On February 5, 2016, the U.S. Department of Energy’s Office of Fossil Energy (“DOE/FE”) issued two orders to Bear Head LNG Corporation and Bear Head LNG (USA), LLC (together, “Bear Head LNG”),1 formally announcing DOE’s comprehensive policy for considering applications involving liquefied natural gas (“LNG”) exports from Eastern Canada to global markets.

  • In Order 3769 (“In-Transit Order”), DOE/FE determined that it lacks jurisdiction under Section 3 of the Natural Gas Act (the “NGA”) over Bear Head LNG’s proposed imports of Canadian natural gas travelling by pipeline through the United States on its way back to Canada (i.e., in‑transit shipments).2  In this regard, DOE/FE dismissed Bear Head LNG’s application seeking authorization to access Western and Central Canadian natural gas supplies that necessarily must cross the U.S.-Canada border (due to transportation pipeline configurations), en route to the proposed Bear Head LNG project.
  • In Order 3770 (the “Non-FTA Order”), DOE/FE granted Bear Head LNG long-term, multi‑contract authorization under Section 3(a) of the NGA to export U.S. natural gas by pipeline to Canada for subsequent liquefaction and export (i.e., re-export) to nations with which the United States does not have a free trade agreement (“FTA”) requiring the national treatment of natural gas (“non-FTA nations”).3

The Bear Head LNG proceedings presented legal issues of first impression4 and “an unusual factual circumstance,”5 as DOE/FE stated.  Certainly, as discussed below, DOE/FE’s legal determinations in the Bear Head LNG proceedings were significant.6  However, the legal significance of the Bear Head LNG Orders is dwarfed by the political implications of DOE/FE’s announced policies of (i) adopting a laissez-faire approach to applications for Canadian gas in-transit through the U.S., and (ii) giving the green light to natural gas exports of U.S. natural gas to Canada for liquefaction and export to non-FTA nations.

The Legal Standard:  FTA or Non-FTA

Specifically, DOE/FE was called upon to determine which of the two legal standards found in Section 3 of the NGA (i.e., FTA or non-FTA) properly applied to Bear Head LNG’s applications filed for the purpose of securing gas supply for the Bear Head LNG project.  For diversity of supply, Bear Head LNG sought authorizations for in-transit shipments of Canadian natural gas, as well as pipeline exports of U.S. natural gas to Canada.  As described in Bear Head LNG’s applications, LNG produced at the project is intended for export to FTA and non-FTA nations.

In addressing this issue, DOE/FE opted to apply the discretionary, non-FTA standard (i.e., the NGA Section 3(a) public interest standard), inasmuch as LNG produced at the Bear Head LNG project is intended for delivery and end-use in non-FTA nations.  DOE/FE reiterated the rationale supporting its determination, previously unveiled in the FTA Order, in the Non-FTA Order.  It explained that its decision is rooted in Congressional intent that all exports destined for non-FTA nations be reviewed for their consistency with the U.S. public interest.  To do otherwise, DOE/FE reasoned, would permit potential exporters to evade the non-FTA public interest analysis simply bytransiting natural gas and LNG through an FTA nation.7

Balancing NGA Mandates with U.S. International Trade Obligations

Undoubtedly, Bear Head LNG’s proceedings presented DOE/FE with the challenge of discharging its statutory mandate under the NGA, without violating U.S. obligations under NAFTA or trampling on an already strained U.S.-Canada energy relationship suffering from the highly politicized discord over the Keystone XL Pipeline.8

As a starting point, consider that DOE/FE’s decision to exercise its NGA Section 3(a) jurisdiction in effect extends beyond the U.S.-Canada border (where the export of U.S. natural gas by pipeline will occur) and follows the gas into Canada (where the export of LNG by vessel will occur).  In this regard, the Non-FTA Order arguably is an exercise of extraterritorial jurisdiction by DOE/FE—which is not to say it is impermissible.9  To further complicate matters, prior to DOE/FE’s issuance of the In-Transit Order, there was uncertainty regarding which NGA Section 3 standard DOE/FE would apply to in-transit shipments of Canadian gas, and whether DOE/FE would be consistent in its view of in-transit gas when Canadian gas was in question, as opposed to U.S. gas in transit for delivery to the Bear Head LNG project.10

Then consider that the NEB has authorized (without restriction) the export of Canadian gas intended for liquefaction and export from U.S. West Coast projects.11

With the lawsuits stemming from U.S. decision to reject the Keystone XL Pipeline as a backdrop, and a newly elected Canadian government looking for a fresh start with the Obama Administration, particularly in energy and climate change, DOE/FE’s favorable determinations in the Bear Head LNG proceedings mark a positive step in strengthening ties between the two nations.

The NEPA Challenge

A secondary, but very significant legal issue, arose under the National Environmental Policy Act (“NEPA”), which requires DOE/FE to consider the environmental impacts of its decisions on applications seeking authorization to export natural gas.  In the past, DOE/FE could meet its NEPA obligations as a cooperating agency in the NEPA review process led by the Federal Energy Regulatory Commission (“FERC”) for U.S. LNG terminal facilities.  In the case of the Bear Head LNG project, the environmental and safety review would be conducted by Canadian federal, provincial and local authorities.

