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Department of Energy Study Boosts Prospects for U.S. LNG Exports, but Challenges Remain

January 7, 2013

 

A recent study performed for the U.S. Department of Energy concludes that exports of liquefied natural gas (LNG) from the United States would provide macroeconomic benefits to the U.S. economy. This study should improve the prospects for additional exports of LNG from the United States. But the study also indicates that the market for LNG exports from the United States may not be large enough to support all of the export projects that have been proposed. Companies seeking to export LNG from the United States face many challenges, including entering into long-term sales contracts, lining up financing, and obtaining regulatory approvals from multiple governmental entities. Potential customers of LNG from the United States may play a key role in choosing which projects move forward by deciding which projects to support with their supply commitments and investments.

Approvals under the Natural Gas Act

Section 3 of the Natural Gas Act (NGA)[1] requires companies seeking to export natural gas, including LNG, from the United States to obtain approvals from both the U.S. Department of Energy, Office of Fossil Energy (DOE), and the Federal Energy Regulatory Commission (FERC).[2] These agencies are required to approve export applications unless the exports are found to be inconsistent with the public interest.[3]

DOE’s public-interest review of proposed natural gas exports focuses on the domestic need for the natural gas, any threat to the security of domestic natural gas supplies, and any other issue determined to be appropriate, including consistency with DOE’s policy of promoting market competition.[4] In the case of exports to countries with which the United States has free-trade agreements requiring national treatment for trade in natural gas (FTAs), the NGA deems the exports to be in the public interest and mandates that applications for export be granted without delay.[5] Applications for exports to non-FTA countries require a more substantive review. Exporters are required to provide information to DOE regarding the destination countries of their exports.[6] DOE also considers the environmental aspects of an export application to comply with its obligations under the National Environmental Policy Act (NEPA).[7] DOE has implemented its NEPA review by serving as a cooperating agency in the environmental review conducted by FERC with respect to the construction, operation and siting of facilities and by conditioning its approval of export applications upon satisfactory completion of FERC’s review and on an issuance by DOE of a finding of no significant impact (FONSI) or a record of decision pursuant to NEPA.[8]

FERC’s public-interest review focuses on environmental and safety impacts of the project. FERC serves as the lead agency in conducting the NEPA analysis to support its decision on whether to approve.[9] The Sierra Club, expressing concerns about the environmental impact of expanding shale gas development in the United States, challenged FERC’s first approval of an LNG export terminal—the Sabine Pass project under construction in the Gulf of Mexico off the shore of Texas. FERC rejected the Sierra Club’s argument that FERC’s environmental analysis needed to include a detailed analysis of the impacts of shale gas drilling “induced” by the export terminal, finding that it is too speculative to assume the location and production activity associated with any such additional shale gas development.[10] FERC’s decision was based in part on a recent decision of the U.S. Court of Appeals upholding FERC’s approval of a pipeline project in Pennsylvania where the Sierra Club and other parties had argued that FERC did not adequately consider the effect of additional shale gas production activities in Pennsylvania that could be induced by the pipeline.[11] The Sierra Club also challenged DOE’s approval of Sabine Pass’s proposal to export natural gas on similar grounds. DOE rejected these arguments, and the Sierra Club’s request for rehearing is pending before DOE.[12]

Pending Applications and DOE LNG Export Study

DOE has received applications to export LNG from 21 separate projects, for a total of 29.21 Bcf/day[13] of exports to countries with FTAs, and 24.80 Bcf/day of exports to countries without FTAs.[14] Most of these applications have been approved so far for exports to FTA countries, but the only approval so far to a non-FTA country is the Sabine Pass application.[15] Many of the projects proposed to DOE also have been proposed to FERC, but the only project to receive FERC approval so far for LNG exports to FTA or non-FTA countries is the Sabine Pass project.[16]

As a pre-condition to processing additional applications, DOE commissioned a study of the cumulative economic impact of LNG exports (LNG Export Study) consisting of two parts: an evaluation by the Energy Information Administration (EIA) of the effect that LNG exports could have on domestic energy markets and a report by a private consultant, NERA Economic Consulting (NERA), on the macro-economic effects on the U.S. economy of LNG exports. The first part was published in January 2012 and the second part in December 2012. DOE has requested public comment on the study, with initial comments due on January 24, 2013 and reply comments due on February 25, 2013.[17]

