01:24 John Skrinar
Sure. Yeah. So I've been working around this, this energy broadly for for almost 20 years started focused on, you know, conventional fuels and most of the last 10 years really focusing on alternative fuels.
00:01:45 John Skrinar
I sat inside some of the largest trading houses that that, you know, Glencore, noble gun war that, you know, move molecules globally and and that's where I sort of honed my skills and and got to know these markets and the players in the markets and the.
00:02:06 John Skrinar
Policies and regulations around everything that we're doing, I sort of left that trading world in 2019.
00:02:15 John Skrinar
Started working with private equity firms around the energy transition. Larger firms that we're getting pressure from their LP's and other constituents to start to think about energy transition investments, X wind and solar. You know, looking for more higher returning opportunities.
00:02:35 John Skrinar
In that process, like sort of a two year process, I got to know Chris Roselle and the partnership group at at Cresta, they were, you know, young private equity firm, a group that had been together for 20 years and.
00:02:51 John Skrinar
They they created, they were part of a midstream company called Regency Energy Partners, and they created an entity called Wildcat Midstream and then ultimately wanted to to, you know, manage institutional capital and formed Cresta in 2016. Their first fund was a conventional energy, you know, midstream and downstream focused infrastructure.
00:03:10 John Skrinar
Fund.
00:03:11 John Skrinar
And as a young private equity firm, most of our you know, roughly 90% of our our LP's are endowments and foundations. In 2019-2020, I think they started looking at the world a little bit differently. They started thinking, is conventional energy really where we want to be invested and as cresto?
00:03:32 John Skrinar
You know, sort of went to their LP group to talk about their next fund. The feedback they got was, you know, we we actually can't a lot of us can't invest in oil and gas anymore. And some of us are divesting from oil and gas.
00:03:46 John Skrinar
And then on the other side, a lot of our commercial counterparts that Dow Chemicals and Exxon Mobiles and Marathon petroleum's of the world.
00:03:55 John Skrinar
In 2020, or by 2020, had started to think about, you know, alternative fuels, renewable diesel, renewable natural gas, carbon capture the things that we're focused on. And so it was really a, you know, a perfect mix of both the commercial side, you know the people that we work with and for telling us what they need and also the.
00:04:15 John Skrinar
The you know the investors coming to us and saying, hey, we've got a we've got to pivot a little bit.
00:04:21 Jeff McAulay
This is wonderful. So it sounds like there's a real large pools of capital that, as you said, are trying to divest from upstream oil and gas. You're coming from a background with your partners of doing more traditional private equity and now seeing that same customer, a lot of those same tools.
00:04:40 Jeff McAulay
Being able to be put to use in unconventional areas, so not the solar and wind that are basically low yielding. You started to get into a few things in that category. Renewable diesel, diesel, renewable diesel, renewable, natural gas.
00:04:53 Jeff McAulay
Guess what else is in that category? Ammonia, hydrogen, CO2. And then what? What's the opportunity here to seek higher yields? A lot of these are still relying on green premiums. So I want to get into that next. But first, help us.
00:05:10 Jeff McAulay
Figure out what's.
00:05:10 Jeff McAulay
In the category, yeah, look.
00:05:12 John Skrinar
I mean, I think for us.
00:05:13 John Skrinar
It's any kind of molecule that.
00:05:18 John Skrinar
You can where you can lower the carbon intensity so again that could be it could be gasoline. That's a that's a harder nut to crack, but it could be gasoline, it could be diesel, it could be jet fuel, it could be ammonia, it could be hydrogen, it could be methane, it could be, you know, any any number of of things, right.
00:05:38 John Skrinar
You could be displacing.
00:05:41 John Skrinar
Fuel use in a factory with thermal batteries right? For us, that sort of falls in in in our categories you could be using waste streams and using them as fuel to displace coal in cement kilns, right? So there's.
00:06:01 John Skrinar
There's a lot of applications that we're that we're evaluating, but I think for us it's finding ways efficient, you know, capital efficient ways.
