Analysis of Proposed Minnesota Statute/RegulationI think the proposed Minnesota statute/regulation has elements that are more problematic than some appreciate. See the bill here:
HF 3911 3rd Engrossment - 93rd Legislature (2023 - 2024) (mn.gov) Generally. Firstly, it is a good thing that Minnesota will be creating regulations that govern gas production. Otherwise, fly-by-night operators can engage in practices that can ruin the industry for all players.
Moratoriam. There will be 2+ year moratorium on helium production. Gas production will be prohibited without a permit. Gas prodution permits will be prohibited until rules are adopted. The state agency will have 2 years (from enactment of the law) to provide a "notice of intent" for proposed rules. After "notice of intent", there is still a bit of process before the rules become effective. Even after rules are then effective, it will take additional process for permits to be applied for (consistent wtih the adopted rules), processed and issued - longer than usual because the state will not have done it before. We need to adjust any production expectations we have acccordingly. Maybe the rules/notice of intent come out earler, but don't count on that.
Royalty/Economics. This is my BIG problem.
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Royalty Rate: The royalty rate is stated as 18.75%. This seems really high - the drafting legislator essentially admitted as much, couching it as "well we can start at 18.75% and see where we end up from there". However, as drafted, 18.75% is not someting that can be flexibly changed by an admistrative agency - it would be a matter of statute that cannot be chagned unless the state legislature in the future adopts a new law reducing the royalty (what are the chances of that...). Even if the royalty does adjust down in the future, it would be so far in the future so as to be irrelevant to our onwership in PLSR. I sincerely hope PLSR and other stakeholders can convince legislators to reduce this royalty rate.
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Royalty Application:
This is the BIGGEST issue. Not only is the royalty extremely high, but it is calculated based on the price actually ultimately paid for the gas by an unrealted third party. For PLSR's business plan (which includes not just discover/extraction, but processing/liquidation), this is extremely bad.
The 18.75% would not just apply to the value of the raw gas that PLSR produces from the ground, but 18.75% of the significantly higher value gas that has been purified (ex. 99.999%) and/or liquified - each of which can only be done by PLSR through complex processes and equipment for which PLSR would need to raise and invest significant resources to perform. The application of this very high royalty on value-adding processes performed by PLSR at significant cost seems extremely unfair and very detrimental to PLSR's business and economics. Conversly, if PLSR just produced the raw gas and sold it to a liquifaction plant next door someone else, then the 18.75% would only apply to the raw gas value (much lower price) and (i) the much greater value of the purified/liquified gas would transfer to the third party plant owner and (ii) the plant owner would not be subject to the 18.75% when that owners sells the higher value gas. That makes no sense.
I hope Thomas is making this argument to legislators right now - after the bill becomes law it will be too late! Not trying to be an alarmist - but this is critically important and I really hope Thomas and team are on top of this, and we all need to be aware of the associated risks. I myself have been burned before, so I really am trying to keep my eyes open here (and remain grounded despite all my innate optimism).
HH