Week Ending April 15, 2016

Jordan Cove/Pacific Connector Pipeline Joint Petition for Rehearing Puts New Evidence of Market Demand Before FERC and Disputes Basis of Commission’s Decision in March to Deny Project Authorizations

This Article Appears as Published in Foster Report No 3095
Jordan Cove/Pacific Connector Pipeline Joint Petition for Rehearing Puts New Evidence of Market Demand Before FERC and Disputes Basis of Commission’s Decision in March to Deny Project Authorizations

On April 8 Jordan Cove Energy Project, LP (JCEP)(CP13-483) and Pacific Connector Gas Pipeline, LP (PCGP)(CP13-492) filed a joint  request for rehearing of FERC’s order issued 3/11/16 that effectively denied JCEP’s application for authorization under section 3 of the Natural Gas Act (NGA) to construct and operate a liquefied natural gas (LNG) production and export facility and Pacific Connector’s application for authorization under section 7 for authorization to construct and operate a natural gas pipeline.  Reciting new developments associated with their efforts to negotiate agreements to anchor the projects, the companies urged the Commission to reverse its decision and issue the requested authorizations “because recently executed agreements demonstrate need for the project.”  Their pleading complained that requiring the applicants to go to the back of the line because the market has not produced contracts on the timetable envisioned by the Commission is “not an efficient or commercially feasible approach.”  Other parties, including various supporters of the project also filed pleadings for rehearing in the past week or so (see adjacent article).

According to the project developer filers, since March 11 five agreements have been reached which demonstrate the need for the project.   Two recently widely publicized agreements involve LNG purchases by Japanese firms, JERA Co. and ITOCHU Corp.  But according to the petition, marketer Macquarie Energy LLC, utility Avista Corp., and Jordan Cove LNG itself have contracted for 817,354 Dth/d of transportation capacity, which represents 77% of the capacity of the Pacific Connector Pipeline.  These agreements, the developers stated, “evidence a change in the facts that served as the Commission’s sole basis for rejecting” their applications, which “warrants the Commission accepting such agreements into the record and revising its analysis accordingly.”

The petitioners suggested the Commission should either issue the requested authorizations, subject to conditions, or keep the record open to receive further evidence, rather than rejecting the applications “simply because conditions in the industry, of which the Commission as an expert agency can take notice, have caused the execution of pipeline precedent agreements to be delayed.”

The authorizations should issue because the Final Environmental Impact Statement (FEIS) found no significant adverse environmental impacts and otherwise identified significant positive economic and fiscal effects.  The Department of Energy (DOE) found the project to have regional and national economic benefits, which together “outweigh the unquantified risk that the power of eminent domain might be needed to obtain some portion of the required right of way.”

The Commission should not have directed them to file new applications,  the petitioners continued, “which would likely take years to process,” in order to submit evidence regarding customers’ contractual commitments, rather than keeping the record open in order to receive such evidence.  The March 11 order suggests that to address one specific deficiency in the record to date, the parties should be forced to repeat the entire process.  There can be no suggestion that, having been through it once, the process will be more efficient and less time consuming the second time around.

Jordan Cove/Pacific Connector recommended a new approach.  “The Commission should utilize methods available to it of ensuring that the Project will not go forward without sufficient customer agreements in place, such as by conditioning the exercise of the power of eminent domain on the execution of precedent agreements, rather than rejecting the applications.”   The Commission previously has conditioned the exercise of the power of eminent domain in orders granting certificates and should do so here (Mid-Atlantic Express, LLC, 2009).

Also, the project developers insisted “it is important for the Commission to understand that the agreement between JCEP and JERA (a new Japanese client, see adjacent article) was not executed and announced” in March because of the March 11 order, but rather “notwithstanding” the March 11 order.  The negotiations had been in progress since the very formation of JERA, according to the petition.  “The signing ceremony and announcement had already been scheduled for the third week in March when the applicants, and the market, received the disappointing news of the Commission’s decision.”  JERA decided to continue with the signing even after receiving the March 11 order, according to Jordan Cove LNG.