00:06:11 John Skrinar
Efficiency through thermodynamics that you're using lower carbon to intensity fuels or lower carbon intensity sources of power to to to to run your businesses.
00:06:26 Jeff McAulay
You've been in this sector a while, so I'm sure people with longer memories listening will immediately think of.
00:06:32 Jeff McAulay
The first generation of biofuels and you've seen that. So why is this time different for people who remember, you know, RS2 and ethanol and biodiesel? Now it's rebranded. Is there something new and exciting or is what's going to prevent you from having a rehash of the first generation of biofuel?
00:06:53 John Skrinar
Yeah. Well, I mean, I think most people when when you, when you think about that first Gen. most people go immediately to ethanol and I think there were a lot of private equity firms and banks that lost their shirt and ethanol, it was it was easy to build an ethanol facility.
00:07:12 John Skrinar
Relatively easy to build an ethanol facility. You could put 100 million gallon.
00:07:15 John Skrinar
Facility up for.
00:07:16 John Skrinar
For, you know, relatively short capital.
00:07:20 John Skrinar
And there was a lot of incentives through the Energy Policy Act and others that that drove a proliferation of of corn and and ultimately ethanol. And so candidly, I don't know that there's that much difference between First Gen. you know, policy backdrop.
00:07:39 John Skrinar
And 2nd Gen. policy backdrop, we've seen state level policies certainly emerged, right, California, Washington, Oregon, New Mexico versus Colombia and now Canada. As a country, there's pending legislation in New Jersey and New York and others. And so you know, I don't, I don't think that it's all together that much difference I think the.
00:07:57 John Skrinar
The capital requirements to build an ethanol facility versus a renewable diesel and sustainable aviation fuel facility are wildly different, right? I mean, you're talking about now the replacement cost for a sort of, call it, world scale 20 to 25,000 barrel a day.
00:08:17 John Skrinar
Renewable diesel facility is going to cost you somewhere between 2 1/2 and.
00:08:21 John Skrinar
$3 billion, that's.
00:08:23 John Skrinar
Wildly different than an ethanol plant that's doing.
00:08:28 John Skrinar
You know 7 or 8000 barrels a day sort of 100 million gallon type.
00:08:31 John Skrinar
Type.
00:08:31 John Skrinar
Scale. So I think there there is a I think there's a perception that the renewable diesel market was a was sort of booming from 2019 to 2023 and there was certainly a lot of of you know.
00:08:48 John Skrinar
Production capacity that was added as we launched our fund and made our investment.
00:08:53 John Skrinar
At Brea, Newfoundland, there was probably a billion gallons of domestic US production capacity. New North American production capacity. Even now we're looking at 5 to 6 billion gallons of production capacity. So you could say that that's been that's, you know, expanded rapidly. And I think there's.
00:09:04
For.
00:09:12 John Skrinar
You know some questions on whether the EPA has the gumption to go and continue expanding the the the RFS.
00:09:21 John Skrinar
I think that also depends on the administration and certainly on Congress and now it's the courts are are looking at like what, what power do they have the you know the Chevron decision may change things as you as you look into the future. But ultimately I think the difference between 2024 and 2005.
00:09:41 John Skrinar
From my perspective, is.
00:09:43 John Skrinar
A lot of.
00:09:45 John Skrinar
The users of fuels, the Amazons, the FedEx is the UPS's. The microsofts. Now any large corporation has made you know they've made a lot of of bold claims about lowering the carbon intensity of their operations. Obviously it's easier for Microsoft to do that than it is for FedEx.
00:10:05 John Skrinar
To do it.
00:10:06 John Skrinar
But they've all made a lot of, you know, claims that they're going to in commitments to do that. And I don't really see them backing off those commitments. I don't think we've seen a lot of that. I think we've seen people recognize that. Ohh, maybe you know these sort of.
