Letter #185: Wes Edens and Husein Cumber (2020)
Letter #185: Wes Edens and Husein Cumber (2020)
Founder of Fortress & New Fortress Energy and Chief Strategy Officer of Florida East Coast Industries | Duke University Energy Conference
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Today’s letter is a conversation between Wes Edens and Husein Cumber. In this conversation, Wes and Husein discuss how Wes came up with the idea for New Fortress Energy, his views on climate change and infrastructure, how he decided to go into the the passenger rail business, growth opportunities for New Fortress Energy, the future of hydrogen as an energy source, New Fortress Energy’s announcement with Fortress Transportation and Infrastructure on the power plant from GE, why New Fortress Energy is unique and how it has separated itself to make it unique in the marketplace along with what infrastructure is lacking globally in order for natural gas infrastructure to really be used in an efficient way, how the traditional big oil companies fare through all the disruption going on in the market, what kinds of companies students interested in starting their career or people looking to shift to a career in the energy market should look at, and what kind of policies Wes would advocate for to position the country in a way to make progress on key issues. They then open up the conversation to audience questions, where Wes and Husein further discuss why the US has been lagging the EU on hydrogen and which regions show promise, what sets different projects apart from others that make them want to invest in their technology, learnings from Brightline for the LA-Vegas rail project, to what degree electrification in the residential and transportation sectors out of the US prevent greater use of hydrogen or LNG affect plans for investing in the future. They end on a light note, with Wes answering a question about Giannis and the Bucks.
Wes Edens is the Cofounder of Fortress Investment Group, the Founder and CEO of New Fortress Energy, and a Co-owner of the Milwaukee Bucks and V Sports (which owns Aston Villa). Wes started his career at a savings and loans in California before making his way out to New York to join Lehman Brothers, where he became one of the youngest Partners and Managing Directors. After leaving Lehman, Wes joined BlackRock, which had just spun out of Blackstone, to lead a yet-to-be-raised private equity fund. There, he served as a Partner and Managing Director of BlackRock Financial Management, where he led BlackRock Asset Investors. He left BlackRock to start Fortress Investment Group, which became one of the first private equity firms, and the first large private equity fund, to go public. A decade after it went public, it was acquired by Softbank for $3.3bn. Six years after being acquired by Softbank, Mubadala acquired a 68% stake for a reported ~$3bn. While running Fortress, Wes also started New Fortress Energy and bought the Milwaukee Bucks. In the first five years of Wes’ ownership, the Bucks went from the worst record in the NBA to the best. Just two more years later, the Bucks were NBA Champions—for the first time in 50 years. He also started a sports holding company, V Sports, which owns Aston Villa, among other sports assets.
Husein Cumber is the Chief Strategy Officer for Florida East Coast Industries (FECI), a Fortress portfolio company. Husein started his career at the John D. and Catherine T. MacArthur Foundation, where he worked in the Florida real estate office. He then entered the world of politics, first as a member of the Jeb Bush gubernatorial campaign, then at a government relations and business development firm, where he led efforts to create Network Access Point of the Americas. After that, he joined EPIK Communications, where he managed Public Affairs and Business Development strategy. He was then named VP of Public Affairs at Florida East Coast Industries. A few years after joining Florida East Coast Industries (FECI), he returned to the world of politics, serving at the US Department of Transportation, first as Assistant to the Secretary for Policy and then as the Deputy Chief of Staff. After his service, he started and served as President of H.A. Cumber & Co., before rejoining FECI at Florida East Coast Railway, where he was EVP of Corporate Development (which had been acquired by Fortress). After a year at the railway, Husein became the Chief Strategy Officer of FECI.
I hope you enjoy this conversation as much as I do!
[Transcript and any errors are mine.]
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Transcript
Hussein Cumber: All right, perfect. Thanks, Davis, for that introduction of Wes and I. And Brian, I just want to also acknowledge you for creating such a great program on a topic that is going through so much transformation, a sector that's going through so much transformation right now. I'm excited to facilitate this conversation with Wes today. I've had the opportunity to work with Wes for a little more than 10 years now. And he's one of the rare people that has the ability to foresee shifts in the marketplace, and then to understand what those opportunities are. And more importantly, what I'm very impressed with Wes about is he's also willing to invest his capital and make sure those marketplace shifts become permanent. And so, where I'd like to start off, Wes, today, is talking about New Fortress Energy. In five short years, you started New Fortress Energy with an initial idea. We've developed it into a company that's providing cleaner energy solutions to the world. And now with a $6bn+ market cap. So let's start with how you came up with that idea, and how your views on climate change really drove you to start this company?
