Pembina's focus on Canada growth renews uncertainty over Jordan Cove LNG

Houston — Pembina Pipeline sees better near-term opportunity growing in Canada than in the US as the timing of its Jordan Cove LNG export project in Oregon remains uncertain amid commercial and state regulatory challenges, the company said Dec. 14.

Calgary-based Pembina said in financial guidance that it was further cutting spending on growth projects in 2021, on top of substantial reductions in such expenses in 2020.

Among other moves, it is indefinitely suspending development of a petrochemical facility project in Alberta. At the same time, it is proceeding with its Prince Rupert terminal expansion and is restarting a cogeneration project at the Empress NGL extraction facility.

"Looking more closely at the North American energy industry, for the first time in a while, Pembina views the opportunities in Canada more favorably than the US in the near term owing to relatively lower decline rates, and producers, particularly in the mid-cap space, having comparably stronger balance sheets and a proven ability to live within their own cash flow," the company said.

Pembina said in February that it was considering developing or taking a stake in one or more liquefaction projects in British Columbia.

While Jordan Cove remains on the board, the proposed liquefaction terminal and affiliated feedgas pipeline will require substantial long-term offtake agreements or investment partners to move forward. Pembina will spend just $25 million in 2021 on continued development, primarily focused on securing state permits.

Given its proposed location on the US West Coast, LNG produced there would have a shorter shipping distance to the key East Asian import market than cargoes shipped from the US Gulf Coast. The project would also benefit Ruby Pipeline, through increased demand for feedgas volumes. Pembina has a stake in Ruby, while Kinder Morgan operates it.

Delays in advancing Jordan Cove are partly to blame for Pembina's decision to take a writedown on its investment in Ruby.

"The existing tariff rate on firm contracts that expire in mid-2021 are well in excess of the current spot rates," Pembina said. "As such, based on the upcoming expiries and prevailing interruptible tariff rates, along with Rockies basin fundamentals, and the ongoing uncertainty with respect to the timing of the ultimate approval of the Jordan Cove LNG project, which would ultimately be expected to utilize capacity on Ruby, Pembina expects to take a material impairment on its investment in Ruby in the fourth quarter of 2020."

While Pembina has deferred or suspended some other projects, it has so far stuck with Jordan Cove, as the ongoing pre-construction development costs are seen as minimal. To date, the company has not announced any firm long-term offtake contracts tied to the proposed liquefaction terminal.

A drop in global LNG demand due to the coronavirus pandemic made commercial discussions more challenging earlier in the year, and even though the global LNG market has rebounded in recent months commercial activity for new projects has remained slow. Sempra Energy's LNG export project at its Energia Costa Azul facility on Mexico's Pacific Coast is the only new North American liquefaction project to be sanctioned in 2020.

Shipping advantage

In March, the US Federal Energy Regulatory Commission conditionally approved the Jordan Cove terminal and Pacific Connector feedgas pipeline. It marked the first major US LNG export project to be approved for the West Coast of the Lower-48 states.

That, however, does not necessarily mean the terminal and pipeline will be built. Oregon has declined to sign off on several key regulatory approvals.

If built, the LNG terminal project would produce up to 7.8 million mt/year of LNG for export. The 229-mile, 1.2 million Dt/d Pacific Connector pipeline would run through Klamath, Jackson, Douglas, and Coos counties in Oregon.