Between Pipeline and the Deep Blue Sea - LNG Driving Pipeline Developments

This week, the liquefied natural gas (LNG) industry received some welcome news. First, Dominion's Cove Point is, according to management, "essentially complete" with construction, and entering the advanced commissioning stage. Second, the D.C. Circuit removed (for the second time) the final legal snag when it ruled in favor of the Department of Energy's (DOE) issuance of export permits for the Cove Point and Cheniere's Corpus Christi LNG terminals. And, third, Cheniere put Sabine Pass Train 4 into service while construction of the remainder of the terminal continues. What do these developments indicate about LNG project risks when compared to their pipeline counterparts? And are there differences between LNG and pipeline commercial agreements, such as offtake, precedent and sales purchase agreements, that can prove problematic, especially with shifting market conditions?

Permitting Process

Differences between natural gas pipeline and LNG terminal projects are both regulatory and physical in nature. At a high level, pipelines involve a single project subject to one Certificate of Public Convenience and Necessity review before one lead agency, the FERC. But LNG terminal projects, depending on how many trains are proposed and the extent to which the location is removed from the pipeline network, may require the issuance of several certificates and DOE sign-off. Additionally, pre-filing review is required for LNG projects, but not for pipelines. Unlike pipeline projects, which routinely seek minor variances for route deviations, LNG projects may require substantial modifications. For example, two weeks ago, Cheniere's Corpus Christi Stage 3 Project proposed to change from two large trains, with gas-fired turbines, to seven smaller trains, with electric-driven


Comparative Construction Duration - Pipeline Projects and LNG Projects

Commercial Agreements

Liquefied Natural Gas facilities have a greater risk profile than pipelines, especially when it comes to their base commercial agreements. Commercial arrangements and permitting snags have led to the demise of a number of projects, including the following, which, unfortunately, will not be the last.

• Leucadia's Oregon LNG Terminal Project - after six years of review, Leucadia abandoned the project, without explanation, although it was likely in response to global market conditions and particularly problematic environmental groups.
  
• Jordan Cove and Pacific Connector Projects - FERC denied these projects because the developers could not establish a need for the project, which is typically done through binding precedent agreements. But the developers are back at it with a new application.

While both LNG facilities and pipelines are usually anchored by long term contracts, a contracting party for a pipeline almost always has an immovable asset at one end of the pipeline. For example, a pipeline supported by a single producer is connected to that producer's production area, which will exist even if that producer has operational issues or the price for the commodity changes. An LNG facility, in contrast, is typically supported by a long term offtake contract by a buyer that could easily choose another LNG facility to fulfill its needs. As a result, this dynamic creates a greater risk profile for these contracts, including one that is not necessarily mitigated the further along the project is in development, especially with changing market conditions. These risks will usually be addressed through the damages and credit requirements in the offtake contracts.