Wes Edens: Yeah. Well, first of all, thanks for having us on. Appreciate the opportunity to talk to you all. As Hussein said, we've been working together for about 10 years, and it was really, the work, originally, the railroad that I started with all this. Back in 2006, 2007 was the first time there was really a material shift between the cost of natural gas and the cost of distillate fuels, diesel fuels. And when you look at it the prior 20 years before that, they moved very much in lockstep. So, as oil prices went up, gas prices went up, and vice versa. When it got to 2007, they basically split apart. And I'm not an oil and gas person by training and background, but we've owned lots of transportation assets. So as a firm, we'd invested over $30bn in transportation in one form or the other. So we're focused on fuel. And I carried this chart around with me for about four or five years trying to figure out what it could mean for us. And finally, we decided to basically do something about it and take the train that we owned at the time, Florida East Coast, the freight railway, and convert it from burning diesel to burning natural gas. So as I tell our customers now, we are very much the chef that ate our own cooking first because we decided to go ahead and convert the train. And to make a very long story short, we did. So we went to the FRA, the railroad administration, we got them to allow us to burn natural gas. We had to design a tender, we had to get GE to make new locomotives, we had to do a whole host of things, all which worked out fine. One small problem at the end--there wasn't a drop of liquefied natural gas in Florida. So what liquefied natural gas is just simply, take gas, freeze it to 261 below Fahrenheit, it turns into a liquid, concentrates at 600 times, you can then ship it around, and use it, warm it up to basically turn back into gas when you need it. And so, we would talk to some of the oil companies about building us a liquefier, and that didn't go very well. They basically said if we would buy all the off take for the next 25 years, they would build it for us, which was not that helpful. So we decided to make it ourselves. Again, make a long story short, we did. It's been operating now for the last four and a half years, five years. But we found ourselves then with extra LNG. And that's when the story really begins. So I started looking around, and--in the United States, less than 1% of our electricity comes from oil. So it comes from gas and coal and nuclear and now renewables. And yet, when you look outside the borders of the country, and you look at emerging markets in particular, it's literally the polar opposite. So what you'd find is that not only are people very under electrified, and I'll talk about that in a minute, but they're also electrified with the wrong, wrong product. They've got diesel or heavy fuel oil, which is expensive and it's dirty, and it's very unstable in price. And so we decided to start a company basically to try to bring cleaner natural gas to these countries. And that's exactly what we have done. So, started in Jamaica, we're now in Jamaica, we're in Puerto Rico, Mexico, Nicaragua, eleven different countries right now. And so that's where the journey really started.
Hussein Cumber: It's great. And when Wes talks about this freight railroad in Florida, one of the things that was really important for us was not only switching from diesel to natural gas, but Florida really grew up around the railroad, as we talked about. And so the cities in South Florida, for example, the railroad doesn't go on the outskirts of the city, it goes through the downtowns of these cities. And so as we looked at the greenhouse gas emissions from the locomotives going through these downtowns, we realized that natural gas was a much cleaner burning fuel source for these trains, and--I just want to take us a little bit on a tangent before we continue on with New Fortress Energy--but, as you talked about the freight railroad, I don't want to miss out on talking about how your view on infrastructure also led us to go into the passenger rail business in Florida. And maybe you can talk a little bit about that, and how that also plays into getting cars off the road in other forms.
Wes Edens: Yeah, and it's all about sustainability, really. And so, given you look at the United States, we have perhaps the greatest freight railway network in the world, we have a tremendous highway network, and we have miserable passenger rail. So really, with the exception of the Northeast Corridor, there's nothing that's really effective or reasonable. And so, I guess about that time, it was probably 2012, I read a book. It's a book you should all read. It's called The Last Train to Paradise. It's a book about Henry Flagler, and really the founding of, him, of the railroad in Florida, which is really the beginning of the settlement of Florida. When you showed up in Florida, there was a few hundred thousand people over there. It was one of the poorest states in the union. And he built the train, basically from Jacksonville all the way down to Key West, eventually. And it really began the commerce that became fourth. When you got to Miami, I think it was 5000 people in the malarial swamp, it was the Everglades, now it's Miami. But infrastructure like a railway can take cars off the road, makes for a more efficient form of travel, is vastly cleaner. And so, obviously, the goal would be to make it truly carbon free, electrify, and do so with renewable energy, which is now the path that we're on. But the first step was just simply build the train. So, first train has been built since 1894, will be done about two years, you'll be able to go from downtown in Miami to downtown Orlando in about three hours. We think it's the prototype of what you can see in a number of different city pairs around the United States, because they're very viable economically. So in addition to building a gas, and hopefully a hydrogen business, we're building the train for this transition.
