Friday, February 15, 2013

LNG & Oil Exports

A. The Natural Gas Act and LNG Exports

The Department of Energy Office of Fossil Energy (DOE-FE) regulates the import and export of LNG. When reviewing export applications, DOE-FE focuses on a number of issues, including 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 whether the proposal promotes competition in the marketplace by allowing commercial parties to freely negotiate their own trade agreements.
DOE-FE’s scrutiny of LNG export applications depends in large part on whether the LNG will be exported to countries with which the United States has a fair trade agreement (FTA).

The Natural Gas Act requires DOE-FE to approve export applications so long as they are not inconsistent with the public interest. That provision creates a rebuttable presumption under which project opponents bear the burden of demonstrating that proposed exports are inconsistent with the public interest.  The Natural Gas Act further provides that LNG exports to a nation with which the United States has an FTA giving national treatment for the trade in natural gas are deemed in the public interest, and applications for such exports are given expedited consideration.

To date, DOE-FE has approved only one application for LNG exports to a non-FTA country. In May 2011, DOE-FE conditionally granted Sabine Pass Liquefaction’s application to export LNG to non-FTA countries. In its order approving the Sabine Pass application, DOE-FE noted that it had a continuing duty to monitor natural gas supplies in order to ensure that export authorizations do not reduce supplies necessary to meet essential domestic needs. DOE-FE also stated that it would evaluate the cumulative impact of the Sabine Pass authorization and any future export authorizations when considering export applications.

DOE-FE is currently holding in abeyance at least 16 applications to export over 20 billion cubic feet per day (Bcf/d) of LNG to non-FTA countries while the agency evaluates the macroeconomic impacts associated with exporting domestic natural gas. To that end, DOE-FE has commissioned two reports evaluating the economic effects of increased LNG exports. In January 2012, the EIA released a report evaluating how specific scenarios of increased LNG exports could affect domestic energy markets, including consumption, production, and prices. A second report, completed by NERA in December 2012, evaluated macroeconomic impacts of increased LNG exports under specified scenarios. NERA concluded that, under most circumstances, LNG exports would have net positive economic impacts. That conclusion, however, is not without controversy. Over 30,000 public comments were filed on the NERA report, and the reply comment period, which runs through February 25, 2013, is expected to generate similar comment volumes.

B. Oil and Refined Product Exports

The public debate concerning energy exports has largely focused on natural gas, but a similar debate concerning oil exports is brewing. Hydraulic fracturing and horizontal drilling have opened up previously inaccessible tight oil formations like the Bakken and Eagle Ford plays. As a result, the IEA projects that the United States will surpass Saudi Arabia as the world’s largest oil producer around 2020, and will become a net oil exporter by 2030. Despite those resources, the future of the United States as an oil exporter remains uncertain due to significant restrictions on crude oil exports that are presently in place.

The United States banned crude oil exports in 1975, with limited exceptions, in response to oil shortages caused in large part by the Arab oil embargo. The Energy Policy and Conservation Act of 1975 (EPCA) directs the President to ban the export of crude oil unless a determination is made that such exports would be consistent with the national interest. Other statutory provisions similarly prohibit crude oil exports. For example, the Mineral Leasing Act restricts exports of domestically-produced crude oil that is transported by pipeline over rights-of-way granted under that statute. The Outer Continental Shelf Lands Act restricts exports of crude oil produced from the outer Continental Shelf. And the Naval Petroleum Reserves Production Act restricts exports of crude oil produced form the naval petroleum reserves.

C. Federal Energy Regulatory Commission

FERC has received applications for 11 domestic LNG import and/or export facilities, and project sponsors have identified seven additional potential LNG facilities in the United States. FERC has exclusive authority to “approve or deny an application for the siting, construction, expansion, or operation of an LNG terminal”– the means for exporting to any region of the world other than North America.

FERC is not authorized to approve or disapprove the import or export of the commodity itself. To avoid duplicating, and potentially contradicting DOE-FE’s export licensing determinations, FERC has interpreted its authority as “limited to consideration of the place of importation, which necessarily includes the technical and environmental aspects of any related facilities.” Nonetheless, even if DOE-FE expands the scope of permissible LNG exports, FERC could be a stumbling block if it refuses to approve export facilities for any of the public interest reasons that it could rely upon for doing so. (Marten Law)

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