Veresen (
TSX: VSN,
Forum) scored a major goal in its journey to construct the Jordan Cove LNG facility in the International Port of Coos Bay in Oregon, USA, when the company announced today that it had finalized key terms with JERA Co, where JERA preliminarily agreed to purchase at least 1.5 million tonnes annually of natural gas liquefaction capacity for an initial term of 20 years.
According to the
news release, the agreement is subject to customary conditions, including the execution of a detailed liquefaction tolling agreement and the project securing necessary regulatory approvals.
The company is currently in negotiations with other parties for the remaining liquefaction capacity at Jordan Cove.
JERA is the result of a joint venture established on April 30, 2015 by Tokyo Electric Power Company and Chubu Electric Power Co, and was intended to implement a comprehensive alliance among its two shareholders covering the entire energy supply chain.
The Jordan Cove LNG facility is planned to have an initial design liquefaction capacity of approximately 6.0 million tonnes annually.
Company President and CEO, Don Althoff, commented on the milestone, “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.”
MARKET REACTION: Shares were up 7.17% on the news to $9.27 per share.
OUR TAKE: Veresen has been at this since 2005, when the company was introduced to the Jordan Cove LNG project by Energy Fundamentals Group; the resulting Jordan Cove Energy partnership then set about to bring the vision of an LNG import facility to reality on a journey that has been anything but smooth for the US$6.0 billion project which currently dwarfs the company’s market cap of $2.8 billion.
The North American fracking boom, which began in 2009, changed the LNG landscape, forcing Veresen to reconsider the purpose of Jordan Cove as with the abundance of American supplied gas, it became economically unviable to erect an import station when it was cheaper to export it abroad. The company changed tack in 2012 and reimagined Jordan Cove as a liquefaction and export facility.
This would be the beginning of a long string of setbacks for the company. First off, the Federal Energy Regulatory Commission (FERC), who had already approved the both the facility and the Pacific Connector pipeline projects in 2009, pulled its approval when it learned Veresen had switched from ‘suck’ to ‘blow’. This scuttled the company’s plans to begin construction on the facility by 2014.
Of course FERC’s approval retraction may have been politically motivated. The organization, historically viewed as a governmental ‘rubber stamp’, had been brought to bear for its 2009 approval with a set of appeals by the State of Oregon, the National Marine Fisheries Service and a large coalition of environmental groups represented by the Western Environmental Law Center.
Regardless of its actual motivation, FERC continued to drag its feet and even though Veresen expected FERC’s final approval to come down at the end of 2015, all it received was silence and as a result, Veresen pushed off its final investment decision for Jordan Cove to the end of 2016.
Then you have the Oregon Department of Land Conservation and Development (DLCD) putting a halt on an application for coastal management certification for Jordan Cove – not once, not twice, but three times in nearly two years. Company officials were quick to state that this Coastal Zone Management Act approval, although federal in nature, had been delegated to the state and wouldn’t affect FERC’s timeline to issue its approval.
Protestors and activists were even quicker to jump on FERC’s issuance of Jordan Cove’s final environment impact statement in September, stating that since the Biological Assessment had yet to be completed; it was ludicrous that FERC would be able to release a final environment impact statement.
To add insult to injury, on March 11, 2016 FERC publicly denied both Veresen’s plan to build the Jordan Cove facility and its Pacific Connector joint proposal with Williams Partners. The reason: Veresen couldn’t prove there would be market support for the facility. In short, it couldn’t guarantee it had enough customers to buy its product. Veresen President and CEO, Don Althoff, responded to the news in a company statement, “Clearly, we are extremely surprised and disappointed by the FERC decision. The FERC appears to be concerned that we have not yet demonstrated sufficient commercial support for the projects. We will continue to advance negotiations with customers to address this concern.”
Today was a red letter day for Veresen as it was able to produce that first customer with JERA, but this deal only covers a minority share of its expected yearly output. Veresen will definitely have to add to the roster if it intends to successfully appeal FERC's ruling by the April 11, 2016 deadline.
Will it be able to jump this last hoop? Environmental concerns aside, this is a bad time for LNG starts. The unconventional oil and gas boom has turned on its head with the commodity price plunge, and with the expected supply, there are already a significant amount of terminals. In short, the market is saturated, especially in Jordan’s intended Asian market. China already has LNG and a slowing economy. Japan is watching its pennies and as a result is turning on its nuclear reactors rather than importing more LNG.
Even if Jordan Cove is able to sign on customers, you need to consider the long-term project viability of domestic shale gas production. Once the forecasts were incredibly positive, with the US Energy Information Administration (EIA) stating that it figured North American production would continue to grow all the way through to 2040. A more recent and far more detailed review carried out in part by University of Texas at Austin’s department head of petroleum and geosystems engineering, Tad Patzek, tells a different story.
While the EIA was operating on the best information it had, it relied on coarse-grained studies of major shale formations, while Patzek’s efforts were based on a much finer array of data which indicated that although the shale formations were massive, there were only relatively small ‘sweet spots’ where it was profitable to extract gas. As a result of this most recent study, the Texas team predicts that production from the big four shale plays could peak by 2020 and then go in sharp decline, producing only about half of what EIA had forecasted earlier.
With AltaGas announcing plans last month to indefinitely shelve Douglas Channel LNG, LNG projects are steadily becoming an iffy proposition. Personally I don’t think Veresen has what it takes to allow Jordan Cove to see the light of day. This is not a matter of incompetence, I just don’t think it’s big enough to outlast the bureaucratic gauntlet it’s been given to run. Whether there will be an LNG future for Jordan Cove to survive in is a whole other matter.
I have no interest in any company mentioned in this article, long or short.
--Gaalen Engen
https://twitter.com/gaalenengen