Hussein Cumber: So just going back to New Fortress Energy, I know we we talk a lot about how it's still in it's infancy stage, and there's just so much growth potential for this industry. So where do you see the growth opportunities for New Fortress Energy?
Wes Edens: Well, again, if you look of the world, so--this is an example I use frequently, because it's a telling one. So, Jamaicans use 1/10th as much electricity per capita as Americans do. Kenyans use 1/10th as much electricity as Jamaicans do. So the world is vastly under electrified. And I think it's a very, very important topic for--when you talk about climate change, you talk about sustainability, you also have to talk about economic viability. And so the first order, in our view, is democratize access to power, give people access to power in the cleanest, best way possible. And then the secondary mission is to make it all emissions free. And so that's really how we view the mission of our company. And I guess, obviously, with the topic today, will be sustainability, we'll talk about some hydrogen here in just a minute. So, when you have that, really, mismatch between populations around the world of the lack of electricity, there's an awful lot of places to go. And so we've got two terminals in Jamaica, the one in Puerto Rico, one in La Paz, which is sort of Baja California, one in Puerto Sandino, Nicaragua. There's about a dozen other countries that we're in some stage or another of development. Obviously, the more populated areas that are also emerging markets, so places like Brazil, places like South Africa, places like Vietnam, the Philippines--so those are big markets. But truthfully, every small market around the world has some level of opportunity. So it's a big, big playing field right now.
Hussein Cumber: So when Brian was doing a little bit of the intro, he talked about one of the tabletop conversations being hydrogen. And that really is one of the newest clean energy, ESG investment themes going on. And we've talked about it, how it's not just a trend but it's going to be a permanent shift, and a new fuel source. So, you started a new division within New Fortress Energy called Zero. Talk a little bit about where you see the future of hydrogen as an energy source, and how Zero will play into that theme.
Wes Edens: I did. Well, it's really interesting. So again, along the theme of--so you'll hear from people, We want power to be 100% renewable. And the beauty of renewable power is it's become less and less and less expensive. That's the good news. The bad news is, it's not dispatchable. It doesn't work when the sun doesn't shine, solar doesn't, excuse me, doesn't work when the wind doesn't blow. And so the question really is how to provide the gap when you need to dispatch power when the renewable sources don't work. And battery power today is far, far from being economically viable, so you can't just have a bunch of solar farms, a bunch of windmills, and a bunch of batteries and make the industry that is the world really work. And I personally think that the narrative around renewables is a little misplaced, because while I think they're not dispatchable power, what they may be is a source of very inexpensive power to then take the next step, which is to create very cheap hydrogen, which at the end of the day--hydrogen is, as probably you all know, it's about 75% of all the matter in the universe, so it's the most prevalent element that exists. Hydrogen: 75%, Helium: 24%, 1% other. So there's an awful lot of hydrogen out there. The challenge is that it doesn't really exist in a pool someplace, there's not an easy place where you can go take it out of the ground like you can a hydrocarbon, or even natural gas. It's tied up in some other molecular structure, the obvious one is course, water, H2O. So the question is, how do you take and separate out the hydrogen from the oxygen so you can use it? The simple example I use is an electrolyzer, is basically a, take an aquarium full of water, put in a positive electrode and a negative electrode, run electricity through it, you're going to separate out the molecules into oxygen and hydrogen--that's great. And having very inexpensive renewable power as your power source for there truly creates--than a product that is really something which is dispatchable. So, we had looked at a lot of different renewable projects and whatnot, and about a year ago, and reached the conclusion that hydrogen was going to be the key to this. And that's when I did set up this division called Zero. We hired a bunch of smart scientists, we then kind of put out a call and said, Look, if you've got an interesting technology, interesting company, Call us. We've had over 150 companies call us, we've looked at a bunch. We made our first investment in an electrolyzer business a couple weeks ago. A new company in Israel called H2Pro that we think has got a very, very interesting, probably the most efficient form of electrolyzer we've seen. So that's a good start. But it's just really beginning. But the real, the goal that I tell people, there's three things that matter about the hydrogen. It's the price and the price and that price. Because really, at the end of the day, if you can create it inexpensively enough, it'll change everything. And so that really is our focus, is to figure out who's got the best technologies, things we can bring in, look to commercialize. And we've looked at a lot of interesting things. I could talk at length about this.
