DOE’s New Procedure for Approving LNG Export Permits: A More Sensible Approach

On May 29, the Department of Energy (DOE) proposed revised procedures for reviewing applications to export liquefied natural gas (LNG) to countries which the U.S does not have free trade agreements. This long overdue revision would ensure that projects that are commercially mature and have obtained environmental clearance under the National Environmental Policy Act (NEPA) receive a prompt public interest determination from the Department of Energy. Scholars at Brookings, including Charles Ebinger and myself, have argued for this kind of rational treatment of applications since the summer of 2013 and I applaud DOE’s proposed improvements.

Problems with the Prior Procedure: Delay and Hot Air

The prior DOE procedure for reviewing applications for LNG exports to non-free trade agreement (non-FTA) countries impeded the consideration of commercially mature projects by requiring applicants to queue up for conditional approvals, in the order in which they applied to DOE. DOE pledged to review applications expeditiously, noting that it was approving projects at an average interval of every eight weeks. However, with 24 applications in the queue as of March 2014, that timeline left the review of many projects more than four years in the future. That timeline applied to all projects, even projects that were able to clear their NEPA review much sooner because they were less environmentally complex or controversial, because they were more simple expansions of previously approved projects, or because sponsors elected to initiate the NEPA review process before filing an application with DOE.

The prior procedure was politically provocative in that it exaggerated the cumulative impact of project approvals by scoring the cumulative export volumes of conditional approvals – many of which might never receive environmental clearance or final investment approval. The result was that projects which might make it through the environmental review, led by the Federal Energy Regulatory Commission (FERC) or the U.S. Maritime Administration (MARAD) depending on jurisdiction, might not be considered until they came up in the queue, possibly years later, or might be rejected altogether because they exceeded the soft cap of 12 billion cubic feet per day (Bcf/d).^[1]

Almost exactly one year prior to the DOE announcement, a Brookings paper suggested that if DOE wanted to preserve its current process, it ought to let FERC-approved, commercially mature projects “jump the queue” and receive prompt consideration for a national interest determination. In proposing this change, DOE has vastly improved on “jump the queue” with its new process, which is, effectively, “dump the queue.” Bravo.

The Proposed Procedure: Commercially Savvy, Politically Savvy

DOE proposes to dispense with conditional approvals and only issue public interest determinations for projects that have completed their environmental assessment as required by NEPA, generally led by FERC or MARAD. This has multiple benefits for all serious applicants. First, it sets a level playing field for all applicants by entitling any applicant to prompt consideration once they complete their environmental review. Second, it eliminates the risk of delay to all applicants whose turn would have come after conditional approvals reached a cumulative tally of 12 Bcf/d^[2], removing the chance that they would face indefinite delays or outright rejection while DOE solicited new analysis of exports exceeding 12 Bcf/d. Under DOE’s proposed procedure the cumulative tally is now effectively 2.2 Bcf/d (the volume of exports that have already received final approval), and the next 9.8 Bcf/d in projects that emerge from FERC should be approved unless market conditions radically change. In addition, DOE also announced that it would seek updated analysis from the Energy Information Administration and an external group to consider the effect of exports between 12 and 20 Bcf/d, further reducing the chance of a soft cap hindering future project approvals. Third, the analysis of the impact of LNG exports on the economy would be calculated in the year the project is ready for approval, not years in advance. This would provide a more accurate projection by using current data.

Winners and Losers

The winners here are the applicants that are doing their homework by proceeding with the required environmental review and securing customers. The companies that have already received conditional non-FTA export licenses from DOE and have also started the NEPA process at FERC are no worse off – they always had to clear FERC to get a final approval. Other winners are those applicants beyond number two in the queue (those that would have been considered after conditional approvals reached 12 Bcf/d) – their risk of rejection has dropped considerably. The biggest winners are those projects at the bottom of the queue, which now have as good a chance to be approved by FERC. Those projects can now compete on a level playing field without worry that customers might perceive their position in the DOE queue as a commercial liability. Among the losers are those applicants who sought a marketing license from DOE but did not have, or could not attract, the funds to mount a serious project. Those projects were always gum in the works.

