Jordan Cove: DOE Issues Seventh Order to Export LNG to Non-FTA Nations, First from Pacific Coast

by K&L Gates LLP
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On March 24, 2014, the U.S. Department of Energy ("DOE") issued an order authorizing Jordan Cove Energy Project, LP (“Jordan Cove”) to export liquefied natural gas ("LNG") from the Jordan Cove LNG Terminal in Coos Bay, Oregon, to nations with which the United States does not have a Free Trade Agreement ("non-FTA nations"). DOE’s Order No. 3413 ("Jordan Cove Order") conditionally grants Jordan Cove’s application for long-term multi-contract authorization to export 292 billion cubic feet per year (“Bcf/yr”) or approximately 0.8 Bcf per day (“Bcf/d”) of LNG by vessel to non-FTA nations. In this order, DOE repeats from its Cameron LNG Order (“Cameron Order”), issued earlier this year, its updated 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”). The resulting conclusions are that Jordan Cove’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 Jordan Cove Order follows the same course as DOE’s prior export orders. DOE’s Jordan Cove Order, like the Cameron Order, 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 Jordan Cove Order has been the quickest to issue, coming approximately 41 days after the Cameron Order. DOE’s relative speed in issuing this order could be due to a number of factors, including the current situation unfolding in Eastern Europe. It is important to note that DOE included new language in the Jordan Cove Order that strengthens its previous statements about the positive international impacts of authorizing LNG exports. In addition, DOE took a significant amount of time to issue the Cameron Order, likely due to its inclusion of the then-new EIA AEO 2014 Early Release data. Consequently, between its earlier orders and the Cameron Order, DOE already had done a significant amount of the necessary analysis. As it has in the past, DOE largely reiterates its analysis from these previous orders.

In the Jordan Cove Order DOE restates its intent 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.

Background
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 Jordan Cove Order

A. Pace of Authorization
Shortly after issuing the Freeport I Order in 2013, DOE made public statements emphasizing that it took only two months to write the Freeport order. The Jordan Cove Order, which has been highly anticipated in part because it is the first of the two Oregon projects and the first on the Pacific coast, comes nearly 6 weeks (approximately 41 days) after the Cameron Order. The Cameron Order issued approximately 88 days after the Freeport II Order, which issued just 65 days after the Cove Point Order. As noted above, DOE’s speed in issuing the March 24 order may be due in part to the current crisis in Eastern Europe and the fact that DOE already has updated its analysis to include the AEO 2014 Early Release data.

Take Aways
DOE did much of the heavy lifting in terms of its analysis in the Cameron Order and Freeport I Order. The fact that the Jordan Cove Order is in large part similar on the substantive analysis to DOE’s previous non-FTA orders underscores this point. As has been the case with the other recent DOE orders, much of the Jordan Cove Order is “cut-and-paste” from those prior orders.

In the last several weeks, there have been calls from both sides of the aisle on Capitol Hill to expedite the LNG export process in an effort to provide political leverage to our allies abroad, triggered by the crisis in Crimea. While these legislative proposals on Capitol Hill are pending, it is possible that there was a push within the Administration to issue the Jordan Cove Order quickly. Further to that point, DOE included new language in the order, expanding on its previous discussion of the international benefits of granting the LNG export authorization requested, which also advance the public interest. More specifically, DOE stated: “[a]n efficient, transparent international market for natural gas with diverse sources of supply provides both economic and strategic benefits to the United States and our allies. Indeed, increased production of domestic natural gas has significantly reduced the need for the United States to import LNG. In global trade, LNG shipments that would have been destined to U.S. markets have been redirected to Europe and Asia, improving energy security for many of our key trading partners.” In addition, U.S. energy officials and leaders from Canada, France, Germany, Italy, Japan, the United Kingdom, and the presidents of the European Council and European Commission economies announced on March 24 that they will gather to discuss measures aimed at enhancing energy security in the wake of Russia’s move to annex Crimea.

Despite the attention on U.S. LNG exports, it is likely that DOE will continue to issue orders approximately every 2-3 months. 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 Jordan Cove Order, DOE reiterated its intent to stick to the previously established queue.

