United States: Department Of Energy Proposal Upends Process For Authorizing LNG Exports

On June 4,.2014, the Department of Energy ("DOE") issued a Notice of Proposed Procedures ("NPP") for Liquefied Natural Gas Export Decisions outlining proposed changes to the way liquefied natural gas ("LNG") export permits would be issued. In short, the DOE is proposing to stop issuing conditional approvals for LNG exports to non-Free Trade Agreement ("FTA") countries before the competition of a full environmental review under the National Environmental Policy Act ("NEPA"). As a result, the DOE's economic "public interest" assessment of whether LNG cargoes may be exported from new LNG projects will be deferred until far later in the project review process. While some support the move as a useful reform, House leaders and others have been critical, and continue to press to curtail the DOE's discretionary power to limit LNG exports. Comments to the NPP must be submitted by July 21, 2014. The NPP is available at: http://www.gpo.gov/fdsys/pkg/FR-2014-06-04/pdf/2014-12932.pdf

Background

The federal government has regulated natural gas transport and sale since Congress enacted the Natural Gas Act ("NGA") of 1938. The NGA requires a permit for natural gas exports, and states that the DOE "shall issue" a permit unless it is found "not to be consistent with the public interest." Under the Energy Policy Act of 1992, Congress mandated that exports to countries with an FTA would be automatically deemed to be in the public interest. Since 2006, natural gas production has exploded, thanks largely to enhanced production techniques. Prior to this explosion, terminals were constructed to import LNG.

However, with the boom in the production, some import terminals have been reconfigured for export, and advocates are urging for the construction of more export terminals to expand exports. One argument proponents have used is helping to reduce greenhouse gas production worldwide. However, some environmental advocates question the greenness of Natural Gas, even in comparison to coal. A DOE report, released the same day as the NPP, concluded that LNG exports will likely have neither a beneficial nor a detrimental impact on climate.

Under current rules, LNG export proposals are submitted to the DOE in conjunction with liquefaction terminal project proposals, which are reviewed by either the Federal Energy Regulatory Commission ("FERC") for land-based projects or the Maritime Administration ("MARAD") for projects outside state waters. The DOE has been granting conditional approvals either prior to or in parallel to the environmental impact process, which generally is led by FERC or MARAD.

Discussion of the DOE Proposal

Under the NPP, the DOE proposes to do away with conditional approvals, which provided project parties and investors some early-stage indication whether cargoes would be permitted to be exported if the terminal development went forward. Prior to the issuance of the NPP, the DOE's policy was to allow the issuance of conditional approvals for non-FTA export applications. In the past three years, the DOE has issued seven conditional authorizations for exports of LNG to non-FTA countries. The only company that has obtained all required permits to export natural gas is Cheniere Energy Inc., which is constructing a plant in Louisiana that is expected to be ready in 2015.

The DOE's rationale for the change is that it will prioritize approval for projects that are ready to move forward. The DOE also notes that it will be able to make better decisions based on current data in projects that have cleared the review process. According to the NPP, the original stated justification for issuing conditional authorizations—to provide greater certainty for FERC and applicants before investing in the NEPA process—no longer appears to apply.

The policy change will likely benefit companies that are farther along in the process, ensuring their DOE reviews are not left in the queue behind less-developed projects. In addition, the conditional permits for the seven companies already issued will remain in place, although it is unclear what their value will be to financiers should the NPP become policy.

Despite concerns that this will create winners and losers, some in the industry agree with the DOE that higher up-front costs would prioritize projects with a greater chance of completion. Oregon LNG Chief Executive Peter Hansen noted that many projects high on the list for conditional approval were "barely real."

Still, the drastic step of eliminating the conditional approval process altogether cuts off a useful source of certainty and predictability regarding the DOE's economic analysis for parties considering the economic benefits of these capital intensive projects at an early stage. The DOE's "public interest" standard is broad and discretionary, balancing a wide range of considerations including economic impacts, international impacts, security of natural gas supply, and environmental impacts, among others. While some general principles can be gleaned from previous approvals and DOE-sanctioned studies (including a perceived unofficial 12 bcf/day limit on exports), these policy priorities can change from administration to administration, making it impossible to predict over the long term whether or when the DOE might start substituting its judgment for the free market to rein in international LNG trade. This regulatory uncertainty is seen as a brake on long term infrastructure investment.

As a result, Republican leaders of the House Energy and Commerce Committee have been sharply critical of the DOE proposal. "Rather than working with Congress to fix the problem, the administration announces an abrupt move to introduce new excuses to delay an already broken process," Chairman Fred Upton said on May 29. "This action will further slow down approvals and could discourage investment in export projects." Chairman Upton and 60 cosponsors have introduced H.R. 6, the Domestic Prosperity and Global Freedom Act, which would make the DOE LNG export approval automatic for exports to any World Trade Organization country. That bill was approved by the committee April 30, 2014, and is awaiting floor action in the House.

Conclusion

The DOE welcomes comments on all aspects of the proposed procedures. Needless to say, the proposal is controversial. Assuming the new procedures are implemented, the clear winners include those applicants who have been proceeding with the required environmental review and working to obtain clients. The clear losers are those projects that were counting on securing conditional DOE approvals to reduce uncertainty about the permissibility of LNG exports before raising and spending significant capital on LNG infrastructure design and investments. All stakeholders should review the NPP closely and provide comments before the July 21, 2014 deadline.

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