00:10:22 John Skrinar
Tools that we were using aren't the right tools, so we're going to pivot and you know, I think Google recently announced they're just going to focus on CDR's and that's going to be the only tool they use to to whether it's actual fuels or CDR's carbon dioxide removal. You know, sort of certificates or however you want to classify that.
00:10:43 John Skrinar
And and so I think those types of changes are happening, but I don't see those commitments being rolled back. And I think you know our our sort of position has been.
00:10:53 John Skrinar
If you feel like the cost of greenhouse gases.
00:10:57 John Skrinar
Is going to be lower in the future. We're probably not the right place for you to to invest with if you think that ultimately over the long term, the cost of greenhouse gases, whether it's on a societal basis or on a tax basis or on just a, you know, fungible basis is going to be higher than the things that we're doing are probably.
00:11:17 John Skrinar
The the right place to be to be, you know, exposed to.
00:11:21 Jeff McAulay
Yeah, I definitely want to come back to the EPA and court. That's a that's a whole can of worms. It's like, no, it's it's important. And I do want to come back to it. But first maybe just clarifying biodiesel versus renewable diesel for the audience, because there are differences. And then?
00:11:26 John Skrinar
A different podcast.
00:11:41 Jeff McAulay
Go into. You mentioned the LCFS regulations. So just highlight what that means, why you think it's so impactful that the state level and the fact that it's growing.
00:11:50 John Skrinar
Sure. Yeah. Well, look, I and I think I, I I sort of.
00:11:55 John Skrinar
Left it off as I started talking about ethanol, but ethanol and biodiesel as first generation biofuels were really blend stocks. I mean, there are certainly some E85 vehicles and I know in Brazil there are some, some cars that run on 100% ethanol, but for the most part as part of our fuel pool broadly.
00:12:14 John Skrinar
They are blend stocks. They're, you know, you're putting in a 10% or maybe even a 20% blend of biodiesel into heating oil or diesel blends. You're putting 10%, maybe 15%. And obviously, again, in certain cases, 85% ethanol into gasoline blends. But you know, I think our our our ethanol blend and don't quote me on this, but to me, I think it's now like.
00:12:34 John Skrinar
11 or 12% across North America and so you know there's that. That's the kind of impact that those have when you think about renewable diesel or sustainable aviation fuel, they could be drop in replacements, right, so in California.
00:12:51 John Skrinar
We've seen over the last five years the share renewable diesel share of the diesel pool increased wildly. I mean, again, I I don't have the numbers at my fingertips, but I'm pretty sure it's close to 60% of the diesel pool in California is renewable diesel. That means that conventional diesel.
00:13:08 John Skrinar
And I think there's also still maybe 10% biodiesel getting blended. That means conventional diesel is probably around 30% of their diesel.
00:13:15 John Skrinar
Cool 10 years ago, if you said that, I think people would have looked at you cross eyed and and said there's no way that's going to happen. So it's happened and I think you know then the the the obvious sort of questions and criticisms are well, you know the California policies have have have increased prices and have have made these fuels.
00:13:35 John Skrinar
Force these fuels into the market, but at a cost to the consumer, and I think we've seen a lot of studies come out that say the LCFS.
00:13:42 John Skrinar
As a program has only added about $0.20 a gallon to the cost of fuels in California and voters in California have supported this. I mean, this has been they've supported it through who they've elected into their, you know, State Congress, they've supported in the bills that they've stood behind. So you know, if you live in California and you want fuel.
00:14:02 John Skrinar
There's a little bit of a premium. There are other things that that make California fuel expensive. There's a lot of taxes on their fuels, right. But if you think about the LCFS program as a whole.
00:14:12 John Skrinar
The numbers are pretty well tracked and it's about $0.20 a gallon. It's probably even less now given how low LCFS prices have been with the proliferation of all these fuels that we've seen between RNG and renewable diesel and and and things like that.
00:14:26 Chris Sass
Now do do folks realize that they're using this fuel, or is it just since it's drop in, do you realize it's any different when you go to the pump?