New Deals/New Evidence.  On March 22 Jordan Cove LNG reached a tentative agreement with JERA and then on April 8 reached preliminary agreement with ITOCHU Corp. with respect to certain “key commercial terms” for the purchase by ITOCHU of an additional 1.5 million tons per annum of natural gas liquefaction capacity for an initial term of 20 years.

Also, on April 8, Pacific Connector and Macquarie Energy LLC executed a precedent agreement for 215,000 Dth/d firm transportation service.  According to the rehearing petition, Macquarie, the fourth largest natural gas marketer in the US, does not intend to subscribe for liquefaction services from Jordan Cove but is instead taking capacity on the proposed pipeline in order to serve as an aggregator of gas supplies for Jordan Cove’s liquefaction service customers.[1]

A few days before that, on April 4, Pacific Connector and Avista Corp. executed a precedent agreement for 10,000 Dth/d of firm transportation.  Avista’s electric-gas utility service reaches over 600,000 customers in Oregon, Washington and Idaho.  “The proposed route of PCGP lies in the heart of Avista’s southern Oregon service territory,” explained the petitioners.  Pacific Connector will have 40,000 Dth/d of capacity to deliver gas into the Grants Pass Lateral near Roseburg which can flow south into Grants Pass on the currently fully contracted pipeline.  “This substantial new quantity of capacity will enable significant economic development in the region by attracting new industries and providing additional natural gas to existing industrial, commercial and residential users throughout southern Oregon.”

And finally, among the key five new agreements, on April 8, Pacific Connector and Jordan Cove executed a precedent agreement for 592,354 Dth/d of firm transportation service.  The timing of the execution of this deal, the petitioners acknowledged, was driven by the March 11 order.  “It has been the expectation of JCEP that it would be a shipper on Pacific Connector.   JCEP has intended to utilize a portion of the terminal’s LNG production capacity in order to produce LNG for sale by JCEP, either at the outlet of the terminal or delivered to a foreign import terminal.”  But in addition to reserving pipeline capacity to support its own sale of LNG, JCEP “is willing to serve as an aggregator and gas supplier” to liquefaction service customers who would prefer a gas supply delivered to the plant inlet.

An affiliate of Jordan Cove has obtained National Energy Board (NEB) approval for the export of gas from Canada, and DOE approval for the import of gas into the U.S.  Another affiliate is the 50% owner of Ruby Pipeline LLC.  Given all of that, “JCEP and its affiliates stand ready to assemble whatever combination of gas supplies and transportation services are necessary to facilitate the sale of liquefaction services.”

Actually, the rehearing petition explains further that while JCEP had intended to enter into a precedent agreement with Pacific Connector to reserve pipeline capacity all along, “it was previously contemplated that JCEP’s precedent agreement would be among the last of the precedent agreements executed, after the preference of liquefaction customers for aggregation service or direct contracting with PCGP had been finalized.”  However, in light of the March 11 order, and the execution of the JERA Agreement and ITOCHU Agreement,” Jordan Cove LNG is prepared to underwrite a substantial portion of the capacity of Pacific Connector.  Thus, the agreement reserves both the capacity required for Jordon Cove to support its own sales of LNG as well as capacity that Jordan Cove can use as an aggregator for JERA and ITOCHU.

In the event that JERA or ITOCHU prefer to contract with Pacific Connector directly, JCEP will relinquish capacity committed to JCEP under this new agreement.

Jordan Cove/Pacific Connector’s petition for rehearing states that the agreements evidence the willingness of customers to stand behind the project and are sufficient to support approval.  While the Commission does not always accept new evidence on rehearing, it should do so if the evidence is “based on matters not available for consideration by the Commission at the time of the final decision or order.”  The above agreements meet the standard for the submission of new evidence on rehearing.

Also, in this case, the need for finality is lessened because the Commission’s denial was without prejudice to refiling.  FERC already acknowledged that further proceedings and additional evidence may be considered and that the project may be approved in the future.  “Accepting additional evidence at this time does not deprive any party of finality.”

