The boom in U.S. natural gas production from shale deposits has important implications for U.S. trade policy. The rapidly increasing supply of natural gas as hydraulic fracturing (“fracking”) techniques continue to improve is resulting in lower prices for consumers and increasing the competitiveness of U.S. manufacturing. At the same time, however, lower prices in the United States are causing producers to seek business in export markets, such as in Japan, where there has been a significant increase in demand for natural gas since the shut down of its nuclear reactors after the tsunami in early 2011. The tension between consumers’ desire for low prices and producers’ desire for increased profitability are creating challenges for U.S. trade policy.

Under the Natural Gas Act of 1938, the Department of Energy approves applications to export natural gas only if they are in the public interest. By statute, exports to countries with which the United States has a Free Trade Agreement are deemed to be in the public interest. [1] Proposed non-FTA exports must be approved, however, and DOE has the authority to impose conditions on such exports. Fifteen license applications to export liquid natural gas (LNG) are currently pending before DOE.

As a Member of the WTO, the United States is prohibited from instituting or maintaining quantitative restrictions on exports. [2] This general prohibition is subject to certain exceptions, however, such as domestic shortages of the product, conservation of exhaustible natural resources, the pursuit of a government stabilization plan, and/or protection of national security. [3] Denial of an LNG export license application as inconsistent with the public interest would be inconsistent with U.S. obligations under international trade law unless the government’s rationale fit within one or more of the available exceptions. That is, if challenged by a trading partner in accordance with the WTO’s dispute settlement provisions, the United States would bear the burden of proving that its rationale for denying an export license was justified under one or more of the exceptions provided for in the WTO Agreements.

In addition, the United States must apply any export restriction in a non-discriminatory manner. [4] This raises the question whether the United States, consistent with its international trade obligations, can simultaneously grant export licenses for shipments to countries with which there is an FTA (as the statute requires), while denying export licenses for shipments to non-FTA countries.

The LNG export question may rise to the top of the trade policy debate in early 2013. A recent study by NERA Consulting commissioned by DOE concluded that “benefits that come from export expansion more than outweigh the losses from reduced capital and wage income to U.S. consumers, and hence LNG exports have net economic benefits in spite of higher domestic natural gas prices.” [5] The U.S. Chamber of Commerce is touting the study and urging prompt approvals of the pending license applications to export LNG.

Congressional interest in this issue may slow the process down. Sen. Ron Wyden (D-OR) has keyed in on the likely increase in domestic prices and reportedly “wants to examine how exporting natural gas could increase the price domestically and hurt consumers and manufacturers.” [6] In a recent letter to the Secretary of Energy, Steven Chu, Sen. Wyden noted the “economic and national security” implications for U.S. consumers’ ability to obtain affordable energy.[7] Congressional hearings are possible. The Sierra Club has long been critical of fracking and recently published a paper urging a full consideration of the environmental impact as part of DOE’s public interest analysis. [8] Thus, the battle lines in the policy debate are being drawn.

DOE has published notice of the NERA study in the Federal Register and stated that it will accept public comments on the factors discussed and conclusions reached by the NERA study for 45 days after the official notice was published, or by January 24, 2013. [9] DOE will then accept reply comments for an additional 30 days, or until February 25, 2013. In light of this comment period and increasing domestic manufacturing and congressional interest in this issue, the first quarter of 2013 looks to be a critical time for parties to influence the development of U.S. trade policy regarding exports of LNG.
____________________
[1] The United States currently has an FTA with the following 17 countries: Australia, Bahrain, Canada, Chile, Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Israel, Jordan, Mexico, Morocco, Nicaragua, Oman, Peru, and Singapore. See Office of the United States Trade Representative at www.ustr.gov/trade-agreements/free-trade-agreements.
[2] GATT 1994 Article XI:1, in WTO, The Legal Texts: The Results of the Uruguay Round of Multilateral Trade Negotiations, at 500 (1995).
[3] GATT 1994 Articles XI:2(a), XX(g), XX(i), XX(j), and XXI.
[4] GATT 1994 Article XIII.
[5] NERA Economic Consulting, “Macroeconomic Impacts of LNG Exports from the Unites States,” December 3. 21012, at 1, available at www.fossil.energy.gov/programs/gasregulation/reports/nera_lng_report.pdf.
[6] Ruger, Todd. “Energy Lawyers Predict Sweeping Legislation,” in The National Law Journal, December 10, 2012, at 9.
[7] October 23, 2012 Letter From Senator Ron Wyden to Secretary of Energy Steven Chu, available at www.wyden.senate.gov/download/wyden-letter-to-secretary-chu-on-lng-export-criteria.
[8] Sierra Club, “Look Before the LNG Leap: Why Policymakers and the Public Need Fair Disclosure Before Exports of Fracked Gas Start, available at www.sierraclub.org/naturalgas/downloads/LOOK-BEFORE-YOU-LEAP.pdf.
[9] 2012 LNG Export Study, 77 Fed. Reg. 73627 (Dep’t Energy Dec. 11, 2012).

Stephen (Steve) Jones Washington, D.C. +1 202 626 2950 sajones@kslaw.com  View Profile