DOE approves LNG exports to non-free trade countries - US foreign policy may be bigger factor moving forward

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The US Department of Energy has issued an Order granting approval to Jordan Cove Energy Project, L.P. to export liquefied natural gas (LNG) from Jordan Cove’s liquefaction and export terminal in Coos Bay, Oregon, to countries that do not have a free trade agreement with the US (non-FTA countries). 

This Order, issued on March 24, is the seventh since 2011 that DOE has granted approving LNG exports to non-FTA countries.

DOE’s review and approval process is normally the subject of an intense debate within the energy sector over how policymakers should strike an appropriate balance between gas producers, who generally favor approval of more LNG exports, and gas consumers and manufacturers, who are generally concerned that domestic gas prices will rise with export levels.  The regulatory scheme for gas exports to non-FTA countries requires DOE to determine whether the export will be in the public interest.  DOE’s “public interest” analysis heavily weighs the export’s predicted impact on domestic gas prices.

DOE’s review and approval of Jordan Cove, however, was unique in that it occurred during a period of intense geopolitical turmoil over Russia’s annexation of the Crimean Peninsula from Ukraine.  There have been increased calls in recent weeks for the US to increase the volume and pace of LNG export approvals as a way to alleviate Russian energy pressure on European markets.  For many, countering Russia’s influence in its international relations is critical in considering whether exporting gas is in the public interest.

Background, the regulatory process and the “public interest” test

The regulatory process for exporting LNG is complex and multi-layered.  For those countries with free trade agreements with the US (FTA countries), DOE approval is essentially required under federal law.  There are currently 20 such FTA countries: Australia, Bahrain, Canada, Chile, Colombia, Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Israel, Jordan, Mexico, Morocco, Nicaragua, Oman, Panama, Peru, Singapore and South Korea.  DOE’s approval to export LNG to these countries may be thought of as automatic.

Unfortunately for gas producers, the principal buyer markets for US LNG exports are in non-FTA countries.  For these countries, DOE is required to approve the export application unless it would be inconsistent with the public interest.  The “public interest” test encompasses a range of factors, including the impact on natural gas prices; domestic gas supplies and demand; economic benefits at the local, regional, and national level; environmental considerations; international trade; and national security. 

Due to advances in fracking technology and the improved ability to locate, capture and produce natural gas, the queue of applicants seeking DOE approval to export LNG to non-FTA countries continues to grow.  Currently, there are 24 applications from the lower 48 states pending.  Prior to Jordan Cove, DOE had approved only six other applications since 2011.

Jordan Cove’s application and DOE’s public interest analysis

DOE’s Order considered Jordan Cove’s application, as well as opposition motions, and determined that export opponents failed to demonstrate that LNG exports to non-FTA countries would not be in the public interest.

Jordan Cove furnished ample evidence to support its public interest arguments.  Jordan Cove asserted: (1) natural gas reserves could easily accommodate the export volumes proposed in the application, as well as growing domestic demand; (2) the impact of exports on domestic gas prices would be negligible, and the impact on the natural gas market as a whole would be beneficial; (3) Jordan Cove’s LNG export project would stimulate local, regional, and national economies through jobs, taxes, and economic activities; (4) DOE’s approval of the project would be consistent with President Obama’s stated agenda to boost exports; and (5) LNG exports would result in numerous international benefits, including a broadening of markets, a global transition to an energy source “cleaner” than coal and oil, and liberalization of international trade policies.

DOE upheld Jordan Cove’s assertions on these points, and determined that opposition groups failed to sufficiently rebut or challenge them.  DOE also reiterated its policy position that “under most circumstances, the market is the most efficient means of allocating natural gas supplies.” 

The Jordan Cove Order

DOE approved Jordan Cove’s proposal to export .8 billion cubic feet of gas per day (Bcf/d) for a 20-year period.  With this Order, DOE will have cumulatively approved gas exports to non-FTA countries totaling 9.27 Bcf/d for the seven export authorizations since 2011.  As with DOE’s past orders for LNG exports to non-FTA countries, approval is conditional.  The authorization period begins either seven years from the issuance of the Order or the date Jordan Cove commences export operations, whichever date is sooner.  Jordan Cove cannot assign or transfer its authorization to another entity without prior DOE approval. 

Similarly, DOE approval is required if Jordan Cove is to act as an export agent for another entity.  Jordan Cove must file with DOE all long-term commercial agreements it enters into with other entities.  The approval is also conditioned on the Federal Energy Regulatory Commission’s satisfactory completion of an environmental review of the project facility.

Finally, DOE makes clear that its approval in this instance is not to be construed as representing a policy shift that will necessarily result in approval of the other proposals in the queue.  DOE will continue to take a “measured approach in reviewing the pending applications…, [it] will continue to assess the cumulative impacts of each succeeding request for export authorization…, [and it] will attach appropriate and necessary terms and conditions to authorizations.”

Additional political and foreign policy considerations

DOE’s Jordan Cove Order is relatively consistent, in its analysis and conclusions, with DOE’s prior approvals for LNG export to non-FTA countries.  There is no mention of Crimea, Ukraine, or whether increased US gas exports will serve to pressure Russia and counter its influence in European energy markets.  But it is impossible to ignore the particular political climate, especially as international trade and national security are among the factors in DOE’s public interest analysis.

For example, the day after the Jordan Cove Order, Congress held several hearings on the subject of energy security and LNG exports.  On March 25, the Senate Committee on Energy and Natural Resources held a hearing on gas exports and the US as an “energy superpower.”  In advance of the hearing, Senator Mary Landrieu (D-LA), Committee Chair, provided a written statement that a quicker, more efficient export approval process would “reduce the stronghold that countries, like Russia, currently exercise over their neighbors.”  That same day, the House Subcommittee on Energy and Power heard testimony on HR 6, the Domestic Prosperity and Global Freedom Act, introduced by Representative Cory Gardner (R-CO), which would approve all complete export applications currently filed with DOE, as well as streamline the regulatory export process for future applications.

Additionally, many major newspapers and media outlets – among them The New York Times, The Wall Street Journal and The Washington Post – have recently published editorials on the positive role natural gas exports can play in US foreign policy.

Guidance for pending and future applicants

A heightened pace and volume of US gas exports enjoys increasing support among lawmakers from both sides of the aisle, as well as newspaper editorial pages, industry analysts and of course, natural gas producers.

But political fervor can subside just as quickly as it arises.  Despite the recent clamor, there is still valid reason to take DOE at its word as expressed in the Jordon Cove Order, i.e., that DOE will maintain the same cautious, measured approach when evaluating future applications for LNG exports to non-FTA countries as it has for past applications.  As Secretary of Energy Ernest Moniz said on March 24, “Maybe we will give some additional weight to the geopolitical criterion going forward, but we will never eliminate for sure the issue of implications for the domestic market."

Ultimately, DOE’s Jordan Cove approval is a positive development, but the extent to which US foreign policy may impact pending LNG export applications is unclear.

 

Topics:  DOE, Foreign Policy, Free Trade Agreement

Published In: General Business Updates, Energy & Utilities Updates, International Trade Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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