pdf

Department of Energy Proposes Changes to Process for Reviewing Applications for LNG Exports to Non-Free Trade Agreement Countries

June 4, 2014 | Energy, Natural Resources & Utilities

 

In several recent actions, the U.S. Department of Energy (DOE) has signaled its continuing—and perhaps growing—willingness to approve U.S. exports of liquefied natural gas (LNG). The DOE is proposing changes to its procedures for considering applications for licenses to export LNG to countries that are not parties to a free trade agreement (FTA) with the United States requiring national treatment for trade in natural gas. Also, DOE has issued for public comment two environmental studies that address issues relevant to LNG exports. Finally, DOE announced that it will prepare new economic studies examining the potential for higher levels of exports than previously studied. Overall, the effect of these changes support continued, and perhaps expanded, approvals of LNG exports.

Proposed Changes to DOE Review Process

On May 29, 2014, Christopher Smith, DOE’s Principal Deputy Assistant Secretary for Fossil Energy (whose nomination as Assistant Secretary is pending before the U.S. Senate) issued a proposal to change the order for processing applications for licenses to export LNG to non-FTA countries.[1] Since the first application for such exports was filed with DOE in September 2010, DOE has approved seven such applications, for a total amount of 9.27 billion cubic feet per day (Bcf/d) of exports. But an additional 26 applications remain in the queue for review by DOE.[2] Under current DOE policy, these pending applications (if received on or before December 5, 2012) would be processed in the order in which the applicants had received approval from the Federal Energy Regulatory Commission (FERC) to use FERC’s pre-filing process for approval to construct the associated export facilities and then in order of their filing with DOE.[3] Under the new proposal, pending applications would instead be processed in the order in which the environmental review process under the National Environmental Policy Act (NEPA) has been completed.

Because FERC—or the Maritime Administration of the Department of Transportation (MARAD) in the case of terminals to be constructed offshore beyond state waters—must approve the construction of facilities for export of LNG, and because most of the expected environmental impacts are associated with construction of these facilities, FERC (or MARAD) has been designated the lead agency for conducting the NEPA evaluation for LNG export projects, with DOE as a cooperating agency. So far, FERC has approved just one application for construction of an LNG export terminal (Cheniere’s facility, which is currently under construction at Sabine Pass, Louisiana), and 14 additional applications are pending FERC review.[4] As part of its review, FERC (or MARAD) will prepare either an environmental assessment (EA), which may support a finding of no significant impact on the environment (FONSI), or a more detailed environmental impact statement (EIS) for each proposed terminal. Under the revised DOE procedures, DOE would process applications in the order in which the NEPA review process has been completed. The completion date for this purpose would be either the day when a FONSI is issued or 30 days after the publication of an EIS. Under DOE’s current process, DOE issues conditional approval before NEPA process is completed and then issues the final approval once the NEPA process is completed. (To date, DOE has issued only one final authorization for LNG exports to non-FTA countries, for 2.2 Bcf/d of exports from the Cheniere/Sabine Pass facility.) Under the revised process, DOE would no longer issue conditional approvals but instead would proceed directly to final approvals.[5]

The revised process likely will be supported by those companies that have progressed further through the NEPA process at FERC. The revised process may also facilitate exports because it is less likely to result in situations where projects that have been approved by one of the two agencies are put on hold for a long period of time waiting on the other agency to complete the reviews. But companies with projects that are further behind at FERC may oppose DOE’s proposed changes. And, in general, companies may oppose DOE’s proposal to eliminate the step of issuing conditional approvals, because even after completion of the NEPA process, there may be a delay in obtaining final FERC approval. Having at least a conditional approval from DOE, even if the FERC (or MARAD) process may not be completed for some time, can assist companies in their efforts to line up customers and financing for their projects.

Draft Studies of Environmental Impacts

DOE has also issued two new environmental studies for public review. The first study is the Addendum to Environmental Review Documents Concerning Exports of Natural Gas from the United States, Draft Report (May 29, 2014).[6] The Addendum addresses the impacts of domestic unconventional gas production activities (particularly hydraulic fracturing of shale formations) on water resources, air quality, greenhouse gas emissions, induced seismicity, and land use.

