What happens when federal regulation designed to guard against national shortages of a critical fuel runs headlong into fuel surpluses?

That’s what the US is finding out now with natural gas, and nowhere is the dilemma more clearly on display than the issue of liquefied natural gas (LNG) exports.

Gas has been federally regulated since 1938, when interstate pipelines and the wells feeding them were declared a “natural monopoly” needing Federal Power Commission (FPC) oversight to prevent market abuses. Natural gas and the pipelines that carried it to customers were often owned by the same companies.

In the decades since, while natural gas use has grown, gas regulation has also produced a series of unintended consequences, including times in the 1970s when interstate pipelines ran short while producing states had surpluses, a crazy quilt of “old” regulated and “new” deregulated gas in the 1980s, and giant paperwork backlogs that swamped regulators.

Wellhead price controls reduced incentives for exploration, leading to lower proven resource estimates and feeding fears the nation was about to run out of natural gas. Energy policy legislation in 1978 forbade use of natural gas for electric generation, producing a generation of coal plants.

Natural gas regulation and the industry have gradually been restructured, with the Federal Energy Regulatory Commission (FERC) ending controls on wellhead prices and treating interstate pipelines as common carriers. Producers, pipelines, and consumer distribution have been split into separate businesses, and competition is the mantra of today’s markets.

But now that technology advances have allowed shale gas to be tapped, decades of fears of natural gas shortages have morphed into uncertainty about how to manage unprecedented surpluses.

While natural gas use has grown, gas regulation has also produced a series of unintended consequences

Producers now want to take advantage of higher prices abroad, but that requires LNG export permits – permits designed to ensure domestic supply for national security in the bygone era of scarcity.

Exports have needed federal approval since 1938. In 1977, Congress created the Department of Energy (DOE) and transformed the FPC into the FERC. In the process, energy policy was given to DOE and facility regulation to FERC. That split has given both agencies a say in LNG exports now, with DOE permitting the exports and FERC permitting the physical facilities.

In 1992, the House-Senate conference inserted language into that year’s Energy Policy to conform natural gas law to the North American Free Trade Agreement (NAFTA). The language specifies that imports from and exports to countries with US Free Trade Agreements, where the FTA covers natural gas, are deemed in the public interest and must be approved by regulators “without modification or delay.”

Imports and exports with non-FTA countries still required individual DOE findings that they are in the “public interest,” creating bifurcated gas export regulation.

In 1992, “imports” meant pipeline gas from Canada and Mexico, and everyone expected the US to need increasing amounts of foreign gas. Exports were a minor consideration, involving pipeline movements into eastern Canada and Mexico, plus LNG to Asia from the small Kenai liquefaction plant in Alaska, the only US LNG plant then and now.

Today, the 1992 division between FTA and non-FTA countries looms large.

FTAs are pacts between two or more countries to lower tariffs on specified sets of goods. They are negotiated individually, and only 18 current US FTAs include natural gas.

The only US trading partner with an FTA that is also a major LNG importer is the Republic of Korea. The Korean FTA was initially negotiated by the George W. Bush administration, had sections renegotiated under the Obama administration, and was ratified after substantial controversy over agricultural goods and autos in both nations in 2011. It took effect in October 2012.

As in the Korean case, FTAs are often political flashpoints, and take years to negotiate.
That leaves US companies wanting to sell to the largest potential LNG customers, big importers like Japan, Taiwan, India and China, needing specific DOE findings that their exports are in the public interest.

Those findings have been on hold for more than a year while DOE tries to assess the economic effects of allowing exports of newly abundant US gas and determine the “public interest” – which is coming down to how much gas can be exported before the domestic market feels pain.