Market Considerations.  From a merits standpoint, the Jordan Cove petition for rehearing argued that the fact that it had not provided more evidence of customer commitment as of the date of the March 11 order “reflects circumstances in the global LNG market,” and should not be taken as an indication that the project does not have market support.  The Commission should have taken into account such market conditions and should not have rejected the applications simply because precedent agreements had not yet been executed.

And the Commission “must recognize that JCEP is competing in a global LNG market.”  The world LNG market still requires the development of additional LNG production capacity, but not as much as previously thought, and not on quite the same timetable.  Despite a winnowing of projects, “in this competitive LNG market US projects have had advantages due to a deep labor supply, infrastructure that can support construction of complex projects, an existing pipeline network, and producing basins that have well-established characteristics.”

In the competition to supply the major LNG markets in the Far East, Jordan Cove LNG has the advantage of being much closer than sources on the U.S. Gulf Coast.  And acquiring LNG from the Pacific Coast represents a diversification of risk.  The project also represents a diversification of risk for large buyers of LNG from the U.S. because it provides access to different supply basins than those to which Gulf Coast projects provide access.  The project can leverage off of the existing GTN and Ruby systems to provide access to prolific and well understood reserves in the Western Canadian Sedimentary Basin and the Rockies.

Jordan Cove believes it also enjoys advantages over other projects on the U.S. Pacific Coast because of the degree of state and local support for the project.

The primary focus of the marketing of its services continues to be on the Japanese and South Korean markets.   Despite delays, the petitioners explained, their project is nonetheless competitively placed to capture a portion of the opportunity to supply LNG in the 2021-2022 time frame.  Prior to the JERA and ITOCHU announcements, Jordan Cove says it was not in a position to share the identity of its anchor customers with the Commission because JERA and ITOCHU insisted on the “utmost confidentiality” throughout the negotiations.

So under the circumstances, the companies explained, the standard open season procedures would have been ineffective to substantiate demand in this context.   Still, Pacific Connector will hold an open season after it has executed precedent agreements with all of the anchor shippers, primarily to ensure that all requirements for service have been identified.

In the meantime, the petition posits that if the Commission “adopts a new policy of denying applications that have not finalized commercial agreements at the time the Commission has completed its FEIS and is ready to issue an order, massive regulatory risk will be introduced, and the competitive advantages that would otherwise be enjoyed by the U.S. LNG industry would be squandered.”  The Commission should adjust its procedures to the conditions in the market that the Commission regulates, the petition admonished.

Eminent Domain.  Finally, Jordan Cove/Pacific Connector charged that FERC misapplied its balancing test of public benefits against adverse consequences in reaching its determination that Pacific Connector’s application should be denied.  First, the March 11 order overestimated potential negative effects.  Second, it mistakenly equated public benefits with commercial need, and third, it ignored other benefits of the project recognized in the FEIS and in the DOE’s separate order approving the export of LNG from the terminal.

Fourth, the requirement of executed pipeline precedent agreements at the time FERC authorizes the pipeline serving an LNG export facility departs from precedent without explanation.   Contrary to the characterization of its past practice in the order, the Commission has approved LNG terminal supply pipelines without executed agreements in place at the time of approval (Cheniere Creole Trail Pipeline, LP, 2013).

When considering adverse impacts, fifth, the March 11 order inappropriately focuses entirely on the possibility that Pacific Connector might have to exercise eminent domain authority in order to acquire some portion of the right of way.  And sixth, the order does not focus on environmental impacts (found not to be significant if mitigation measures are followed).

Instead, the project backers asserted, the order focuses “on a perception of an inordinate risk of the utilization of condemnation authority.”  The order did not examine the actual level of risk that condemnation will be required to any substantial extent.

