On August 30, 2016, the Department of Energy’s Office of Fossil Energy (“DOE/FE”) published in the Federal Register a notice that sets forth procedures for the submission of information concerning in-transit shipments returning to the country of origin (the “Notice”). The Notice clarifies that in-transit shipments of natural gas – i.e., shipments that only temporarily pass through the U.S. before returning to their country of origin, or temporarily pass through a foreign country before returning to the U.S. – are not “imports” or “exports” within the meaning of Section 3 of the Natural Gas Act (“NGA”). Therefore, persons that engage in qualifying “in-transit” shipments need not obtain approval from the DOE/FE before doing so. Notably, persons making such in-transit shipments will still be subject to monthly reporting requirements to ensure these movements meet the criteria defining in-transit shipments and are tracked accordingly.

Background

In an order issued on February 5, 2016 to Bear Head LNG Corporation & Bear Head LNG, LLC (“DOE/FE Order No. 3769”), DOE/FE concluded that “in-transit shipments returning to the country of origin are not imports or exports within the meaning of Section 3 of the [NGA],” and are therefore not subject to DOE jurisdiction.1 The Notice further details obligations for persons making such in-transit shipments, in light of DOE/FE Order No. 3769.

In-Transit Shipments Returning to the Country of Origin

The Notice clarifies that DOE/FE considers an “in-transit shipment returning to the country of origin” to be “a shipment of natural gas through the U.S. between points of a single foreign nation, or through a single foreign nation between points in the U.S., that are physical and direct.” Further, DOE/FE indicates that “physical” means that the natural gas will be transported between two cross-border points. Exchanges by backhaul or displacement, or other virtual shipments will therefore not qualify as in-transit shipments for purposes of the Notice. In addition, “direct” means that the natural gas must not be diverted for other purposes but must travel a commercially reasonable path between points in one country consistent with an intention merely to transit the other country. Finally, to qualify as “in-transit,” the natural gas must cross points of entry and exit at the United States border within a 30-day period, consistent with the U.S. Customs and Border Patrol regulations concerning in-transit shipments.2

Reporting Requirements

Notwithstanding the declination of jurisdiction by DOE/FE over in-transit shipments of natural gas, DOE/FE imposes an obligation to file monthly reports on entities making such shipments. Specifically, entities holding title to natural gas as it crosses borders must file a report giving the following details of each in-transit shipment returning to the country of origin:

  1. The name of the country that is both the origin and final destination;
  2. The name of the country through which the gas is transported before returning to the origin country;
  3. The initial border crossing point;
  4. The foreign pipeline at the initial border crossing point;
  5. The U.S. pipeline at the initial border crossing point;
  6. The final border crossing point;
  7. The foreign pipeline at the final border crossing point;
  8. The U.S. pipeline at the final border crossing point;
  9. The volume of natural gas moving through the final border crossing point;
  10. The month and year in which the in-transit shipment took place;
  11. The name of the entity that has title to the natural gas during the in-transit movement;
  12. The name of the individual who prepared the report; and
  13. Contact information.

The obligation to report in-transit volumes includes a requirement to inform DOE/FE of any line losses and/or natural gas that may be consumed as fuel during the transit process. In addition, DOE/FE requests that monthly reports for in-transit shipments specify the difference in volumes entering the transit country and volumes leaving the transit country and the reasons for any such differences, to the extent the information is available. Such information must be reported to DOE/FE within 30 days following the month during which the in-transit shipment took place. The entity holding title to the natural gas as it crosses borders must also maintain copies of monthly reports filed for each in-transit shipment returning to the country of origin for a period of one year after completion of the in-transit shipment, and provide that information to DOE/FE upon request.

This reporting obligation will enable DOE/FE to confirm the non-jurisdictional status of such in-transit shipments, and facilitate the agency’s understanding of “the extent to which imports and exports are affecting the domestic natural gas market, and what movements of natural gas are limited to utilizing natural gas infrastructure and not directly impacting natural gas supply or demand.”

Implications

DOE/FE’s policy disclaiming its NGA Section 3 jurisdiction over in-transit shipments of natural gas may provide some benefit to shippers in Canada and Mexico, such as local distribution companies. However, the impact to those parties by the Notice, which adds additional formality to the policy determination that DOE/FE already announced in DOE/FE Order No. 3769, is not likely to be significant. This is particularly so given the continued obligation to file monthly reports and the fact that the process for obtaining blanket authorization to export natural gas to Canada and Mexico is relatively simple and procedural in nature.

However, the Notice will allow developers of LNG terminals in Canada and Mexico to transport natural gas produced in their own countries through the U.S. for re-exportation to a third country without the concern that the DOE/FE will regulate that transaction.

The Notice is effective immediately and is available here.