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The DOE Approves a Second LNG Export Project: A Sign of the Future?

by Daryl Kuo

As the world’s largest producer of natural gas, the United States has the potential to also become the world’s leading exporter of liquefied natural gas (LNG).  The Department of Energy (DOE), however, continues to proceed extremely cautiously with respect to authorizing LNG exports, particularly to countries that have not signed free trade agreements (FTA) with the United States.

To approve a project, the DOE must determine that it is not contrary to the public. While exports are presumed to be in the public interest, this presumption can be rebutted in comments filed by opponents to the proposed exports. The public interest test balances various factors, including (i) the impact of the liquefaction project on domestic natural gas demand, supplies, prices and resource base, (ii) the benefits of international trade, and (iii) the benefits to the domestic economy, national energy security and the global environment. The approval process is further impeded by the fact that the applications are processed in the order in which they are received, pursuant to an Order of Precedence issued by the DOE in December 2012. The DOE will not change this order absent a change in policy.

To date, the DOE has only approved two projects to export LNG to non-FTA-signatory countries.  In August 2012, the DOE authorized the Sabine Pass Liquefaction project, and in May 2013, the DOE conditionally approved the Freeport LNG Expansion project, which permits the export of 511 billion cubic feet of gas per year for a twenty year period.  The delay between both approvals stemmed from the DOE’s commissioning of two studies to assess the potential impact of LNG exports on domestic gas prices and the national economy.  Both studies yielded positive findings that encouraged LNG exports.

Although over twenty LNG export applications to non-FTA-signatory countries remain pending before the DOE, the Freeport approval may be indicative of the DOE’s shifting position regarding LNG exports to non-FTA countries.  The DOE’s review of the Freeport application focused on comparing Freeport’s arguments with the objections made by an opponent to the project, taking stock of concurrences by commentators and acknowledging the favorable study findings.  The DOE applied the rebuttable presumption standard strictly and held that the protestor’s evidence was insufficient to rebut the statutory presumption that LNG exports are consistent with public interest.  The DOE did not debate the validity of the arguments made by Freeport or the pro-export commentators; it did not question the significance and accuracy of the studies (in fact, it dedicated over 50 pages to justifying the studies’ methodologies and findings); and, most importantly, it did not lend much weight to the protestor’s objections.

Despite the pro-export tone of the Freeport approval, the DOE indicated that it would proceed cautiously in reviewing pending applications by assessing the cumulative impact of each application.   Energy Secretary Moniz has not commented on the timeline for reviewing pending applications, and some companies are threatening to go to court to speed up the approval process and strike down the Order of Precedence, which was issued after [...]

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New DOE Study Fuels Debate Over LNG Exports

by Bethany K. Hatef

The U.S. Department of Energy (DOE) engaged the controversy over exporting liquefied natural gas (LNG) with its December 5 publication of Macroeconomic Impacts of LNG Exports from the United States. Prepared for DOE by NERA Economic Consulting, the report concludes the domestic economy will benefit from LNG exports and thereby paves the way for approval of LNG export applications pending DOE approval. But, given the lead times for building export terminals and that only four of the 15 pending applications are expected to be approved in 2013, significant exports are unlikely in the near term. To be considered, initial public comments on the report must be submitted to the Department by January 24, 2013, reply comments by February 25, 2013.

The report evaluated economic impacts “under a wide range of different assumptions about levels of exports, global market conditions, and the cost of producing natural gas in the U.S.” NERA modeled impacts using its Global Natural Gas Model and its general equilibrium model of the domestic economy. NERA considered the 16 economic scenarios addressed in DOE’s first study, issued in January 2012, as well as 47 global scenarios NERA developed.

