On May 17, 2013, after a nearly two-year hiatus, the Department of Energy, Office of Fossil Energy (DOE) issued its second-ever authorization to export domestically produced LNG to countries with which the United States does not have a free trade agreement (FTA). DOE granted the application of Freeport LNG Expansion, L.P. and FLNG Liquefaction, LLC (collectively, Freeport) for authorization to export up to 1.4 Bcf/day of LNG for a 20-year term. Project proponents hope that more authorizations will follow. However, the order signaled that DOE remains cautious in considering the collective impact of the authorizations it grants, and the fight over how much domestic LNG will ultimately be permitted to be exported to non-FTA countries is likely far from over.
Section 3(a) of the Natural Gas Act (NGA) requires entities to obtain DOE authorization in order to export or import natural gas, including LNG, from/to the United States. While exports to countries with which the United States has an FTA are deemed in the public interest under Section 3(c) of the NGA, exports to non-FTA countries are granted unless DOE concludes that the proposed exportation is not in the public interest. With the shale boom and plunging domestic natural gas prices, interest in exporting LNG to gas-hungry parts of the world such as Japan has increased. There are currently about 20 applications to export LNG to non-FTA countries pending before DOE, and a recent Barclays report indicates that if all pending projects were actually built, the total capacity for LNG exports would be about 28.7 Bcf/day.
The gas industry’s increased interest in exporting domestically produced LNG has been met with stiff resistance, not only from environmental groups concerned with the impact of global fossil fuel use but also from energy-intensive domestic industries, such as petrochemical manufacturing, that would prefer to prohibit the export of LNG in a bid to keep domestic gas prices near all-time lows. The issue has become politically charged as well, with high-ranking members of Congress on both sides of the aisle weighing in both in support of and opposition to LNG exports. After issuing its first authorization to export domestically produced LNG to non-FTA countries in 2011, DOE commissioned a study by NERA Economic Consulting to assess the potential macroeconomic impact of LNG exports. In December 2012, NERA completed its study, concluding that the United States would experience net economic benefits from increased LNG exports in all scenarios studied.
In approving Freeport’s application, DOE concluded that permit opponents failed to demonstrate that authorization would be inconsistent with the public interest. The order found that "exports proposed in this application are likely to yield net economic benefits to the United States." The order concluded that the NERA study and its conclusions are "fundamentally sound" and provided "substantial additional support" for Freeport’s application. DOE stated that it expects more gas to be produced if LNG exports are authorized than if they are prohibited, finding that "granting the requested authorization is unlikely to adversely affect the availability of natural gas supplies to domestic consumers or result in natural gas price increases or increased price volatility such as would negate the net economic benefits to the United States." EIA currently projects record production rates of 69.3 Bcf/day in 2013 and 70.1 Bcf/day in 2014.
Nevertheless, DOE sounded a note of caution, "hasten[ing] to add that DOE will take a measured approach" in reviewing other pending applications to export domestically produced LNG to non-FTA countries. The order asserts that DOE views "most seriously" the economic impacts of higher natural gas prices and possible increases in gas price volatility that may occur with increasing LNG exports. Recognizing the need to "monitor market developments closely as the impact of successive authorizations of LNG exports unfolds," DOE stated that it will "assess the cumulative impacts of each succeeding request for export authorization in the public interest with due regard to the effect on domestic natural gas supply and demand fundamentals." DOE has indicated that it plans to address the backlog of pending export applications starting with (1) pending applications where the applicant received approval on or before December 5, 2012 from FERC to use the FERC pre-filing process, in the order that DOE applications were received; (2) pending applications where the applicant did not receive approval to use the FERC pre-filing process, in the order that DOE applications were received; and (3) future applications to DOE, in the order received. Queue position will therefore be extremely important as DOE begins to address its current backlog. It remains to be seen how much domestically produced LNG DOE will allow to be exported in aggregate, and the fight over whether each additional permit is in the public interest will likely continue for some time.