The EIA study unsurprisingly found that exports would lead to higher domestic natural gas prices and production, although these effects would vary depending on factors such as the rate of economic growth and the amount of recoverable natural gas resources.[18] The NERA study concluded that the United States would experience net economic benefits from LNG exports under all of the scenarios studied but notably found that some of the scenarios studied by EIA were not feasible given limits on the amount of exports that would be accepted by world LNG markets (i.e., in some cases, prices for competing world LNG supplies would not be high enough to support the needed increases in U.S. shale gas production).[19] The NERA study found that the largest price increase in U.S. natural gas markets would range between $0.22 and $1.11/Mcf, depending on the assumptions used, and that the higher end of the range would be reached only if U.S. gas supplies are plentiful and prices are relatively low.[20] The level of annual exports projected by the LNG Export Study vary greatly depending on the assumptions used, but they generally range between 1.19 to 4.38 Tcf in the 2025–2035 period under scenarios using the reference case for the estimated ultimate recovery of U.S. shale gas, and between 2.01 to 4.38 Tcf in the same period under scenarios using the high case for the estimated ultimate recovery of U.S. shale gas.[21] An annual export level of 4.38 Tcf (12 Bcf/day), for example, represents less than one-fourth of the total export capacity associated with all of the applications that have been filed with DOE. Even the highest export scenario projected by NERA (8.39 Tcf per year in 2035) suggests that the market will not support all of the LNG export projects proposed in the applications filed by sponsors at DOE.

DOE has stated that it will use the LNG Export Study and the comments filed in response to the study to determine whether the pending applications for export to non-FTA countries are in the public interest. It first will process the applications for which applicants have commenced the pre-filing process at FERC as of December 5, 2012, in the general order in which DOE received the applications, and then it will process other applications in the order of receipt. It is not clear on what basis DOE could decide to approve some applications and not others except for environmental/safety reasons (which are primarily under the purview of FERC). If DOE were to impose an overall limitation on the amount of exports approved, then it might approve applications only up to that limit.

Other Barriers to LNG Exports

Based on the market analysis in the LNG Export Study, it does not appear that all proposed LNG export projects will have market support. To obtain financing for their projects, sponsors likely will need to demonstrate that there is a market for their capacity by entering into long-term contracts with creditworthy customers. Sponsors also will need to show that they have lined up qualified vendors to perform engineering, procurement, and construction services, and that they have acquired all material permits.

In addition to the authorizations required under the NGA, sponsors typically will need various state and local permits, including state permits under the Coastal Zone Management Act, the Clean Air Act, and the Federal Water Pollution Control Act.[22] Obtaining all needed permits can be difficult. For example, the proposal by Oregon LNG to construct a 1.25 Bcf/d export terminal in Oregon is facing a decision by a newly elected Clatsop County Board of Commissioners to reverse a decision by its predecessor Board under the county’s environmental laws approving the construction of an associated pipeline.[23] Opponents of the Oregon LNG project also have challenged the Letter of Recommendation by the U.S. Coast Guard determining the suitability of the Columbia River for LNG marine traffic as it relates to safety and security.[24] As another example, the State of New York exercised its authority under the Coastal Zone Management Act to object to a proposed LNG import terminal in Long Island Sound. The U.S. Department of Commerce upheld New York’s objection, and the project subsequently was cancelled.[25]

However, most of the LNG export projects proposed to DOE and FERC are located along the Gulf of Mexico coastline, in Texas, Louisiana, and Mississippi, or in certain East Coast locations that are less likely to be subject to significant local opposition than the project in Oregon.[26] Moreover, many are located at the sites of existing import terminals, where they should encounter less resistance based on the successful track record of obtaining permits for similar activities at such sites and the generally lower environmental impacts of projects that are able to use existing infrastructure as compared to entirely new facilities.[27] Note that export terminals do not need to be located close to shale gas production; instead, projects can be located close to conventional gas supplies that are being displaced by shale gas production in other parts of the country. LNG export projects in Canada and Mexico also could provide re-export outlets for U.S.-sourced natural gas.[28]

