Liquefied Natural Gas Exporters Queue Up
The US Department of Energy gave final approval in August to Sabine Pass Liquefaction LLC to export up to the equivalent of 2.2 billion cubic feet of liquefied natural gas a day for the next 20 years to any countries with which the United States does not have a free trade agreement requiring “national treatment” for trade in natural gas.
“National treatment” for trade means treating an imported good the same as a locally-produced good once it enters a market.
The Sabine Pass Liquefaction approval is the first such approval to be granted.
The agency has another six applications pending for authority to export more than 1 billion cubic feet of LNG each per day, plus three more applications for authority to export smaller quantities of LNG. Earlier this year, a senior US Department of Energy official indicated that action on these nine applications will await completion of a two-part study that the agency commissioned to examine the effects of large-scale exports of domestically-produced LNG on domestic gas supplies and prices. Part one of the study was released in January.
Shift to Exports
Although Alaskan LNG has been exported to Japan for more than 30 years, the lower 48 US states began importing LNG in the 1980s, based on projections of decreasing US natural gas supplies. However, the US Energy Information Administration, or EIA, reports that US LNG imports decreased in 2011 to 349 bcf, the lowest level since 2002.
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. Gas production is increasing faster than US demand for natural gas, causing natural gas prices to decrease. EIA reported in July that while US natural gas spot prices fell over the past two years, LNG prices in international markets rose significantly during the same period.
Because natural gas prices are higher outside of the US, developers are looking at projects to export domestically-produced LNG, focusing mainly on modifying existing LNG import terminals to also allow LNG exports rather than building entirely new terminals.
Legal Approvals Required
Exports of natural gas, including LNG, from the US require prior authorization under section 3 of the Natural Gas Act, and jurisdiction over LNG export projects is divided between the Federal Energy Regulatory Commission and the US Department of Energy.
FERC authorizes the construction and operation of LNG export facilities upon a finding that the construction and operation of such facilities are not inconsistent with the public interest. In April, FERC authorized construction of liquefaction and export facilities at the existing Sabine Pass export terminal in Cameron Parish, Louisiana.
The Department of Energy grants authority to export. Exports of LNG to countries with which the US has free trade agreements requiring national treatment for trade in natural gas are considered automatically consistent with the public interest under the Natural Gas Act and must be approved without modification or delay. The US had such free trade agreements with 17 countries as of mid-May: Australia, Bahrain, Canada, Chile, Colombia, Dominican Republic, El Salvador, Guatemala, Honduras, Jordan, Mexico, Morocco, Nicaragua, Oman, Peru, Republic of Korea and Singapore.
Authorization to export LNG to countries without such free trade agreements, on the other hand, requires DOE to find that the proposed exports are not inconsistent with the public interest.
This requires decisions on, among other issues, whether the gas is needed domestically, whether the proposed exports pose a threat to the security of domestic natural gas supplies and whether the proposed exports are consistent with the US policy of promoting competition in energy supplies by allowing commercial parties to freely negotiate their own trade arrangements.
Sabine Pass Liquefaction received conditional authority in May to export LNG to countries without free trade agreements with the US, subject to further environmental review. DOE said that Sabine Pass Liquefaction submitted studies indicating that the US is expected to have more than enough natural gas both to export the volumes proposed and supply domestic demand for the 20-year term of the export authorization. It said no one intervened in the proceeding to suggest otherwise.
According to DOE, the studies submitted by Sabine Pass Liquefaction indicated that there will be only a modest increase in the domestic market price for natural gas through 2035. DOE suggested this price increase will result from increasing marginal costs to produce gas for LNG export rather than from a convergence of domestic natural gas prices with prices in international markets where the price of natural gas is linked to the price of oil.
However, the agency took administrative notice that future government actions as well as advances in technology could affect the supply and price forecasts. In particular, DOE said that federal agencies are still looking into the environmental and safety consequences of shale gas production, and the results of this review could reduce future US natural gas supplies. DOE also postulated that fracking could be more widely adopted outside the US, leading to an increase in international gas supplies and reducing prices for gas abroad. Finally, DOE indicated that US natural gas demand could increase over time.
DOE said it would monitor the situation, because “[t]he cumulative impact of these export authorizations [for Sabine Pass Liquefaction and any other exports the government approves in the future] could pose a threat to the public interest . . . . In the event of any unforeseen developments of such significant consequence as to put the public interest at risk, [DOE] is fully authorized to take action as necessary to protect the public interest.” The agency did not say what actions might be taken.
However, subsequent statements by senior DOE officials suggest that the most likely action, if the agency starts to fear that domestic natural gas supplies are endangered, is to deny or limit additional LNG export authorizations rather than rescind existing export authority. Energy Secretary Steven Chu told the Cleveland Plain Dealer in January, “You don’t permit a whole rash of [exports] and then find out what a terrible mistake you made.”
In February, Christopher A. Smith, a deputy assistant secretary at DOE, told Rep. Edward Markey (D-Massachusetts)in a letter that the government does not intend to use its authority to modify previously-granted export authorizations as a price maintenance mechanism in the event of a price spike in domestic prices of natural gas. Smith acknowledged that the good-faith expectations of private investors in export terminals will make it hard to withdraw or modify export licenses “except in the event of extraordinary circumstances.”
Smith also told Markey that DOE will not address the pending applications for export of LNG to countries with which the US does not have free trade agreements requiring national treatment for trade in natural gas until DOE has received and reviewed the results of two studies it commissioned in
EIA released the first part of the study, an assessment of how specific scenarios of increased natural gas exports could affect US energy consumption, production and prices, in January. The second part of the study, which is being done by a private contractor, has not been completed yet. It will address the impact of the same specific scenarios of increased exports examined by EIA on the US economy and manufacturing sector.
Now that Sabine Pass Liquefaction has been given authority to export, the question is what DOE will do about the other pending applications once the DOE study is completed. The DOE deputy assistant secretary told Congressman Markey in February that “no decision has been made whether to approve, limit, phase-in or deny the presently pending or any future proposed export authorizations.” Some of the options DOE could consider include approving all of the pending applications on the assumption that not all of the projects that receive authorization will be constructed, or approving the applications but only authorize exports up to a certain level.
In the meantime, DOE is being lobbied by members of Congress from gas-producing states to allow more LNG exports. On August 7, the same day that DOE granted final authorization to Sabine Pass Liquefaction, 44 members of the House of Representatives from Texas, Louisiana, Oklahoma and Arkansas wrote to Energy Secretary Chu arguing that surplus US gas supplies need an international outlet and urging DOE to “take the steps necessary to expedite the approval process for the export of LNG.”