DOE Breaks the Logjam on LNG Export Applications

Last Friday, the Department of Energy (DOE), Office of Fossil Energy conditionally authorized Freeport LNG Expansion L.P. and FLNG Liquefaction, LLC (jointly, “Freeport”) to export domestically produced liquefied natural gas (LNG) to countries with which the United States does not have a Free Trade Agreement (FTA).¹ Under the authorization, Freeport may export up to 511 billion cubic feet of LNG per year for 20 years, commencing on the earlier of (i) the date of first export, which must occur within seven years of the date of the order, or (ii) May 17, 2018. The authorization is subject to further environmental review and regulatory approval, including authorization from the Federal Energy Regulatory Commission.² Originally developed to import LNG, the Freeport project is only the second facility to receive authorization from the DOE to export LNG to non-FTA countries. The first such authorization was granted in 2011 to the Sabine Pass LNG Terminal in Louisiana.

Freeport has signed 20-year liquefaction tolling agreements with BP plc and three Japanese corporations. The United Kingdom has become increasingly dependent on LNG imports from Qatar to make up for dwindling gas reserves in the North Sea. Japan has been paying extremely high prices to import sufficient energy because of the shutdown of its domestic nuclear power facilities. Japan now accounts for roughly one third of the international LNG market. These trading partners, among others, have been eager to gain access to relatively inexpensive U.S. natural gas. Natural gas producers and free trade advocates also have urged the DOE to approve increased LNG exports. However, LNG export remains controversial, both among environmentalists, who fear that it will lead to more shale gas drilling, and among domestic manufacturers, who use natural gas as a raw material as well as a fuel and believe LNG exports will raise domestic natural gas prices. Similarly, the American Public Gas Association intervened and protested Freeport’s application, stating that the export of natural gas is inconsistent with energy independence and will raise domestic prices.

Section 3(a) of the Natural Gas Act³ directs the DOE to authorize export of natural gas from the United States if such export is consistent with the “public interest.” The DOE noted in Order No. 3282 that it “must grant such an application unless opponents of the application overcome” a rebuttable presumption that the authorization is in the public interest. Id. at 6. The DOE has interpreted the public interest to include “economic impacts, international impacts, security of the natural gas supply, and environmental impacts, among others,” and particularly focuses on the domestic need for gas and the security of domestic gas supplies. Id. at 6-7. Based on studies commissioned from NERA Economic Consulting and the Energy Information Administration, the DOE concluded that there is no zero-sum trade-off between domestic natural gas prices and exports, noting that more natural gas is likely to be produced if export is permitted, and the United States will enjoy net economic benefits from LNG exports. Id. at 71, 110-111. The DOE also considered the United States’ commitment to free trade and the needs of its trading partners and allies, concluding that LNG exports also would provide non-economic benefits. Id. at 111. The DOE’s order made preliminary findings warranting approval on all issues except for environmental issues. Once the environmental review process is complete, the DOE will revisit its findings before issuing a final order. Id. at 12.

Currently, there are multiple outstanding applications for authorization to export LNG, many of them for facilities that, like the Freeport facility, were originally constructed for importing LNG. Next in line for review is a request to begin exporting from Lake Charles Exports, LLC, located in Lake Charles, Louisiana. The DOE states that it will consider the cumulative effect of LNG export approvals in reviewing outstanding applications and promises to monitor market developments closely. Id. at 112. New deals relating to LNG exports continue to develop. On May 17, the same day that Freeport received its authorization, three foreign companies, Mitsui and Mitsubishi from Japan and GDF Suez from France, announced that they were each purchasing a 16.6 percent interest in Sempra Energy’s LNG export facility, which is being developed in Hackberry, Louisiana.

¹ Freeport LNG Expansion, L.P., DOE/FE Order No. 3282, Order Conditionally Granting Long-Term Multi-Contract Authorization to Export Liquefied Natural Gas by Vessel from the Freeport LNG Terminal on Quintana Island, Texas to Non-Free Trade Agreement Nations (May 17, 2013) (“Order No. 3282”).

² FERC approval for the siting, construction and operation of the liquefaction facilities is pending in Docket No. CP12-509.

³ 15 U.S.C. § 717b(a).