04 Apr How FERC has bent the LNG sector
I’ve not been too alarmed about the number of LNG projects falling by the wayside of late. Low oil and gas prices provide just the right kind of Darwinian process by which only the very best projects get sanctioned. But the situation with one particular project is very curious. Here’s why.
The Project In Question
Jordan Cove LNG is one of those nifty US LNG export projects intended to take advantage of the near worthless low cost gas supplies in North America. Uniquely, it was to be placed on the Oregon coastline, which gave it low cost access (ie, no Panama Canal fees and quick Pacific transit) to the desirable Asian market. A new gas interconnect pipeline would be required to connect the plant to the existing gas network, which was part of the application. The project would ship 6 million tons of LNG each year.
Of note, it was going to source mostly Canadian natural gas, not US gas, which would be shipped using existing cross border pipelines. Canada has been historically a key gas supplier to the US, and by creatively using Canadian gas, the project would not impact the domestic US gas market. Canada’s surplus gas (and there’s lots of it), is effectively stranded now that the US is awash in its own shale gas supplies.
Jordan Cove had secured permits from Canada to permit the export of gas to the US and from there overseas, and permits from the US Department of Energy to ship Canada’s gas to non Free Trade countries (an odd thing – can the US block the shipment of Canadian gas to countries it doesn’t trade with?).
Oregon had zoned the land on which the plant and its related power infrastructure would reside as heavy industrial, and provided permits for any air emissions. The project had secured some initial expressions of interest from gas buyers, but no definitive purchase and sale agreements.
The pipeline connecting the LNG plant to the gas network WAS a problem – without it, the plant cannot run, and the pipeline confers little direct benefit to anyone other than the plant, but does impose some measure of inconvenience to the landowners whose property the pipeline would need to cross (about 157 miles or so of private land, of which 54 of 630 landowners objected to the pipeline).
FERC denied the application on the basis that the 54 land owners would be inconvenienced by the construction and operation of the pipeline and there was not enough public benefit to offset that inconvenience.
Complications. So Many Complications
There are so many elements to this story that I don’t really know where to begin.
For the project
Let’s begin with the project. Does it go to the back of the regulatory queue? Is there a proposal repair process? FERC offers a 30 day window of appeal, but I can well imagine the other projects that have been patiently waiting their turn in the regulatory sun now insisting that their proposals receive full attention.
Sadly, this was a solid play – a big attractive Asian market, ample gas supply, ready gas sellers, low cost product, low cost shipping, FOB terms, fast construction cycle, tolling model, land and air permitted, trade permitted, environmental studies complete – and is now in some doubt. The FERC process is estimated to require a $100m budget, which may now show very little return.
Once again, a promising large energy project has been upended by a small vocal minority. Despite all the history now behind failed energy proposals, new projects still seem to get caught up in the same basic challenges.
For gas buyers
If you look at the trail of correspondence in FERC’s decision, they repeatedly asked for information on the buyers of the gas, and were repeatedly told “negotiations were on-going“. In FERC’s view, the presence of gas buyers is a clear sign of a public benefit to the project, and their absence is clearly a worry.
Surely gas negotiations with prospective customers would have been on-going for years, since the project was first discussed in 2012.
It certainly appears to me that Asian gas buyers have played a game of chicken with these new gas supplies, thinking that they could defer committing to gas projects and allow more supply to become available, and in the process transferring bargaining power to the gas buyers.
Well, FERC called them on it. No buyer, no project. Betting that American commercial interests would outweigh domestic social license concerns is a poor wager.
Then, within days of the FERC decision, a potential buyer finally shows up for 25% of the production, but frankly, I would not be surprised if FERC said “too little too late“.
For other U.S. LNG projects
Of course, this isn’t the only US LNG project. There’s dozens more. At least they now know that the precedent is set – LNG projects, even those not based on US gas supplies, must have long term signed commitments from gas buyers in sufficient quantity to offset even minimal community inconvenience, or they won’t proceed. There should be a mad scramble now among the other projects in the regulatory queue to get their customers on board. And FERC doesn’t actually say how much gas needs to be contracted. Investors and boards in those projects better be asking hard questions about off-take agreements or they will end up with a wasted investment and a lost position in the regulatory queue.
The FERC decision may also trigger contracting wars between the upcoming projects and those with uncontracted supply.
Activists have now figured out that a minimum of land opposition to pipeline feeder projects may be sufficient to derail new gas investments. First Keystone XL, now Pacific Gas Interconnect. Pipelines need to rethink their benefit statements, and invest even more time getting landowners on board.
For Canadian gas
If Canadian gas exporters harboured any hope of using existing US industrial lands and quality international ports for export, they need to think again. The Canadians have now been clearly told that the US will favour as few as 54 land owners over their relations with other countries, ignoring the hundreds of construction and operations jobs to be created, along with the tax revenues for the use of the land and port.
One of the attractive features of this project was how it leveraged existing gas infrastructure while neatly side-stepping the whole morass of social license issues on Canada’s west coast, in favour of the more entrepreneurial and industrial US west coast. It didn’t work.
The various layers of Canadian government (federal, provincial) now know that Canada alone will have to solve its export gas market problems. The US will not assist, even on what would have been attractive commercial terms. This decision should give a positive nudge to the Canadian projects awaiting the go-ahead.
For U.S. energy policy
US trade partners must be baffled by FERC’s decision. The sitting President has made it a key part of his legacy to lower GHGs by committing to changes in the use of fossil fuels, but FERC is denying access to the most expedient solution (gas as a replacement for coal) on the basis that customers must line up precisely opposite export projects. All this decision does is slow down the transition to lower carbon fuels at precisely the time when we need to speed things up. Indeed, the US rearranged the FERC/Department of Energy process last year to move the most promising projects into the FERC process ahead of the DoE process to speed up overall approvals.
The U.S. is criss-crossed with gas pipelines – there must be thousands of kilometres altogether, and almost all U.S. cities have high pressure gas pipelines just under city streets in densely populated areas – so any concerns by the landowners of possible problems would be based on infinitesimally small probabilities. The pipeline route, as they all do, would skirt any built up areas anyway. I would conclude that FERC thinks the rights of cows to peaceful grazing in the 39th most densely populated U.S. state (15 people per square km – think Big Open) outweigh any Presidential concerns for GHG emissions and the global environment.
For energy markets
This decision helps perpetuate the price linkage between oil and gas. To meet FERC on its terms, US gas buyers and sellers will continue to need to lock in long term supply contracts, and the only generally accepted contracting model is to base gas prices using some formula based on the price of oil.
If there was one feature of the US gas market highly sought after by gas buyers, it was pricing based on the oversupplied North American market, and a delinking of oil pricing from gas pricing. That’s now at risk.
So much for purely speculative LNG projects.
Where to from here?
If there’s a silver lining to the FERC decision, it would be that everything in the regulatory queue has just slowed down, which will give the market time to absorb any uncontracted supply. That will help.