What’s Next for US LNG Exports – A Rulemaking?

Susan L. Sakmar's picture
Susan L. Sakmar, Independent consultant, author and adjunct law professor, University of Houston Law Center
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In a significant development in the US LNG export stampede, America’s Energy Advantage (AEA) has filed a formal motion to intervene in the next project in line for Department of Energy (DoE) export approval to non-FTA countries. It happens to be the second application filed by Freeport LNG, whose first application was approved in May.

AEA – a trade association representing major manufacturers and commodity producers, as well as publicly owned natural gas local distribution companies – is worried about the impact LNG exports could have on domestic gas prices. It has previously raised concerns that large-scale exports from the US could derail the “manufacturing renaissance” currently underway in America, thanks to abundant supplies of shale gas.

One can only assume that despite prior statements that it would proceed with “caution,” the DoE might have been on the verge of approving the Freeport application. If authorised, it would raise the cumulative volume of approved exports to non-FTA countries to 8.3 Bcf/d, well beyond the “low-export scenario” level of 6 Bcf/d identified in the NERA report that the DoE has been taking into account in its determinations to date.

Across the 6 Bcf/d threshold: The DoE crossed the psychologically significant 6 Bcf/d threshold when it approved Dominion’s Cove Point Project, thereby cumulatively authorising non-FTA exports totalling 6.4 Bcf/d.  The other approvals were for Cheniere’s Sabine Pass (2.2 Bcf/d), Freeport’s first application (1.4 Bcf/d) and Lake Charles Exports (2.0 Bcf/d).

In its latest report of export licence applications, published in mid-October, the DoE lists 34 applications for export licences to FTA countries, totalling 37 Bcf/d (most of which has been approved), and 26 applications for non-FTA countries totalling 34 Bcf/d. These volumes are not cumulative in most cases, so it is important to avoid double-counting. Nevertheless, the numbers are startling.

To put this in perspective, 37 Bcf/d is 290 million metric tonnes per annum of LNG (using the DoE’s conversion factor of 1 Bcf/d = 7.82 mtpa) – around 50 mtpa more than was produced world-wide in 2012.

Currently, the world’s largest LNG exporter is Qatar, with export capacity of 77 mtpa.   Australia has massive LNG export projects under construction and is expected to exceed Qatar’s LNG export capacity by the end of the decade. Despite these large numbers, if just a fraction of the proposed US LNG export capacity came to fruition, the US would rival both of them.

Moreover, 37 Bcf/d represents over half of current US production of natural gas, which is about 70 Bcf/d. This fact has not been lost on the AEA, nor on a growing number of US policy-makers, many of whom will face voters in congressional elections in 2014.

What impact would a formal rulemaking have on approvals? In addition to intervening in the Freeport case, AEA has also made a formal request for a “rulemaking” which would require the DoE to develop clearly defined public interest criteria and to establish comprehensive standards for reviewing and approving all LNG export applications.

The challenge thus far for the US LNG export approval process is that the DoE has been forced to try to apply guidelines that were written decades ago in the context of a very different market, when the US was expected to be an LNG importer, not an exporter. The recent legal challenge by AEA points out that LNG exports raise a variety of unique economic, environmental, and other strategic concerns that cannot be adequately addressed by simply replacing the word “import” with “export.”

Accordingly, the DoE needs to establish appropriate standards for reviewing LNG export applications. Under US law, the best way for the DoE to do this is with a formal rulemaking procedure.

Overlooked by many followers of the US LNG export approval process is the fact that the Sierra Club was the first party to seek a formal rulemaking, back in April.   Its rulemaking petition is still pending and with now two formal requests for a rulemaking, it is possible that DoE may feel it can no longer avoid calls for more detailed standards and procedures.

A lengthy and contentious process? While most people in the industry loath the idea of what would likely be a lengthy and contentious rulemaking process, there appears to be at least some bi-partisan support for clarification of certain issues that the DoE could decide through such a process.

For example, in an August 2, 2013 letter to US Secretary of Energy, Dr. Ernest Moniz, Senators Ron Wyden (D-Oregon) and Lisa Murkowski (R-Alaska) expressed concerns over the lack of clarity with respect to the DoE’s authority to modify or rescind prior export authorisations. The concern that the DoE could, at some future date, rescind an export authorisation has also been raised by some of the offtakers in approved export projects.

Related to the ability of the DoE to rescind an export license are the factors and conditions that could give rise to such an event.  For example, the DoE has cautioned that “[t]he market of the future very likely will not resemble the market of today” and has indicated that it intends to monitor changing conditions and the implications they may have on pending and future LNG export applications.

But the DoE has not provided any detail on what conditions it is monitoring or how those changing conditions might affect export applications. The rulemaking process would serve as the forum for the DoE to determine what these conditions might be and would allow industry experts and the public to weigh in on the conditions DoE should consider.

Delay and uncertainty: There is no doubt that the absence of definitive standards for evaluating LNG export applications has already caused delay and uncertainty for LNG markets.

While it is possible the DoE could continue to “muddle along”, with two formal rulemaking petitions pending, it is increasingly likely that it will seek to avoid a lawsuit and grant one, or both, rulemaking petitions. It is also possible that exporters will sue as well, having grown weary of DoE’s promises to move the process along.

With over half of current US production already theoretically approved for export, the stakes are high and tensions are starting to mount for action – one way or the other.

About this author: Susan is currently a visiting assistant law professor at the University of Houston Law Center and an independent consultant on global gas markets, including LNG and global shale gas development.   She is the author of the latest book on LNG, “Energy for the 21st Century: Opportunities and Challenges for LNG.”

She is also one of the contributors to the Gastech Student Programme, alongside Chairman, Bernhard Godderidge, PSV Charterer/Marine Contract Holder, Upstream International, Shell. The programme offers the opportunity 60 international students to attend a high level conference and network with some of the industry's leading experts in LNG and natural gas as well as well as attend the main Gastech conference and exhibition. The Gastech Student Programme runs on 25th March 2014 in Korea and the closing date for applications  is the 30th November 2013.

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