Updates

In a positive—albeit limited—decision for proponents of LNG exports, the U.S. Court of Appeals for the D.C. Circuit rejected environmental challenges to authorizations of export-related modifications and additions to two LNG facilities issued by the Federal Energy Regulatory Commission (“FERC”). The court determined that FERC had adequately addressed arguments frequently raised by project opponents related to the environmental impacts of natural gas production allegedly induced by increased LNG exports. However, the court’s decisions will likely shift the focus of litigation to related authorizations issued by the Department of Energy (“DOE”).

In one of a pair of companion cases, the Sierra Club and the Galveston Baykeeper (“Petitioners”) jointly sought review of FERC’s analysis under the National Environmental Policy Act (“NEPA”) for Freeport LNG Development, L.P.’s proposals to upgrade its existing terminal to support LNG exports (“Freeport Projects”).1 The court considered Petitioners’ arguments (1) that FERC failed to consider the environmental impacts from the increase in domestic natural gas production that the projects would induce, along with resulting increases in coal consumption that would occur as LNG exports drive domestic natural gas prices higher, and (2) that FERC failed to analyze the projects’ cumulative environmental effects together with the impacts of other proposed and authorized LNG export projects in the United States.2

Background

Under the Natural Gas Act, the DOE has exclusive authority over natural gas commodity exports, although the agency has delegated to FERC authority to review proposals to site, construct, and operate related LNG terminal facilities. As a result, entities wishing to export LNG must apply for approval from both DOE and FERC. Under federal law, FERC serves as the lead agency for environmental review under NEPA, while DOE participates in FERC’s environmental review. DOE must independently review FERC’s environmental analysis and determine whether to adopt and/or supplement it.

The Freeport Projects had received authorization from the FERC to site, construct, and operate LNG export facilities and from DOE to export LNG from those facilities. Petitioners unsuccessfully challenged FERC’s NEPA review for the Freeport Projects in proceedings before the agency and subsequently sought review before the D.C. Circuit. The Sierra Club is also challenging DOE’s orders authorizing the export of LNG from the Freeport Projects, citing environmental concerns similar to those it has raised in the FERC proceedings. That case is currently pending.3

The Court’s Decision

The D.C. Circuit found that in approving the facilities related to the Freeport Projects the FERC was not required to consider in its environmental analysis Petitioners’ claims regarding induced domestic production of natural gas. The court found that such concerns “do not fall within [FERC’s] bandwidth,” because FERC lacks the legal authority to authorize LNG exports; that authority instead resides with DOE. DOE’s authorization of exports, the court found, is an “intervening action” that “breaks the NEPA causal chain” between FERC’s decision to permit the facilities of the Freeport Projects and any purported impacts resulting from induced domestic gas production arising from the export of LNG. Accordingly, the court stated that the issue should be raised in the Sierra Club’s pending challenge to DOE’s export-authorization decision. The court took pains to note that its decision expressed no opinion on the adequacy of FERC’s NEPA review as applied to DOE’s export authorization.

The court also rejected Petitioners’ argument that FERC should have expanded the scope of its review to include cumulative environmental impacts of pending and approved LNG export projects throughout the entire United States. On this issue, the court held that FERC’s decision to establish the relevant geographical area for cumulative impacts analysis as Brazoria County, Texas, was neither arbitrary nor capricious, and was consistent with controlling NEPA precedent.

Implications

By finding Petitioners’ induced-production challenges outside the realm of FERC’s authority and therefore outside of its required NEPA consideration, the D.C. Circuit has ostensibly foreclosed a key argument for environmental challenges to FERC’s review of LNG export terminals. The court adopted the same reasoning in the companion decision issued concurrently regarding FERC’s approval for increased export capacity at the Sabine Pass LNG terminal.4

These decisions, however, could raise the stakes for challenges to pending and future LNG export authorizations from the DOE. The Sierra Club’s challenge to DOE’s export authorization for the Freeport Projects is currently pending before the D.C. Circuit. The court’s June 28 decisions relating to the Petitioners’ challenge to the Freeport Projects and the Sierra Club’s challenge to the authorization of the Sabine Pass LNG export terminal suggest that it may give more consideration to the merits of arguments regarding the environmental impacts of induced production from LNG exports when reviewing the DOE’s actions. The outcome of the D.C. Circuit’s review of the LNG export authorization granted by DOE for the Freeport Projects is thus likely to affect pending and future LNG export projects, as well as a number of LNG export projects currently subject to judicial challenge.

The D.C. Circuit’s opinion related to the FERC approval of the Freeport Projects can be found here, and its opinion in the companion case upholding FERC’s authorizations related to the Sabine Pass LNG terminal can be found here.