00:14:34 John Skrinar
Yeah, I mean.
00:14:34 John Skrinar
You have to label it right. I think California is pretty pretty clear about that. You can't just put it in there and pretend that it's something that it's not. But but again, I think most people in California are are OK using this.
00:14:47 John Skrinar
It performs the same or better and it and it and it, you know, it is making an impact, right? It is lowering the emissions. If you look at California's emission profile, it's lower than than any state on a, you know, on a you know per gallon basis.
00:15:03 Chris Sass
What is that doing for our demand for oil globally and from the US?
00:15:07 Chris Sass
This market regionally, are we seeing our demand going down yet or is is it, is there still enough growth that it's offset by the renewables being built or used?
00:15:17 John Skrinar
I'm not seeing oil demand declining. I mean, I think there's every every couple year there's a call that that we've hit peak oil, but.
00:15:27 John Skrinar
I see demand continuing to rise. I mean obviously you've got COVID and and you know the fluctuations around that. But if you look on a on a much longer scale, it appears to to be like to Crest it broadly that that oil demand has has continued to grow.
00:15:42 John Skrinar
Now part of that is from developing countries that don't have the ability to to blend in renewable diesel or ethanol even. But I think broadly we're seeing oil demand increase, right, so.
00:15:54 Jeff McAulay
So let's talk about the green premium, because it sounds like the good news is these next generation of fuels are drop in placements, but especially in things like sustainable aviation fuel, there's not a real path as I understand it, to get to parity with existing fuels. Is that tolerable because it's a?
00:16:14 Jeff McAulay
Small amount of the the blend. Or do you see a pathway to that converging with market price?
00:16:22 John Skrinar
Yeah, I mean, look, I think if you there's a bunch of different ways to rank this stuff, but if you rank what's the highest and best use of biogenic oils and that could be used cooking oil, soybean oil, talos canola oil, corn oil, right, it could be any of those types of products. But what's the highest and best use of those?
00:16:42 John Skrinar
You know, from our perspective, when you're thinking about decarbonization, it's probably jet fuel, right? Ultimately that's going to be the hardest to decarbonize. I I think we're skeptical of the idea that you can.
00:16:55 John Skrinar
Truly power 18 Wheelers with batteries and move large cargoes across the country. The physics just don't add up when you think about the the energy density of batteries versus the energy density of of diesel fuel. That could be that could be solved though right? I think we could see technological advances over the next 2025 years.
00:17:15 John Skrinar
That make that more and more likely to happen.
00:17:20 John Skrinar
Certainly it's really difficult for me and my partners to think about aviation ever being electrified just because of the, you know, it's hard to to fill up planes, tanks up with fuel and fill the the body up with with people and and baggage today as it is.
00:17:39 John Skrinar
All of a sudden you change that balance and and let's again, let's say you fix that. You've also got a bigger problem with much heavier plane planes. You've got to replace every runway in the world and you got to make them longer and made out of more, you know, more durable.
00:17:54 John Skrinar
Materials. Sorry about that, guys. And so, you know, I think for us sustainable aviation fuel it is, it is expensive and there there is a premium to it. I think there are emerging tools that are helping.
00:18:12 John Skrinar
To offset those costs, I think you've seen groups like Microsoft and Boston Consulting Group who've recently announced deals with world energy that you know or booking claim around their sustainable aviation fuel where they're saying we're going to bear the cost. This is an effective way for us to.
00:18:32 John Skrinar
To reduce the carbon intensity and meet the, you know, meet the goals that.
00:18:35 John Skrinar
We've set out for our for.
00:18:37 John Skrinar
Our GHG profile and and so I think there is a lot of different things happening. The idea that you're going to take a you know today what's a call it a $2.50 jet, a fuel and then you're going to sell into that.
00:18:53 John Skrinar
Market of $5 per gallon fuel.