Hussein Cumber: Talk a little bit about the recent announcement that New Fortress Energy made with Fortress Transportation Infrastructure on the power plant for GE, and what we're hoping to learn from that partnership.
Wes Edens: Yeah, well, under the presumption that you will find cheap hydrogen, which I think is likely, then the question is, Well, how will you use it? One of the things that's wonderful about hydrogen is that it really can exist in our existing power infrastructure. So if you take a GE turbine, and you run your feedstock as hydrogen, and all that are part of it, it burns it and has no emissions. So that obviously is a great aspect of it. That's the theory. And so what we wanted to do is actually get some field data and practice for it. So we took a power plant that was being built by a sister company of ours out in Long Ridge, Ohio, an old aluminum smelter, they were building a big power plant out there. We got hydrogen sourced from a local industrial source, we now can mix it in. And so the goal will be when that new power plant turns on about this time next year, maybe a little earlier, we will then mix in a portion of it, probably initially about 15% of the feedstock will be hydrogen along with natural gas, and we'll get some real field data as to how it all works. We're sure that it will work well, and that's great. We're happy there's assurances, but there's nothing like real data to see how it actually does work.
Hussein Cumber: Super. So New Fortress Energy is unique in that it provides the capital to build the infrastructure and then operates those facilities as well, to provide affordable power to end users. This also allows foreign governments and companies to deal with one company. And we've talked a lot about how that's really kind of--differentiate us in the marketplace where we've seen the disruptions in the energy sector. But we've also come up and said, We can build the infrastructure that's needed. So as you look globally, talk a little bit about how New Fortress Energy has separated itself to make it unique in the marketplace, and what infrastructure is lacking globally, in order to allow natural gas infrastructure to really be used in an efficient way.
Wes Edens: Yeah, we mentioned it already. I mean, again, our background, at least in part on the investment side comes from the transportation business and logistics businesses. And a logistics exercise, if there's 10 things that you need to do in order to make something happen, if you do nine perfectly, and one you don't do well, the whole thing is useless. So really, it doesn't do you any good just to one portion of it. And this, I think, is a big part of the reason why this infrastructure doesn't exist right now. So we found, is there are many people who want to do one element or another. So for example, if you're going to bring natural gas into Jamaica, you need to get the gas from somewhere, you buy from a liquifier, you have to put it on a ship, you have to build the infrastructure to accept it, you then have to build the infrastructure to deliver it, and you have to build a power plant. And then have the logistics package surrounding the whole thing to make that all happen. And last and not least at all, someone's got to pay for it. And so what we found is there are people who wanted to do one element, they wanted to run a ship, they wanted to build infrastructure, they wanted to build a pipeline, they wanted to run a power plant, but nobody seemed to want to do all of it. And when I look at it, I mean, some of the examples are astonishing. So the the power plant, the first power plant that we converted in Jamaica was a smallish plant by our standards, so 120 megawatts of power, it was built as a dual fuel plant. So it was actually designed as a gas plant, built in 2001--had never had gas. They'd been burning diesel on it. And we won the tender, I guess, in 2015. I think that's right, the years fly by, and turned on the gas about a year later, or two months later. And if you looked at the prior five years, had they burned gas at the price we were delivering, versus diesel, the price that they were using, it would have saved about $350mn. And so you look at it, you're like, Gosh, the numbers are so big, why didn't this happen before? And the answer is they just didn't have the capital to do it. And so, the capital that was required between the infrastructure and the transportation, the ships, and whatever, was several hundred million dollars. But several hundred million dollars to save $350mn over five years, you don't really need a calculator to figure that that's a great return. That all makes sense unless you don't have the capital. And so, what I didn't really fully appreciate when we first got into it, that I have a great appreciation for now, is being able to self fund, and then we find ourselves on balance sheet, gives us both a huge competitive advantage versus other folks, and it also makes us a much, much more valuable counterparty to the government. So when the government from some country says we need power because we are underpowered, we really are the one stop shop that can then go and both design, build, operate, and pay for it. And that's really what it takes in order for it to all really work together.