DOE indicated that this study was not based on any new analysis or research but rather was based on a review of existing studies and analyses. However, DOE identified a report entitled Environmental Impacts of Unconventional Natural Gas Development and Production (May 29, 2014), prepared by DOE’s National Energy Technology Laboratory (NETL),[7] as the “key resource” it relied upon in preparing the Addendum. Accordingly, DOE issued this study together with the Addendum for public review.[8]

The Addendum contains conclusions regarding some of the specific types of impacts reviewed. For example, it indicates that impacts of unconventional natural gas production on water resources are primarily local and that these impacts may be temporary and minor if properly managed, but can be significant if not properly managed. The Addendum further indicates that there may be short- and long-term increases in certain air pollutants, which could affect attainment of ozone standards in some areas, but that the intermittent presence of such air emissions makes it difficult to analyze the impacts at a regional level. With respect to greenhouse gasses, the study indicates that emissions from unconventional natural gas production activities may contribute to climate change, but that the net impact depends on the fuels that are replaced by increased natural gas production and that there may be a net positive impact with respect to climate change. The study found that fluid injections and withdrawals in connection with hydraulic fracturing do not create a high risk of induced seismicity, but noted that there is potential for some induced seismic events, particularly in connection with wastewater injection.

The second study is Life Cycle Greenhouse Gas Perspective on Exporting Liquefied Natural Gas from the United States (May 29, 2014), prepared by NETL.[9] This study addresses the following two questions:

  • How does LNG exported from the United States compare with regional coal (or other LNG sources) used for electric power generation in Europe and Asia, from a life cycle greenhouse gas perspective?
  • How do those results compare with natural gas sourced from Russia and delivered to the same European and Asian markets via pipeline?

The Life Cycle study generally concludes that the use of LNG exported from the United States to generate electric energy in Europe or Asia will not increase greenhouse gas emissions from a life-cycle perspective relative to the use of coal extracted in those regions. Because of data limitations, the study was not able to determine any significant increases or decreases in climate impact due to the use of U.S.-origin LNG in Europe or Asia relative to use of regional LNG or Russian natural gas.

Economic Studies

Finally, DOE announced that it plans to update the economic studies that were issued in 2012 regarding the economic impacts of LNG exports.[10] First, the Energy Information Administration (EIA) will update its study of the effect that LNG exports may have on domestic energy markets. This will use more recent data, including from EIA’s 2014 Annual Energy Outlook, and will consider cases involving exports of 12 to 20 Bcf/d (compared to the cases of 6 to 12 Bcf/d addressed in the 2012 studies). Then, DOE plans to contract for an external analysis of the economic impact of these higher export scenarios and other effects that such exports may have on the domestic natural gas market. DOE indicates that it will continue to act on applications to export LNG while these studies are being prepared; this contrasts with the situation when the 2012 studies were prepared when DOE suspended processing of applications for exports to non-FTA nations pending preparation of the studies.

DOE’s announcement of these studies indicates that DOE may be amenable to approving applications for exports in amounts that cumulatively may exceed 12 Bcf/d. The total of all non-FTA applications received to date by DOE is 35.93 Bcf/d (as of April 18, 2014). Of course, DOE approving an application for any particular project does not mean that the project sponsors will receive other necessary approvals (including from FERC or MARAD and from state and local authorities), line up customers and financing, and actually be able to construct and operate the project.

Public Comments

DOE issued public notices seeking comments on the proposed changes to its procedures for reviewing applications and for the two separate environmental studies.[11] In each case, the due date for comments is July 21, 2014. DOE also indicated that it will seek public comment on the new economic studies once they have been completed.

