Insight for Industry – FERC Issues Target Date for Oregon LNG Project
On April 17, 2015, the Federal Energy Regulatory Commission (FERC) issued a notice of Schedule for Environment Review of the $6 billion Oregon LNG export terminal, setting a final review date of February 2016. The FERC filing is a major step forward for Oregon LNG, which has been stuck in limbo for seven years due to market dynamics and regulatory delays, but does little to mitigate concern over the lengthiness of bureaucratic review. The regulatory delays facing U.S. LNG export projects has allowed competing projects in Australia to race ahead in supplying growing Asian demand.

The Department of Energy approval process has been repeatedly criticized by industry and members of Congress for its lengthy delays and opaque processes – due in part to the tremendous scrutiny of FERC’s review, as well as the vague timeline for final authorization. Lawmakers have introduced several bills that would set deadlines for the DOE to approve LNG after they receive their authorization from FERC, with political momentum from both sides of the aisle. In addition, recent legislation moving through both chambers that would facilitate a Trans Pacific Partnership (TPP) could also impact the DOE requirement.

Under FERC’s planned schedule for the Oregon LNG project, Issuance of Notice of Availability of the final Environmental Impact Statement (EIS) is due on February 12, 2016. The 90-day Federal Authorization Decision Deadline is May 12, 2016. At that point, the largest hurdle in the approval process will have been cleared, but the LNG export project, which is owned by the Leucadia National holding company, will still have to wait for final DOE authorization. The three approved U.S. LNG export projects had to wait an average of 105 days after their FERC authorization to get a final approval from the DOE. The Australian LNG export projects that are currently under construction will add over 60 million metric tons per annum (mtpa) to the global LNG market before 2017, meaning that only the U.S. projects able to move quickly through the regulatory process will be commercially viable.

U.S. Shale Boom and Regulatory Delay Cause Left Project in Limbo

Oregon LNG first applied to build an LNG import terminal (Docket No. CP09-6) on the East Bank Skipanon Peninsula in Clatsop County, Oregon in 2008, but the shale gas bonanza in the following years lead to an abundance of supply across the United States, virtually eliminating the need for imports. In addition to the import terminal, Oregon Pipeline Company, another wholly-owned Leucadia subsidiary, filed an application (Docket No. CP09-7) to construct and operate a send-out pipeline from the proposed LNG import terminal to the regional natural gas pipeline system. On July 16, 2012, Oregon LNG formally started the FERC pre-filing environmental review process.

However, five years after it first applied, the U.S. natural gas market had been turned on its head and Oregon LNG moved to reverse the direction of its LNG project, aiming to export abundant supplies of cheap natural gas unlocked by hydraulic fracturing and horizontal drilling. On June 7, 2013, the companies amended their pending applications (Docket Nos. CP09-6-001 and CP09-7-001) to add LNG export capabilities and revise the pipeline route. The terminal would have the capacity to liquefy up to 1.3 billion cubic feet per day (bcf/d) of natural gas for export or regasify 0.5 bcf/d of natural gas for import. The current proposed pipeline would consist of an 86.8-mile-long, 36-inch-diameter bidirectional pipeline from the terminal to an interconnect with the interstate transmission system of Northwest Pipeline LLC near Woodland, Washington.

On June 25, 2013, Northwest Pipeline filed an application (Docket No. CP13-507) requesting approval to expand the capacity of its existing natural gas transmission facilities between Woodland and Sumas, Washington. Oregon LNG Terminal and Pipeline Project and Northwest’s Washington Expansion Project are connected actions, and FERC will evaluate the proposals in a single EIS. On July 31, 2014, DOE conditionally granted long-term multi-contract authorization for Oregon LNG to export LNG to non-FTA countries from the Oregon LNG Terminal. However, the DOE will not give its final authorization until FERC completes its review and, even then, there is no timeline for approval.

FERC LNG Approval Process is Lengthy, but Predictable and Comprehensive

The FERC LNG export process is cumbersome and protracted, but it is extremely thorough and provides a level of predictability that is required for investors to invest billions on projects. Under FERC regulations, pursuant to the 2005 Energy Policy Act, applicants are required to pre-file with FERC at least six months before formally filing. Duration of the pre-filing phase, which includes a public input process, depends on site-specific characteristics and applicants’ responsiveness. An assessment by the Government Accountability office (GAO) reported that the Freeport and Lake Charles applications were in the pre-filing phase for more than 19 months, while the Cameron application was in the pre-filing phase for approximately seven months. An applicant completes the pre-filing period upon submission of the required documentation, which includes detailed information on project engineering and design, air and water quality, and fish and wildlife, anticipated environmental effects, and proposed mitigation measures. According to the GAO assessment, one applicant submitted resource reports consisting of more than 12,000 pages.

