Originally published for customers May 22, 2024.
What’s the issue?
From Department of Energy (DOE) export pauses to bankruptcy to litigation, to play in the LNG terminal business, developers have to face a lot of curveballs. Golden Pass just stepped up to the plate to confront a bankruptcy filing by its Engineering, Procurement and Construction (EPC) contractor, and Rio Grande LNG just faced a flurry of difficult pitches in oral arguments at the D.C. Circuit.
Why does it matter?
LNG projects are extremely costly to finance and often the target of litigation. Given how long it takes to develop and construct these complex projects, either one of these factors can face headwinds that put the project at risk. Stakeholders need data-backed context to assess these risks.
What’s our view?
Compared to impacts from bankruptcy proceedings on other projects, the risk of this proceeding delaying Golden Pass’s construction is higher. The oral arguments concerning Rio Grande LNG were particularly instructive on the court’s interest and FERC’s approach to environmental justice (EJ) analysis. FERC’s decision not to issue a supplemental Environmental Impact Statement (EIS) despite a new conclusion of disproportionate impacts on EJ communities sounds tough to defend, but FERC’s explanation combined with its proposed mitigation measures could tip the scale in its favor.
From Department of Energy (DOE) export pauses to bankruptcy to litigation, to play in the LNG terminal business, developers have to face a lot of curveballs. Golden Pass just stepped up to the plate to confront a bankruptcy filing by its Engineering, Procurement and Construction (EPC) contractor, and Rio Grande LNG just faced a flurry of difficult pitches in oral arguments at the D.C. Circuit. LNG projects are extremely costly to finance and often the target of litigation. Given how long it takes to develop and construct these complex projects, either one of these factors can face headwinds that put the project at risk. Stakeholders need data-backed context to assess these risks.
Compared to impacts from bankruptcy proceedings on other projects, the risk of this proceeding delaying Golden Pass’s construction is higher. The oral arguments concerning Rio Grande LNG were particularly instructive on the court’s interest and FERC’s approach to environmental justice (EJ) analysis. FERC’s decision not to issue a supplemental Environmental Impact Statement (EIS) despite a new conclusion of disproportionate impacts on EJ communities sounds tough to defend, but FERC’s explanation combined with its proposed mitigation measures could tip the scale in its favor.
Golden Pass’s Bankruptcy Knuckleball — Previous Hits by Freeport and Cameron
If only the LNG industry had a baseball announcer, we’d be getting a lot of “Juuuuuust a bit outside” calls reminiscent of those made by Harry Doyle from the classic movie “Major League” in response to the curveballs we’ve been seeing. The most recent pitch came from Zachry Holdings, Inc. (Zachry), when it initiated a voluntary Chapter 11 bankruptcy proceeding to address financial challenges related to the Golden Pass LNG Export Terminal (Golden Pass), which is currently under construction. Citing financial strain from geopolitical issues and the pandemic, Zachry has stated that it has encountered problems staffing the project and keeping it on schedule.
To judge the impact this may have on the project, we looked back at another bankruptcy filing on January 21, 2020 by McDermott International Inc. (McDermott), an EPC for the Sempra Energy-led Cameron LNG terminal (Cameron) in Louisiana and the Freeport LNG Development LP facility in Texas (Freeport).
To start, the same three developers — Zachry, McDermott, and Chiyoda International Corporation (Chiyoda) — are teammates for these three projects. For Freeport, McDermott partnered with Zachry Group for the first two trains. Chiyoda joined the partnership for the third train. For Cameron, the EPC is CCJV, a joint venture between McDermott and Chiyoda International Corporation, and JZJV, (a joint venture between Zachry Group and Houston-based JGC America Inc.) was awarded a Front End Engineering Design (FEED) and (EPC) bid agreement contract for the Cameron expansion project in 2022. Finally, Golden Pass is supported by CCZJV — a joint venture among Chiyoda, McDermott, and Zachry, with Zachry serving as the EPC contractor.
McDermott’s bankruptcy filing was telegraphed and the nature of the commitments from these joint venture partners meant that if one was unable to perform its duties, the other would be required to complete the project. As a result, stakeholders at the time were not as concerned with bankruptcy proceedings on Cameron's and Freeport’s timelines. From a timing perspective, the month before McDermott filed for bankruptcy, Cameron had just received authorization to introduce hazardous fluids and commission the second of its three trains, and Freeport had just received the same authorization for the last of its three trains. We were not tracking “stage gates” at the time, but if we were, this would be the last one on the list, meaning that these projects were very near completion.
By contrast, press reports indicate that Zachry isn’t the only contractor running into trouble; apparently Golden Pass found both Chiyoda and Zachary to be in default of their respective contracts on May 8, which could indicate issues with two out of the three contractors, leaving only McDermott. From a timing perspective, Golden Pass’s most recent stage gate order was the last authorization in the “construction phase” of the stage gate orders — stage gate 5, authorization to commence aboveground piping. It has yet to receive any “authorization phase” orders, and remains firmly in the construction phase.