Conclusion

DOE’s recent actions regarding its program for reviewing applications for LNG exports indicate that DOE may be more amenable to LNG exports than it was previously thought to be. While all applicants seeking DOE’s approval for exports of LNG to non-FTA countries may not agree with DOE’s proposal to change the order of processing of applications, the change appears to be motivated by a desire to be more efficient and to focus on applications that are most likely to result in actual exports in the near term. Of course, DOE may decide to adjust its proposal based on comments it receives from applicants and other interested parties. Moreover, the environmental studies appear to be motivated by a desire to respond to comments received in response to the various applications and to ensure a full record (notwithstanding DOE’s view that the matters addressed in the Addendum are not required under NEPA). And, most significantly, DOE signaled that it may be willing to approve applications for exports in amounts that cumulatively exceed 12 Bcf/d.

DOE did not specifically discuss geopolitical issues in its statements regarding these new initiatives, but it is conceivable that one factor influencing its actions is the situation in Ukraine and the dependence of countries in Europe on natural gas imports from Russia. Also, it is notable that these actions have been taken at the same time as the White House issued a new report on its “All-of-the-Above Energy Strategy,” including discussion of natural gas as a transitional fuel, and in anticipation of the publication, on May 2, 2014, of the new stationary source greenhouse gas emissions regulations by the Environmental Protection Agency.[12]


[1] As discussed in our prior Client Alerts, Section 3 of the Natural Gas Act (NGA), 15 U.S.C. § 717b, requires companies seeking to export LNG from the United States to obtain approvals from both DOE and the Federal Energy Regulatory Commission (for facilities located onshore or in state waters offshore; facilities located offshore in waters beyond state waters must be reviewed by the Maritime Administration of the Department of Transportation). DOE is required to approve export applications unless the exports are found to be inconsistent with the public interest. Our prior Client Alerts are as follows: Department of Energy Approves Second Application for LNG Exports to Non-Free Trade Agreement Countries (May 23, 2013), available here; Department of Energy Study Boosts Prospects for U.S. LNG Exports, but Challenges Remain (Jan. 7, 2013), available here.
[2] A summary of all DOE applications for LNG exports is available here
[3] DOE publishes an order of precedence for processing these applications: Available here
[4] Maps showing the location of LNG export terminals that have been proposed to FERC can be found here
[5] DOE also has stated that it will continue processing applications under the current procedures and order of precedence pending review of comments on its proposed revised process and final action on those procedures.
[6] Available here
[7] Available here
[8] DOE stated that the matters addressed in the Addendum go beyond what is required under NEPA and cited its view, as stated in Sabine Gas Liquefaction, LLC, DOE/FE Order No. 2961-A (Aug. 7, 2012), that it cannot estimate where, when, or how any additional natural gas will be produced as a consequence of its approval of an LNG export application and therefore, the impacts of such production are not “reasonably foreseeable” under the applicable NEPA regulations at 40 CFR 1508.7.
[9] Available here
[10] These were discussed in our January 7, 2013 Client Alert.
[11] These notices are available on the DOE website here. They also will be published in the Federal Register. The notice with respect to the Addendum was issued in the dockets for 13 projects that have applied for approval by FERC, and the notice with respect to the Life Cycle study was issue in the dockets for 25 projects pending DOE review (either for conditional or final approval); the notice with respect to the procedural changes is not specific to any particular dockets at DOE.
[12] See our Client Alert available here


This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Junaid Chida, an O'Melveny partner licensed to practice law in California and New York, Eric Rothenberg, an O'Melveny partner licensed to practice law in Missouri and New York, Richard Shutran, an O'Melveny partner licensed to practice law in New York, Greg Thorpe, an O'Melveny partner licensed to practice law in California, and Hugh Hilliard, an O'Melveny counsel licensed to practice law in the District of Columbia and Maryland, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.

Portions of this communication may contain attorney advertising. Prior results do not guarantee a similar outcome. Please direct all inquiries regarding New York's Rules of Professional Conduct to O’Melveny & Myers LLP, Times Square Tower, 7 Times Square, New York, NY, 10036, Phone:+1-212-326-2000. © 2014 O'Melveny & Myers LLP. All Rights Reserved.