B. Authorization of Full Volumes Requested but Only for 20 Years
In the Jordan Cove Order, DOE authorizes the full 0.8 Bcf/d of LNG exports that Jordan Cove requested in its non-FTA application. DOE notes in its order that these volumes are non-additive of the 0.8 Bcf/d of exports to FTA nations that DOE previously authorized for Jordan Cove.

In its application, Jordan Cove requested export authorization for a 25-year term. In the order, DOE only grants the authorization for a 20-year term, explaining that “because the NERA study contains projections over a 20-year period beginning from the date of first export, we believe that caution recommends limiting this conditional authorization to no longer than a 20-year term beginning from the earlier of the date of first export. . . .”

Take Aways
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 Jordan Cove 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.

DOE’s 20-year limitation on the term of Jordan Cove’s export authorization is not unexpected. To date, DOE only has authorized 20-year export terms for non-FTA licenses.

C. AEO 2014 Early Release Data
As noted, the Cameron Order was the first non-FTA authorization in which DOE incorporated EIA’s AEO 2014 Early Release data. The NERA Study used data from the AEO 2011 Reference Case and 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 also updated its analysis in the Lake Charles Order to include the final AEO 2013 Reference Case data.

In discussing whether using post AEO-2011 data changes the conclusions of the LNG Export Study, DOE states in the Jordan Cove Order, as it had in the Cameron Order, that the updated AEO 2014 Early Release projection suggested domestic supply and demand conditions are more favorable to LNG exports, not less favorable. It reiterates that EIA’s updated projections in the AEO 2014 Early Release 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, it again explains 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. 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 in the Jordan Cove Order, as it had in the Cameron Order, that these projections do not undermine its conclusions regarding the consistency of Jordan Cove’s proposed exports with the public interest.

Take Aways
The underpinnings of DOE’s analysis continue 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 before the next DOE non-FTA license issues, will maintain and further bolster this position. Such positive conclusions will provide DOE with a strong basis to grant additional LNG exports.

D. Total Exports above 8 Bcf/d Level
In the Freeport I Order and each successive order, including the Jordan Cove 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 Jordan Cove Order, the current cumulative total of authorized LNG exports to non-FTA nations is now 9.27 Bcf/d. DOE describes this total in the Jordan Cove Order, as it had 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.”

Take Aways
DOE has not indicated to date that it 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 Jordan Cove 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 Jordan Cove Order, 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. DOE consistently has cited to the NERA Study to support its conclusions in each of the successive orders.

E. External Comments on the Jordan Cove Order
Sen. Stabenow (D-Mich.) cautioned against rushing LNG export authorizations. Joining Sen. Stabenow in her calls for a slow approach, Sen. Markey (D-Mass.) issued a statement on March 24 arguing that “There can be no doubt that we have crossed a line into an era when we could be massively exporting America’s natural gas, sending the jobs and consumer benefits abroad along with the fuel. . . . This is the moment to take a time out and do the studies, have the debate, and discuss the policies needed to protect consumers, enhance our national security and grow our economy, not rush to export more of America’s resources abroad.”

There have been voices of support as well. Sen. Wyden (D-Ore.), who at the outset of the US shift to LNG exports was vocally opposed to LNG exports, issued a statement on March 24 praising the DOE decision as good for Oregon: “This announcement is exactly what Coos Bay, North Bend and America need: new jobs and new investment, while factoring in a changed geopolitical landscape through a case-by-case process.” Importantly, it remains unclear whether Senator Wyden will adopt a different approach toward Oregon LNG, which is in a much more populated community. Sen. Murkowski (R-Ala.), ranking member on the Senate Energy and Natural Resources Committee, has been very supportive of LNG exports generally and urged DOE to move quickly. She stated, "Given the situation in Ukraine, this license sends a positive signal to our allies and to energy markets that the United States is ready to join the growing global gas trade.  While this license moves us in the right direction, I would be strongly opposed to any 'pause for further study,' as some have proposed."

In addition, the National Association of Manufacturers (“NAM”), which has also supported LNG exports, posted a piece on its website on March 24 arguing that it is “time to pick up the pace.” There, NAM stated, “The U.S. doesn’t exist in a vacuum and we must pay attention to what is happening in the world around us. In this case we are getting strong signals from our allies that they are looking for our help. It’s time to get our heads in the game.”

 

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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