Claiming that Pacific Connector “has obtained easements for only 5 percent and 3 percent respectively of its necessary permanent and construction right of way” has no bearing on the likelihood that the pipeline will be able to obtain right of way through mutually acceptable agreements with landowners, asserted the petitioners.  And a pipeline to supply an LNG export facility is different from a typical stand-alone interstate pipeline project, particularly with respect to construction timing (the LNG project timeframe could extend 4 years or more).

“As a result, to date there has been little need to expend development funds to acquire right of way; it makes more sense to expend development funds on critical path items such as engineering and permitting and to expend funds on right of way acquisition only once Project financing has been obtained.”

Pacific Connector engaged in a limited land acquisition program, which focused narrowly on critical crossing and surface facility parcels.  It believed there was no need yet to start a broader effort to acquire, or to obtain options on the remainder of the right of way.  Actually, out of 231.8 miles of land crossed by the pipeline, only two tenths of one mile, or less than 0.1%, is residential.  In over 230 miles of right of way, there are just ten residences within 50 feet of the right of way.

In contrast to the Commission’s assessment of other recent pipeline projects, the petition continued, the Commission failed to note the extensive measures taken by Pacific Connector to minimize landowner impacts, or provide a way for the pipeline to continue to facilitate progress made so far.  All evidence suggests that condemnation will be limited.  The March 11 order “appears to be under the mistaken impression that many more landowners are potentially subject to condemnation than is in fact the case.”

“If the sole adverse effect with which the Commission is concerned is the use of eminent domain authority, and the extent to which eminent domain authority is to be used is a factor, the Commission should look to the likely number of instances in which eminent domain authority will actually be required.”  Many fewer landowners will be subject to condemnation proceedings than is typical for a pipeline project of comparable length.

The balancing of potential use of eminent domain on the one hand, against the lack of demonstrated commercial need on the other hand, is “inappropriate” because these are mutually exclusive scenarios.  If there is no market need, there is no project, and if there is no project, there are no adverse consequences.  “What the Commission should be weighing against adverse consequences (which only occur if the project goes forward) is the public benefit that will occur if the project goes forward.”

On that score, the project has benefits that go beyond satisfying a need for transportation and liquefaction services.  It represents “by far the largest investment” proposed for southern Oregon.

So, the developers/petitioners for rehearing posit that FERC can condition use of eminent domain authority on Pacific Connector’s demonstration of market support.  The Commission routinely includes conditions in certificate orders on a variety of topics and this is one of them.  The Commission has included conditions in certificate orders regarding eminent domain authority numerous times.  The Commission sometimes limits eminent domain authority to ensure that pipelines do not acquire more land than is needed for the project as well.  The Court of Appeals has found that conditions imposed by the Commission are effective to limit the exercise of eminent domain authority.

In this case, the Commission could have exercised its statutory authority to prohibit the initiation of condemnation proceedings until Pacific Connector had submitted executed agreements to the Director of the Office of Energy Projects (OEP).

Alternatively, the Commission can re-open the record if it believes the applicants still have not provided adequate evidence of market support.  But now that JCEP and Pacific Connector have presented evidence of market support, with the prospect of more to follow, the basis for the Commission’s decision has changed.  New evidence that changes the facts regarding the sole basis for the March 11 order “strikes at the ‘very heart’ of this proceeding.”

The policy of administrative finality is not relevant in this case because the decision was without prejudice to the filing of a new application.   Staying the order denying the applications and reopening the record places the parties in a similar position to what they would occupy if new applications were filed, but without the delay and wasted resources associated with a new application, Jordan Cove/Pacific Connector pleaded.

Meanwhile, the applicants declared they intend to continue to seek customers while this request for rehearing is pending.  But it may be difficult giving “the cloud of the March 11 order hanging over the project.”  But if the Commission were to stay the order and reopen the record, the applicants “anticipate that the remaining customers could be obtained within six months.”


[1]  Macquarie was previously a shipper on the import pipeline approved by the Commission in Docket Nos. CP07-441, et al.



Copyright © 2016 by Concentric Energy Publications, Inc.  All rights reserved.

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