Pembina Pipeline Corporation (NYSE:PBA) acquired a 100% stake in the Jordan Cove LNG project when it purchased Veresen Inc. last year in a transaction valued at $9.4 billion.

The project envisions building a liquefied natural gas terminal along the West Coast in Oregon that would be capable of exporting 7.8 million metric tons of LNG per year (equal to 1.3 billion cubic feet of natural gas per day), with an eye on East Asian markets. As this project is expected to cost $10 billion to develop if it is approved, this is clearly one of Pembina Pipeline Corporation’s most ambitious endeavors. Let’s dig in.

Overview
As part of its Veresen acquisition, Pembina acquired a stake in the Ruby Pipeline. Back in 2014, Veresen spent $1.425 billion buying Global Infrastructure Partners’ convertible preferred interest in the Ruby Pipeline, effectively giving the firm a 50% stake in the system. Now Pembina owns half of the Ruby Pipeline and the operator Kinder Morgan Inc. (NYSE:KMI) owns the remaining interest.

The Ruby Pipeline runs for 680 miles, from Wyoming’s Opal Hub to Oregon’s Malin Hub, and has the capacity to transport 1.5 Bcf/d of natural gas. When Veresen purchased the pipeline, management noted that compression upgrades could increase the system’s capacity up to 2 Bcf/d. It would take more than that to support the proposed Jordan Cove LNG project, which is why Pembina is pursuing the Pacific Connector project.

Pacific Connector Gas Pipeline LP is now 100% owned by Pembina through a string of subsidiaries. What Pembina wants to do is build a 239-mile long gas pipeline that would connect with both the Ruby Pipeline and TransCanada Corporation’s (NYSE:TRP) Gas Transmission Northwest Pipeline.

The GTN Pipeline runs for 1,353 miles and has the capacity to transport 2.9 Bcf/d of gas produced in the Western Canadian Sedimentary Basin and the Rocky Mountain region to markets in Washington, Oregon, and California.

With a proposed capacity of 1.2 Bcf/d, the Pacific Connector Gas Pipeline would ensure the Jordan Cove LNG facility had access to numerous producing basins in North America (note that this is marginally lower than the nameplate LNG production capacity of the proposed facility as the facility won’t be operational 100% of the time).

The Ruby Pipeline has access to ample natural gas supplies produced in the Rockies region, including Colorado (home to the DJ Basin, the Piceance Basin, and the San Juan Basin) and Wyoming (home to the Powder River Basin and the Greater Green River Basin). Rockies gas producers would love the additional takeaway capacity as natural gas prices in the region remain quite low as you can see here, a product of rising regional production.

TransCanada’s GTN Pipeline has access to ample supplies from British Columbia (home to the Montney play, the Liard Basin, and the Horn River Basin) and Alberta (home to the Duvernay play and the Deep Basin). Due to rising gas production in Western Canada, regional natural gas realizations are also quite low as you can see here. Pembina has access to cheap gas supplies from two major producing regions in North America, ensuring the Jordan Cove facility can remain competitive over the long haul.

The origin point, where deliveries would be sent to, is expected to be in Klamath County, Oregon, in the south-central part of the state. From there, the Pacific Connector Gas Pipeline would route those supplies to the North Spit of Coos Bay in Coos County, Oregon.

The Jordan Cove LNG facility is being built in the Port of Coos Bay, and when it’s completed, the terminal will cover 240 acres of an area specifically designated for major industrial activity. Having a terminal that is capable of handling deepwater vessels was a major determining factor when choosing the location of the facility.

Being situated along the West Coast would give these LNG exports a major leg up on the competition as it takes only nine days to travel from Coos Bay to Tokyo Bay, Japan. Pembina thinks that will make the greenfield project competitive with brownfield projects in the US Gulf Coast region (meaning that LNG supplies from the Jordan Cove facility will be competitive with the supplies from a new LNG train at an existing export terminal along the US Gulf Coast).

Regulatory Wait
Pembina is still waiting for final approval from America’s Federal Energy Regulatory Commission before officially sanctioning this project. In September 2017, Pembina filed its application with FERC to move forward with the Jordan Cove LNG development and the related pipeline project. FERC sent Pembina a Notice of Scheduling during the third quarter of 2018, and the company expects to receive FERC’s final approval by November 2019.

It appears likely that FERC will give Pembina its approval this time around, as federal American regulatory authorities have been very willing to approve large LNG projects as of late. Note that FERC originally denied approving the project in 2016 due ostensibly to the inability of the developers to prove sufficient market demand (state politics were also at play here), but a lot has changed since then.

FERC recently asked Pembina for an update on its process of acquiring the necessary easements to build the Pacific Connector Gas Pipeline. Pembina plans on spending $100 million on the Jordan Cove LNG development next year, which includes the cost of acquiring the remaining easements. The company should have just sent in that update to FERC.

However, it remains to be seen how local and state forces may impact the Jordan Cove LNG development. Oregon state’s Supreme Court upheld a decision by the state’s lands department to allow dredging at Coos Bay in July 2018, which is a good sign. In September 2018, the firm resubmitted its application for a Clean Water Act permit with Oregon’s Department of Environmental Quality after an extensive public comment period.

As things stand today, Pembina is waiting on additional state and federal regulatory approvals before sanctioning this project. The development has been billed as one of the largest in Oregon’s history, and one that would economically revitalize the region by breathing new life into the Port of Coos Bay.

Final Thoughts
The Jordan Cove LNG project is ambitious, especially for a firm the size of Pembina Pipeline Corporation. While the economics of such a development make perfect sense considering North America is swimming in natural gas and Asian LNG markets are hungry for additional supplies, there are local and state hurdles that need to be kept in mind.

Pembina Pipeline Corporation mentions that LNG cargoes could commence by 2024, but before a final investment decision is made, all guidance on development costs and project timetables remain highly speculative.

Before reaching a final investment decision, Pembina Pipeline Corporation will likely try to find a partner to share development costs with and spread out the risks associated with embarking on such a large project. Management has mentioned finding a partner willing to purchase a 40-50% stake in the venture.

Several East Asian buyers have expressed interest in or are already actively engaging in signing long-term agreements with the Jordan Cove LNG venture. Reportedly, those non-binding agreements cover the majority of the Jordan Cove’s LNG production capacity.

As this isn’t a space Pembina Pipeline Corporation has a lot of experience in, it would be wise for the midstream firm to bring a seasoned LNG player on board as a partner. We’ll see how this plays out.

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