The US Department of Energy signaled that it would proceed cautiously before approving any more applications to export US-produced liquefied natural gas after granting only the second export license in May.

The question of how much LNG should be exported has become a difficult political issue in the United States.

Advances in natural gas drilling techniques, principally hydraulic fracturing or "fracking" that allows production of natural gas from shale, have led to dramatic increases in US natural gas production. US natural gas production is increasing faster than US natural gas demand, causing natural gas prices to decrease. Because natural gas prices currently are higher outside the US, domestic natural gas producers and project developers are looking at projects to export domestically-produced LNG. Meanwhile, the US manufacturing sector and other natural gas users are hoping to benefit from low gas prices. Unresolved environmental issues also remain in play.

The Department of Energy granted the developers of a liquefaction and export facility planned at the existing Freeport LNG import terminal in Texas conditional authority on May 17 to export domestically-produced LNG on a long-term basis to countries with which the United States does not have free trade agreements requiring "national treatment" for trade in natural gas. "National treatment" for trade means treating an imported product the same as a locally-produced one once it enters a market.

This is only the second such order issued by DOE since 2011.

More than 20 other applications for export licenses are still pending.

DOE conditionally authorized the Freeport project to export LNG equivalent to up to 1.4 billion cubic feet of natural gas a day for 20 years.

The agency said Freeport had introduced substantial evidence projecting a future supply of domestic natural gas sufficient to support both the proposed export authorization and domestic natural gas demand with only a modest increase in the domestic market price for natural gas through 2035. DOE said Freeport had also shown that the exports would produce significant local and regional economic benefits in terms of employment and income.

DOE Role

Section 3 of the Natural Gas Act requires DOE approval before natural gas can be exported from the US.

Exports to countries with which the US has free trade agreements that require national treatment for trade in natural gas are considered automatically in the public interest, and applications for such exports must be approved without delay or modification.

The US had such free trade agreements with 18 countries as of the end of October 2012: Australia, Bahrain, Canada, Chile, Colombia, Dominican Republic, El Salvador, Guatemala, Honduras, Jordan, Mexico, Morocco, Nicaragua, Oman, Panama, Peru, South Korea and Singapore.

DOE granted Freeport authorization to export LNG to such countries in 2011.

Authorization to export LNG to countries without such free trade agreements requires DOE to find that the proposed exports are not inconsistent with the public interest. In making this determination, DOE considers the domestic need for the natural gas proposed to be exported, whether the proposed exports pose a threat to the security of domestic natural gas supplies and other factors bearing on the public interest.

DOE granted the Sabine Pass LNG export terminal in Louisiana conditional authority in May 2011 to export LNG equivalent to up to 2.2 billion cubic feet of natural gas a day for 20 years. The agency granted Sabine Pass final authority in August 2012 after an environmental review of the Sabine Pass project had been completed and the Federal Energy Regulatory Commission had granted the project developers authority to construct the project. DOE rejected a challenge to its final Sabine Pass order by the Sierra Club in January 2013.

The agency said in early in 2012 that it would not process the other pending applications for export authority until the second part of a DOE-commissioned LNG export study had been completed and fully reviewed. The study was completed in December 2012, and then there was a period through February 2013 for public comment, after which the agency said it would act on the pending applications based on the order they were received by DOE and the applicants had started the separate approval process at the Federal Energy Regulatory Commission for permission to construct. It published a list with the applications by name and where each sits in the queue.

The Freeport application was the next in line after Sabine Pass.

Freeport

Only the American Public Gas Association, whose members include publicly-owned gas distribution systems, public utility districts and other public agencies that purchase natural gas, objected to the Freeport application.

Much of the Freeport order focused on DOE’s analyses of the LNG export study and of the comments filed in response to the study.

The first part of the study was done by the US Energy Information Administration, which is an independent agency within DOE, and it examined the potential impact of additional natural gas exports on US energy consumption, production and prices under several export scenarios. It said export of US LNG will lead to higher domestic natural gas prices, increased US natural gas production, reduced US natural gas consumption and increased natural gas imports from Canada via pipelines.

In the second part of the study, NERA Economic Consulting examined how LNG exports would affect the US economy. It said the net effect would be positive in that US gross domestic product would increase, but households and industries that use natural gas would have to pay more for gas.

DOE said, in granting the Freeport license, that it also considered the international consequences of its decision and the US commitment to free trade.

Freeport’s authority to export is subject to several conditions, including that Freeport must begin exporting within seven years. The deadline is May 2020.

Freeport asked for authority to export for up to 25 years, but DOE said "caution recommends" limiting the conditional export authority to 20 years because the customer contracts Freeport submitted with its application were for 20 years and that is the same period that DOE authorized for Sabine Pass.

The Freeport export authority is conditional, pending satisfactory completion of environmental review of the project by FERC and DOE, after which DOE will issue a final order.

Freeport still must get authority from FERC to build and operate the gas liquefaction and export facility at the existing Freeport LNG import terminal on Quintana Island, Texas. It filed an application with FERC in August 2012.

Freeport also has pending before DOE a second application to export another 1.4 billion cubic feet of gas a day to countries with which the US does not have free trade agreements requiring national treatment for trade in natural gas. Freeport’s second application is third in the DOE queue after applications by the Lake Charles and Dominion Cove projects.

Outlook?

After granting Freeport conditional authority to export, DOE "hastened to add" that it will take a "measured" approach in granting Freeport final approval and in reviewing the other pending applications to export.

DOE gave three reasons for taking a cautious approach to future export applications. First, the LNG export study, like any study based on assumptions and economic projections, is inherently limited in its predictive accuracy. Second, applications to export significant quantities of US-produced LNG are a new phenomena with uncertain impacts. Third, the natural gas market has experienced rapid reversals in the past and is again changing rapidly due to economic, technological and regulatory developments. DOE said it intends to monitor developments in natural gas markets that could undermine the public interest if it authorizes additional exports.

DOE said that it will assess the "cumulative impacts" of each succeeding export application on US natural gas supply and demand. It said it would attach terms and conditions to future export authorizations to ensure that they are used in a timely manner and refrain from granting permission to export except in cases where the applicant can show that it will have the export terminal up and running within a reasonable time after the authority to export is granted.

Several people who filed formal comments on the LNG export study urged the government to phase in exports over time to minimize potential price impacts. DOE said that while it was not adopting a formal phase-in schedule, it would consider the comments in the course of reviewing future LNG export applications.

The new energy secretary, Ernest Moniz, who was sworn in May 21, said during his confirmation process that he would undertake his own review and analysis of the LNG export study with an eye to whether the data in the study is already outdated before moving forward with the other applications.

Bills have been introduced in both houses of Congress by members who favor allowing more gas exports to direct the Department of Energy to treat gas exports to a longer list of countries as automatically "consistent with the pubic interest."

One bill, S. 192 in the Senate, was introduced by 11 Senators from Alaska, Louisiana, North Dakota, Oklahoma, Texas, Wisconsin and Wyoming in January and would authorize exports to member countries of the North Atlantic Treaty Organization and Japan. It would also give discretion to the US secretaries of state and defense to add to the list.

No action has been taken on the bill in the Senate. A companion bill, H.R. 580, was introduced in the House.