On February 11, 2014, the U.S. Department of Energy ("DOE") issued an order authorizing Sempra’s Cameron LNG to export liquefied natural gas ("LNG") from the Cameron Terminal in Cameron Parish, Louisiana to nations with which the United States does not have a Free Trade Agreement ("non-FTA nations"), its sixth such order for LNG exports. DOE’s Order No. 3391 ("Cameron Order") conditionally grants Cameron’s application for long-term multi-contract authorization to export 1.7 billion cubic feet per day (“Bcf/d”) of LNG by vessel to non-FTA nations. In this order, DOE updates its analysis based on the most recent supply, demand, and price information available from the Energy Information Administration’s (“EIA”) Annual Energy Outlook 2014 Early Release Reference Case (“AEO 2014 Early Release”), as DOE previously had stated it would. The resulting conclusions are that Cameron’s proposed LNG exports have not been shown to be contrary to the public interest and that the AEO 2014 Early Release data supports the positive conclusions of the DOE-commissioned NERA Study exploring the macroeconomic impacts of LNG exports on the U.S. economy.
Generally the Cameron Order follows the same course as DOE’s prior export orders. DOE’s Cameron Order, like the Freeport II Order, Cove Point Order, Lake Charles Order, and Freeport I Order, continues to demonstrate DOE’s robust view of the global gas market. The Cameron Order has taken longer to issue than any of DOE’s other recent non-FTA orders, which likely is primarily the result of DOE’s inclusion of the new EIA AEO 2014 Early Release data. In the Cameron Order DOE reiterates its statement from the Freeport II Order, Cove Point, Lake Charles, and Freeport I orders that significant LNG exports and the rapid reversal of the natural gas market are new phenomena that are likely to change over time. Consequently, DOE affirms that it intends to monitor market developments that could tend to undermine the public interest in grants of successive applications for exports of domestically produced LNG to non-FTA nations.
DOE derives its authority to grant or deny applications for authorization to export LNG from the Natural Gas Act (“NGA”). Pursuant to Section 3 of the NGA, DOE must grant applications for authorization to export natural gas to countries with which the United States has a Free Trade Agreement without modification or delay. By contrast, the NGA sets up a rebuttable presumption that natural gas exports to non-FTA nations are in the public interest.
Following its order authorizing LNG exports to non-FTA nations from the Sabine Pass terminal, DOE commissioned two studies on the impacts of LNG exports on the U.S. economy: a microeconomic study performed by the EIA and a macroeconomic study performed by NERA Economic Consulting (collectively, the “LNG Export Study”). In December 2012, DOE invited public comment on the LNG Export Study, with an initial comment period ending January 24, 2013 and a reply comment period ending February 25, 2013.
The Cameron Order
DOE’s analysis in the Cameron Order is substantially similar to its analysis in its other recent orders. A few key differences are highlighted below. Under DOE’s regulations, requests for rehearing are due Thursday, March 13, 2014.
Pace of Authorization
Shortly after its issuance of the Freeport I Order earlier this year, DOE made public statements emphasizing that it took only two months to write the Freeport order. The Cameron Order, which has been highly anticipated, comes nearly 13 weeks (88 days) after the Freeport II Order. The Freeport II Order issued approximately 65 days after the Cove Point Order, which issued just 35 days after the Lake Charles Order. The relative difference in timing may be due in part to the fact that in the interim between the Freeport II Order and the Cameron Order, DOE updates its analysis to include the AEO 2014 Early Release data.
DOE did much of the heavy lifting in terms of its analysis in the Freeport I Order. The fact that the Cameron Order is in large part similar on the substantive analysis to the Freeport II Order, Cove Point Order, Lake Charles Order, and Freeport I Order underscores this point.
DOE previously indicated that it will continue to refresh its analysis based on the most currently available information, including the results of the AEO 2014 Early Release, which issued on December 6, 2013. This is the first order in which DOE took the new EIA data into account and thus, the slight lag in DOE’s issuance of the Cameron Order to update its public interest analysis to account for the new information is not surprising.
DOE has made several public statements recently that it will continue to process the pending applications and any future applications in the order of precedence established in December 2012. In its press release covering the Cameron Order, DOE reiterated its intent to stick to the previously established queue.
Authorization of Full Volumes Requested
In the Cameron Order, DOE authorizes the full 1.7 Bcf/d of LNG exports that Cameron requested in its non-FTA application. DOE notes in its order that these volumes are non-additive of the 1.7 Bcf/d of exports to FTA nations that DOE previously authorized for Cameron. In addition, DOE notes, as it has in other prior orders, that the proposed export volume in Cameron’s non-FTA application mirror the liquefaction capacity of the Cameron LNG Liquefaction Project estimated at the time the application was submitted.
DOE did not authorize the full volumes requested in the Freeport II Order, noting that the volumes requested, when added to the volumes authorized in the Freeport I Order, exceeded the liquefaction capacity of the Freeport LNG Liquefaction Project as filed at FERC. Taking DOE’s recent orders on the whole, including the Cameron Order, DOE likely will continue to focus on project capacity when issuing its decisions on non-FTA applications and will make adjustments to the requested export volumes as necessary to keep those volumes within the project’s proposed liquefaction capacity.
