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Morneau/Trans Mountain Overshadowed Pembina Pointing To FID on Jordan Cove LNG In 2018 Or Following Final Approvals

By Dan Tsubouchi

It was bad timing for Pembina’s analyst day to start at 8:30am EDT on May 29 given it was just before the Morneau Trans Mountain statement.   Mgmt was well aware of this and started off by saying “Yes, we might have an evacuation if Trans Mountain or Kinder Morgan announces whatever they’re going to do”.   It meant that Pembina’s comments were completely overshadowed as investors and sell side analysts were forced to deal with the implications of that Morneau announcement.  Its too bad because mgmt. made some key comments (not on the slides) on LNG and Jordan Cove.   We listened to the webcast and believe mgmt. is signaling FID on Jordan Cove is coming in 2018. Pembina sees a perfect timing for Jordan Cove LNG right now (they were too early before) to take advantage of a LNG supply gap opening up in 2023, are working with pipeline companies about the natural gas supply to Jordan Cove, are in active discussions with Chinese offtakers, and also state a “final investment decision expected following receipt of regulatory and environmental approvals”.  We get a similar impression as we did with Shell’s comments six months ago – it just sounds like Pembina is pointing to or signaling a FID on Jordan Cove LNG in 2018, or as soon as they get the final approvals.

Pembina’s analyst day is a good reminder that transcripts/webcasts add significant color to a slide deck.   There are many excellent slides in the 110 slide analyst presentation.  However, the slides only tell a part of the story and in most cases, management’s verbal comments added significant color to the slides.  An example is LNG and the Jordan Cove ~1.3 bcf/d LNG export facility in Oregon.  The slides are positive, but management’s comments provide an even more positive commentary.

Pembina would still pursue LNG even if they didn’t have Jordan Cove.  Pembina had a typical LNG supply/demand outlook slide and calls for a LNG supply gap by 2023.   The Pembina slide noted “LNG demand expected to exceed current supply by 2023”.   Like all other LNG outlooks, Pembina highlighted Asia and China as the key demand factors.   This is a positive LNG outlook for projects looking to FID in 2018.   It was also interesting to see management say “and we weren’t really thinking a lot about LNG, but we got a world class opportunity through the Veresen acquisition to look at Jordan Cove and we like Jordan Cove. There is only two kinds of West Coast projects, that’s the hard ones and the ones you don’t know anything about yet. And Jordan Cove will be hard, but we think we can get it done. And it’s now down the fairway of our strategy. We like LNG enough that even if Jordan Cove didn’t work, we would still pursue LNG.  It’s a fundamental next step in our evolution.”  It is also a reminder how for most, other than Shell, their LNG outlook call in 2018 is way more bullish than from a year ago.

They may not have said it, but they certainly signaled FID on Jordan Cove in 2018 or following receipt of final regulatory and environmental approvals.  Pembina’s comments reminded us of how Shell was commenting or signaling on LNG Canada six months ago.   Nowhere in the 170 min call did Pembina say it was a done deal to go FID, but their LNG market call, their comments below about being matched up on the timing of demand increase, and they write “Final investment decision expected following receipt of regulatory and environmental approvals” certainly signal a FID is coming in 2018 or following the final approvals.  They aren’t quite as leading as Shell but pretty close,.   Mgmt said “The timing of the demand. Jordan Cove was possibly a bit before it’s time previously, but right now with our in-service, our expected in-service date, we’re very much matched up to when that demand starts to exceed the supply basis.  Most of the growth is expected to be in Asia, where LNG imports will be on a rise due to constraints in domestic supply. Chinese imports in Q1 2018 have increased by over 50% year-over-year.”  Also in talking about TransCanada’s GTN pipeline, mgmt. says “and we’re working with TransCanada to access gas through its system and GTN into our Jordan Cove facility”.  Their comments about working with TransCanada is much like we saw a few months ago with Shell and TransCanada comments about working together on natural gas pipeline to support LNG Canada.   We believe Pembina’s comments would be less positive overall and wouldn’t be working with TransCanada if FID was going to more than a year out.

