This week the US House of Representatives voted to approve legislation that would expedite the Department of Energy's (DOE) process for approving applications to export liquefied natural gas (LNG) to countries with which the US does not have a free trade agreement (FTA). This action is the culmination of an active month for US LNG export policy. On May 29, DOE formally proposed a major change in its approach to evaluating applications to export LNG to non-FTA countries. In the Senate last week, the Energy and Natural Resources Committee held a hearing on LNG exports with a focus on DOE's new proposal, and legislation was introduced that—like the House-passed bill—would place a tight deadline on DOE for final action on export applications.
This article examines these various actions and their relationship to each other, and seeks to explain and put into context the present state of LNG export policy.
The existing DOE process for considering LNG export applications
Imports and exports of natural gas to and from the US are governed by Section 3 of the Natural Gas Act (NGA). Under that statute, imports and exports must be allowed unless it is shown that the proposed importation or exportation of gas "will not be consistent with the public interest." 15 USC. § 717b(a).
Applications for the export of LNG to nations that have entered into an FTA with the US are deemed to be consistent with the public interest under the NGA and DOE must approve them without modification or delay. For applications for exports to non-FTA nations, however, DOE must make a public interest determination.1
DOE has a great deal of discretion in making this public interest decision with respect to non-FTA countries, both in substance and timing. It has established a broad set of criteria for determining whether an application would not be consistent with the public interest, including factors such as the domestic need for natural gas, impact on international relations, environmental considerations, the impact on energy security and the cumulative impact of prior authorizations. At the present time, DOE is under no time constraint for taking action.
Regulatory authority under NGA Section 3 is bifurcated between DOE and the Federal Energy Regulatory Commission (FERC). DOE's Office of Fossil Energy has authority over imports and exports of the natural gas commodity, while FERC has authority over the siting, construction and operation of facilities for imports and exports of natural gas. FERC is the lead agency for conducting a review of the environmental impacts of an application to export LNG and to construct and operate an LNG terminal under the National Environmental Policy Act (NEPA).
In most cases, applicants have applied to DOE and FERC in parallel, which has enabled the two agencies to conduct concurrent reviews of the applications. In deciding in what order to consider the applications, DOE has given first priority to those applicants that had filed with DOE and received approval to use the FERC pre-filing process for NEPA review.
DOE has discretion under its regulations to issue a "conditional" public interest decision. Its current process is to issue these conditional decisions for applications to export to non-FTA countries after completion of DOE's notice and comment process, but before completion of the NEPA review by FERC. To date, DOE has issued seven conditional approvals for projects that would export 9.27 billion cubic feet per day (Bcf/d) of LNG to non-FTA countries,2 explaining that it will consider the information gathered in the environmental review by the FERC before taking final action. Again, DOE is under no statutory or regulatory time constraint for final action once the NEPA review is completed.
After an extended period that included the completion of studies conducted by the Energy Information Administration (EIA) and NERA Economic Consulting regarding the cumulative impact of LNG exports, DOE began issuing conditional authorizations for pending applications in the spring of 2013 (only one conditional decision, for the Sabine Pass application, had been issued prior to the studies), and has been issuing these conditional decisions at a rate of one approval approximately every 60 days. It has issued one final public interest decision taking into account FERC's NEPA review, for the Sabine Pass project, which is now under construction and is designed to export up to 2.2 Bcf/d.3
DOE's proposed process change
DOE has proposed to suspend its practice of issuing conditional authorizations for non-FTA applications. Going forward, it would make only the final public interest determination after completion of the FERC environmental review. DOE does not propose a deadline for its final action following completion of the NEPA review.
DOE argues that the proposed changes to the manner in which LNG applications are ordered and processed will make the process more efficient by prioritizing resources on the more commercially advanced projects, while also providing the agency with more complete information when applications are considered and public interest determinations are made. It is relatively inexpensive to apply for an export authorization from DOE, and the department contends that an applicant's willingness and capability to incur the substantial cost of preparing the engineering and design plans required as part of the NEPA review are indicative of its capacity to actually complete the proposed project.
The DOE proposal to change the approval process is subject to a 45-day public review and comment period. During the review period, DOE will continue with evaluations of projects that have already received conditional authorizations and completed their NEPA review. DOE stated that it will also continue to act on requests for conditional authorization currently in the queue pending a determination on its proposed changes. It does not appear that the conditional authorizations granted to date will be affected by the new process.
DOE has also announced plans to undertake a further cumulative impact study in order to gain a better understanding of how potential US LNG exports between 12 and 20 Bcf/d could affect the public interest. The conclusions reached in the earlier studies completed by the EIA and NERA were viewed as applying to "threshold" export quantities of between 8 and 12 Bcf/d.