00:18:55 John Skrinar
That's challenging, right? I I don't think that the consumer is going to bear that cost. Certainly the airlines can't bear that cost. I mean they run really tight margins to begin with. So if all of a sudden you double their fuel cost, which is their their largest part of their OpEx, you know we're going to have a problem. So it's not certainly without without its.
00:19:16 John Skrinar
Its potential issues, but as you pointed out Jeff, it is a really small portion of the pool today, so.
00:19:22 John Skrinar
So you know, if you said to the electricity markets in 1993 that you know 50% of your power is going to come from wind and solar at $175 a MW, they would have told you you're crazy. Like, we can't do that. Obviously, we've gotten to a point where depending on where you are.
00:19:43 John Skrinar
That's not the case. It's cheaper. So I think when we think about the world, we think about technical, you know, evolution and changes and and better ways to do things. I don't think that's any different here. I think ultimately we're going to find ways to drive down those costs, whether it's through new feedstock sources that are planted in shoulder seasons.
00:20:03 John Skrinar
Between crops, whether it's technological advances that lower the you know the the need for hydrogen or right, I mean other there's all kinds of things that you do at a refinery to make fuels. And so I suspect.
00:20:16 John Skrinar
That if there is an increase in cost in in greenhouse gases and carbon that we'll probably find a way to to reduce those costs to a point where they're palatable.
00:20:27 Jeff McAulay
Yeah. And John, you're getting into some specific examples. So maybe talk and we've talked about some of the challenges. So are there some specific projects or or plants that you're really excited about that you either have already put money in or or in late stages of contemplating it that, that show where these investments really have impact for the end user and return for the investor?
00:20:50 John Skrinar
Yeah, I mean, I I can point.
00:20:52 John Skrinar
Easily to our refinery in Newfoundland Brea. You know this is an old oil refinery that had had a hard time, you know, operating profitably leading up to COVID and then certainly when COVID hit it was it was, you know, the first refinery in the world to shut down what made it.
00:21:12 John Skrinar
A a high cost oil ref.
00:21:15 John Skrinar
Winery is sort of oddly makes it a low cost renewable diesel and sustainable aviation fuel facility, mainly because most of the Rd. and S facilities globally are, you know, depending on feedstock deliveries from from locomotives or trucks.
00:21:35 John Skrinar
Certainly some some depend on the water, but having a massive infrastructure on an island that can that can take, you know, large cargoes of feedstock. When you think about where Newfoundland is on a map, it looks like it's far away, but moving things by water is just a lot more efficient than moving things on the road or by.
00:21:54 John Skrinar
Rail and and so that large scale infrastructure at an oil refinery that had always been fed by water was an advantage rather than rather than the disadvantage as an oil refinery. They didn't have a lot of local supply of crude and they didn't have a lot of local demand. So they had to move things by water when a lot of their competition.
00:22:06 John Skrinar
Know.
00:22:15 John Skrinar
Is moving things by pipeline now Exxon, Baytown moves Permian crude in by by pipe and they move products out the colonial pipeline all the way up to New York and that's a lot more efficient than moving things by rail or or or even.
00:22:28 John Skrinar
By boat. But when you think about renewable diesel and sustainable aviation fuel, most facilities don't have those advantages. So they're, you know, they're advantage in that way. And so I think when we look at that facility, we say here's an interesting facility, it's got all the right, you know, pots and pans, we've got to spend a bunch of money to to retrofit them and change the metallurgy.
00:22:48 John Skrinar
To reconfigure it, but the bones are there and and ultimately you know this facility when it's.
00:22:56 John Skrinar
Running at its optimal level with the right feed stocks delivering into the right markets should be operating pretty close to a refinery operating cost right there shouldn't. There's no reason why we'd be too far off a conventional oil refineries operating cost. The piece that does become.
00:23:16 John Skrinar
You know, challenging is the cost of feedstocks and I think for you know for 20 years now, we've looked to predominantly soy and corn as feedstocks for, for biofuels and you know that's changing. I think you're looking at things like Camelina and I know that Camelina has been thrown around for 15 years.
