The US Department of Energy has released an Order granting approval to Freeport LNG Expansion LP and FLNG Liquefaction LCC (collectively, Freeport) for the export of liquefied natural gas (LNG) from Freeport’s export terminal in Quintana Island, Texas, to countries that do not have a free trade agreement with the US.

The Order was released on Friday, May 17, 2013.

This is the second time DOE has granted approval for the export of LNG to non-FTA countries. It is a welcome and potentially significant step for US gas producers seeking to capitalize on the technological improvements in hydraulic fracturing (or fracking, as it is commonly known) that have made accessibility to domestic gas supplies less expensive and more convenient.

However, the regulatory process for exporting LNG is complex and multi-layered, and DOE has repeatedly signaled that it intends to proceed cautiously with respect to LNG exports. For those wishing to transact for US LNG in the global marketplace, the Freeport approval is good news and grounds for optimism. But it is too soon to conclude that the approval heralds a sea change in DOE policy.

The regulatory process and the “public interest” test

There are two entities with authority to regulate LNG exports: DOE and the Federal Energy Regulatory Commission (FERC). According to Section 3 of the Natural Gas Act, DOE approval is necessary to export LNG as a commodity. FERC, however, has authority over the construction of export terminals.

For those countries that have free trade agreements with the US, DOE approval is required under federal law. The US currently has free trade agreements with 20 countries: Australia, Bahrain, Canada, Chile, Colombia, Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Israel, Jordan, Mexico, Morocco, Nicaragua, Oman, Panama, Peru, Singapore and South Korea. DOE approval to export LNG to these countries may be thought of as automatic.

For those countries that do not have free trade agreements with the US, however, DOE is required to approve the export application unless it would be inconsistent with the public interest. In other words, for non-FTA countries, there is a presumption that the export of LNG is in the public interest, but it is a rebuttable presumption. The “public interest” test encompasses a range of factors, including the impact on natural gas prices, US natural gas suppliers and the resource base, US natural gas demand, benefits to the US economy, trade balance, global environmental benefits and US national security benefits.

Due to advances in fracking technology, the queue of US energy producers seeking DOE approval for exporting LNG to non-FTA countries has grown considerably. Currently, 19 such applications from the lower 48 states are pending. Prior to Freeport, DOE had approved only one other company: Sabine Pass Liquefaction LLC (owed by Cheniere Energy Partners) in Cameron Parish, Louisiana.

Freeport’s application and DOE’s public interest analysis

DOE’s Order considered Freeport’s application and determined that there were insufficient bases to conclude that the exporting of LNG to non-FTA countries would be against the public interest.

Freeport asserted in its application that export approval would have a minimal impact on US domestic prices for natural gas through 2015. It also asserted that approval would result in significant local and regional economic benefits in terms of employment and income. DOE commissioned an LNG Export Study to consider these questions and reached the same conclusions. Groups opposing Freeport’s application failed to sufficiently rebut or challenge Freeport’s assertions and the LNG Export Study’s conclusions.

DOE determined that Freeport’s LNG exports would, by counteracting concentration within global LNG markets, diversify international supply operations and improve energy security for US allies and partners.

DOE also reiterated its policy position that “under most circumstances, the market is the most efficient means of allocating natural gas supplies.”

The Freeport Order

DOE approved Freeport’s exporting of 1.4 billion cubic feet of gas per day for a 20-year period. The authorization period commences either five years from the issuance of the Order or the date Freeport begins exporting, whichever date is sooner; although DOE’s approval is conditioned on Freeport beginning its exporting within seven years of the Order being issued.

Freeport cannot assign or transfer its authorization to another entity without prior DOE approval. Similarly, DOE approval is required if Freeport is to act as an export agent for another entity. Freeport must file with DOE all long-term commercial agreements it enters into with other entities.

Finally, the approval is conditioned on FERC satisfactorily completing its environmental inspection.

Guidance for pending and future applicants

Certainly, the foregoing analysis could apply to any of the other pending applications. However, DOE repeated its position that it will continue to proceed slowly and cautiously.

DOE stated that, with respect to the remaining queue of applications for LNG exports to non-FTA countries, it “will take a measured approach in … reviewing the other pending applications to export domestically produced LNG. Specifically, [DOE] 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.”

DOE gave several reasons for maintaining a cautious approach as it moves forward on the other applications: the LNG Export Study it relied on, like all such studies, is limited in predictive accuracy; exporting LNG on such a potentially large scale is a novel phenomenon with uncertain impacts; the supply of and demand for gas in global markets are unpredictable and routinely changing; and DOE must be vigilant for developments that could be adverse to the public interest in the future.

Ultimately, DOE’s Freeport approval is a positive development, but uncertainty persists for pending LNG export applications.