DOE Study Showing Net Economic Benefits from LNG Exports Kicks Off Important Period for Industry

Explore:  DOE Exports Natural Gas

[authors: Salo Zelermyer and Kirstin E. Gibbs]

On December 5th, the U.S. Department of Energy (DOE) released its long-awaited second independent study from NERA Economic Consulting (NERA) on the impact of increased exports of liquefied natural gas (LNG) to foreign countries. The release of the NERA study kicks off an important period for companies invested in and impacted by LNG export policy. 

Release of NERA Study and Public Comment Process
The NERA study is notable first for its robust conclusion that all scenarios studied predict "net economic benefits from allowing LNG exports" for the United States. Moreover, NERA found that net economic benefits to the U.S. economy would be expected to increase as the level of LNG exports increased, in every market scenario examined. Such conclusions will make it increasingly difficult for LNG export critics from Capitol Hill, the environmental activist community, and some industrial sectors to argue for restrictions on macroeconomic grounds. 

DOE's actions are also important for what they did not include: any commitment as to whether the Department agreed with the conclusions reached in the study or how such conclusions would impact the 15 pending LNG export applications. Despite this, in a cover note above the study on DOE's website, the Department gave a small indication on its thinking about process when it stated that it "expects to act first upon applications for which the applicants have commenced the pre-filing process at the Federal Energy Regulatory Commission (FERC) as of December 5, 2012, in the general order in which the Department received them." After dealing with these applications, DOE notes that it expects to act upon the remaining pending (and any new) applications in the order they were received.

DOE indicated that it would take public comment on the factors discussed and conclusions reached by the NERA study, as well as the previously released study published by the Energy Information Administration (EIA), for 45 days after the official notice appears in the Federal Register. DOE will then take reply comments for an additional 30 days.  

DOE Authority Under the Natural Gas Act and the Two Studies
To review the legal bidding, the Natural Gas Act provides that applications to export LNG to foreign countries with whom the United States has a free trade agreement (FTA) require little more than the filing of an application, since the statute instructs that such applications "shall be granted without modification or delay." However, for licenses to export LNG to non-FTA countries, DOE must make a case-by-case determination that such licenses are "consistent with the public interest." How DOE interprets this phrase and, accordingly, how it treats the approximately 24 billions of cubic feet per day (bcf) of liquefied natural gas export applications currently in line are the crux of the issue confronting DOE.

After DOE granted its first LNG export license to Sabine Pass in May 2011, the "public interest" issue began to receive increased public attention. DOE's first shot across the bow was an announcement that it would solicit two studies on the impact of increased exports of LNG on domestic natural gas prices and, thereafter, determine whether existing and further licenses were consistent with the public interest. The first study, released by the Energy Information Administration (EIA) on January 19th, 2012, showed varying degrees of increases in domestic natural gas prices as a result of increased LNG exports. EIA's study, however, did not analyze whether world gas prices would support the domestic prices that EIA calculated. In contrast, the NERA study released on December 5th did assess world gas prices and their relationship to LNG export quantities, concluding that some increase in domestic natural gas prices would occur (a peak of 20 percent by 2020), but less than EIA predicted (35 percent). NERA also looked more broadly at economic impacts in the U.S. and concluded that all scenarios led to the U.S. experiencing "net economic benefits from allowing LNG exports."  

Next Steps
What happens next? After the public comment period, DOE will proceed to act on the pending LNG export applications. Even if, as DOE states on its website, the applications are evaluated chronologically, first by FERC pre-filing status and then by DOE receipt, it is likely that DOE will look at other factors such as financial viability, geographic diversity, environmental impacts, etc. While no one can predict with certainty DOE's decision, the release of the NERA study marks an important opportunity for companies invested in and impacted by LNG export policy. Such companies would be well advised use the public comment period to weigh in with DOE and express their policy preferences.

Topics:  DOE, Exports, Natural Gas

Published In: Administrative Agency 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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