At the time Bear Head LNG filed its applications, relevant DOE/FE non-FTA precedent could be summarized in a single bullet:12

  • Applications involving the construction of new, or the modification of existing, LNG facilities subject to FERC jurisdiction:  DOE/FE acts as cooperating agency in the NEPA review process led by FERC.13  DOE/FE then adopts the NEPA documentation prepared by FERC (be it an environmental assessment (“EA”) or environmental impact statement (“EIS”)), provided DOE/FE has conducted an independent review of such NEPA documentation and determined its comments and suggestions have been satisfied.  In those instances that an EA is prepared, DOE/FE issues a finding of no significant impact (“FONSI”).  In other instances that an EIS is prepared, DOE/FE issues a record of decision.

Since then, relevant DOE/FE non-FTA precedent has evolved as follows, culminating with the most recent decisions issued on February 5, 2016:

  • Applications involving existing LNG facilities not subject to FERC jurisdiction: DOE/FE grants categorical exclusion under its regulations at 10 C.F.R. Part 1021, Subpart D, Appendix B5.
  • Application involving the construction of new CNG facilities not subject to FERC jurisdiction: DOE conducts NEPA review process and prepares NEPA documentation.14
  • Applications involving the construction of new LNG facilities in Canada (i.e.not subject to FERC jurisdiction):  DOE/FE grants categorical exclusion in accordance with its regulations at 10 C.F.R. Part 1021, Subpart D, Appendix B5, with authorized export volume in proportion with level of existing U.S. pipeline capacity.15

New Rules for In-Transit Canadian Gas Shipments

DOE/FE dismissed Bear Head LNG’s in-transit application on the grounds that in-transit shipments returning to the country of origin are not “imports” or “exports” within the meaning of NGA Section 3, such that they fall outside of DOE/FE’s NGA Section 3 jurisdiction.  In reaching this conclusion, DOE/FE noted Congress’ likely intention that the terms “import” and “export” apply only to those categories of shipments that, by their nature, could have a material effect on the U.S. public interest.  Shipments of Canadian-sourced natural gas between Canadian points, according to DOE/FE, are “categorically unlikely” to have a material impact on the U.S. public interest and are, therefore, outside of DOE/FE’s NGA Section 3 purview.

In further support of its jurisdictional determination, DOE/FE cited a 1977 agreement, theAgreement Between the Government of the United States of America and the Government of Canada Concerning Transit Pipelines, which espouses a laissez-faire policy for in-transit shipments of hydrocarbons between the two countries.

Definition of “In-Transit Shipment Returning to the Country of Origin.”

DOE/FE explained these are shipments of natural gas through the U.S. between points of a single foreign nation that are physical and direct.  “Physical” means transportation between two cross-border points, and excludes “exchanges by backhaul, displacement or other virtual shipments.” “Direct” means that the natural gas travels a commercially reasonable path between foreign points consistent with an intention merely to transit through the U.S. without being diverted for another purpose.  Lastly, citing U.S. Customs and Border Protection regulations, DOE/FE noted that the natural gas must enter and exit the U.S. within a 30-day period to qualify as “in-transit.”

Filing and Recordkeeping Requirements.

Despite dismissing the application and disclaiming jurisdiction, DOE/FE drew on its authority under Section 16 of the NGA to direct Bear Head LNG to file monthly reports.  When in-transit shipments occur, Bear Head LNG is to report:  (1) the volumes of natural gas delivered into the U.S., (2) the entity that has title to the natural gas on first entry into the U.S., (3) the points of entry into the U.S., (4) the name of the U.S. pipelines used at the points of entry to and exit from the U.S., (5) the points of exit from the U.S., (6) the entity that has title to the natural gas at the point of exit from the U.S., and (7) the volumes of natural gas delivered to the points of exit.  Lastly, in the event of any discrepancy in volumes, Bear Head LNG must show that no deliveries into U.S. commercial markets occurred.

The In-Transit Order further directs Bear Head LNG to maintain “records of the pipelines used for each in-transit shipment for a period of one year after completion of each in-transit shipment.”  These records are to be provided to DOE/FE upon request.

In Conclusion

DOE/FE rendered Bear Head LNG’s Non-FTA Order in under 12 months.  Certainly, that processing time very likely would have been cut by more than half had DOE/FE applied the FTA standard instead.  Nonetheless, given the complexity of the legal issues and the political implications affecting the Bear Head LNG proceedings, having the benefit of a thoughtful and deliberate analysis carries many tangible benefits.

As to intangible benefits, considering that Bear Head LNG was the second applicant raising issues of first impression before DOE/FE, its chances of achieving timely resolution were not very high.16  Recognizing this, Bear Head LNG pulled together an experienced team of advisors to forge and implement a permitting strategy to improve its odds.  In the end, whether by fortune, miracle or design, Bear Head LNG managed to walk by the awakened snake without getting bitten.  It did not suffer the deluge of public comments that most proponents of LNG exports experience, and it did so in record time.

DOE/FE also is to be commended for resolving Bear Head LNG’s applications in a manner that preserves each sovereign’s interests in its natural resources, but also is consistent with international principles of free trade, reciprocity and comity.  To the extent the Bear Head LNG Orders may be viewed as bringing North American LNG a step closer to serving global demand, consider the words of President Dwight D. Eisenhower:  “Accomplishment will prove to be a journey, not a destination.”

Cadwalader serves as Bear Head LNG’s U.S. energy regulatory counsel.  Special thanks to Norton Rose Fulbright Canada LLP, FaegreBD Consulting and Boundary Stone Partners for their participation in the journey.