Untitled Document
Untitled Document

LNG regulatory prospects for 2014

Aerial photo of the Sabine Pass terminal, with an artist rendition of the six LNG liquefaction units planned at the site.

Aerial photo of the Sabine Pass terminal, with an artist rendition of the six LNG liquefaction units planned at the site.
Courtesy of Cheniere Energy

Heather Corken, Bracewell & Giuliani, Houston
Kirstin Gibbs, Bracewell & Giuliani, Washington DC
Tyler Johnson, Bracewell & Giuliani, Seattle

The year 2013 was the year in which the Department of Energy (DOE) finally resumed issuing authorizations allowing LNG exports to non-Free Trade Agreement (non-FTA) countries. The year started with a contentious debate over the merits of a study DOE commissioned to evaluate the impacts of LNG exports on the US (LNG Export Study), included involvement by members of Congress, and finished with DOE restarting its authorization of LNG export projects, a process that will likely take several more years at DOE's current pace.

The LNG Export Study

The year began with a flurry of comments on the DOE LNG Export Study. To recap, in response to the growing number of applications seeking authority to export natural gas to non-FTA countries, like Japan, DOE commissioned a two-part study to evaluate the macroeconomic impacts on the US. The first part of the LNG Exports Study, performed by the Energy Information Administration (EIA), analyzed how specified scenarios of increased natural gas exports could affect domestic energy markets. The second part of the study, performed by NERA Economic Consulting, broadly concluded that LNG exports will result in net positive economic benefit for the US. NERA also concluded that the net economic benefits were higher if DOE did not impose restrictions or caps on the quantity of LNG exports.

DOE opened up the studies to public comment and received thousands of comments from individuals, manufacturers, non-governmental organizations (NGOs), and LNG exporters, including nearly 800 substantive and unique comments and 11 different economic studies. While many supported the broad conclusions of the studies, others claimed that allowing unlimited natural gas exports would cause domestic US natural gas prices to increase, thus harming a re-surging US manufacturing industry that was benefitting from low natural gas prices. Many urged the DOE to take a "go slow" approach and cautioned that higher prices would harm individual ratepayers for the benefit of the corporate entities exporting the natural gas. Further, several NGOs, including the Sierra Club, claimed that LNG exports would cause more environmentally harmful natural gas production activities. On the contrary, supporters of LNG exports insisted the domestic price increases would be minor given the elastic nature of gas supplies, and thus any detriment to the US would be less than opponents claimed.

Reflecting the political sensitivity of the issue, a group of Congressional representatives also filed comments and stated that LNG exports will create growth in the natural gas industry and related jobs, plus growth in tax revenues, royalties, and orders for equipment and material, thus stimulating economic demand.

Restarting LNG export authorizations

After the final order approving Sabine Pass Liquefaction LLC's LNG export authorization in August 2012, DOE finally weighed the comments on the LNG Export Study and issued its second order authorizing LNG exports to non-FTA countries in May 2013. This order conditionally granted Freeport LNG Expansion LP and FLNG Liquefaction LLC authorization to export LNG to non-FTA countries from Freeport's LNG terminal in Texas. Like the initial Sabine Pass order, Freeport's authorization was conditioned on completing the environmental review process being conducted by the Federal Energy Regulatory Commission (FERC). Under the Natural Gas Act, FERC is the "lead agency" for purposes of reviewing LNG export terminal projects under the National Environmental Policy Act (NEPA). DOE is participating in that environmental review as a cooperating agency. To date, FERC has completed the environmental review of only the Sabine Pass terminal, though several other terminals are currently winding through FERC's review process.

The Freeport order included DOE's response to the many comments submitted on its LNG Export Study. Broadly, DOE concluded that (1) the LNG Export Study was sufficiently reliable and supportive of LNG exports; and (2) DOE would let market forces govern LNG exports (while being closely monitored by DOE). DOE also stated that it will take a "measured approach" in reviewing other pending LNG export applications. "Specifically, DOE/FE will assess the cumulative impacts of each succeeding request for export authorization on the public interest with due regard to the effect on domestic natural gas supply and demand fundamentals." This approach suggests that applications further down on DOE's queue may face a higher hurdle due to the cumulative impacts of the preceding applications.