The application review phase begins after the pre-filing process and includes FERC review and development of the document required under NEPA, with input from cooperating agencies and stakeholders. FERC then prepares either an environmental impact statement (EIS) or environmental assessment (EA) depending on the proposed facility’s location and construction levels. For example, FERC prepared an EA for the Sabine Pass facility as the proposal was within an existing LNG import facility and previously subject to an EIS. FERC prepares an EIS for facilities proposed to extend beyond the footprint of an existing import facility. Subsequently, FERC solicits comments from federal agencies and the public on the draft EIS or EA and integrates them into a final document, as necessary. The final EIS or EA includes recommendations for environmental and safety mitigation measures. Federal agencies cooperating in the preparation of the EIS, include the U.S. Coast Guard, U.S. Army Corps of Engineers, Environmental Protection Agency, U.S. Department of Fish and Wildlife, Department of Energy, and the DOT’s Pipeline and Hazardous Materials Safety Administration.

DOE Approval Process Straightforward, but Redundant and Unclear

Owing to the 1938 Natural Gas Act (NGA), the DOE is responsible for reviewing LNG export applications and determining whether they are in the public interest. Section 3(c) of the 1992 Energy Policy Act altered DOE authority, enabling essentially open trade with countries that hold free trade agreements (FTA) with the U.S. The DOE must treat applications to export LNG to FTA countries as consistent with the public interest and approve them without modification or delay. These FTA applications therefore do not require the same public interest review as non-FTA applications. Twenty FTA nations may currently receive U.S. LNG exports under the revised law. However, none of the major LNG importers – Japan, South Korea and China – are included on that list.

The DOE’s public interest determination primarily focuses on (1) the domestic need for natural gas, (2) possible threat to domestic supply security, and (3) potential to promote market competition along with bearing on economic and environmental concerns. On August 15, 2014, the DOE revised its procedures for non-FTA LNG export decisions, meaning that it could only act on applications after they completed the NEPA review.

The revisions aim to reduce the likelihood of being compelled to act on applications with little prospect, facilitate better allocation of DOE resources, and improve the quality of information on which the DOE bases its final decisions.

The DOE has acted on non-FTA LNG export applications in the order of precedence since December 2012. Its conditional authorizations intend to provide regulatory certainty before significant resources are spent for the comprehensive NEPA review. The DOE acts on applications in the order they become ready for final action – upon completion of the NEPA review and availability of sufficient information for public interest determination – and not in the published order of precedence. As a result, applications that completed NEPA review would not be subject to undue delays by their position in the current order of precedence based on initial application. According to DOE, applicants are increasingly willing to commit resources for the NEPA review process without conditional authorizations. The revisions do not affect the continued validity of already-issued conditional authorizations, as DOE will reconsider their conditional orders based on information gathered in the NEPA review process and take appropriate final action.

The DOE’s revisions have improved its approval process considerable, but its usefulness and clarity remain dubious. Given that FERC coordinates with a wide range of federal agencies before issuing its final EIS and approval, DOE’s approval could be folded inside the approval process. While FERC sets out clear schedules for each stage in its approval process, there is no timeline for the final DOE authorization. An LNG project can satisfy FERC’s far-reaching requests and criteria and receive a conditional authorization from the DOE, but still be forced to wait in limbo before it can break ground on construction (see Table 1).

 

Bills Introduced to Senate Would Provide Greater Certainty in LNG Approval Process
The Republican-controlled 114th Congress has introduced a number of bills that would benefit the oil and gas industry, from the elimination crude oil export restrictions to the streamlining of the LNG approval process. Sen. John Barrasso (R-WY) introduced S.33 on January 6, 2015, which would force the DOE to provide a final non-FTA LNG export permit within 45 days of FERC’s final authorization. The bill was the first hearing held by the new Senate Energy and Natural Resources Committee on January 29, 2015. Rep. Bill Johnson (R-OH) introduced H.R.351 – LNG Permitting Certainty and Transparency Act – on January 14, 2015, which would mandate the DOE to give its final authorization within 30 days of the FERC approval. A day before the Senate hearing, the bill passed a vote in the House 277 to 133, with 41 Democrats voting Yea. Rep. Chris Gibson (R-NY) was the only Republican to vote against the measure.

The modest bipartisan support that HR.351 received in the House, combined with the Senate Energy and Natural Resources Committee prioritization of the measure and Secretary of Energy Earnest Moniz’s public statements saying that his department would be able to comply, suggest that the bill could be headed to Oval Office. It is increasingly likely that President Obama would sign a bill to streamline the LNG approval process. An economic report released by the White House in February read, “An increase in U.S. exports of natural gas, and the resulting price changes, would have a number of mostly beneficial effects on natural gas producers, employment, U.S. geopolitical security, and the environment.”

