DOE proposes major changes to LNG export rules, comments due July 21

by DLA Piper

The US Department of Energy is proposing to change its rules and procedures for reviewing applications to export liquefied natural gas (LNG) to countries that do not have a free trade agreement with the US (non-FTA countries).

The proposed change, announced on May 29, would suspend the current practice of issuing conditional authorizations, and instead allow only those applicants with a completed National Environmental Policy Act (NEPA) compliance review to proceed to a final DOE analysis of whether the export would be in the “public interest.”  Since 2011, DOE has issued seven conditional approvals for LNG exports to non-FTA countries, only one of which has completed its NEPA review and received DOE's final approval.

With this proposed change, DOE intends to focus and prioritize departmental resources on those projects that are further along in their commercial development, and to improve the quality of information for its public interest analysis.

In addition to the proposed procedural change, DOE has announced that it will commission new studies to examine the economic and public interest impacts of LNG exports with export levels between 12 to 20 billion cubic feet of gas per day (Bcf/d) LNG.  DOE also announced its release of two environmental reports: one on the environmental impacts of fracking, and the other on greenhouse gases (GHG) and LNG exports.  Interested parties have until July 21, 2014, to submit comments in response to the proposed procedural change and the two environmental reports.

A substantial change from the existing export regulatory scheme

The proposal would mark a substantial change from the existing export regulatory scheme.  That scheme is bifurcated, with controls over natural gas as a commodity, and controls over the liquefaction and exportation facilities.

DOE has export jurisdiction over natural gas as a commodity.  DOE’s authority over natural gas exports derives from Section 3 of the Natural Gas Act, which requires a “public interest” examination for proposed exports to non-FTA countries (whereas exports to FTA countries are deemed automatically to be in the public interest).  Over the last three years, DOE has conditionally approved seven applications, finding that each of the non-FTA exports would be in the public interest.  DOE has explained that “conditional approvals” are appropriate in cases where there is a need for DOE to issue preliminary findings and conclusions, but more information is needed before it can make a final decision.

For its public interest analysis, DOE considers such factors as impacts on natural gas prices, domestic gas supplies and demand, economic benefits from the local to the national level, environmental effects, international trade and national security.

Regarding the liquefaction and export facilities, other federal entities have jurisdiction.  The Federal Energy Regulatory Commission (FERC) has jurisdiction over the siting, construction, operation and expansion of the export terminals.  The Maritime Administration (MARAD), a Department of Transportation entity, has authority over the ownership, construction, operation and decommissioning of deepwater export facilities located beyond US territorial waters (12 nautical miles offshore).

DOE and FERC/MARAD have independent review processes.  DOE’s approval of the export commodity, and FERC/MARAD’s approval of the export facility, are both generally required for LNG exports.

DOE’s review process.  The process for DOE approval of a non-FTA export begins with submission of an application.  Submitting an application is not a difficult task – it does not require a tremendous amount of information and is relatively inexpensive.  DOE will then place the application in a queue order according to two factors: (i) when the DOE application was submitted and (ii) whether the applicant has already initiated the NEPA review process (the NEPA review commences when the applicant applies for approval to use FERC’s “pre-filing” process).  In December 2012, DOE determined that all then-pending applications would be sorted into three tranches according to these two criteria.

The first tranche: applications pending at DOE as of December 5, 2012, in which the applicant has received FERC approval to pre-file, in the order the DOE application was received. 

The second tranche: applications pending at DOE as of December 5, 2012, in which the applicant has not received FERC approval to pre-file, in the order the DOE application was received. 

The third tranche: DOE applications received after December 5, 2012, in the order the DOE application is received.

As of DOE’s most recently published April 18 queue, there are 26 applications pending for LNG export to non-FTA countries.

FERC’s review process.  The typical review process under NEPA begins with FERC approval for pre-filing and ends with publication of an Environmental Impact Statement (EIS) or an Environmental Assessment describing the potential environmental impacts of the proposed export.

Completing a NEPA review is not a simple task.  It requires, among other things, an applicant to prepare project engineering and design plans, and these are generally very costly and time-consuming endeavors.

Proposed change and how it affects pending applications

Under the proposed change, DOE would not conduct its public interest review until after the NEPA review process is completed – that is, after publication of a Final EIS or a Finding of No Significant Impact, or DOE’s determination that the project is categorically excluded from DOE’s NEPA obligations.

DOE attributes the proposed change to an acknowledgment that, given the burdensome NEPA review process, applicants who have incurred the time and cost of a completed environmental review are more likely to have commercially sound projects.  Accordingly, DOE should devote its limited time and resources for public interest examinations to projects that are otherwise ready to proceed.  The proposed process would also improve the quality of information for DOE’s public interest test.  Under the current system, DOE’s public interest analysis can precede finalization of the NEPA review by several years.  By requiring a NEPA review to be conducted beforehand, the examination of impacts on natural gas prices and markets would be more accurate because much less time would elapse between DOE’s approval and commencement of export operations.