The report concludes that in all 63 scenarios evaluated, increased LNG exports produced net domestic economic benefits. Even scenarios of unlimited export of LNG consistently produced higher net economic benefits than scenarios involving limited LNG exports. The report projects some negative effects of increased LNG exports on the U.S. economy, noting that large amounts of exports would slightly raise natural gas prices (e.g., with significant increases in LNG exports, prices could jump by more than $1 per thousand cubic feet over five years, an increase of more than 25 percent) and negatively affect utilities and “energy-intensive” manufacturers (i.e., manufacturers with energy expenditures exceeding 5 percent of output and significant exposure to foreign competition).

Rising domestic natural gas prices would have a ceiling, the report observes, since “importers will not purchase U.S. exports if U.S. wellhead price rises above the cost of competing supplies.” Energy-intensive industries are not projected to lose employment or output exceeding one percent per year. Additionally, the report projects that LNG exports will positively affect some segments of the domestic economy and improve consumer welfare, outcomes that, the report concludes, outweigh the losses associated with increased natural gas prices. The report estimates that LNG exports could produce between $10 and $30 billion in annual export revenues.

The report is certain to fuel already hot contention over whether DOE should authorize LNG exports. Dow Chemical has already decried the report’s conclusions, warning that increased domestic natural gas prices would impede energy-intensive manufacturers’ ability to keep up with their foreign counterparts. As mentioned in last month’s update, Senator Ron Wyden (D-OR) and Congressman Edward Markey (D-MA) are also critics of increased LNG exports, noting that a rise in LNG exports would essentially constitute a transfer of wealth from consumers to oil and gas companies. Environmental groups, who oppose the practice of hydraulic fracturing, which has contributed to the current abundance of natural gas in the [...]

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LNG Exports Continue to Await DOE Approval

by Daryl Kuo

The discovery and accessibility of vast domestic shale gas reserves in the United States has motivated states and industry alike to lobby heavily for the approval of liquefied natural gas (LNG) exports.  LNG exports to non-Free Trade Agreement (FTA) countries, including China and Japan, are of particular interest because estimates for exports to those countries are as high as 16 billion cubic feet per day, more than ten times greater than all U.S. LNG exports in 2011.  So far, the U.S. Department of Energy (DOE) has approved only one LNG export project to non-FTA countries, and that approval is being challenged. Meanwhile, more than a dozen applications sit in DOE’s queue pending the release of a critical study by the end of the year. The debate over exports to non-FTA countries is likely to become more intense in the coming months once that study is released and subjected to a public comment period prior to any decisions by the DOE on the pending applications.

Section 3 of the Natural Gas Act (NGA) prohibits the export of LNG without the prior approval of the DOE, which must approve an export project unless it determines that the proposed export will be inconsistent with the public interest.  To date, the DOE has authorized only one project to export LNG to non-FTA countries, the Sabine Pass liquefaction project on the border of Louisiana and Texas. However, on September 6, 2012, Sierra Club requested a rehearing and stay of the DOE’s order authorizing Sabine Pass to export LNG to non-FTA countries. The DOE issued a tolling order on October 5, 2012 to extend the date by which it must act on Sierra Club’s request, which would otherwise have automatically been denied after 30 days. Sierra Club filed a motion to supplement the record in that case on November 1, 2012.

Fourteen other applications for projects involving non-FTA countries are currently pending DOE review (the most recent application was submitted by Golden Pass Products LLC, an affiliate of Exxon Mobil, on October 25, 2012), but the approval process is frozen while the DOE waits for the second half of a two-part study on the domestic impact of LNG exports to non-FTA countries.  The first part of the study, conducted by the U.S. Energy Information Administration, found that increased exports would raise electricity bills in the U.S. by an average of 1 percent to 3 percent annually between 2015 and 2035.  The DOE is delaying any further action until the release of the second part of its study looking at the macroeconomic impact of LNG exports, which is not expected until the end of the year. 

Given the political sensitivity of exporting domestic resources, particularly to non-FTA countries, lawmakers and industry have expressed concern about whether DOE could withdraw an approval. In a letter to Congressman Edward J. Markey (D-MA), dated February 24, 2012, the DOE responded to this concern by referencing its Sabine Pass order and noting that its authority to issue supplemental orders modifying previous [...]

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