Finally, DOE has prepared two reports that discuss the potential environmental impacts associated with unconventional natural gas production. These reports are in addition to what is required for the NEPA review and do not expand the scope of the NEPA process for projects pending at the FERC. These DOE reviews could be relevant in responding to allegations in future litigation that neither DOE nor the FERC evaluated lifecycle and indirect greenhouse gas emissions as part of the LNG export approval process.
These environmental reports, like the proposed process changes described above, are subject to a 45-day public comment period ending July 21.
Congressional response
Members of Congress have generally fallen into two camps with respect to LNG exports. Proponents argue that DOE has too much discretion in making its non-FTA authorizations, and that it moves too slowly and is not bound by any deadlines. They contend that the marketplace will dictate the number of LNG export projects that can be built and the volume of LNG that will ultimately be exported. They believe that increasing LNG exports will enhance US national security by increasing US influence in international energy markets. Opponents of expanded LNG exports argue that expediting the approval process will increase the price of natural gas in the US, jeopardizing the significant advantage our domestic manufacturers enjoy as a result of our abundant and inexpensive natural gas resource.
DOE's practice of issuing one conditional approval at a time, at its own pace and with the potential for a "pause" in approvals as the volume of approved exports increases, has come under increasing criticism among the LNG proponents in Congress and motivated them to introduce legislation in the House and Senate that would expedite and modify DOE's existing process. Representative Cory Gardner (R-CO) introduced H.R. 6 in the House, which would have automatically granted approval to pending applications and amended the NGA to deem applications to export to World Trade Organization nations (not just the much smaller group of US FTA countries) to be in the public interest. In the Senate, Senator Mark Udall (D-CO) introduced S. 2083, which also would have deemed applications to export to WTO countries to be in the public interest. Neither bill would have affected the FERC's review of LNG export applications.
In an effort to gain broader support, these proponents of LNG exports have adapted their legislative strategy to preserve DOE's role with respect to non-FTA countries but to strictly limit the timeframe for DOE's final public interest determination under its newly proposed process.
The version of H.R. 6 approved this week by the House was amended on the floor to require DOE to issue a final decision no later than 30 days after the completion of the FERC's NEPA review or the date of enactment of the bill, whichever is later. (The bill had previously been amended in committee to subject DOE's decision to a 90-day deadline tied to the end of the comment period on the application to DOE, but that action was taken before DOE proposed its new process.) The bill subjects DOE's compliance with the deadline to judicial review. Last week, similar legislation was introduced in the Senate by Senators Mark Udall and Mary Landrieu (D-LA). The Senate bill would impose a 45-day deadline for a DOE decision tied to completion of the NEPA review, with judicial review.
Both bills address the concern that there is presently no deadline for final approval by DOE. Under current law, even after the FERC completes its review, DOE could delay indefinitely its final public interest determination. Notably, when he was asked about the Udall-Landrieu bill at a Senate Energy and Natural Resources hearing on June 19, Principal Deputy Assistant Secretary for Fossil Energy Chris Smith stated that DOE could and would comply with such a deadline if it is adopted. He made no effort, when asked, to persuade the committee that it is unwise to impose a deadline or that this particular deadline might be too onerous.
Conclusion
The House approved the modified version of H.R. 6 with significant bipartisan support. The bill is virtually identical to the legislation introduced by Democratic Senators Udall and Landrieu in the Senate. Both bills represent a substantial compromise that largely preserves DOE's role but puts a tight deadline on its final public interest decision once the NEPA review is completed by the FERC.
Nevertheless, most opponents of LNG exports are likely to continue to oppose legislation that limits DOE's discretion in evaluating the public interest under the NGA. They will also argue that any additional export authorizations should wait until the completion of the new study commissioned by DOE to examine the economic impacts of LNG exports at volumes between 12 Bcf/d and 20 Bcf/d.
While the Udall-Landrieu bill will likely be approved in committee, it will be a challenge to bring it before the full Senate either as freestanding legislation or an amendment to another bill. Procedural disputes over the amendment process have thus far prevented the approval of any significant energy-related legislation by the Senate this year (not even the widely-supported Shaheen-Portman energy efficiency bill).
Nevertheless, the LNG export approval process is moving forward, albeit at a slower pace than proponents and applicants support. The new process proposed by DOE is arguably more rational than its practice of issuing conditional approvals based on an outdated order of precedence, and it focuses DOE's decision-making on the most commercially viable projects. The new economic study does create some uncertainty, but absent a new analysis, DOE likely would have had difficulty justifying any final approvals that increase the volume of exports to between 12 Bcf/d and 20 Bcf/d. While opponents of LNG exports are hopeful the new study will yield a different result than the earlier analyses, it seems likely that taking into account these higher potential volumes will not fundamentally change the conclusion that LNG exports are a net economic benefit to the nation.
Footnotes
1. At present, very few FTA countries have substantial markets for LNG.
2. DOE has granted approval to export 38 Bcf/d of LNG to FTA countries.
3. Sabine Pass has applied for additional export quantities, but those applications remain pending.
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