Need or Want? LNG and the FERC Certificate Inquiry

A key focus of FERC's Notice of Inquiry (NOI) regarding its Certificate Policy Statement is how FERC should determine which projects are needed, as opposed to those which developers simply want to build. In the past, failure to meet the need requirement, when balanced with potential environmental impacts, has rarely led to direct project viability problems. Possible changes stemming from the NOI have led to increased anxiety for some developers.

Veresen's Jordan Cove LNG Terminal and Pacific Connector Pipeline failed the current Certificate Policy Statement balancing test and were denied by FERC in 2016. Despite that denial, Veresen chose to refile. In light of the FERC's review of its Certificate Policy Statement, including the methodology for determining need, will Veresen's attempts to remedy its issues be sufficient to pass muster with FERC? And how will this review impact other pending LNG/Pipeline combination projects?

What Changed for Jordan Cove?

Veresen's Jordan Cove LNG Terminal and Pacific Connector Pipeline are now under review for the second time. The FERC initially denied the projects for failing to secure sufficient agreements with shippers. In particular, the agreements that the developers secured were largely with affiliates that had entered into agreements relatively late in the project's review.

Veresen appears to have taken an aggressive approach to the resolution of its issues. Not only does the proposed terminal have an increased liquefaction capacity on the second go around, it has secured over 95% of the capacity on the Pacific Connector Pipeline. The original terminal was designed to take in 0.90 billion standard cubic feet per day (Bscf/d) of natural gas, but the recently filed proposal is designed to receive a maximum of 1.2 Bscf/d. Similarly, the developer increased the capacity of the Pacific Connector Pipeline to meet the needs of the terminal. The pipeline itself will remain about 230 miles in length and 36 inches in diameter.

Demonstrating Need

In its most recent Certificate application, filed last September, Jordan Cove provided that it continues to negotiate definitive liquefaction tolling agreements with two large LNG purchasers and is in active discussions with other potential tolling customers. Specifically, Jordan Cove has finalized the key commercial terms with JERA Co., Inc. for the sale of at least 1.5 mtpa of natural gas liquefaction capacity for an initial term of 20 years. JERA is a joint venture of Tokyo Electric Power Company, Inc. and Chubu Electric Power Company., Inc. According to Veresen, "TEPCO and Chubu are the first and third largest electric utilities in Japan, which is the largest LNG market in the world, and JERA is the world's largest purchaser of LNG."

However, the only holder of capacity on the related pipeline, Pacific Connector, is the LNG facility, an affiliate. Having an affiliate subscribe to the capacity on the pipeline is consistent with the practices of other industry players, such as Cheniere and Sempra, which, through affiliates, are involved in the entire chain of LNG production from purchasing the gas in the field, transporting it to the liquefaction facility, and selling it as LNG.

At this point, FERC has not sought any additional information in the form of a data request regarding Veresen's project need.

NOI Impact on LNG

The NOI called for comments on virtually all parts of the FERC's review process. Specifically, the NOI seeks input on whether, and how, FERC should adjust its methodology for determining whether there is a need for a proposed project, including the Commission's consideration of precedent agreements and contracts for service as evidence of such need.

It is unclear what, if anything, the FERC will choose to do following the close of the comment window on June 25. A central issue will be whether FERC will delay review of these large LNG projects and their related pipelines until it can consider the issues raised during the comment period. The further along a project is in the review process may help shield it from any changes made to the policy, although projects, such as Sempra's Port Arthur LNG, which filed in November 2016, but have not yet received an environmental review schedule from FERC, are likely anxious. Given that Jordan Cove is the project that most recently began the review process, it could once again find itself being adversely impacted by any changes in FERC's need assessment