00:23:36 John Skrinar
But it is starting to emerge. You're starting to see South American countries planting and being ready to harvest, Camelina. You're seeing large, you know, swaths of land being planted in the West in Montana around.
00:23:48 John Skrinar
Celina and and I think something like that where it's a shoulder crop. You can plant it between the the the soybean crop or between the wheat crop or between the corn crop and and and doesn't have any land use change impacts it can doesn't need a lot of water right you you start looking at these things that are emerging that are that are potentials.
00:24:09 John Skrinar
All of a sudden, maybe that cost of feedstock comes down to something that's more in line with with crude oil is, you know I don't, is it ever gonna be cheaper? Maybe, I don't know, but. But I think just being more in line with.
00:24:22 John Skrinar
Certainly if you if you assign a value to carbon or to GHG's that you can start to say, OK, this doesn't. This isn't the craziest thing ever. It's going to take some time to develop. But but we can probably get there.
00:24:36 Chris Sass
So what's happening in your opinion then? In the hydrogen world, I I see a lot of money. You're saying they're not going into some of these kind of futuristic things. A lot of companies and countries and investors pushing for hydrogen green hydrogen.
00:24:50 Chris Sass
What's your opinion on hydrogen, your molecule specialist? Where? Where do you think it's going?
00:24:54 John Skrinar
I think there's been a lot of hype around hydrogen for too long and I you can go back decades it it sort of comes and goes. I I just think that oftentimes the hype around what's possible with this 0 carbon molecule.
00:25:14 John Skrinar
It sounds good, but the physics just.
00:25:16 John Skrinar
Just don't. Just don't follow that story and and the reality is you've seen a company like Toyota basically start to abandon the the hydrogen fuel cell that they've for 20 years championed. It's just expensive. It's small, it's not energy dense, it's leaky. It's a hard thing to.
00:25:36 John Skrinar
To move, you know. And so I when we look at hydrogen, we're looking at.
00:25:42
You know.
00:25:43 John Skrinar
Is there a great resource?
00:25:46 John Skrinar
That can generate green hydrogen or blue hydrogen and localized and A and a significant demand pull localized right. If you can take 60% capacity factor wind, put it through electrolyzer, make green hydrogen and then use it on site.
00:26:07 John Skrinar
That's a compelling case, and that probably will pencil out overtime, certainly in the US if we get some clarity on the 45 V and you've got incentives that are there that's going to make a ton of sense. But if you've got a make take, solar panels, make electricity, turn it into hydrogen, build a pipeline and then move it.
00:26:27 John Skrinar
Turn it into ammonia and then move it through a pipeline and then turn it back. And I it's just the yield losses again the the, the, the, the laws of thermodynamics just say this isn't how this is going to work efficiently. So I.
00:26:39 John Skrinar
Think.
00:26:40 John Skrinar
Too many of those types of projects have been pursued and too many of those types of projects have been.
00:26:46 John Skrinar
Not enough of the practical ones where you're taking hydrogen in a steel making process and you're producing it locally and you're you're using it right there and you've now got a either a a green iron or a green steel or you're taking hydrogen and displacing Gray hydrogen that that's fed by, I think the the highest carbon intensity.
00:27:06 John Skrinar
Of of an oil refinery is make taking methane and turning it into hydrogen and an SMR that's like, you know, it's really it's twice as carbon intensive as the fuels that they're making or the crude oil that's.
00:27:17 John Skrinar
Going in and so then you start to think about like, what, what what could I do there if I could make hydrogen next to a refinery or near to nearby a refinery that might be impactful and that might be investable. But but the idea of, you know, trucks being fueled by hydrogen or cars or planes.
00:27:38 John Skrinar
It's just it's just challenging. I think again, it goes back to the simple physics. I'm not an engineer and I'm certainly not a physicist, but the simple laws.
