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KeyBank: Strengthening Tribal Independence Through Energy Development

Achieving economic self-sufficiency plays a major role in strengthening and preserving sovereignty for American Indian and Alaska Native communities. For many tribes, natural resource development is an attractive vehicle for creating jobs, diversifying revenue sources, and generating funds for education, infrastructure, and other services. Energy operations could add billions in revenues to tribes over time, helping provide a path forward for Nations while enhancing self-determination and control.

Energy Opportunities for Native America

Courtesy KeyBank

Courtesy KeyBank

Natural resource development offers significant opportunities for Indian Country. According to the U.S. Department of Energy (DOE), Native American lands include up to 20% of the country’s known natural gas and oil reserves and almost 30% of the nation’s coal reserves west of the Mississippi. Indian Country also contains substantial potential for energy from renewable sources: The DOE estimates that American Indian land comprises 2% of U.S. property but contains an estimated 5% of solar and hydropower electricity generation potential and more than 3% of wind electricity generation potential.

Native America is already actively engaged in the development of natural resources. For example, crude oil production from tribal lands totaled 56 million barrels in 2014, an increase of 460% from 2003 levels. However, Nations have vast untapped potential: The U.S. Department of the Interior estimates that of the 15 million acres of potential energy and mineral resources in Indian Country, 86% remains undeveloped.

“Native America has the opportunity to responsibly harvest the considerable benefits of both renewable and non-renewable energy resources,” said Mike Lettig, National Executive of KeyBank’s Native American Financial Services. “The good news is that many tribes are well positioned to include energy as part of an integrated growth strategy. Successful energy development can be a significant component in achieving economic independence and improving the quality of life in Indian Country.”

Capturing the Benefits of Energy Potential—Best Practices

While each tribe’s long-term energy development roadmap will be unique to its circumstances, the following best practices can help ensure that a Nation’s benefits are maximized.

Choose business partners carefully. Energy development involves a number of parties, with each bringing specialized capabilities to the table. Unfortunately, there are many examples of promises made by business partners that have not been fulfilled. Tribes need to develop a sound organization and framework for making strategic alliances work effectively. This includes having an effective discipline for finding and selecting consultants and advisors who are steeped in the resource development issues that are pertinent to each Nation.

Select a Financial Partner With Expertise in Energy, Financial Services, and Indian Country

Financing in Native America requires a specific understanding of how to approach and manage business risks, and the tribe and its financial partner must address complex legal, regulatory, cultural, governmental, and operational issues. “Having huge reserves on tribal land is one thing, but bringing natural resources to market and monetizing them is another matter,” said Lettig. “A financial services provider should understand tribal governance and priorities and how to do business with sovereigns. In addition, a financial partner must have access to a broad range of financial tools and be able to provide practical solutions. Importantly, the financial institution also has to possess top-tier industry knowledge and expertise.”

Understand collateral and legal complexities. As noted above, having financial partners that understand the complexities of lending in Native America is essential. For lenders, the sovereign status of tribes has material implications for jurisdiction, collateral, and dispute resolution. Tribal lands generally may not be sold or encumbered, and fixed assets often cannot be reclaimed in an economically feasible manner if a borrower encounters difficulties. As a result, the process of securing and perfecting a lender’s mortgage liens on real property becomes complicated.

“Banks that are experienced in Indian Country development can help tailor business and legal mechanisms to address some of these long-standing obstacles,” said Daniel Brown, Managing Director, KeyBanc Capital Markets Utilities Power & Renewable Energy team. “The challenge is to construct a lease that’s acceptable to the capital provider in the event that the borrower encounters financial problems. For example, a tribe may have land and resources to support a solar project, but it has to know how to address collateral and other legal complexities with the private sector. Banks and tribes must work together to ensure that lenders can enforce contracts and resolve contract disputes through litigation, arbitration, or other methods of adjudication.”

Streamline the decision-making process. In the current environment, tribes need to be able to move at the speed required to take advantage of opportunities. “Today’s energy market underscores the importance of having a streamlined decision-making process,” said Nicholas Stuart, Director, KeyBanc Capital Markets Oil & Gas team. “Oil and gas prices were recently at decade lows. Many producers are highly leveraged, making their situation even more uncomfortable. These businesses need access to capital now. For tribes that are able to move quickly, there are tremendous win-win opportunities.”