Uncertainty in export authorizations

In the Freeport order, DOE continued to caution applicants that it will monitor the market and the impact of LNG exports and "may issue, make, amend, and rescind such orders . . . as it may find necessary . . . ." Further, DOE stated that it "cannot precisely identify all the circumstances under which such actions may be taken." Though DOE's authority to issue subsequent orders derives directly from the Natural Gas Act, many questioned under what circumstances DOE may act, as it was unclear if DOE would revoke or curtail a previously-issued authorization should DOE find market impacts warranted such action.

Senators ask for clarification

Seizing upon the uncertainty created by the DOE's statements reserving the right to modify or rescind LNG export authorizations, Senators Wyden and Murkowski, both vocal on the issue of LNG exports, submitted a letter to DOE in August, 2013 asking for clarification of the circumstances under which DOE might revoke or modify an export authorization.

In an October 30, 2013, response to the senators, DOE stated that it "takes very seriously the investment-backed expectations of private parties and would not rescind a previously granted authorization except in the event of extraordinary circumstances." DOE also clearly stated that it would not use its authority to rescind an authorization "as a price maintenance mechanism." Further, DOE explained that it will consider the cumulative impacts of prior authorizations when evaluating new applications for export. DOE also clarified that it has never revoked or modified an export authorization when such revocation was opposed by the holder.

Manufacturers make another plea for delay

On September 18, 2013, a trade association for the US manufacturing industry, America's Energy Advantage (AEA), urged the DOE to initiate a rulemaking process to update its public interest analysis for LNG exports and to explain under what conditions DOE might rescind or condition a previously-granted export authorization. DOE rejected AEA's requests, first on the grounds that AEA's comments were untimely and because DOE had already considered and rejected such requests in its analysis of the LNG Export Study.

DOE continues issuing LNG export authorizations

Following the Freeport order, DOE has issued several more orders approving LNG exports to non-FTA countries. These orders conditionally allowed exports from Lake Charles, Dominion Cove Point, and the Freeport expansion terminals, resulting in a cumulative total quantity of authorized exports of 6.77 Bcf/day, as shown in the table below.

In reaching this cumulative total, DOE explained that it has only just exceeded the "low" export case evaluated in the NERA study, a case that predicted very modest impacts to domestic US natural gas prices.

In issuing the above export authorizations, DOE has not always granted the authorizations under the terms requested by the applicants. For example, several applicants requested export authorizations for a 25-year term, but DOE would only issue authorizations for 20-year terms, on the basis that the 20-year term was consistent with the horizon evaluated by NERA and was consistent with the term authorized in the Sabine Pass order. Moreover, DOE may not authorize export quantities in the amount sought by the applicant. For example, in Freeport's expansion proceeding, Freeport sought authorization to export 1.8 Bcf/day, but DOE limited the export quantity to only 0.4/day on the grounds that Freeport's application before FERC requested authority to construct facilities capable of handling only an additional 0.4 Bcf/day. Nonetheless, Freeport's FTA export authorization still allowed for the incremental 1.8 Bcf/day, meaning Freeport could use its FTA authorization to export any natural gas above the incremental 0.4 Bcf/day to FTA countries.

DOE has also imposed several notable conditions, besides completing FERC's environmental review, on its authorizations. First, DOE typically required that exports must commence within 7 years from the order date. DOE stated that this condition is necessary to ensure that other entities seeking similar authorizations are not frustrated by holders of such authorizations that are not using it. Second, an authorization holder must seek DOE approval before any transfer, assignment, or change in control of the authorization or the authorization holder. Third, an authorization holder may export natural gas as an agent for others, but the authorization holder must register those on whose behalf it exports gas with the DOE. Finally, the authorization holder must file long-term export agreements with DOE, though such agreements can be filed under seal.

Next steps

DOE has a significant queue of pending non-FTA export applications, with 22 non-FTA applications currently awaiting review. DOE previously stated that it would issue authorizations approximately every 6 to 8 weeks, a pace that suggests it would take roughly two years to process the queue. Some, such as Senator Murkowski, have urged DOE to pick up the pace of its authorizations, reasoning that delay could cause the US to miss the opportunity to be a significant player in the global LNG trade. Applicants remain nervous that DOE may decide to stop authorizing export projects if the volume of LNG authorized for export reaches a certain (as yet unstated) threshold. Because DOE has been granting applications in the order in which they are listed on the queue, applicants further down the queue have urged DOE to consider alternative approaches to processing export applications other than simply considering the next in line.

