On March 11, the Federal Energy Regulatory Commission (FERC) denied an application by Pacific Connector to construct and operate a 232-mile pipeline, which would have completed the supply chain of natural gas from the Piceance Basin in western Colorado, to Jordan Cove in Coos Bay, Oregon. With the denial of the pipeline project, the FERC also denied the related application by Jordan Cove LNG to construct and operate the proposed $5.3 billion gas export facility known as the Jordan Cove Project.
Veresen, Inc., is the project’s principal contractor with plans to build a terminal to export liquefied natural gas (LNG) to Asia.
In the order, the FERC applied its “Certificate Policy Statement” in which “the Commission balances the public benefits against the potential adverse consequences.” In this case, the FERC focused primarily on the impacts of the Pacific Connector Pipeline over the impacts of the natural gas terminal. The Pacific Connector Pipeline would cross over 157 miles of privately owned lands. A majority of the approximately 630 affected landowners have lobbied against the project for more than a decade, citing various negative economic and environmental consequences.
The FERC acknowledged that the best way to demonstrate need for the project is through evidence of long-term service agreements. But Pacific Connector had provided only non-binding term sheets that might eventually lead to service agreements, and thus no evidence of a demand for liquefied natural gas in the Asian market. For those reasons, the Commission found insufficient evidence of need to justify giving Pacific Connector the power of eminent domain.
Lacking enough evidence of a public benefit, the pipeline application was denied and without the pipeline, that meant the Jordan Cove liquefied natural gas terminal would not be viable.
The FERC order clearly demonstrates that if eminent domain will be necessary in order to take private property rights, a higher threshold of need and public benefits must be required to overcome the taking of those private property rights.
I should say something here about the irony of the FERC making the argument against the “taking of property rights” as the reason to deny the LNG pipeline and terminal facility versus the oil & gas industry consistently and repeatedly making a similar argument against the “taking of mineral rights” as a reason to oppose fracking bans — but I won’t.
The FERC’s decision should have been the end of it. But it wasn’t. There are loopholes. Of course.
The companies involved in the application process have 30 days from March 11 to file for a rehearing. The FERC also left the door open for future applications with this final caveat:
Our actions here are without prejudice to Jordan Cove and/or Pacific Connector submitting a new application to construct and/or operate LNG export facilities or natural gas transportation facilities should the companies show a market need for these services in the future.
Supporters of the project called the FERC denial a bump in the road and vowed that Jordan Cove was not dead in the water. Living in the gaspatch you quickly learn the oil & gas industry’s motto: “Never take ‘no’ for an answer.”
Last week Jordan Cove LNG and Pacific Connector announced plans to seek a rehearing on their applications. Jordan Cove LNG spokesman Michael Hinrichs insisted they are working with potential customers overseas to reach agreements.
This week, Veresen announced the signing of a preliminary agreement with JERA Co, Inc., to purchase 1.5 million tons of LNG per year, for 20 years.
In a press release, Veresen president and chief executive Don Althoff said: “This agreement signals strong market support for the Jordan Cove LNG project from the world’s largest LNG buyer and represents a significant step forward in the project’s development. We are pleased to have JERA as our first customer and look forward to deepening our relationship with them as we continue to progress Jordan Cove LNG.”
JERA Co. Inc,. is a joint venture formed in April 2015, by Japan’s biggest power companies, Tepco and Chubu Electric Power. In February 2016, JERA joined in a memorandum of understanding (MOU) with the world’s biggest LNG customers, Korea Gas Corp. and China National Offshore Oil Corp. to create an alliance of buyers that will represent more than one-third of the global liquefied natural gas procurement and investment market.
The digital ink had barely dried on the virtual agreement between Veresen and JERA and supporters were already salivating over Tepco’s protégé swooping in to rescue Jordan Cove.
The Daily Sentinel reported:
… David Ludlam, executive director of the West Slope Colorado Oil and Gas Association, hailed Tuesday’s announcement involving what will be the world’s biggest LNG buyer in the country that is the product’s biggest consumer.