View energy as a fixed investment in the budget. Tribes have a very long time horizon; energy investments today can accelerate wealth creation for tribes for future generations, producing funds to spend on infrastructure, education, and other priorities. “Tribes should try to view energy expenditures as a fixed investment where an agreed-upon ongoing allocation—either in dollar or percentage-of-budget terms—is established,” said Stuart. “It makes the investment program more predictable when everyone knows the commitment over a multi-year period, and allows the day-to-day managers charged with running these businesses to be more opportunistic.”

Use hedging tools to strengthen risk management. Energy prices can be volatile, subjecting tribes that rely on commodity revenues for a material component of their budget to be at significant risk. Hedging tools can provide tribes with a degree of protection from downside risk and bring some much-needed certainty to a tribe’s finances. A seasoned financial services partner should work with a tribe to go through budget projections to demonstrate how hedges work and what the budgetary implications are under various commodity price scenarios. A customized hedging solution can then be designed to meet the tribe’s specific needs.

Enhance sovereignty by establishing tribal-owned utilities. Natural resource development can also help satisfy tribal energy needs. Even if tribal lands do not possess mineral resources, there may be significant renewable energy potential, including biomass resources, geothermal, hydroelectric, solar, and wind. American Indian and Alaska Native communities can develop their capabilities to decrease reliance on outside suppliers, enhance energy security, lower costs, and strengthen tribal economies. By developing the infrastructure to meet their Nation’s energy requirements, tribes can reduce or even eliminate reliance on outside utilities. This keeps dollars on the reservation, which further promotes economic independence and self-determination.

The Southern Ute Indian Tribe – Planning for Independence

The Southern Ute Indian Tribe is an excellent example of how to manage resources and generate significant economic benefits for its community. Beginning in the 1970s, the Nation began to transform itself from being a passive participant in developing reservation resources to an active leadership role. By adopting a self-management strategy and reducing reliance on federal decision-makers, the Nation has demonstrated that that it is fully capable of managing its natural resources. Today, the Southern Ute Indian Tribe is the largest employer in La Plata County, Colorado, and oil and natural gas development accounts for the lion’s share of the Nation’s profits.

The tribe has expanded beyond fossil fuels into real estate and alternative energy, including the pursuit of renewable energy to serve its own power needs. With energy development as the driver of its economy, the Southern Ute Indian Tribe has been able to achieve a remarkable degree of financial independence and self-determination.

The Last Frontier: An Energy Success Story for Alaska Natives

Alaska Native Regional Corporations (ANRCs) are partnering with Alaska’s resource industries in oil and gas development projects across the state. For example, the Arctic Slope Regional Corporation is a highly successful corporation and one of Alaska’s largest employers, with a set of subsidiaries engaged in oil and gas services, petroleum refining, and several areas of government contracting. Another example of success is the Chugach Alaska Corporation (CAC), which completed large-scale construction and maintenance projects on the Trans-Alaska Pipeline. CAC is recognized as an expert in the operation and maintenance of the latest oil spill response equipment.

How Key Can Help

Key can assist Nations in every aspect of financing natural resource development. We work with tribes to gain access to sources of capital and provide advice on negotiations with third-party debt and equity providers.

With Key’s combination of seasoned bankers focused on Native America with industry and capital markets specialists, Nations are in position to take full advantage of the opportunities in America’s energy future.

For more information, speak with your KeyBank Relationship Manager or visit key.com/nativeamerican.

As a service to our clients, KeyBank is providing this brief overview to raise client awareness. KeyBank does not make any warranties regarding the results obtained from the use of this information. The information and recommendations contained herein is compiled from sources deemed reliable but is not represented to be accurate or complete. In providing this information, neither KeyBank nor its affiliates are acting as your agent, broker, advisor or fiduciary, or is offering any tax, accounting, or legal advice regarding these instruments or transactions. ©2016 KeyCorp. KeyBank is member FDIC.

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KeyBank: Strengthening Tribal Independence Through Energy Development

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