Senate Trade Priorities and Accountability Act Would Secure LNG Market Access in Japan

In addition to the Congressional bills focused on expediting the approval process, the Senate is currently considering a trade bill that would have significant impacts on the ability of U.S. LNG export projects to secure market access to key Asian markets. On April 16, Senate Finance Committee Chairman Orrin Hatch (R-Utah), Ranking Member Ron Wyden (D-Ore.), and House Ways and Means Chairman Paul Ryan (R-Wis.) introduced the Bipartisan Congressional Trade Priorities and Accountability Act of 2015 (TPA-2015) aimed to help the U.S. deliver trade agreements that boost exports and create new economic opportunities. TPA-2015 would establish congressional trade-negotiating objectives with enhanced consultation requirements for negotiations and allow Congress to vote on treaties. Objectives aim to obtain a more open, equitable, and reciprocal market access and reduce trade- and investment-related barriers that decrease market opportunities for U.S. exports or distort U.S. trade.

The legislation would increase transparency by requiring that Congress have access to important information on pending trade deals and that public receive updates and details of agreements before they are signed. It would enhance accountability of the Executive Branch, strengthen Congressional oversight, and facilitate removal of expedited procedures of a trade agreement that does not meet TPA requirements. It would establish trade-negotiating objectives that reflect current economic challenges, addressing currency manipulation and eliminating barriers to innovation and trade. It would also address government involvement in cyber theft, trade secret protection, and intellectual property protection.

The TPA would facilitate completion of two significant trade agreements – Trans-Pacific Partnership (TPP) and Transatlantic Trade and Investment Partnership (T-TIP) – that would cover approximately two-thirds of the global economy. According to World Bank data, the two agreements would open markets comprising approximately 1.3 billion customers and 60 percent of global GDP. President Obama expressed support for the legislation, emphasizing that it would level the playing field and provide strong, fully enforceable protections for workers’ rights, environment, and a free and open internet.

The passage of the TPP agreement would have significant impacts on the viability of U.S. LNG export projects, as shipments of LNG to TPP countries would no longer require a DOE non-FTA export permit. Additionally, LNG exports to the signatory countries – a list that includes Japan, Singapore and Malaysia – would be deemed to be in the “public interest”.

Japan’s inclusion in the TPP negotiations is directly related to its desire to diversify and guarantee its LNG access. Japan is the world’s largest importer of LNG and automatic access to United States LNG exports was the critical motive in joining the TPP negotiations.

Brownfield LNG Projects Advantaged Commercially and Politically

The Oregon LNG projects has several conflicting advantages and disadvantages. First, the cost to construct brand new LNG projects, known as greenfield developments, have been considerably higher than brownfield projects where existing natural gas infrastructure exists. Chevron’s massive greenfield Gorgon LNG export project in Australia – which will export 15 metric tons per annum (mtpa) – have ballooned to a staggering $52 billion.

On the other hand, Cheniere Energy’s 18 mtpa brownfield Sabine Pass project in Louisiana is expected to come online this year at a cost of $12 billion. On the other hand, transportation costs from Oregon LNG on the Pacific Coast to Asian markets will be significantly less than its competitors on the Gulf Coast, taking into account distance and Panama Canal tolls. Finally, liquefaction involves the process of freezing natural gas in order to reduce its size by 600 times. The cooler ambient temperatures in Oregon compared to Louisiana and Texas will provide for lower operating costs over the life of the terminal. However, Oregon LNG will be stuck in the regulatory process for another year before it can even consider constructing the project, while its competitors in the U.S. and around the world race ahead. Oregon LNG claims to have initiated its regulatory process more than 12 years ago, a drawn out proceeding that has required it to correspond with a list of agencies that, in addition to smaller local, state and federal departments, includes:

• City Permitting
• County Permitting – for each County (Oregon and Washington) the Pipeline runs through
• Energy Facilities Siting Council
• Oregon Department Environmental Quality
• Oregon Department of Transportation
• Oregon Department of Forestry
• Oregon Department of Fish and Wildlife
• Oregon Department of Water Resources
• Oregon Department of State Lands
• Oregon Department of Land Conservation and Development
• United States Coast Guard
• United States Army Corp of Engineers
• United States Fish and Wildlife Service
• National Marine Fisheries Service
• Federal Energy Regulatory Commission
• Department of Energy

In order for the United States to compete with global LNG sellers, including Qatar, Malaysia, Australia and Indonesia – all located significantly closer to key Asian LNG markets – the government must eliminate redundancies and provide greater clarity in its regulatory approval process, while significantly reducing the amount of time it takes for a project to break ground. The bills currently in front of the Senate Energy and Natural Resources Committee would provide greater clarity and certainty to natural gas producers considering investing tens of billions of dollars on export projects.

Originally published by EnerKnol.

EnerKnol provides U.S. energy policy research and data services to support investment decisions across all sectors of the energy industry. Headquartered in New York City, EnerKnol is proud to be a NYC ACRE company.