Hussein Cumber: And I assume that it's--they don't have the capital, as you said. But now that climate change and greenhouse gas emissions has become a topic that everybody is talking about, it's almost like transcended political parties, transcended third world countries versus first world countries talking about it, everyone seems to be talking about it, I think that probably also helps too, is people are more open, educated, that these types of investments actually have a long term benefit to their own citizens.
Wes Edens: There's no question. Of course, a lot of these places are tourism-based economies. So Jamaica, Puerto Rico, Mexico, those are tourism based places. You go to these countries, you can look on our webpage, actually, and you see the black smoke is pouring out of an HFO power plant, it's disgusting. And I think there's a real misconception. People have said this to me. They said, Gosh, if they're in these developing parts of the world, they don't care as much about the environment, they just care about the cost and whatever. In my experience, nothing could be farther from the truth, because exactly the same. These people love their children and their grandchildren too. They want to have a cleaner environment. And they're willing to actually pay for it. And so yes, they got less means than we do as US citizens, perhaps, or other industrialized countries, but they care about it deeply. The Philippines just basically outlawed the building of any new coal plants. There's a bunch of different examples around the world for it. But really, the two things that are important are, number one, getting off the distillate fuels, getting off those liquid fuels, getting on the gas, and then introducing as much renewables as you can. And then I think the last step that will be the important step is how do you get off the gas, like what--it is a transition fuel, and I firmly believe that the transition from it will be off of natural gas into hydrogen. Then you will truly have a carbon free existence.
Hussein Cumber: So that makes me think, a natural kind of follow up to that is, how did the traditional big oil companies fare through all this disruption going on in the market today?
Wes Edens: I think they've got a lot of challenges, honestly. I think that they're big and they're industrious, and I know a lot of people in the E&P business, and they're generally people that are admirable, they're hard working, smart, entrepreneurial. The companies, when they get that big, tend to become much more bureaucratic than maybe the smaller ones. But we know a ton of people in the oil and gas business that I think really highly of. The problem is that their position is a very difficult one, because they're long a position of dealing with the hydrocarbons. And even if they have got divisions, as they all do now, that are focused on alternatives, their economic interests are very much at odds to that. And I think it's a challenging position. And I think--I was asked the other day, Do I think that it's likely or possible that the innovations in hydrogen are going to come from some of these big companies? And my answer was, Likely? No. Possible? Sure. Anything's possible. But I just think that we've got 100,000, or more than 100,000 employees, you've got all of your assets tied up in the production and management and movement and refining of hydrocarbons, and you're really trying to create something that actually is trying to put that out of business, that's a very difficult thing to manage under one roof, and that's why I think it's less likely. I do believe that they're earnestly looking to be more emissions sensitive, be more focused on climate change actions, but I think it's a tough place to start.
Hussein Cumber: So, knowing that there's a lot of folks watching this today that are graduate students, or undergrads, or alumni that are looking at being able to enter this market as this energy disruption is taking place, what types of companies would you recommend folks to look at if they were beginning their career, trying to do a career shift into the energy market?
Wes Edens: That's a good question. I think--we're in the gas to power business. I think that actually powering people is a noble exercise. I think that that's good. I do think that there will be incredible opportunities in this whole hydrogen economy. I've said this before, but I think there'll be literally trillions of dollars made in this energy transformation. The challenge today is that much of the companies that are being developed there are really startups, they're really not big industrialized companies. But one thing to think about is, I did this, actually, slide recently is, the hydrogen market today is actually a considerably larger market than even natural gas is today, LNG. So worldwide hydrogen sales, about $125bn, worldwide annual sales of LNG, about $90bn. So it shocks a lot of people there's more hydrogen sold than the other. Here's the irony of it. So hydrogen is very useful. And in the industrial forms it's used right now, it's used in two industries in particular: 1) by the refineries, so they use in their own industrial processes, so again, back to the oil companies, and 2) in the production of fertilizer in one form or another--so whether it's ammonia or urea, or whatever, but all that. Now, the way that the hydrogen is produced today is the dirtiest thing possible. It's very ironic. The cleanest fuel, but basically, SMR, which is steam methane reform, basically produces 11 kilos of CO2 for every one kilo of hydrogen. So it's 11:1 in terms of the production of it. In fact, if you take all the hydrogen that's produced today, the process to create it accounts for about 2.5% of all emissions. So a huge proportion of emissions for just the one thing. Now, I think that's going to change, and change, like monumentally. And the whole notion of you create the CO2, what can you do with it? The answer is, there's lots of things you can do with it, but at the end of the day, you have to sequester it or use it, and then make that process be an emissions free process. And then I think it changes everything. But I think looking at businesses that are going to produce or use hydrogen in one form or another, I think is a really fruitful thing. If I was 20 years old and I was mission driven about wanting to be a part of this new economy and also make money, make a living doing it, I think there's going to be amazing opportunities in this side.