Conclusion

The NERA report recently published by DOE may open the door a bit wider to U.S. LNG exports by providing evidence that such exports will provide net benefits to the U.S. economy. However, the report also indicates that the door may not be as large as previously expected because of limits on the amount of LNG that can be absorbed by world markets. So, which of the projects that have been proposed to DOE will move forward? These are likely to be the ones whose sponsors can obtain financing by demonstrating to investors that they have firm purchase commitments from creditworthy customers, favorable contracts for engineering, procurement, and construction, and a clear path forward to obtaining all necessary permits. Parties seeking to import LNG from the United States will play an important role in determining which projects move forward by choosing which projects to support with their purchase commitments (and potentially financing). In making this choice, they will want to consider the track record of the sponsor and the likelihood that the project will be able to obtain all necessary permits, in addition to purely economic factors.

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[1] 15 U.S.C. § 717b.
[2] Section 301(b) of the Department of Energy Organization Act, 42 U.S.C. § 7151(b), delegated the NGA Section 3 authority to the Secretary of Energy. See also Section 402(f), 42 U.S.C. § 7172(f). The Secretary of Energy subsequently delegated to FERC the authority to approve or disapprove the construction and operation and siting of particular facilities for natural gas exports. See DOE Delegation Order No. 00-044.00A. The Under Secretary of Energy delegated to the Assistant Secretary for Fossil Energy the Secretary’s approval authority with respect to natural gas exports other than those delegated to FERC. See DOE Delegation Order No. 00-002.00M § 1.16; DOE Redelegation Order No. 00-002.04E.
[3] 15 U.S.C. § 717b(a).
[4] Sabine Gas Liquefaction, LLC, DOE/FE Order No. 2961 at p. 29 (2011) (“DOE Sabine I”).
[5] 15 U.S.C. § 717b(b)(2). The United States has such FTAs with Australia, Bahrain, Canada, Chile, Colombia, Dominican Republic, El Salvador, Guatemala, Honduras, Jordan, Mexico, Morocco, Nicaragua, Oman, Panama, Peru, Republic of Korea, and Singapore. The United States has free trade agreements with Costa Rica and Israel that do not require national treatment for trade in natural gas. Waller LNG Servs., LLC d/b/a Waller Point LNG, DOE/FE Order No. 3211 at n.3 (2012).
[6] Applicants are required to provide transaction-specific information in their applications, to the extent available, and to file monthly reports of their exports. If the applicant has not yet entered into contracts and therefore does not include this information in its application, then it is required to file copies of its long-term export contracts with DOE within 30 days after execution. Exporters may be required to include in their contracts provisions limiting re-exports only to countries covered by the DOE authorization. DOE Sabine I at pp. 41-45.
[7] 42 U.S.C. § 4321.
[8] DOE Sabine I at pp. 40–41.
[9] Sabine Pass Liquefaction, LLC, 139 FERC ¶ 61,039 at PP 31–33; order on reh’g, 140 FERC ¶ 61,076 at PP 4–6 (2012) (“FERC Sabine”).
[10] FERC Sabine, 140 FERC ¶ 61,076 at PP 9, 13.
[11] Id. at P 11 (citing Cent. N.Y. Oil &Gas Co., 137 FERC ¶ 61,121 (2011), reh’g denied, 138 FERC ¶ 61,104 (2012), aff’d, Coalition for Responsible Growth & Res. Conservation v. FERC, No. 12-566, 2012 U.S. App. LEXIS 11847 (2d Cir. June 12, 2012)).
[12] Sabine Pass Liquefaction, LLC, DOE/FE Order No. 2961-A at pp. 27–28 (2012) (“Sabine II”); Order Granting Rehearing for Further Consideration, FE Docket No. 10-111-LNG (Oct. 5, 2012).
[13] This article uses Tcf, Bcf, and Mcf, respectively, to denote trillion, billion, and thousand cubic feet of natural gas.
[14] U.S. Department of Energy, Office of Fossil Energy, Applications Received by DOE/FE to Export Domestically Produced LNG from the Lower 48 States (as of December 19, 2012), available at http://fossil.energy.gov/programs/gasregulation/reports/summary_lng_applications.pdf. Fifteen projects (in addition to the Sabine Pass project) include proposals for exports to non-FTA countries.
