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The Land Investor

News and Commentary on Land-based Investment

“If You Build it, They Will Come”
Conservation Banking in Wyoming

“If you build it, they will come” is a line that originated in the 1988 movie “Field of Dreams”.  This expression has since morphed within real estate circles to an expression used jokingly or sarcastically, referring to a phenomena common to speculative real estate developers’ and investors’ exuberant early project stage state-of-mind.  If you build it and they don’t come, you have a white elephant.

What if you could build it and the buyers were compelled to come?  This is the actual predicted outcome for some ahead-of-the-curve, pioneer landowners/developers of strategic conservation wetland and species mitigation banks in certain pockets of the Rocky Mountain Region, particularly within Wyoming.

This is not a futuristic or theoretical discussion to be confused with carbon markets and cap and trade.  Wetland banking has been in play in the U.S. since 1984 and species banking has been administered in part by the United States Division of Fish and Wildlife Service (USFWS) since 1995.  Today there are literally hundreds of permitted and operating wetland and species banks in the United States.

As the Niobrara shale oil producing areas within Wyoming Federal lands become increasingly attractive, the EPA/Army Corp of Engineers and the energy companies have come to loggerheads in a battle about strengthened Clean Water Act regulation of streams and wetlands.   It was reported last week  in the “EENews – ClimateWire” that energy players including Exxon Oil Corp, Marathon Oil Corp, and the American Petroleum Institute have fully geared up the legal battle against Clean Water Act rules that will increase the number of wetlands and streams subject to federal pollution regulation and permitting.

As a practical matter, the EPA and USFW cannot enforce today, without approved wetland banks in place, the purchase by oil and gas operators of wetland mitigation bank credits that don’t exist.  But as these conservation banks, that today are in the works, are permitted within the Rocky Mountain Region energy belt, and at various stages of approval, this landscape will change drastically.

Once these banks are permitted and in place as early as the 4th quarter of 2010 and others rolling out next year, the same regulators who oversaw their creation and approval, will impose these banks on the oil and gas producers as the preferred solution to mitigate impacts within the bank service area. The EPA and Army Corp of Engineers, with one hand, participates in the creation the mitigation bank credit supply, (by permitting and approving the bank), and with the other hand, creates the demand for mitigation by requiring oil and gas developers to offset their environmental impacts.  The operators can either mitigate their impacts onsite, or offsite – by purchasing wetland mitigation bank credits to offset their impacts.  From experience in other regions of the country, particularly in Florida and California, where wetland and species mitigation banking has been in practice for many years, offsite mitigation is generally preferred from both a conservation and financial perspective.  From a conservation viewpoint, larger offsite projects with entire, intact landscape-scale ecosystems, can provide superior environmental benefits than piecemeal onsite mitigation that the operator might undertake.

Concurrent to the oil industry fight with the Obama administration over its strengthening Clean Water Act regulation of streams and wetlands, there is an under-the-radar but very significant interest on the part of high net worth private investors, many of whom are significant oil and gas players, investing their own nickel in ranchland involving mitigation banking plays.  Others involved are a handful of alternative asset hedge funds but with a common thread of oil and gas players as cornerstone investors.  This is in itself an acknowledgement that the EPA mitigation offset requirements are real, and these investors are hedging their risk and ensuring continuity of uninterrupted operations.

Benefits to the oil and gas entities also include a lock in at known costs, which can create an advantage over others in competitive bidding rounds on new fields.  Wells have a life cycle and unforeseen events can occur – banked credits are a part of risk management and ensure less regulatory downtime.  Further, offsite mitigation has the advantage of larger scale and lower unit credit costs than onsite, piecemeal mitigation that could be directly undertaken by the energy producers.  Future responsibility and liability for the operation and management of the bank from the perspective of the energy producer, is severed and instead borne by the banker who is in this business.

From the landowner’s perspective, the mitigation bank boosts returns, unlocking a previously untapped component of value and revenue stream.  In addition to increased returns is a significant diversification factor.  The landowner who weighs benefits and offsets of current cattle numbers and irrigated acres/water use, may find it beneficial to cut back on livestock numbers and cultivated land in tradeoff for creating or adding scale to a conservation bank.  Then the income, which was previously solely based on cattle and hay, is augmented by revenues from credit sales and ongoing wetland bank management, creating diversity from uncorrelated income sources and broader exit strategies.  The landowner/banker can manage risk and capital by permitting the bank in such a way that the build-out is not undertaken until needed.  Banks can be phased with an umbrella agreement in place, allowing for maximum upside while controlling risk.

In many cases the build out of the conservation bank is additive to the recreational attributes and value of the property, which is icing on the cake.

Social and political policy are shifting toward recognizing the“true costs” and incorporating “honest pricing” of industrial input and output to reflect environmental externalities.  Conservation banking is a part of this process.

The 2010 American documentary film, “Gasland” http://www.youtube.com/watch?v=dZe1AeH0Qz8 , which was released last summer at the Sundance Film Festival, focused on clean water impacts on communities in the United States by natural gas drilling.  Much of the documentary’s focus was on the stimulation method known as hydraulic fracturing,  which involves the injection various chemicals and substances,  that enable the release of natural gas locked in shale formations.  The impacts of “Gasland” have been far reaching.  Many of the viewers, which included many well-known activists and actors, were dismayed to learn about the environmental impacts asserted in the documentary  to be associated with “fracking”, no doubt and ironically reflecting upon this on their private jets flying home from the Utah film festival.

This entry was posted in Biodiversity, Conservation Banking, In-Stream Flow, Ranches, Ranching, Recreational Land, Wetland Banking, Wyoming. Bookmark the permalink. Post a comment or leave a trackback: Trackback URL.

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