Hussein Cumber: So we can't ignore the fact that there's a transition going on in DC right now. And I'll put a hypothetical on the table to kind of let you react to it, but let's assume President Elect Biden decides that he wants to create a climate change council. Says I want to coordinate the efforts from DOT and DOE and EPA, and really put a lot of focus on that, and said, Wes, I want you to come and chair this. What would be the first few policies you think you'd advocate for in order to position the country in a way where we continue to make progress on these issues?
Wes Edens: Yeah, it's a great question. I think it goes back to this issue of cost. So I'll give you an example. When you take the electrolyzer, an example I used, and define what is the best possible price you could create--the lowest possible price you could create hydrogen. So assume you had an electrolyzer that had a 100% efficiency rate, and you had 2c continual renewable power, which is pretty much the perfect example we'll use. The cost of the hydrogen created is about 80c per kilogram, without without taking into account the cost of capital it uses to create that. So by the time you put the cost of capital into it, it maybe takes it to $1.25 or $1.50 a kilogram. To convert that to MMBtu equivalents versus natural gas, multiply it by 7.5. So take the 7.5, times that 125-150, you end up at about $9.50. Well, natural gas today, if I run the power plant at Duke University, I'm probably buying gas that is Henry Hub-base, which is around $3 right now, gave us 75c for a pipeline charge of about a $3.75 versus my $9. So it's quite a bit higher. And so that's why I say the price has got to be lower. And so I'd say, with--and if you look at it, industrial uses, transportation uses, power uses, those three things together constitute about 80% of all emissions. So if you can solve those three things, in other words, if you're cheap enough hydrogen that you only use hydrogen rather than any other fossil fuel for those three industries, you've got a very long way of decarbonize the economy. So that's a really good way, the way I think of it anyway. So, 80c a kilogram, not going to be good enough. The next clip down is actually using the fossil fuels themselves as a source of hydrogen, which may sound anathema to, but actually, I think it's a really interesting concept is if you use natural gas and you do it in an emissions free way, your 80c best case goes down to 40c, or even lower. If you use coal, which is the hardest one, because coal's a very dirty product to start with, it's conceivable it's even lower than that. So those are really interesting things, just kind of checkpoints of where would it end up being on this thing. And so, I'm addressing this from a cost standpoint, so if I was working for the President, I'd say, Look, you can you can do this one of two ways. You can either subsidize the production costs of hydrogen. So he said, I'm gonna give everybody 50c rebates if they produce it, so now I've driven down the cost of it, so I am really cost competitive for the other ones, that would actually have a material impact in terms of the utility of it, adoption of it, et cetera. The other way to do it, it is more complex, but it's kind of the path they're on right now, is to impose taxes on people that are using fossil fuels. And so either you make using fossil fuels more expensive, or you subsidize the costs of hydrogen so it gets cheaper. I personally think it's easier to subsidize the production cost because it's just a simpler thing. You can't really game it. So if you, Hussein, come to the government and say, I'm producing 100 kilos of hydrogen and they're like, Great, Hussein, here's 50c for every kilo, now we've got a very simple metric to do it. You've driven down the cost, the lower the cost, the broader the adoption, the faster that people will start, and the market--and then then you just let the masses go. And everybody on this call quits their day job and becomes a hydrogen expert, and starts to use it. That's literally what would happen. Look what happened with Bitcoin mining. It became a viable thing and people stopped doing things, became Bitcoin miners. So it's a very simple thing to kind of relate to. It's a relatable process. And I think that is what I would encourage. I think that the taxation of it is also viable, but the minute that you impose taxes, what happens? People start to think about ways to avoid the taxes. And there's all kinds of behavior that goes into that that's not--it's a) it's not that productive, and b) it's complicated to keep track of and whatnot. So I would say, Look, if I was the king of the day for the hydrogen, I would say, subsidize the cost of hydrogen, and then just see what happens in terms of people getting out there and finding different ways to use it.
