Wrapping Up: Developments at DOE affecting LNG exports in 2014

In 2014, the Department of Energy (“DOE”) issued several notable regulatory opinions affecting the export of domestic natural gas, including the publication of new environmental studies and economic reports that will impact LNG project developers and would-be exporters in 2015. The year 2014 also brought the sharpening of environmental issues facing LNG export projects seeking approval from the Federal Energy Regulatory Commission (“FERC”), which will continue to be reviewed and refined next year.

DOE revises procedures for reviewing applications
In arguably the most significant regulatory development of the year, DOE revamped its procedures for reviewing non-FTA export applications.  Under the old paradigm, many LNG export projects filed applications with DOE —following the lead of Sabine Pass—seeking conditional authorization to export LNG to non-FTA countries; the principal condition being completion of the related environmental review by FERC. On May 29, 2014, DOE proposed to upend this practice and cease issuing conditional orders.  Instead, DOE proposed to issue only final orders once a LNG export project had completed the FERC process, if applicable.  DOE claimed that the revised procedures will prioritize action on applications that are ready to proceed and that conditional orders are no longer necessary as applicants have been willing to devote resources to the review process (pursuant to the National Environmental Protection Act (“NEPA”)) at FERC without waiting for a conditional order from DOE. DOE also noted that the revised procedures will improve their decision making by relying on more timely economic information and by having the environmental review at hand.

Specifically, DOE stated that it would issue final export authorization only after (1) completion of the NEPA review, and (2) DOE had sufficient information on which to base a public interest determination.  DOE clarified that it will consider the NEPA review complete either (a) 30 days after issuance of the final environmental impact statement (“final EIS”); (b) upon publication by DOE of a Finding of No Significant Impact (“FONSI”), for project for which an environmental assessment (“EA”) has been prepared; or (c) upon determination that an application is eligible for a categorical exclusion.  DOE adopted the revised procedures on August 15, 2014, and in response to comments DOE stated it would not commit to issuing orders pursuant to definite timelines, arguing that it needed adequate flexibility to consider the merits of each application.

DOE issues new studies
Contemporaneously with promulgation of the revised application processing procedures, DOE issued two new reports.  The first, entitled Addendum to Environmental Review Documents Concerning Exports of Natural Gas From the United States (the “Addendum”), provides additional information to the public regarding the potential environmental impacts of unconventional natural gas exploration and production.  DOE acknowledged that the Addendum was not required by NEPA, but DOE found that the Addendum was needed to respond to the public and provide current information on these potential impacts.  DOE further stated that it could not meaningfully analyze the specific environmental impacts of unconventional production and thus such impacts were not “reasonably foreseeable.”

The second report, entitled Life Cycle Greenhouse Gas Perspective on Exporting Liquefied Natural Gas From the United States, provides information on the life cycle greenhouse gas emissions of US LNG exports to Europe and Asia, as compared with alternative fuel supplies such as regional coal and other imported gas, for electric power generation in the destination counties. The report concluded that LNG exports from the US will not generally increase greenhouse gas emissions on a life cycle perspective, when compared to regional coal extraction and consumption for power production and that there was no significant difference in greenhouse emissions between US LNG exports and other imported natural gas.

The two reports could be viewed as a reaction to the oft-repeated argument that FERC (and DOE) must consider the potential environmental impacts associated with upstream natural gas production activities. Opponents claim that FERC and DOE have an obligation to examine these potential impacts under indirect impacts and cumulative impacts analyses.  FERC and DOE have consistently rejected these arguments as beyond the scope of their NEPA obligations. NEPA obligations aside, DOE has reviewed the two reports in the several final orders recently issued in the course of DOE’s public interest analysis.

Besides the two environmental reports, DOE also announced that it planned to commission two additional economic studies. First, DOE asked the Energy Information Administration (“EIA”) to update its 2012 LNG Export Study with the newer data from EIA’s Annual Energy Outlook 2014 and to consider the impacts of LNG export scenarios of 12-20 Bcf/day. The earlier 2012 LNG Export Study drafted by EIA did not consider export levels above 12 Bcf/day.  EIA promulgated the updated study in October, and the study concluded that increased LNG exports will lead to increased residential natural gas prices, roughly 2 to 5 percent higher, depending on the anticipated level of exports, 12 or 20 Bcf/day. The study also found that the natural gas industry will respond to the increased demand by increasing natural gas production. Further, the study noted that greater levels of LNG exports will result in marginally higher carbon dioxide emissions, -0.1 to 0.6 percent, however the study also found that greater LNG exports will result in higher levels of economic output, as measured by real gross domestic product.

In addition, DOE stated it will again contract for an external analysis of the economic impacts of the increased range of LNG exports.  This study remains pending.

DOE resumes issuing final orders
Since adopting the revised procedures, DOE has issued four final orders authorizing exports to non-FTA countries. These four orders and several projects queuing up final orders are described below.

Project

NEPA review

Export volume

FERC order

FERC rehearing order

DOE final order

Cameron LNG

EIS

1.7 Bcf/d

June 19, 2014

July 29, 2014

Sept. 10, 2014

Carib Energy

Categorical Exclusion

0.04 Bcf/d

N/A*

N/A

Sept. 10, 2014

Freeport**

EIS

1.8 bcf/d

July 30, 2014

Nov. 13, 2014

Nov. 14, 2014

Cove Point

EA

0.77 Bcf/d

Sept. 29, 2014

Pending

Pending

Corpus Christi LNG

EIS

2.1 Bcf/d

Pending

Pending

Pending

Jordan Cove

EIS

0.8 Bcf/d

Pending

Pending

Pending

* Carib Energy plans to export LNG from a facility that already has undergone FERC’s review, thus DOE was able to complete its NEPA obligations by issuing a Categorical Exclusion.

