Quick Idea: NextDecade Corp. (NEXT US)
Legal & Regulatory
I. OVERVIEW
Situation Overview
NextDecade Corporation ("NEXT" or the "Company") is a $4.5bn EV liquefied natural gas ("LNG") development company focused on LNG export projects and associated pipelines. The Company is developing the Rio Grande LNG project in the Port of Brownsville, Texas.
After originally obtaining FERC authorization for its $18.4bn Rio Grande LNG project, on August 6, 2024, the U.S. Court of Appeals for the D.C. Circuit ("DC COA") issued an order vacating the FERC remand authorization claiming that FERC should have issued a supplemental environmental impact statement (“SEIS”).
Since this order vacated the previous FERC remand authorization, the possibility of a construction shutdown could have major consequences for NEXT. However, the mandate to shut down construction will not happen if the "appeals process" is ongoing. As a result of this August 2024 order, NEXT stock sold off substantially, and the Company issued the following statement:
NextDecade is disappointed in the Court’s decision and disagrees with its conclusions. The Company is reviewing the Court’s decision and assessing all of its options. At this time, construction continues on the first three liquefaction trains and related infrastructure (Phase 1) at the Rio Grande LNG Facility, and the Company is evaluating the impact of the Court’s decision on the timing of a positive final investment decision (FID) on Train 4.
II. CONSTRUCTION & APPROVALS
Initial Plans
In May 2015, NEXT awarded the initial front-end engineering and design ("FEED") study contract along with the initial EPC terms for the Rio Grande project to Chicago Bridge & Orin Company ("CB&I"). However, CB&l was subsequently acquired by McDermott. Thereafter, NEXT and McDermott agreed not to finalize the EPC contract.
In September 2018, NEXT announced it had reopened the bidding process for EPC contractors to bid on the Rio Grande LNG project. In May 2019, it was announced that the EPC contract had been awarded to Bechtel Corporation.
FERC Approval Process
Initial Authorization
Rio Grande commenced the FERC approval process for its proposed export terminal in 2016. FERC spent three years preparing a detailed environmental impact statement ("EIS") spanning 2,300 pages. After affording the public ample opportunity to comment, FERC concluded that the project's only significant impacts were visual and that the terminal was in the public interest. FERC accordingly authorized the project in 2019.
First Petition for Review (Remanded without Vacatur)
Environmental groups sought review; a prior panel rejected all except two challenges. The Court concluded that FERC provided insufficient explanation for why it chose to analyze impacts on environmental justice communities within a two-mile radius. Applying the Allied-Signal test, the Court remanded without vacatur, finding it "reasonably likely that on remand," FERC would "reach the same result" and reauthorize the project, while vacatur would cause needless disruption."
It should be noted that because the court during the First Petition for Review “remanded without vacatur,” NEXT could continue construction on the project.
Second Petition for Review (Vacated and Remanded)
On remand, FERC expanded its environmental justice review to a 31-mile radius, including the furthest conceivable impacts of the project. FERC solicited public input on the 31-mile-radius-data, receiving and responding to over 150 comments. On a second petition for review, a different panel vacated and remanded, concluding that FERC's consideration of data from the larger radius meant that FERC needed to prepare a supplemental EIS - even though the data reinforced FERC's earlier conclusion that the only significant impacts were visual and mostly limited to communities within the two-mile radius FERC originally studied.
It should be noted that because the court “remanded with vacatur” during the Second Petition for Review, NEXT may not be able to continue construction on the project.
The panel also held that FERC should have reviewed Rio Grande's intervening proposal to build a carbon capture and sequestration ("CCS") system as a "connected action" even though the LNG project can operate without one.
Petition for Rehearing
On October 21, 2024, NEXT filed a petition for a rehearing of the DC COA's ruling. In its petition, NEXT highlighted how the court’s decision to remand with vacatur is unprecedented for a perceived procedural misstep. There are a few potential outcomes, including (1) Reaffirmation, (2) Modification (remand without vacatur), or (3) Reversal. NEXT may petition the Supreme Court for review if the ruling is not overturned.
III. BACKGROUND
NEXT was founded in 2010 by Kathleen Eisbrenner, a former Royal Dutch Shell ("Shell") LNG portfolio executive who managed Shell's global LNG portfolio and LNG trading business. On 7/24/17, NEXT went public via a reverse merger with Harmony Merger Corporation, an SPAC.
NEXT's initial liquefaction development plan was focused on their Rio Grande greenfield site, located on 984 acres in Brownsville, Texas. By late 2019, NEXT had already signed a lump sum turnkey (LSTK) engineering, procurement, and construction ("EPC") contract with Bechtel to build on the site.
Natural Gas Sourcing
Although the first wave of U.S. Gulf exports was driven by gassy production in the Marcellus play around Pennsylvania (where it was transported via pipelines to Louisiana's Henry Hub pricing point), a newly developing abundance of stranded associated gas was located in the Permian Basin of Texas. The Permian Basin's production economics are driven by crude oil production and flared gas.
NextDecade planned to build a 137-mile header pipe from its Port of Brownsville facility in South Texas to the Agua Dulce gas trading hub to source its gas. However, significant pipeline capacity was being planned to bring cheap Waha gas to Agua Dulce, which could drive the price of Henry Hub below the current level.
Rio Grande Project
With ~40,000 acres, the Port of Brownsville is also the largest land-owning public port authority in the United States. The plan for full development at NEXT's Rio Grande footprint is for six 5.5 MTPA LNG liquefaction trains to be built. The initial two-train project would have a base nameplate capacity of 5.5 MTPA per train and require two 180,000 cubic meter storage tanks and one marine jetty.
The estimated EPC cost per ton for the initial two trains is ~$640/MT (expect economies of scale for additional trains). A potential advantage for NextDecade's Brownville, Texas location is that the planned liquefaction facilities are located only 7 miles from the open ocean of the U.S. Gulf, as compared to many of the planned liquefaction projects (in addition to existing port terminals) located in Louisiana.
Full Development Case
While NEXT had not signed a Lump sum turnkey ("LSTK") for trains 4-6 at the Rio Grande by the end of 2019, the development would be similar to a brownfield project at that point. The full development would be able to leverage the two initial jetties, berth pocket, and turning basin for the full development to leverage the existing infrastructure further.
Project Structure
NEXT is a more simplified SPA-styled finance liquefaction project. NEXT will have 100% ownership of the Rio Grande liquefaction project and the Rio Bravo header pipeline to connect to Agua Dulce. Unlike Tellurian, NEXT will not build proprietary pipelines to connect and control gas volumes to its LNG export facility. Instead, NEXT will rely on third parties to build access to the Permian via an already planned project and will receive prevailing market prices.
Disclaimer: The author does not guarantee the accuracy or completeness of any information provided. The author does not provide personalized investment advice and the information written is not tailored to the needs of any individual investor; everything written herein is the opinion of the author and is subject to change without notice. There is substantial risk of loss in the investments mentioned and you should consult with your financial advisor whether any investments suit your specific needs. The author may have positions in the investments mentioned and those positions may change without notice.
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