Hussein Cumber: Davis, I know we wanted to keep some time for questions, so I'm going to turn it back to you and have you go through some of the questions that have come in through the Q&A box.
Host: Yeah, absolutely. Thank you very much. To begin with, I'd like to stay on the topic of hydrogen and ask for a little bit of context, as your firm is a global firm. Can you provide a little bit of context as to why the US has been lagging behind relative to the EU, and if the US were to expand in this area, what regions do you think show promise?
Wes Edens: I think we have lagged a little bit, but I think it's primarily just a geography and resource issue. If you look at Europe, Europe has very little in the way of actual direct natural resources. There's about 35, 36, 37 import terminals that ring the continent to bring natural gas in, or they get pipelines that come from Russia on the other side. And so there's a lot of energy insecurity that happens as a result of that. And I just think that creates a climate where people are then maybe a little bit more focused on alternatives. They've been a real leader in terms of some of the renewables, and I think that the hydrogen then becomes a natural kind of like step on that. I don't think the US is far behind, but we obviously are blessed, or cursed, depending on how you think of it, in terms of natural resources that's probably been a little bit more of an issue. But I do think it's going to change, and change rapidly. And this is a country full of innovation, and full of entrepreneurs, and so I think our chances to kind of catch up here are actually quite good.
Host: Okay, great. Thank you. And that actually leads me to the next question I have for you, is on the topic of innovation. You had an RFP that you released where 150 organizations responded to it. What sets some of these different projects apart from others that would make you want to invest in their technology?
Wes Edens: Well, first and foremost, what I'm looking for are technologies that if they work, they're scalable. Because the best solution that is a small one is simply not that interesting to me. It needs to be something that's really material. And so we look for things that we think, if it does work, it can be scaled up dramatically, because then it'll have a chance of being effective. Many of these technologies, though, work in a laboratory but haven't been field proven. So we tell people, Look, show me your technology, we'll invest in the company, and we'll provide the capital to build a prototype so we can actually get field results on something, then see if you can take and expand it. And we've seen a lot of things. I've joked about, let's say I--when you do something as mission driven as this, and you say, Everyone come see me, I feel like I've offered to host a Star Trek convention at times. So we see a lot of people. There's a few that are pretty eccentric, but the general quality of the science and the seriousness of the people involved, the quality of people involved, give me great encouragement that there's going to be enormous, enormous innovations in this area. Because it's from all of over Earth. Climate change is not a local issue in Durham, North Carolina, or New York City, or any place else you pick. It really does strike everybody. It's clear that there's going to be monstrous amounts of innovation. There's gonna be a real transformation that's going to happen.
Host: Yeah, okay, thank you. And switching gears a little bit to some of the earlier part of our conversation this afternoon on the rail system, we have a question that says, California has faced unprecedented challenges in developing their proposed high speed rail system. Are there any key lessons learned from this example that Brightline will keep in mind as they approach the LA to Las Vegas rail project?
Wes Edens: Yeah, when we started building the railroad, and I worked on it with Hussein, we made what was a very logical decision to take an existing railway system and enhance it then to put a passenger rail in place. That seems logical because you had a railway system was there, there was a short section of the track that we didn't have, which is the Route 528 that runs from Miami up to Cocoa Beach and then you have to turn left to go to Orlando, that like stretch across, those Route 528, gonna go to the governor, they put that up for bid, we won the tender for it, we then connected to the Orlando airport, and then, respectfully, to Disney. And that seemed like a sensible thing. In hindsight, there are some good things in terms of cost mitigation, because you're using existing infrastructure, but when you use an existing rail system, you're then limited by the other people that use that rail system. So Los Angeles to Las Vegas, the bulk of the trip will be along I-15. So the median of a big highway that runs through there. And because you're running the median, you can enclose it. Because you can enclose it, you can now run at-grade, at very high speeds. So you can build a high speed, at-rail train line, which is actually great. Also, you can electrify the whole system so that you can--because in order for a system to work, everyone has to be electrified that's on it, and you're building yourself, you're doing that using existing rail system that runs on some other fuel that you can't electrify. So we're using biodiesel in Florida, which is better than than diesel, but it's not as good as electricity, that's for sure. So there's been a lot of different examples. I think the California high speed rail system, again, my two cents on it, which is about what it's worth, is, I would focus, even today, I would say, Go look at I-5, go look at existing corridors that already exist for traffic, for cars, and use those perhaps as the linkages and where you want to build this stuff. They're doing what is essentially the hardest thing possible, which is a greenfields development across farmer grounds fields. And that's challenging for lots of different reasons. And it's expensive, and it takes a long time. And I think that they could probably do a lot better than the others.
