[authors: Monica Hwang, Matt Salo]
Only a few years ago, natural gas production in the United States was on the decline and prices were climbing, leading to the construction of a number of terminals for the import of liquefied natural gas (LNG). But the discovery of significant shale gas reserves and the development of the technology necessary to exploit them have drastically changed the North American natural gas market. There are now abundant exploitable natural gas reserves throughout North America, and it has been said that the United States is the “Saudi Arabia of natural gas.” Domestic natural gas prices have fallen significantly, serving as the impetus behind an effort to export LNG from the continental United States. This article provides an overview of the requirements to obtain a U.S. Department of Energy authorization to export LNG.
DOE Export Authorization
In order to export LNG from the United States, an export authorization must be obtained from DOE’s Office of Fossil Energy (FE). Long-term authorizations must be obtained when the exporter has a definite contract for the export of LNG for a term of longer than two years, but they may be obtained in the absence of definite contracts. Short-term authorizations, commonly known as “blanket” authorizations, are valid only for two years from the date that the applicant specifies as the “start date” in its application.
Contents of an Export Application
The contents of an application for LNG export authorization are described in 10 C.F.R. § 590.202. In addition to general requirements contained in § 590.202(a), an application must include information listed below “to the extent applicable” and “[a]ll factual matters shall be supported to the extent practicable by the necessary data or documents”:
• a statement describing the proposed scope of the project (including volume of natural gas);
• the dates of commencement and completion of the proposed export;
• the facility or facilities to be utilized;
• the source and security of the natural gas to be exported;
• identification of all the transactional participants;
• the terms of the transaction (e.g., take-or-pay obligations);
• the lack of a national or regional need for the gas; and
• an environmental impact statement.
An application must also contain a statement that includes “a signed opinion of legal counsel” showing the “export of natural gas is within the corporate powers of the applicant and a copy of all relevant contracts and purchase agreements.”
However, an application may be approved despite a lack of some of these items. Examples include applications submitted by Sabine Pass and Freeport LNG. Sabine Pass, for instance, cited the “to the extent applicable” and the “to the extent practicable” language of 10 C.F.R. § 590.202(b) to request a waiver from providing specific supply and transaction information. The DOE found that no waiver was needed because Sabine Pass promised to supply contract specific information once contracts were executed, thereby conforming “to the regulation which calls upon applicants to supply transaction specific information ‘when practicable.’”
Standard of Review
The DOE is required to authorize an export of natural gas unless it finds that the proposed exportation “will not be consistent with the public interest”; however, the exportation of LNG is deemed to be consistent with the public interest (and therefore granted expedited approval) if the exports are to countries “with which there is in effect a free trade agreement requiring national treatment for trade in natural gas.” In October, President Obama signed new free trade agreements (FTAs) with South Korea (which stands as the world’s second-largest LNG buyer), Colombia, and Panama into law. All three FTAs contain a provision for the national treatment of goods, but the DOE has not yet made a determination on whether these FTAs require national treatment for trade in natural gas.
Although authorizations to export to non-FTA countries are not subject to the expedited approval process, the DOE/FE has noted that “Section 3 [of the Natural Gas Act] creates a rebuttable presumption that a proposed export of natural gas is in the public interest and DOE must grant such an application unless those who oppose the application overcome that presumption.” Further, the DOE has emphasized its policy “[to] minimize federal control and involvement in energy markets and to promote free and open trade.”
Despite the statements above, the DOE recently announced that it will await the results of studies it has commissioned to determine the impact of LNG exports from the United States on the U.S. economy, domestic energy consumption, and other items before issuing any further long-term export authorizations to non-FTA countries. These studies are expected to be completed during the first quarter of 2012.
The United States has gone from being in desperate need of foreign natural gas supplies to being a potential major LNG exporter. Competition in the domestic export market seems to be heating up even though no domestically produced LNG has yet been exported from the lower 48 states.