[15] Id.; DOE Sabine II.
[16] U.S. Department of Energy, Office of Fossil Energy, Pending Long-Term Applications to Export LNG to Non-FTA Countries - Listed in Order DOE Will Commence Processing, Dec. 12, 2012, available at http://www.fossil.energy.gov/programs/gasregulation/publications/export_applications_order_of_precedence.pdf; see also FERC, North American LNG Import/Export Terminals Proposed/Potential, Dec. 5, 2012 (“Proposed/Potential Terminals”), available at http://www.ferc.gov/industries/gas/indus-act/lng/LNG-proposed-potential.pdf, and FERC, North American LNG Import/Export Terminals Approved, Dec. 5, 2012 (“Approved Terminals”), available at http://www.ferc.gov/industries/gas/indus-act/lng/LNG-approved.pdf; FERC Sabine.
[17] 2012 LNG Export Study, 77 F.R. 73,627 (Dec. 11, 2012). The EIA Report is available at www.eia.gov/analysis/requests/fe. The NERA Report is available at http://www.fossil.energy.gov/programs/gasregulation/LNGStudy.html.
[18] EIA Report at pp. 6–11.
[19] NERA Report at pp. 3–4. Note that the EIA study did not take into account developments in world natural gas markets. Id. at p. 3; see also EIA Report at p. 3.
[20] NERA Report at pp. 1–2, 9–10.
[21] Id. at pp. 38–40. These cases generally assume certain limits on U.S. shale gas export capability. Assuming no such constraints on U.S. LNG export capacity, the scenario with the highest annual export levels ranges between 3.93 and 5.75 Tcf, under the reference case for the estimated ultimate recovery of U.S. shale gas, and between 6.72 and 8.39 Tcf, for the high case for the estimated ultimate recovery of U.S. shale gas, over the 2025–2035 time period. Id. Under some of the scenarios studied by NERA using the reference case for the estimated ultimate recovery of U.S. shale gas, NERA projected no LNG exports. Id. at p. 4.
[22] The NGA specifically preserves the rights of individual states under these acts, as well as the application of other federal laws, to LNG terminals. 15 U.S.C. §§ 717b(d) and (e)(1).
[23] State ex rel.Or. Pipeline Co. LLC v. Clatsop Cnty., 288 P.3d 1024 (Or. Ct. App. 2012) (affirming decision of circuit court dismissing petition of Oregon Pipeline Co. LLC seeking a writ of mandamus to require Clatsop County to approve company’s application for land-use approval of a natural gas pipeline; the court held that the previous Board of Commissioners’ approval met the requirement to take final action on the application within the statutory limit of 150 days and that the Land Use Board of Appeals had exclusive jurisdiction over the issue because of an appeal that had been filed in response to the previous Board of Commissioners’ approval, notwithstanding that the subsequent Board of Commissioners requested withdrawal of the prior decision for reconsideration).
[24] Pet. for Review, Columbia Riverkeeper, et al. v. U.S. Coast Guard, No. 12-73385 (9th Cir. Oct. 19, 2012).
[25] Decisions and Findings by the U.S. Sec’y of Commerce in the Consistency Appeal of Broadwater Energy LLC and Broadwater Pipeline LLC from an Objection by the State of New York (Apr. 13, 2009); Olivia Winslow, Gas Plan Dropped: Broadwater Kills LI Sound Project, Newsday, Mar. 9, 2012, at A6.
[26] See FERC, Proposed/Potential Terminals, supra note16.
[27] A court in Maryland recently found in favor of the operator of an existing LNG import terminal, holding that the operator’s prior settlement agreement regarding construction of its import terminal also grants the operator permission to use its facility for LNG exports. Dominion Cove Point LNG, L.P. v. The Sierra Club, et al., Case No. 04-C-12-000598 (Prince George’s Cnty., Md. Cir. Ct. Jan. 4, 2013).
[28] See FERC, Approved Terminals, supra note16, and FERC, Proposed/Potential Terminals, supra note 16; see also FERC, North American LNG Import/Export Terminals Existing, available at http://www.ferc.gov/industries/gas/indus-act/lng/LNG-existing.pdf.


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