Hussein Cumber: And I'd probably add, I think one of the things that we learned is, as we looked in Europe, people don't care how fast the train goes, what they care about is how long the trip is. So nobody walks out and says I just got off a train that went 182mph, they say I got off a train that went 2H14M between origin and destination. And so what we do is actually build the infrastructure, and then have the technology that's out there run on that infrastructure, as opposed to the other way around where you see people wanting to pick the technology and say, I want a 220mph system, and if I can't get a 220mph system, then it's not worth doing. And then you're faced with the challenge of having to design the infrastructure for that train technology you've chosen. So at Brightline, we actually do it the opposite. We build the infrastructure, and then we have the technology--we procure the technology that can operate on that infrastructure. And I think that's the way the country really needs to think about how they build out these routes.
Wes Edens: I agree.
Host: Okay. And so thinking about these two concepts of transportation, and then for energy as a broader concept, to what degree will electrification in the residential and transportation sectors outside of the US prevent greater use of hydrogen or LNG? How does that affect your plans for investing in the future?
Wes Edens: Yeah, again, think of the three kind of food groups that constitute 80%. So, transportation is the most obvious because they pay the most for fuel. But it's also the most complicated because you have to then build the infrastructure to deliver it. One of the reasons I think that electric cars have been as successful as they have been is that virtually everybody has a garage, and in your garage you have a plug-in, so the infrastructure already exists for you to power up your car. With hydrogen, you have to build the filling stations for cars, you have to build it for trucks, trains, etc., and so that's just more challenging. Probably what you'll see in the transportation sector is what you've seen in the adoption of the liquefied natural gas or compressed natural gas, is, you'll pick the places where everyone comes back to the same place every night, the so called return to base users. So garbage trucks, UPS trucks, city buses all come in. That's who uses natural gas today. It would be the likely people to use hydrogen. But the net of it is, is that there's a lot of infrastructure has to be built, a lot of opportunities for people, but a lot of construction has to be built to accommodate that transportation. So I personally think that even though that's the most cost competitive part of these three, it's also probably the last one to get done kind of fully. Industrial uses, it's a plant that uses it, or power plants, it's a plant that uses it, they're in one place and they're big users, those I think you've got a much better chance of having real widespread adoption. And one of the things that's really exciting about hydrogen is--potentially--let's say that we end up with a very efficient way of making it out of water, you could put the electrolization, you could put the creation of hydrogen at the source that's using it. Because again, a big part of the cost structure of moving fuels around is the transportation of them themselves. It's not that hard to transport water, or transport other things you can use. So it's a really, really interesting and very vibrant topic, and it's a little bit of a whack-a-mole, if you hit one place and it pops up in another in terms of what it is, but at the end of the day, you're still looking for this low cost point that competes with natural gas. That's at the point at which then you get really widespread adoption for power for industrial use. I do think that it will come in transportation, but I think that's a longer pole.
Host: Okay, thank you. So maybe taking a step back now, and perhaps a lighter question, and a different hat that you wear, as a co-owner of the Bucks, I have a question from the audience, which is, What can we do before December 22 to ensure Giannis signs the supermax?
Wes Edens: I'm doing everything I can to make that happen. So we're very focused on that. That's near and dear to our hearts. I'm a big sports fan, obviously, with the Bucks and now, Aston Villa, give those guys a shout out because they're off to a great year as well. And we do employ the same exact things. We try and hire the best people possible to run it and then try and stay out of their way. It's a little hard to stay out of their way when you're rooting for a basketball or soccer team, but we're all rooting for Giannis.
Host: That's great. Well, thank you to both of you for being with us today and for sharing your insights. And thank you to everyone for joining.
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