The US/China May 19 joint statement on trade is likely the final push for Jordan Cove LNG.  Its not clear if the May 29 White House fact sheet “President Donald J. Trump is Confronting China’s Unfair Trade Policies[LINK] will impact the May 19 US/China “Joint Statement of the United States and China Regarding Trade Consultations[LINK].   It sounds like most don’t believe Trump wants an all out trade war with China, rather that the May 29 fact sheet is another play in the Trump art of the deal approach in executing the May 19 joint statement.  Our May 20, 2018 Energy Tidbits [LINK] noted the May 19 joint statement and how is could be the final push to push Jordan Cove ~1.3 bcf/d LNG in 2018.  China agreed to a “meaningful” increase in US energy imports and the numbers that were attributed to US officials this week in the lead up to the joint statement was to reduce the deficit by $200 billion.  There were no numbers reportedly in the joint statement.  We said US LNG exports to China has to be a big winner in this China trade and that Jordan Cove was ideally positioned to take advantage of this increasing LNG trade.  This is especially so as Jordan Cove is still looking for at least 1 or 2 new LNG purchasers, and this could help get them there and these added offtakers could be owners and not just LNG purchasers.  Jordan Cove has been looking for additional buyer support beyond JERA and Itochu, who both have 1.5 mmta.   And Jordan Cove would also give China some supply diversification from the Gulf of Mexico LNG supply projects and any potential risks that could happen with items like hurricanes.

Not much of a give for China to have a “meaningful” increase in LNG imports from the US.  LNG has to be the winner in any increased China imports and the reality is that it really isn’t much of a give for China to increase LNG imports from the US.  China basically needs any LNG they can get their hands on for the next decade or more.  The market has moved to a much positive LNG view in the past six months, but we still believe China’s natural gas and LNG demand will surprise to the upside.  We outlined our thesis in our Sept 20, 2017 blog “China’s Plan To Increase Natural Gas To 10% Of Its Energy Mix Is A Global Game Changer Including For BC LNG” [LINK].  Our blog noted how China was urgently and seriously dealing with pollution and making clear steps to its plan to move natural gas to 10% of its energy mix by 2020.  And that the math to do so meant that China, by itself, can move LNG markets to undersupply closer to 2020 than the conventional wisdom last summer of closer to 2025.  Last Sept, we said it wasn’t that we were trying to be bold, but the urgency we were seeing in China last summer to fight pollution makes us think that their plan to increase natural gas to 10% of its energy mix is a logical plan that they are working to attain.   Our math last Sept showed that China will need to increase its natural gas imports by ~3.5 bcf/d to ~4.5 bcf/d per year and that meant that BC LNG has to be back on the map.

Jordan Cove is “actively in conversations with Chinese offtakers”.   This may be the most significant comment in the analyst day and a reason, all by itself, to listen carefully to management’s words.  I is significant because it implies that the discussions to come into Jordan Cove are at some sort of advanced stage and we believe getting new Chinese offtakers may put them over the hump to go FID.  It also fits into the comments above about Jordan Cove being attractive to Chinese companies moreso with any Chinese commitment to increase LNG imports from the US.  Pembina didn’t mention the China/US joint statement on trade, but mgmt. said “We are actively in conversations with Chinese offtakers. And Korea, Taiwan imports are projected to be flat to declining. However, 50% of Japan’s existing contracts expire between 2019 and 2025. They are looking for diversification from their historic supplies. Recent election of Korea signaling phase out of nuclear and coal gas-fired generation brings in a strong new offtaker for the project and North America’s abundant gas supply with the cheap shipping costs makes Jordan Cove a very attractive opportunity.

Its like Shell on LNG Canada, its really hard to not believe a FID on Jordan Cove is coming in 2018.  After listening to the Pembina analyst day webcast and looking at what they said (especially their active discussions with Chinese offtakers), its hard to believe Pembina isn’t going FID on Jordan Cove in 2018 or following the final regulatory/environmental approvals.   Pembina sees the LNG market window, believes they have the right timing to go FID, are working or having active discussions with TransCanada and Chinese offtakers, and states ““Final investment decision expected following receipt of regulatory and environmental approvals”.