Improving the National Interest Determination

Finally, DOE has taken the prudent step of considering the upstream effects of producing natural gas for export and the lifecycle effects of LNG exports. While this step was entirely discretionary and not required under NEPA (as noted by DOE in the Federal Register notice and public announcement regarding the papers), it should preempt the inevitable criticism that DOE’s national interest determination would attract if it had not considered these environmental issues.

Numerous studies, including a Brookings report on liquid markets and the EIA’s Annual Energy Outlook 2014, show that U.S. LNG exports are unlikely to exceed even 6 Bcf/d in the next 10 years. Fears that LNG exports will drive up domestic natural gas prices significantly remain unsupported by credible evidence. One uncertainty does remain, however, even for export projects that complete their NEPA review. The U.S. is alone in its peer group in its issuance of national interest determinations for LNG exports, a Congressionally mandated determination that raises questions about the right to export even for projects that receive a final export permit, because the government retains the right to rescind export permits in the event that market conditions or other factors render them to no longer be in the national interest. This is a significant uncertainty that is not faced by LNG export projects in competing countries like Russia, Australia, Canada or Qatar. While this uncertainty will continue to remain as a specter over the U.S. LNG export industry, it is outside of the jurisdiction of DOE to abolish this process – only the direct action of the Congress could achieve such an outcome. In spite of lingering concerns and uncertainties, at last, the decision as to which projects will succeed will be made on merit, by considering those who have met the legal requirements in the order that they complete their environmental assessments mandated by NEPA.

The only major lacuna in DOE’s procedure is a commitment by the agency to complete its consideration of the public interest determination promptly. We believe that the Energy Policy Act of 2005 requires all agencies that cooperate with FERC to complete their work within 90 days of FERC’s environmental review.^[3] In addition to all of the reasons that DOE has already given for this process change, if DOE were also to recognize and commit to meeting this 90-day requirement, the agency will meet its obligations under EPACT 2005 and will also have put in place a process that is transparent, fair and prompt. This will enable potential LNG customers to pick their partners based on their ability to complete the work required for approval. This is a vast improvement over the current process, and DOE is to be complimented for correcting its course.

[1] While DOE never announced a cap of any kind, the fact that the NERA study focused on exports of to 12 bcf/d, and that each DOE order cited this number led analysts to assume that a new study would be required for exports in excess of 12 Bcf/d. DOE’s announcement of updated studies to assess the impacts of exports between 12 and 20 Bcf/d appears to confirm this view.

[2] As of June 3, 2014, the U.S. Department of Energy had approved 9.27 Bcf/d of LNG exports, 7.07 Bcf/d of which was in the form of conditional permits. The cumulative volume would have exceeded 12 Bcf/d with the approval of the Cheniere Marketing project, currently number two in the queue, assuming that both it and the project preceding it, Oregon LNG, were approved for the full volumes requested (2.1 and 1.25 Bcf/d respectively). Approval of the Cheniere project would have pushed the cumulative tally to 12.62 Bcf/d.

[3] The Energy Policy Act of 2005 (2005 EPAct) establishes FERC as the lead agency responsible for coordinating review by other federal and state agencies of LNG export projects, encouraging structure and timeliness in the LNG review process, providing that the FERC “shall establish a schedule for all Federal authorizations “to (1) ‘ensure expeditious completion of all such proceedings,’ and (2) ‘comply with applicable schedules set by Federal law.’” (15 U.S.C. 717n(c)) Notably, EPAct 2005 also sets a deadline of 90 days for agencies to provide final decisions in a timely manner, stating that “a final decision on a request for a Federal authorization is due no later than 90 days after the Commission issues its final environmental document, unless a schedule is otherwise authorized by Federal law.” (18 C.F.R. 157.22) Indeed, the typical FERC “Notice of Schedule for Environmental Review” directs Federal agencies issung federal authorizations “to complete all necessary reviews and to reach a final decsion on the request for a federal authorizaton within 90 days of the issuance of the Commsion staff’s final Environmenal Imact Statement (EIS) for the Project.” (U.S. Federal Energy Regulatory Commission, “Notice of Schedule for Environmental Review of the Corpus Christi LNG Project,” (12 February 2014) http://elibrary.ferc.gov/idmws/search/advResults.asp)