** DOE issued two separate orders responding to Freeport’s two applications, for which DOE authorized a total of 1.8 Bcf/day in exports to non-FTA countries.

Cameron LNG, as the first major project (since Sabine Pass) to receive an order from FERC and a final order from DOE, is the presumptive lead case for challenge by opponents of LNG exports.  Rehearing was sought of FERC’s order on the Cameron LNG terminal, but the rehearing request was filed 25 seconds after FERC’s 5PM deadline and the challenge has been sidetracked at the United States Court of Appeal for the D.C. Circuit (“D.C. Circuit”) on the issue of whether the rehearing request was timely.  Opponents also have sought rehearing of DOE’s final order for Cameron LNG; the rehearing request remains pending as well.   

As the above table suggests, in practice DOE does not issue a final order promptly after completion of the NEPA review, as it defines that endpoint in the revised application processing procedures, but DOE appears to wait typically at least until FERC has issued an order on rehearing on the given LNG terminal application.

Besides DOE, in 2014 FERC too has issued orders for several LNG export terminals, namely, Cameron LNG, Freeport, and Cove Point.  By comparison, prior to 2014 FERC had issued only one order for an LNG export terminal, Sabine Pass in 2012. This development may indicate that FERC has resolved many of the environmental concerns.  Further, this could signal the synchronization between FERC and PHMSA on safety issues and FERC and DOE on issues such as review of potential environmental impacts of induced gas production.

Small scale LNG
Also noteworthy in the foregoing discussion is the final order for Carib Energy. Carib Energy sought authorization to export LNG by container to FTA and non-FTA countries, mainly in the Caribbean. Carib Energy does not plan to construct any liquefaction facilities itself but to purchase LNG from the proposed, but not yet constructed, Floridian liquefaction and storage facility to be located in Martin County, Florida.  FERC issued several orders authorizing the construction of the Floridian facility, thus the environmental review was already completed by FERC, and in accordance with DOE’s revised application processing procedures, DOE acted on Carib Energy’s application much earlier than it would have otherwise under the legacy order of processing, a first-come, first-served approach.  As the example of Carib Energy indicates, small scale LNG exporters need not wait at the end of the line of non-FTA export applications if any associated NEPA reviewed can be timely concluded.

Change in control
On November 5, DOE issued a new policy regarding procedures to amend pending applications and changes in control. Specifically, DOE stated that entities may file notices of changes in control before such changes have been effectuated, but in all cases, the notice must be filed no later than 30 days after such change has been effectuated. DOE also described the procedures it would use should a notice of change in control be submitted during the pendency of an export application or after a final order has been issued.

Up Next:  2015
With challenges pending to final DOE orders and to FERC orders, 2015 could be the year where the industry can obtain greater certainty on how the courts of appeal will view FERC’s and DOE’s arguments not to include the potential environmental effects of induced natural gas production. Another environmental issue influencing the parties arises from the D.C. Circuit’s decision in Delaware Riverkeeper v. FERC.  In that case, the court agreed with the environmental and natural gas pipeline opponents that FERC had impermissibly segmented its NEPA review of several geographically proximate and functionally interdependent expansion projects that were being undertaken along a single line. Opponents of LNG exports have sought to extend this argument to LNG terminals and other pipeline infrastructure expansion projects on the theory that the pipeline expansion projects are a connected action and will be used to serve the increased demand created by the LNG terminal. FERC has rejected these arguments, but LNG terminal proponents may see this argument again if certain upstream pipeline expansions are designed to serve a given LNG terminal.

The past year also has seen a proliferation of proposed LNG terminals in Canada. LNG export projects located near the US border may seek to access US natural gas production basins for feedstock, but this creates nuanced regulatory issues for DOE. For instance, a near-border Canadian LNG terminal would be technically exporting natural gas by pipeline to a FTA country, Canada, and thus DOE might automatically grant such an application because exports to FTA countries are deemed in the public interest by the Natural Gas Act. However, the Canadian LNG terminal might then export the U.S.-sourced gas to non-FTA countries. Thus, should DOE automatically grant the application or conduct the more searching public interest review as it does for applications to export to non-FTA countries? In one example, Pieridae Energy is proposing an LNG export terminal in Nova Scotia, Canada, and it proposes to source a portion of the feed gas from the US. DOE has elected to conduct a public interest analysis for this application. Notably, as the export of natural gas to the US by pipeline will not require construction of additional facilities, Pieridae has asked that DOE find that the application merits a Categorical Exclusion. Should DOE agree and issue a Categorical Exclusion, then such a result could catapult the Canadian LNG terminal ahead of other US LNG export projects undergoing a NEPA review by FERC because under DOE’s newly revised application processing procedures the Canadian LNG terminal’s application would be ripe for final review.

Finally, the coming year also may see the issuance of a new macro-economic study, akin to the NERA Consulting’s 2012 study, evaluating the domestic economic impacts from increased LNG exports and accounting for global LNG supply and demand factors, an element not included in the updated EIA study issued this year.

Going forward, 2015 is shaping up to be a year of consequential decisions by the agencies on new regulatory issues and the courts on environmental issues, all while LNG export projects march further down the regulatory road to construction.

About the authors

Kirstin Gibbs

Kirstin Gibbs is a partner in the Washington, D.C. office of Bracewell & Giuliani LLP where she advises energy companies on a variety of regulatory and transactional matters involving the production and transportation of natural gas and oil, including matters involving LNG export projects.
Ty Johnson

 

 

 

 

Ty Johnson, a member of Bracewell & Giuliani's energy regulatory practice in Seattle, counsels domestic and foreign energy-industry clients on regulatory matters before the Federal Energy Regulatory Commission and the Department of Energy.

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