Notably, DOE's priority of processing non-FTA applications is not based simply on a first-come, first-served priority, but the priority is also based, in part, on whether the applicant has initiated proceedings before FERC as well. One applicant, Carib Energy (USA) LLC, filed a request with DOE asking it to move Carib up the priority list because the terminal from which it proposed to export had already been authorized by FERC, meaning Carib did not need to initiate proceedings before FERC. While Carib's request is untimely and DOE has not acted on the request yet, granting the request may open up DOE's queue to challenge by other applicants.

Going forward, DOE is expected to continue its pace of authorizing LNG exports to non-FTA countries, though some have speculated that DOE may pause its approvals under its "measured approach." However, the likelihood and duration of such a pause remains uncertain.

About the authors

Heather Corken  
  Heather Corken is a partner in Bracewell & Giuliani's Houston office. She advises clients on energy-related environmental issues with a particular focus on construction and operation of LNG import/export facilities in the US.
     
Kirstin Gibbs
  Kirstin Gibbs is a partner in the firm's Washington DC office. She counsels global and US-based clients in connection with liquefied natural gas (LNG) issues including supply, siting, maritime, exporting, and other matters affecting the LNG industry.
     
Ty Johnson  
  Ty Johnson is an associate in the firm's Seattle office. He counsels domestic and foreign energy-industry clients on regulatory matters involving the Federal Energy Regulatory Commission.

Related Articles

Rock Oil Holdings receives $250M commitment

03/14/2014 Rock Oil Holdings LLC, a newly formed oil and gas company, reports an equity commitment of up to $250 million from funds managed by energy private equity firm Riverstone Holdings LLC and ...

LNG exports year in review: Unfreezing regulatory approvals

01/06/2014 The year 2013 was the year in which the DOE finally resumed issuing authorizations allowing LNG exports to non-FTA countries. The year started with a contentious debate over the merits of a study D...

Jones Energy completes Anadarko Basin acquisition

12/20/2013

Jones Energy Inc. has closed its acquisition of oil and gas properties in the Anadarko Basin from Sabine Oil & Gas LLC for $195 million.

Cheniere Partners subsidiary to offer senior secured notes

11/19/2013

Cheniere Energy Partners LP reports that its wholly owned subsidiary, Sabine Pass Liquefaction LLC, intends to offer $1 billion principal amount of senior secured notes due 2022. 

More Oil & Gas Financial Articles

Rock Oil Holdings receives $250M commitment

Fri, Mar 14, 2014

Rock Oil Holdings LLC, a newly formed oil and gas company, reports an equity commitment of up to $250 million from funds managed by energy private equity firm Riverstone Holdings LLC and additional amounts from the company's management team.

How the US shale gas boom benefits Asian LNG importers

Fri, Feb 7, 2014

LNG exports year in review: Unfreezing regulatory approvals

Mon, Jan 6, 2014

The year 2013 was the year in which the DOE finally resumed issuing authorizations allowing LNG exports to non-FTA countries. The year started with a contentious debate over the merits of a study DOE commissioned to evaluate the impacts of LNG exports on the US (LNG Export Study), included involvement by members of Congress, and finished with DOE restarting its authorization of LNG export projects, a process that will likely take several more years at DOE’s current pace

Jones Energy completes Anadarko Basin acquisition

Fri, Dec 20, 2013

Jones Energy Inc. has closed its acquisition of oil and gas properties in the Anadarko Basin from Sabine Oil & Gas LLC for $195 million.

Cheniere Partners subsidiary to offer senior secured notes

Tue, Nov 19, 2013

Cheniere Energy Partners LP reports that its wholly owned subsidiary, Sabine Pass Liquefaction LLC, intends to offer $1 billion principal amount of senior secured notes due 2022. 

Most Popular

Oil & Gas Jobs

Search More Job Listings >>
Subscribe to OGFJ