Oracle has issued a force majeure on Project Jupiter meaning that they are free from debt liability under unexpected circumstances preventing them from continuing with the data center. According to the Financial Times Oracles $18 billion debt is 'under strain'.
Abigail Salas:
Can you explain to me what is going on? Like I'm five years old.
Dr. Erickson:
There are three factors that are affecting the loans for Project Jupiter right now. The first one is the overall saturation of the market with AI products. The spend on data center development is tremendous. It represents about half of all investment in the United States currently. And at that level, there simply is not enough appetite to absorb all of the demand for financial capital. And so, the result is that many companies that are building data centers are having trouble financing those data centers. The second factor affecting the ability of Project Jupiter to issue loans is that they have, is the problems that are arising with Project Jupiter itself, particularly their major anchor client is Oracle. And Oracle has seen a very dramatic decline in its stock valuations in recent times. There's considerable concern that Oracle is taking on too much debt, that it's overcommitted to data center, it is overcommitted to data center construction, including overcommitting to projects like Project Jupiter. And that has made it harder for Project Jupiter to raise funds because Oracle may not be able to meet their commitment when it comes time to occupy the data center that it has committed to in the process of the financing of Project Jupiter. And then the third problem that Project Jupiter is facing that's affecting its ability to raise capital is the regulatory environment in New Mexico, which is quite challenging, compared to other states, and also the increasing political pushback against data centers, which we're seeing all over the country, but in particular we're seeing in New Mexico.
Speaker 1
Can you tell me a little bit about those regulations, the New Mexico regulations?
Dr. Erickson:
Well, the two big issues facing Project Jupiter in terms of New Mexico regulations are the inability to get a permit to use public lands for a natural gas pipeline, making it difficult for Project Jupiter to secure its energy source. And the second one is in the air permitting process, which has been dragging on more than I think was anticipated. And of course, that recently was halted completely by an injunction that was released that was lifted, I think, last week. And those two factors are the prime examples, but there's also little things that have come up in terms of the regulatory process here in New Mexico. I think there's a general consensus that New Mexico is a hard place to do business. A recent CNBC report rated New Mexico's 40th among the 50 states for a place to do business, which is pretty low on that list. And so, you compare it to other neighboring states, Texas, Colorado, Utah, not so much so Arizona and even less so Oklahoma, particularly Texas and Colorado and Utah. We don't do well on those places to do business rankings generally in regard to a project like Project Jupiter that becomes more acute. Since they have obviously a very large project that needs lots of permits and lots of, and it has lots of steps that have to go through in terms of regulation.
Abigail Salas:
And so, you were talking about how they might not be able to pull through. What would happen? What would happen if they can't?
Dr. Erickson:
Oracle has given a force majeure notification, which means that they're saying that because of circumstances beyond either the control of Project Jupiter or Oracle's control, the project may not be done on time. If it's not done on time, Oracle's reserving the right not to make payments until the project is completed. Now, that's been gotten a lot of play in the news, and that play has been probably overstated as the significance of this, but it's not zero. It's not zero importance. It is saying to Project Jupiter that if the construction is not complete on time, that Oracle reserves the right not to make payments, and that can seriously affect the cash flow that Project Jupiter has in order to repay its debt, and that's what the markets are reacting to. And if they were not able to get the permitting and were not able to finish the construction, that would be a major blow. And this is a very large project. I think they've committed to about $22 billion in investment over the next several years, I think by 2028. That is the largest investment of any single project ever in New Mexico history and dwarfs any project previously done in Dona Ana County. And if that were not to be successful, it would be a major economic setback. Of course, the opponents of Project Jupiter focus on the economic, sorry, the opponents of Project Jupiter focus on the environmental impact, which is non-zero. And so, if they weren't able to complete the project, it would be financially crippling to the companies involved in Project Jupiter, and it would adversely affect Oracle, which of course is a major technology company.
Abigail Salas:
So, you talked about how the media is kind of making that force majeure a big deal, but... What do you think is what we should be focusing on?
Dr. Erickson:
I think the force majeure is not something that's zero. Oracle felt that there was a significant chance of the project being delayed, and they wanted to assert their legal right to delay payment if this were to actually come true. So right now, Oracle's committed to start making payments as a major tenant in, I think, 2028. And if a construction project is not done by 2028, which looks increasingly less likely, then Oracle is going to withhold payments. That could adversely affect the project and cause it to perhaps even potentially to not be completed. But what is more likely is that the project may be delayed past 2028, and Oracle may delay making its payments. But Oracle still says, and I think legally they are, still committed to ultimately make payments once the construction project is done. And it's in the best interest of Oracle and Project Jupiter for the project to be completed. And based on that, I expect it to be completed, although just not on time. But that could mean that Project Jupiter will have cash flow problems as they attempt to complete the project. Potentially, result in it not being completed.
Abigail Salas:
I read in the release that it said that trades were quoted at 89 to 91 cents on the dollar. Can you explain to me what that means for Project Jupiter?
Dr. Erickson:
Well, that means that they're borrowing, say they borrow 100, they're borrowing $100. They're agreeing to repay back $100 plus interest, but they're only able to borrow $90. What that means is they're in effect paying a higher interest rate than what they initially put into the loan contract, it works out to an eight and a half to nine and a half percent interest rate. And over or the depending on whether they repay the loans after four years or as the contracts allow, they repaid after six years. And and so that That's a pretty high interest rate. That's higher than the average mortgage. That's higher than car loans. That's a pretty decent stiff interest rate. And it indicates that there's considerable concern about the ultimate outcome for Project Jupiter. But it's not the same as saying it won't happen. It's not the same as saying it can't happen.
Abigail Salas:
So a big selling point for Project Jupiter is economic impact. What can you tell me about that?
Dr. Erickson:
Well, if you look at the gross receipts tax revenue for the county, it's gone from a base collection level of $20 million to recently a collection level of $100 million. And that dramatic increase in revenue from and gross receipts tax in the county is indicative of the economic impact of Project Jupiter. We see a number of businesses have moved into the county that have been moved here specifically to support Project Jupiter. There's been a large increase in employment in Dona Ana County because of Project Jupiter. Now, of course, many of the construction workers are coming in from out of state. This is a very, very large project. They have a huge crew, but still hundreds of people in Dona Ana County have been hired by Project Jupiter. So that's a major impact, major impact on the lives of the people involved who've gotten jobs, a major impact on the revenue to the county, which gives the county way more revenue that they can use for different projects, Rd. construction, expanding programs for the public and so on. And so it's a big deal economically.
Abigail Salas:
So if Project Jupiter doesn't follow through, that will have a negative impact on the county.
Dr. Erickson:
That will reverse those positive impacts. I have to say though, to be clear, this huge increase in gross receipts tax revenue, which by the way doesn't all go to the county, some of it goes to the state, And this huge increase in gross receipts taxes and the increase in employment associated with construction is temporary. It's only going to be ongoing during the construction period. Once the construction is completed, The economic impact will be still significant, but less than it is right at the very at this moment.