00:27:46 John Skrinar
That you know, if you just pay attention to them, tell you what, what may or may not work.
00:27:51 Jeff McAulay
So John, we've got to get to a couple final questions and then we'll wrap. These are big topics, but hopefully you can help us narrow it down. So for folks who are listening, who might be clean energy entrepreneurs, maybe.
00:28:06 Jeff McAulay
Portfolio companies in breakthrough energy or some of these other leading climate tech companies. So you've said explicitly you want to be earlier stage than some of the giant funds but not yet first of a kind. So what's the right stage for these companies to approach you? You kind of hinted at 50 million to help us parameterize.
00:28:25 Jeff McAulay
What fits in your sweet sweet.
00:28:28 John Skrinar
Yeah. I think for us, you know investments anywhere from you know 25 or $30 million up to $150 million sort of fit down the fairway, right. Those are those are the types of things we can make. We've made bigger investments then we have to get creative and bring in other sources of capital and and and really.
00:28:47 John Skrinar
You know, build the capital stack around them, but but 25 to 150 is is easy for us to evaluate and and and get our heads.
00:28:56 John Skrinar
I think where we play best is with experienced teams. It doesn't have to be, you know, again, RNG was a new thing, we we backed A-Team called LF Bioenergy in 2021 of you know it was oil, oil industry engineer.
00:29:15 John Skrinar
DNA and it was dairy DNA and they came together to form a really interesting team.
00:29:20 John Skrinar
Team and and they didn't have a project. They had a single MU, but they had a they had a great pedigree and they had a great vision for what they wanted to build. That was a has been a wild success, you know, we sold 49% of that business to marathon in 2023. They're now are, you know, effectively our JV partner in that business as it continues to build out.
00:29:41 John Skrinar
And that's a model that I think for us is is very repeatable, good teams with good pedigrees that understand what they're trying to do that have a practical approach to it.
00:29:51 John Skrinar
But aren't necessarily at that final investment decision yet. They're still doing the development work they've got. You know, some of their permits, but not all of their permits. They've got some of their engineering sorted, but not all of their engineering sorted. We're great at helping them, you know, crossed that line and then.
00:30:11 John Skrinar
You know most of our capital is deployed into construction projects and that's really.
00:30:15 John Skrinar
I think you know my partners and and in my experience over the last 20 plus years is building energy infrastructure and building, you know, cryo plants and renewable diesel facilities and pipelines. I mean that you know whether you're moving crude oil or soybean oil it, it doesn't really matter, it's this, it's a molecule that's getting moved.
00:30:36 John Skrinar
Through one of these processing facilities or through a pipeline network. And so I think those are the types of opportunities where we add a lot of value and we can, we can help A-Team, you know, drag things across the line and and into realization.
00:30:50 Jeff McAulay
OK, we have to come back to EPA. So you hinted at it and maybe the way to constrain this is to have.
00:30:57 Jeff McAulay
You.
00:30:57 Jeff McAulay
Make some predictions so a lot of the things that you mentioned may benefit from tax credits, 45 Q perhaps or.
00:31:05 Jeff McAulay
4540.
00:31:06 Jeff McAulay
5X things that are that are in there, but then also other targets and regulations.
00:31:12 Jeff McAulay
Potentially at the.
00:31:12 Jeff McAulay
At a level, you already hinted that you think it's not going to be a monumental shift because one the end user adopters have their individual commitments and LCFS as you mentioned our state level. So maybe not as impacted by federal. So it seems like you have a bit of an optimistic take here. Do you wanna venture to make some predictions in the next two years?
00:31:34 Jeff McAulay
That all of the tax credits that you're looking at are going to stay in place.
00:31:39 John Skrinar
Well, I think that's a big part of our due diligence and our underwriting process is, you know we look at durable.
00:31:49 John Skrinar
Regulatory sort of framework. You know the 45 Q as much as that was an IRA sort of.
