The Office of Fossil Energy of the Department of Energy (DOE/FE)
ended a nearly two-year moratorium on liquefied natural gas (LNG)
export approvals on Friday when it conditionally approved the
export of LNG to countries that do not have a free trade agreement
with the United States (non-FTA countries). The approval
Order,[1] which specifically addresses the export
application of Freeport LNG Expansion L.P. and FLNG Liquefaction,
LLC (together, FLEX), is the first non-FTA long-term LNG export
authorization granted by the DOE/FE since 2011, when all pending
non-FTA export applications were put on hold while the DOE/FE
commissioned a study to examine the cumulative effects of such
exports. Although the Order provides important insight into how the
DOE/FE will consider pending and future non-FTA export
applications, it raises many questions, and clearly indicates that
the DOE/FE will not be backing down from its controversial position
that it has the authority to revoke such authorizations in the
future.
Background
Historically, the U.S. has been an importer of natural gas. With
the dramatically increased production of natural gas through
fracking and the decrease in domestic natural gas prices in recent
years, however, interest in LNG exports has increased. Importers
and exporters of natural gas require authorization of the DOE/FE,
which must approve import or export applications unless doing so
"will not be consistent with the public interest." By
statute, exports to FTA countries are deemed to be within the
public interest and must be approved by the DOE/FE without delay.
Although there is a statutory presumption that exports to non-FTA
countries are in the public interest as well, that presumption is
rebuttable. When considering such non-FTA export applications, the
DOE/FE performs a public interest analysis that considers a number
of factors, including domestic need for the gas to be exported and
whether the proposed exports pose a threat to the security of
domestic natural gas supplies.
In 2011, after conditionally granting the Sabine Pass non-FTA
export authorization,[2] the DOE/FE commissioned a
two-part study (LNG Study) of the economic impacts of LNG exports
to "better inform its public interest review" of further
export applications. Pending applications were put on hold while
the DOE/FE awaited the outcome of the LNG Study, which was
performed by the U.S. Energy Information Administration (EIA) and
NERA Economic Consulting (NERA). Once the LNG Study was published
in December 2012, the DOE/FE solicited public comments. The comment
period ended on February 25, and since that time the industry has
awaited this first post-Sabine Pass non-FTA export order.
The FLEX application, which was filed December 17, 2010, requested
authorization to export LNG equivalent to up to 1.4 billion cubic
feet per day of natural gas to non-FTA countries for a period of 25
years. FLEX requested the authority to export such LNG on its own
behalf and as an agent for other parties.
The Order
The portion of the 127-page Order that will receive the most
industry attention is found on page 112, and footnote 126, where
the DOE/FE indicates that it will not be backing away from its
statement, originally made in the Sabine Pass Order, that "in
the event of any unforeseen developments of such significant
consequence as to put the public interest at risk, DOE/FE is fully
authorized to take action as necessary to protect the public
interest." The DOE/FE further clarifies that such
"action" could include revocation, in whole or part, of
previously granted export authorizations. This portion of the Order
will not be received well by the LNG industry, which argued
vigorously that the DOE/FE does not have such revocation power, or
in the alternative requested that the DOE/FE at least clarify under
what circumstances such revocation might occur. In this respect the
Order does little to provide additional certainty to
applicants.
The remainder of the Order, though specifically addressing the FLEX
application, devotes significant attention to a general discussion
of the LNG Study, defending its conclusions against the attacks
made by some commenters. Very broadly speaking, the LNG Study
concluded that LNG exports would result in higher domestic natural
gas prices but net economic benefit to the U.S.
With respect to the FLEX application in particular, the DOE/FE
determined that the LNG Study "supports the proposition that
the proposed authorization would not be inconsistent with the
public interest." The DOE/FE also cited to the National Export
Initiative, which sets an administration goal to promote exports,
in support of its finding that granting the FLEX application was
not inconsistent with the public interest, and reiterated its
general policy that "under most circumstances, the market is
the most efficient means of allocating natural gas supplies."
The DOE/FE found that the sole protestor to the FLEX application,
the American Public Gas Association (APGA), failed to support its
protest with significant analysis, did not identify meaningful
errors or omissions in the studies submitted by FLEX, and did not
provide a basis for rejecting FLEX's claims that benefits would
result from granting the application. Accordingly, the DOE/FE
concluded that APGA failed to rebut the statutory presumption that
granting the application was in the public interest.
Also of interest to those with pending or yet-to-be-filed
applications, the DOE/FE acknowledged that neither the EIA nor NERA
studies examined regional impacts of LNG exports, and indicated
that it will review such regional impacts on a case-by-case basis.
In addition, while concluding that there are adequate natural gas
resources to meet demand associated with the FLEX application, the
DOE/FE acknowledged that such supply estimates change over time,
and indicated that it will "continue to monitor [supply
estimates] to inform future decisions."
The DOE/FE "hasten[ed] to add" that it will take a
"measured approach" in reviewing pending export
applications. While declining to set a definitive cap on total
volume of LNG that may be exported, the DOE/FE noted that it
"will assess the cumulative impacts of each succeeding request
for export authorization on the public interest with due regard to
the effect on domestic natural gas supply and demand
fundamentals." In an apparent attempt to guard against
companies attempting to obtain authorizations without the immediate
ability to utilize them, the DOE/FE indicated that it will attach
terms and conditions to such authorizations to make sure they are
used in a timely manner, and will not issue authorizations unless
the applicant can demonstrate "that there are or will be
facilities capable of handling the proposed export volumes and
existing and forecasted supplies that support that
action."
Some additional aspects of the Order that signal DOE/FE treatment
of pending and future export applications include its decision to
limit FLEX's conditional authorization to 20 years rather than
the 25 years requested in FLEX's application. It appears likely
this cap will be imposed on other applicants. In addition, as a
condition of the authorization, FLEX is required to commence LNG
export operations no later than seven years from the date of
issuance of the Order. As it did in Sabine Pass, the DOE/FE will
require prior approval for any change in control of the
authorization holder.
The approval is conditioned on completion of review under the
National Environmental Policy Act (NEPA), which the DOE/FE intends
to complete in tandem with FERC review of the FLEX liquefaction
project.
Our attorneys have significant experience advising clients on a
variety of natural gas matters, and filed the first FTA and non-FTA
applications for small-scale LNG exports. If you have any questions
concerning the Order specifically or LNG or other natural gas
issues generally, please contact any of the attorneys listed in
this alert.
Footnotes
[1] Freeport LNG Expansion, L.P. and FLNG Liquefaction, LLC, DOE/FE Order No. 3282, Order Conditionally Granting Long-Term Multi-Contract Authorization to Export Liquefied Natural Gas by Vessel from The Freeport LNG Terminal on Quintana Island, Texas, to Non-Free Trade Agreement Nations (May 17, 2013) (the Order).[2] Sabine Pass Liquefaction, LLC, DOE/FE Order No. 2961, Opinion and Order Conditionally Granting Long-Term Authorization to Export Liquefied Natural Gas from Sabine Pass LNG Terminal to Non-Free Trade Agreement Nations (May 20, 2011) (Sabine Pass Order).
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