Commodity Watch: The Vault Is Not Enough

<div class="grid grid--33-66-col"><div class="col"><img loading="lazy" src="/getContentAsset/061c994a-a452-418f-bfa0-f2cf3cf5c577/cb87803a-320c-480f-ab75-7b9029eaaf79/Ahmad-Al-Sati-new.png?language=en" alt="Ahmad Al Sati - insights" title="Ahmad Al Sati - insights" style="width: 180px" class="fr-fic fr-dii"></div><span style="font-size: 12px"><div class="col"><strong>AHMAD AL-SATI<br></strong>PORTFOLIO MANAGER<br><br><p>Ahmad is the President and Portfolio Manager for Gemcorp Capital Advisors LLC, based in New York.&nbsp;<br><br>Ahmad has spent most of his career in the global credit markets. Prior to Gemcorp, Ahmad was President of Pandion Mine Finance and RiverMet Resource Capital, LP - a fund focused on investing in precious metals, where he was responsible for managing the investments and the day-to-day operations of the registered investment adviser.&nbsp;</p></div></span></div><hr><p>Across Louisiana and Texas sit large salt caverns as deep as 2,500 feet (nearly the height of the Burj Khalifa). These caverns of impermeable, self-healing (as the salt self-corrects micro factures) underground chambers are ideal for storing oil. Created by the US Strategic Petroleum Reserve (SPR), the 60 caverns contain over 700 million barrels of oil used to smooth supply shocks.</p><p>As the US became a hydrocarbon superpower, the SPR has become less relevant - sales from the SRP have been used once a decade for emergencies. Yet, other commodities, with concentrated and fragile supply chains, are now as important as oil was. Thus, the US announced Project Vault to store $12 billion worth of strategic metals and minerals. The vault can act as a shock absorber because the US is dependent on third party supply chains for these products (it imports 13 of the 42 minerals key to high-tech products).&nbsp;</p><p>Like the SPR before it, this vault is an important near-term solution. Yet it won’t secure a stable supply and meet long-term need. After all, China’s dominance (and monopoly) in metals and minerals was built over decades. As an example, between 2000 and 2022, China has invested $172 billion in Africa, creating proprietary supply chains for many of the materials the world needs. Competing for resources globally, inlcuding across Africa and Latin America, will be key. The US is starting to do that.</p><p>But ultimately it was not the SPR that made a difference. It was the shale revolution. And yes, shale was helped by higher oil prices in the 2000s and the zero interest-rate policy (ZIRP) in the 2010s. But its foundation started years earlier with policies and partnerships that encouraged fracking experimentation in shale. In turn, that allowed pioneers to experiment, learn and improve – Mitchell (a fracking pioneer) spent 17 years drilling, collecting data and trying different fracking methods.</p><p>The East Shale Project in 1976 created new mapping techniques and government developed diamond-studded drill bits and micro seismic imaging, which were later used by private companies to explore and produce from shale formations. Flexible financing and risk sharing deals with DOE mitigated producer risk early on. The DOE had targeted financings to encourage drilling in the Devonian Shale, which Mitchell used to drill 35 shale wells.</p><p>Targeted tax policy was also key. The Unconventional Gas Credit (UGC) and the Intangible Drilling Deduction (IDC) both spurred production and investment in shale. The UGC was a tax credit for shale gas that remained in effect for 22 years and allowed producers to generate revenue by selling the credits for cash, effectively providing a runway for producers to try new technologies. The IDC allows drillers to deduct 100% of certain expenses such as wages in the same fiscal year, immediately lowering income tax and increasing cash flow (the lifeblood of any energy company).</p><p>Mining needs similar help (for example, NASA used its Other Transaction Authority to successfully subsidise the Falcon 9 rocket for SpaceX). The US is a continental country with significant land resources. You overlay that with American business ingenuity, and the results could be revolutionary. The best time to start was yesterday. The second-best time is now.</p>