AEO 2014 Early Release Data
The Cameron Order is the first non-FTA authorization in which DOE has incorporated EIA’s AEO 2014 Early Release data. The NERA Study used data from the AEO 2011 Reference Case. With each non-FTA order it has issued since the LNG Export Study, DOE has repeated its statement that it will continue to monitor any market developments and assess their impact in subsequent public interest determinations as further information becomes available. Importantly, DOE also has stated in its orders that the NERA Study modeled a wide range of possible future supply and demand conditions, thereby reducing the dependence of its results on the accuracy of the AEO 2011 Reference Case. Thus, the positive conclusions of the NERA Study can continue to be applied to new EIA data as it is released. For example, DOE updated its analysis in the Lake Charles Order to include the final AEO 2013 Reference Case data.
In the Cameron Order, DOE states that the updated AEO 2014 Early Release projection suggests domestic supply and demand conditions are more favorable to LNG exports, not less favorable. These updated projections are for a significantly greater quantity of natural gas to be available at a lower market price than estimated just three years ago. In addition, proved reserves have been increasing - reserves increased from 9.2 years of production in 2000 to 14.2 years of production in 2011 (the latest year statistics available). DOE further notes that, since 2000, proved reserves have increased 88 percent to 334,067 Bcf, while production has increased only 23 percent. DOE concludes that growing supplies of natural gas are available under existing economic and operating conditions. With regard to price, the 2035 Henry Hub price in the AEO 2014 Early Release Reference Case is $6.92/MMBtu, as compared to the AEO 2011 Reference Case projection of $7.31/MMBtu. It is worth noting that the AEO 2014 Early Release projection of the 2035 Henry Hub price is up $0.49/MMBtu from the AEO 2013 Reference Case projection. However, DOE notes that the AEO 2014 Early Release projection that domestic natural gas prices will rise due to both increased domestic demand and exports, but that these price increases will be followed by a sustained increase in production, leading to slower price growth over the rest of the projection period. Importantly, DOE notes that these projections do not undermine its conclusions regarding the consistency of Cameron’s proposed exports with the public interest.
DOE’s analysis continues to be rooted in the NERA Study’s conclusions. DOE updates its analysis based on the then-current EIA projections - those projections have remained positive, both from a supply/demand and a domestic price impact perspective. The AEO 2014 Reference Case, which is due to be released this spring, likely will maintain and further bolster this position. Such positive conclusions will provide DOE with a strong basis to grant additional LNG exports.
Total Exports above 8 Bcf/d Level
In the Freeport I Order and each successive order, including the Cameron Order, DOE has explained that in each order it would assess the cumulative impacts of each succeeding request for export authorization. In the Cove Point Order, DOE noted that, including the volumes authorized in that order, it had authorized cumulative non-FTA exports totaling 6.37 Bcf/d, which it noted was just over the 6 Bcf/d threshold NERA analyzed in its three "low" cases. In the Freeport II Order, DOE noted that, including the 0.4 Bcf/d authorized in the Freeport II Order, it had authorized cumulative non-FTA LNG exports totaling 6.77 Bcf/d, which “only moderately exceeds the 6 Bcf/d volume evaluated by NERA in its ‘low’ export case.”
With the addition of the Cameron Order, the current cumulative total of authorized LNG exports to non-FTA nations is now 8.47 Bcf/d. DOE describes this total in the Cameron Order as “within the range of DOE/FE-prescribed scenarios analyzed in the EIA and NERA studies.” DOE notes that “NERA found that in all such [DOE/FE-prescribed] scenarios - assuming either 6 Bcf/d or 12 Bcf/d of export volumes - the United States would experience net economic benefits.”
It still does not appear that DOE plans to move away from the market based approach it traditionally has relied upon or that it is looking to impose any kind of a cap on the volume of LNG exports. In fact, DOE expressly reaffirms in the Cameron Order its commitment to the agency’s 1984 Policy Guidelines that advocated that “the market is the most efficient means of allocating natural gas supplies.” Although DOE refers to exports of 6 Bcf/d to 12 Bcf/d in the Cameron Order, it is worth noting that the NERA Study also examined the macroeconomic impacts on the United States of unlimited LNG exports and that the NERA Study concluded that scenarios with unlimited exports had higher net economic benefits than corresponding cases with limited exports.
Given the poast use of a 12 Bcf/d LNG exports high case scenario by EIA and other industry analysts, it is possible that as authorized exports approach 12 Bcf/d, DOE may undertake a more cautious approach. If projected supplies remain high in the spring EIA release, it remains likely that DOE will have little reason to depart from the conclusions of the NERA Study that LNG exports result in net economic benefits under all cases studied.
External Comments on the Cameron Order
Senator Stabenow (D-Mich.) has expressed concern regarding what she perceived to be the quick pace of DOE’s authorizations for LNG exports and had voted against the nomination of Christopher Smith as DOE Assistant Secretary of Fossil Energy in the Senate Energy Committee hearing earlier this year. Importantly, after DOE’s issuance of the Cameron Order, Sen. Stabenow released a statement indicating non-opposition to the Cameron Order and noting that , “I've been working with the secretary, and I'm comfortable with what he is talking about as a strategy at this point longer-term. . . I'm not going to object to this particular one [export license]. I think we're more on the same wavelength.”