00:32:00 John Skrinar
Increase to the subsidy from $50 a ton to $85 a ton. That's an old that's a 14 year old policy at this point and it took him a long time to figure out the rules. I think it was, you know, second year.
00:32:14 John Skrinar
Their third year of Trump's presidency, when they finally said, hey, here are the rules around the 45 Q and and then of course, you know, Biden came in and and and and gave a a tremendous increase to that to that program or, you know, Biden and Congress to that program with the increase from 50 to 85. But like, that's not probably.
00:32:34 John Skrinar
Going anywhere, it's a it's well supported on both sides of the aisle. Most of the states that benefit from it are red states, so it can be politicized, but I don't think that's going to get that's going to be something that's going to get pulled out.
00:32:47 John Skrinar
You know the 45V and the 45 Z. Those were pop potatoes and and I think the the the Z is a perfect example you know.
00:32:59 John Skrinar
It's going to be subject to congressional review.
00:33:02 John Skrinar
It it hasn't the rules, you know this was passed two years ago. The rules still haven't been laid out for for the industry. So it's really uncertain what that looks like. I I'm not saying it's not going to be in place, but they were supposed to have it all sorted by the end of this year.
00:33:17 John Skrinar
They've effectively punched in on that and and so I don't, it's hard to know how that gets, you know, treated in the political, you know, landscape of the next six months. I mean, there's a, there's a binary, you know, election that's happening on November 4th. One way you know, you can probably read the tea leaves and think.
00:33:37 John Skrinar
That things will stay status quo and the other way they're probably going to change significantly, but I don't to sit here and say, well, 45 V is going to be dead if if Trump is elected.
00:33:49 John Skrinar
I don't know about that. I mean, I think that what what Exxon has said publicly.
00:33:53 John Skrinar
Is Congress passed a law and the rules were very clear and straightforward. Treasury has now taken that law and modified it to their to to, you know, to to, to meet their constituencies or whoever's been been sort of talking to them about what, what the 45 should look like. Exxon has publicly said if you.
00:34:14 John Skrinar
Go by the letter of the law and you give us a, you know, a a tax credit for reducing the carbon intensity of the hydrogen that we make. We will invest in our projects. If you change the rules and make it more difficult, we're not going to invest in our prop.
00:34:29 John Skrinar
To me, Trump's he's a pragmatic guy and and he he's a populist. He does what his supporters want him to do. And one of his biggest supporters is the oil and gas industry. And if Exxon is saying, hey, we're OK with this.
00:34:43 John Skrinar
But just don't make the rules too too difficult to adhere to. Maybe maybe that doesn't go away like some of the other things that are there. So I don't know. Again, it's really hard to predict this stuff. We try to stay away from it when we make investment decisions, it's things. Those are things that we consider as as upside cases, but to underwrite A45V at this stage, that's suicide.
00:35:03 John Skrinar
I mean, I don't like you. Might as well just flip coins for a living. As far as I'm concern.
00:35:09 Jeff McAulay
Well, John, we covered a ton of ground from renewable diesel to sustainable aviation fuel to hydrogen and now weighing into the alphabet soup of the tax code for renewable tax credits. We could, we could talk for hours on this stuff, so really appreciate your your depth of knowledge.
00:35:29 Jeff McAulay
Here, and it's inspiring to see putting real money to work in energy transition infrastructure. So thank you so much for the time today. We really.
00:35:37 Jeff McAulay
Appreciate it.
00:35:38 John Skrinar
Now, thank you guys. It's been a pleasure and hopefully we can do it again soon. Maybe we'll do it after we see some of these programs come through and and we'll see if I was, if I was even close to being right.
00:35:49 Chris Sass
I'm looking forward to that, to seeing how your predictions came out for our audience. We we hope you've enjoyed this content as much as we did making it. If you did, please don't forget to comment, get engaged in the conversation, join us on our discord channel, join us on the YouTube conversation and we'll see you again next time on the insiders guide energy. Bye for now.