In the wake of the Ukraine crisis and amid heightened pressure on the Obama Administration to speed up the approval process for new liquefied natural gas (LNG) export plants, the geopolitical argument over LNG exports has gained traction in Congress as reflected in various already held committee hearings on the LNG export issue and drafted legislation such as H.R. 6, the Domestic Prosperity and Global Freedom Act, authored by Rep. Cory Gardner (R-CO), which intends to expedite LNG exports to US allies. The Subcommittee on Energy and Power approved H.R. 6 by a vote of 15 to 11 on April 9. It is important to remember that no export plants will be imminently built because these major business development projects take several years to finalize.
The projects must go through rigorous engineering design phases, extensive financial planning, several years of construction and myriad regulatory approval processes. Interestingly, most of the aforementioned legislative proposals do not identify the real bottleneck in the approval process and also fail to address the question initially spurred by the dramatic surge in US natural gas production, which is whether or not the US should allow unrestricted LNG exports, as discussed by Brookings’ Charles K. Ebinger and Tim Boersma.
Under current law, energy companies that seek to export domestically-produced LNG are required to obtain two sets of approvals for their export facilities – one from the Department of Energy (DOE) and another from the Federal Energy Regulatory Commission (FERC).
First, the Natural Gas Act (NGA) stipulates that the Department of Energy (DOE) must deem the projects in the “public interest” before granting a license to export US natural gas in liquefied form if their prospective LNG buyers are located in countries that have not signed a Free Trade Agreement (FTA) with the US: “The [Secretary] shall issue such order upon application, unless, after opportunity for hearing, [he] finds that the proposed exportation or importation will not be consistent with the public interest.” Exports to FTA-countries, in turn, are deemed in the public interest and are automatically approved. It is crucial to understand that the NGA imposes a rebuttal presumption to the effect that the burden of proof lies with the opponents of any export project, who then must demonstrate to the DOE that the project is harmful to, for example, the environment. So, that means proponents are not required to prove that the project is beneficial to the country. Note, opponents have so far not succeeded in preventing DOE approval. The reasons for that and why this actually may change will be discussed in a follow-up article.
In general, the DOE takes economic, geopolitical, and environmental considerations relevant to the public interest into account, as well as the levels of domestic supply and demand for natural gas. Since May 2011, seven US projects, with a total of 9.27 billion cubic feet per day (bcf/d) of export capacity (equivalent to more than 12.5% of current US natural gas production) – according to Ernst & Young – have received conditional export approvals to non-FTA countries.
Approved export project capacity could top 10 bcf/d by the end of 2014, Ernst & Young says. Thirty-one proposed facilities have applied for DOE export licenses and are awaiting a decision in DOE’s processing queue; the longest has languished for over two years. The DOE issued its latest conditional approval for the Jordan Cove export terminal in Oregon on March 24 – the first on the West Coast. However, the project still requires additional regulatory and environmental permits before it can be constructed. Only one of the approved projects is already under construction. At present, the Cheniere Energy Sabine Pass export facility in Louisiana is the only one to have gained all the regulatory approvals necessary for exporting LNG, including the final construction go-ahead from the Federal Energy Regulatory Commission (FERC), which is the second indispensable permit energy companies need. Applying for FERC approval is also an expensive process because Front-end Engineering and Design (FEED) work must be included in the proposal.
FERC is the lead environmental regulator for LNG terminals. Section 3 of the NGA states that FERC is responsible for approving the siting and construction of LNG facilities on and near shore. The Energy Policy Act of 2005 (EPAct) designates FERC as the lead agency for coordinating “all applicable Federal authorizations” and for National Environmental Policy Act (NEPA) compliance. Thus, FERC conducts the environmental assessments. NEPA requires full environmental impact statements (EIS), which provide a comprehensive review of environmental as well as climate impacts, for LNG projects at new and converted terminals that will have a considerable effect on the environment, as Gwynne Taraska of the Center for American Progress notes. An EIS also has to identify any other acts that apply to the project, such as the Clean Water Act et cetera.
Given all that, unsurprisingly, it is the FERC process where the real bottleneck is occurring. Reporting by the Financial Times underscores this assessment: “Two projects, Cameron LNG in Louisiana and Freeport LNG in Texas, had hoped to secure approval last year, but both have received their first draft environmental impact statements only this year, and face months of consultation before a decision is expected.” In short, the approvals from FERC seem to be lagging behind because the process is fairly complicated with many moving parts. Actually, perhaps the main reason for the delays is that FERC has to incorporate the work of several other government agencies. Approximately 20 federal and state agencies get involved in LNG terminal projects, Patricia Outtrim, Cheniere Energy’s VP for Government Affairs, told a Senate panel on May 21: “An LNG project can take up to three years, and a sponsor must spend up to $100 million for compliance to receive all necessary permits. The vast majority of these costs are spent during the FERC process.” In this respect, keep in mind that there are no statutory time limits within which FERC must complete its review process. FERC is also an independent regulatory agency within the DOE, which means that neither the President nor Congress can review FERC decisions, which makes the federal courts system the only avenue for review open to all stakeholders in the process including the DOE.
Consequently, the valuable non-FTA LNG export licenses – to LNG markets that really matter such as Japan, South Korea, India, or China – may become more difficult to obtain as more US LNG export facilities are granted full regulatory approval. FERC, already a significant bottleneck within the process, could end up becoming a full-blown ‘regulatory black hole’ for many proposed and potential projects. Reasons for this assessment will be discussed in a follow-up article.