“If the pretext for denying the permit is truly about demonstrating demand then there’s no better customer in the world to do that. This is a marquee customer. You couldn’t bring a more viable, creditworthy customer to the LNG table than this one,” Ludlam said …
… This week, local project supporters, including representatives of Club 20, Associated Governments of Northwest Colorado, the Grand Junction Economic Partnership, the Grand Junction Area Chamber of Commerce, several local counties and the city of Grand Junction, urged U.S. Sen. Michael Bennet, D-Colo., to address the issue via video teleconference at CMU April 19. Bennet has been a project supporter.
The supporters said in their letter, “We believe Jordan Cove LNG has been treated differently in the FERC hearing process compared to other export project applications despite the tremendous regional and national benefits. We believe, as ranking member on the U.S. Senate Subcommittee on Energy, Natural Resources, and Infrastructure, you are in a unique situation to help assure Jordan Cove LNG receives fair consideration during their rehearing, and that the only viable LNG export project on the West Coast is brought to fruition.”
In a prepared statement, Bennet called the JERA deal “encouraging news for Jordan Cove and Colorado’s natural gas producers. Jordan Cove’s agreement … with JERA Co., Inc. would represent approximately 25 percent of the terminal’s capacity and could be helpful to moving the permitting process forward. The export terminal would help create new markets for natural gas producers in Colorado and support local economies.”
Someone ought to tell Senator Bennet that thanks to tourism and pot taxes, Colorado’s economy has never been better, in spite of a depressed market and the reduction in oil & gas drilling.
The popping of champagne corks is definitely premature. Even with this flimsy agreement, the Jordan Cove Project must still overcome major hurdles, not the least of which is that stubbornly depressed market for natural gas.
Then there’s the matter of the preliminary agreement, which is just that – preliminary – and therefore subject to regulatory conditions of approval.
Even though Veresen signed a preliminary agreement with JERA, it still needs to negotiate a tolling agreement and price agreement. In the energy sector, a tolling agreement is a contract where one company is the toller – Veresen – that provides another company – JERA — with natural gas to be converted into LNG on their behalf. The tolling agreement is a common financing method for natural gas liquefaction facilites.
Chris Cox, an analyst for Raymond James, said a note to investors that Veresen’s agreement with JERA was “encouraging” but more work needs to be done, most of all finalizing a tolling agreement with JERA.
Cox wrote: “This agreement only covers a quarter of the capacity of the project, so there is still a great deal of commitments that are likely needed before the company can show sufficient commercial support to justify FERC changing its ruling.”
Cox was referring to the gaping hole in Veresen’s numbers game. Jordan Cove’s initial design plan projects a capacity of 6 million metric tons of natural gas per year, but the JERA agreement only accounts for 1.5 million tons per year. So Veresen still needs to scramble for customers for the 4.5 million tons of leftovers.
Managing to skirt icky terms like “private property rights” and “eminent domain,” Cox addressed the problem of those pesky landowners this way: “While a lack of commercial support was a key sticking point in the FERC ruling, it was not the only issue raised, so it is not clear to us how successful this announcement might be in Veresen’s appeal of the ruling.”
Petroleum and energy expert Art Berman has never been a fan of Jordan Cove and he remains steadfastly unimpressed with the project saying, “Whenever I look at them, the economics are marginal to non-profitable. The announcement today is largely symbolic.”
According to Berman, the combination of liquefaction, processing, transportation and supply costs would mean that JERA would have to charge their customers more than the current Japanese LNG spot price of $7.50 per MMBTU.
“They say they have a deal, but until they have a purchase agreement, they have nothing,” Berman said. “The devil is in the details and as they’ve stated, I remain skeptical.”
In an email to the Daily Sentinel, Jody McCaffree, executive director of Citizens Against LNG, summed up the deal with a warning for JERA: “Knowing the permitting, landowner, environmental and safety issues that Jordan Cove has not yet overcome after 12 years of scheming and trying, I would question anyone who would think that this is a viable project. Just wait until JERA does their own research. JERA best be paying attention or they could be in for Hard Times in Paradise. The Jordan Cove project is one of the worst-sited LNG export proposals out there. Best to run, run away as fast as they can.”