Comparing the contracting profiles and the construction timelines below, because Golden Pass remains firmly in the construction phase and because there is additional indication of other contractor default, the risk of this bankruptcy proceeding causing delays is substantially higher than it was for Cameron or Freeport.
In February, Exxon, which owns a 30% stake in Golden Pass, messaged that it expected to start production in the first half of 2025. With respect to the bankruptcy proceeding, Exxon has stated its ongoing support for the project and has said it will provide construction timing updates in the future. We will be monitoring this closely.
Litigation Slider — Rio Grande Oral Argument
The next series of pitches were thrown on May 17th by three Democrat-appointed judges at the D.C. Circuit — Chief Judge Srikanth Srinivasan, Julianna Michelle Childs, and Bradley Garcia — to Rio Grande LNG, LLC (Rio Grande), FERC, and a group of petitioners who were challenging two FERC orders concerning the Rio Grande LNG project, both of which were issued in response to the D.C. Circuit’s previous remand, in which the court directed FERC to conduct supplemental analysis or explanation. The court questioned the attorneys on three main issues:
- Whether FERC adequately expanded its environmental justice (EJ) analysis as directed by the court. It previously had a two-mile radius, and expanded to a 50-kilometer (31-mile) radius;
- Whether FERC adequately explained why the Social Cost of Carbon tool (SCC) is not widely accepted in the scientific community for assessing a project’s “significant” impact on climate change; and
- Whether FERC’s conclusion that its updated EJ analysis or Rio Grande’s updated proposal adding carbon capture and sequestration (CCS) did not require it to prepare a supplemental Environmental Impact Statement (EIS) under the National Environmental Policy Act (NEPA).
With respect to EJ analysis, the court framed the threshold question as whether there is new information from FERC’s additional analysis that paints a seriously different picture this time around. The court characterized FERC’s position as previously finding no disproportionate impacts to EJ communities within a two-mile radius but identifying such impacts to hundreds of census blocks with EJ communities within the new 50-kilometer radius (based on the same emissions data). Despite this, FERC concluded that no new threat was identified and with one exception (visual impacts to EJ communities close to the terminal) those impacts “would be less than significant.” Petitioners responded that FERC’s new conclusion of disproportionate impacts does paint a seriously different picture, and that the act of curing its defective environmental analysis and its reliance on that new analysis both needed to go out for public comment.
FERC responded that it made a change in language but not substance, highlighting a “numeric” difference in the new analysis — that where all impacts under the two-mile radius would be felt by EJ communities, most, but not all, of the impacts would fall on EJ communities under the 50-km radius. Therefore, this disproportionate impact conclusion arose because the expanded radius included some non-EJ communities, providing a basis for comparison. FERC characterized this as a numeric difference without substantive change, asserting that under either radius, no unique factor would amplify these impacts compared to the rest of the population.
This is an extremely nuanced and fact-specific case, but it is important to remember that while the court instructed the Commission to better explain its choice of a two-mile scope or analyze the project’s impacts within a different radius, it never explicitly directed FERC to conduct a supplemental EIS. Therefore, the Commission’s decision to conduct additional analysis with a 20-day comment period means that, procedurally, it complied with the court’s direction. Substantively, while it doesn’t sound good to make a novel conclusion of disproportionate impact to EJ communities, FERC’s explanation combined with its mitigation measures could tip the scale in its favor. We will have to wait and see.
The arguments with respect to the SCC focused on the difference between its utility for projects as opposed to rulemakings, and that no agency has yet made a “significance” determination under NEPA as a result of using the tool. The court prodded more on why the tool couldn’t be used to determine “significance” of emission impacts of projects. FERC responded that the EPA developed the social cost of emissions tool to support monetary cost-benefit analysis in rulemakings. However, when evaluating a specific project under NEPA, the Commission often cannot quantify all benefits, necessitating qualitative assessments. Using the social cost of emissions in such cases would result in a distorted cost-benefit analysis.
Finally, regarding Rio Grande LNG’s new proposed CCS facility, the court focused on whether it should be considered a “connected action” or a new “alternative” under NEPA. Petitioners argued that it should be, especially since it is proposed by the applicant, leaving no question about its technical feasibility. FERC counsel argued that reopening the alternatives analysis was unnecessary because this particular project was not proposed at the time the original project was introduced. Additionally, FERC committed to conducting a thorough analysis of the CCS project once its application was filed. FERC counsel also stated that this was not a connected action because no official application had been submitted and the terminal could operate independently of the CCS facility.
FERC’s explanation of its decision not to issue a supplemental EIS despite a new conclusion of disproportionate impacts on EJ communities combined with its proposed mitigation measures could tip the scale in its favor. The SCC arguments were not new, and FERC’s approach to quantify and disclose emissions without determining significance so far has been upheld, so the court is unlikely to deviate here. Finally, the LNG terminal’s “independent utility” from the contemplated CCS facility, and the fact that the CCS facility has not yet officially been proposed lend support for the Commission’s argument that it is not a connected action or new alternative.