Among the seven applicants with conditional approval, only one has subsequently concluded  its NEPA review and received final approval.  The next applicant to receive conditional DOE approval expects to receive a Final EIS from FERC this month.  A third was conditionally approved in February 2014, and FERC issued a Final EIS for the facility in April 2014, but the project has not yet received final approval from DOE.

For those companies with pending applications, the proposed change would essentially eliminate the queue in its present form.  None should expect DOE to conduct its public interest analysis as the queue is currently ordered.  Instead, companies may instead need to redirect their focus toward completing the NEPA review process.

New studies to come

In addition to the proposed change, DOE also announced that it will be commissioning new economic analyses of the economic and market impacts of increased natural gas exports.  These new studies will update the earlier two-part study by the US Energy Information Administration (EIA) and NERA Economic Consulting on the potential impact of increased natural gas exports on domestic consumption, production and prices, and the overall macroeconomic impact of increased exports. 

In its previous study, EIA contemplated hypothetical export volumes of 6 to 12 Bcf/d.  With the most recent conditional approval for non-FTA LNG export, DOE has cumulatively approved gas exports to non-FTA countries totaling 9.27 Bcf/d for the seven authorizations.  We are quickly approaching the 12 Bcf/d ceiling contemplated by EIA, and so the new study will contemplate export volumes of 12 to 20 Bcf/d.

Environmental reports

Finally, DOE has released two environmental reports to “better inform the Department and the public of the environmental impacts of increased LNG exports… beyond what is required for NEPA.”  Both of these documents, when finalized, will be included with comments in DOE’s public interest analysis for future exports.

Draft addendum to environmental review documents.  The first environmental report is a discussion of potential environmental issues associated with unconventional gas production.  DOE produced it in response to comments urging DOE to consider how higher levels of  domestic production resulting from export authorizations will affect the environment.

The draft addendum is not new information, but a review of existing data and literature.  DOE’s purpose in releasing it is to better inform the public about fracking and the environment.  Covering water resources, air quality, GHGs, seismicity and land use, it provides technical information along with examples of state and local regulations and best practices.

GHG and LNG exports.  The second report examines the impact of US-exported LNG on European and Asian power plant GHG emissions, as compared with (i) the plants’ use of regional coal or other LNG sources, and (ii) the plants’ use of natural gas sourced and delivered from Russia via pipeline.

This report concludes that European and Asian power plants’ use of US-exported LNG would not result in higher lifecycle GHG emissions.

Concerns persist: the public interest criteria

Many are applauding the new developments.  To Senator Mary Landrieu (D-LA), who has in the past been critical of the export processes, the proposed rule is a streamlining measure, and a “positive step forward to responsibly export America’s abundant supply of natural gas.”  And Senator Ron Wyden (D-OR) welcomed the prospect of increased environmental reviews before any export authorization is issued.

However, the proposed rule does not cure a fundamental problem with DOE’s ranked-and-ordered review of non-FTA LNG exports according to the public interest criteria.  It is likely that “public interest” will continue to focus on domestic natural gas price impacts to the near-exclusion of all other factors.  It therefore stands to reason that there will be a time when domestic gas prices rise excessively, and DOE will suspend authorizations because exports are no longer in the public interest.

This continues to impose an unreasonable uncertainty on project applicants.  The fact that applicants would need to obtain final NEPA review before any public interest analysis by DOE does not lessen the uncertainty.  In fact, the proposed change could arguably put companies in a worse position.  Now they are expected to begin heavily investing to complete NEPA review, and then wait possibly years until DOE examines their proposed export according to the public interest criteria.

A way forward: all parties deserve an equitable and reasonable system

It is encouraging that DOE has recognized its current LNG export regulatory scheme is flawed.  However, the proposed change does not adequately address the underlying problems.  Investors, companies seeking export approval, critical overseas markets and the American public all deserve an equitable and reasonable system for the approval of natural gas exports.  Given the overwhelming importance of domestic gas prices to the public interest analysis, DOE’s proposed export procedures will likely result in the denial of some applications because of rising prices when the application comes up for review.  Some applications will therefore be mutually exclusive with others – some, but not all, of the applications will be approved.

There is a more sound approach, and it fits within the proposed procedural change.  After applicants’ NEPA reviews are completed and DOE begins evaluating applications according to its public interest criteria, DOE could employ a comparative analysis.  Applicants who are mutually exclusive with one another should be given the opportunity to present their projects’ respective merits.  Project merits can include those that would naturally emerge during the NEPA review process – such as environmental impacts and commercial viability – as well as those that may be dynamic – such as national security issues and particular destination markets.

DOE is arguably legally required to follow a more rational approach and, if it refuses, could be compelled to do so.  It is to be hoped that DOE will correct its intended approach during the comment period.

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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