JURIST Guest Columnist Mike Blackwell, Indiana University McKinney School of Law Class of 2013, discusses the US federal regulatory framework for liquefied natural gas exportation…

Global energy markets are currently undergoing a number of significant changes. A recent and rapid expansion in the US domestic supply of natural gas, resulting mainly from increased use of hydraulic fracturing extraction technology in the US, has caused a significant decrease in the domestic price of natural gas. Meanwhile, global population growth and the industrialization in the developing world encourages a consistent rise in demand for natural gas. Today, resource developers aim to take full advantage of the expanding gas market by extracting US shale gas reserves for export to foreign markets. Citizens, government agencies and NGOs alike have raised a number of concerns about the economic and environmental effects of prospective US gas export. As a result, US policy makers are in the midst of a significant debate regarding the future of the US natural gas industry.

Estimates suggest that the current domestic supply of natural gas in the US is substantial, due in large part to the recent commercial viability of hydraulic fracturing extraction techniques. According to the US Energy Information Administration (EIA), US natural gas production increased from 0.039 trillion cubic feet in 2000 to approximately 4.87 trillion cubic feet in 2010. In its 2013 Annual Energy Outlook, the EIA predicted [PDF] that natural gas production will increase by 44 percent to 33 trillion cubic feet by the year 2040. These domestic resources are highly valuable on the world market. Most nations, especially those nations located in resource-constrained regions of the world, strongly desire natural gas for its ability to provide cheap and relatively clean power to electric utilities, industrial manufacturers and power generating sources. Transporting natural gas to these markets has historically been very difficult and costly. However, recent advancements in gas liquefaction, storage and transportation technologies allow natural gas to be converted to liquefied natural gas (LNG) for transport overseas. Today, resource-constrained nations like South Korea and Japan are able to purchase and consume natural gas supplied by resource-rich countries like Quatar, Indonesia and the US.

Despite the high costs of investment for LNG export infrastructure, speculators suggest that LNG export will not only yield high returns but also boost US tax revenues, improving the US trade balance. Accordingly, a number of natural gas companies have taken initial steps toward installing the necessary LNG export infrastructure by applying for proper permitting with US state and federal agencies. As of this writing, more than 25 applications are filed [PDF] with the Department of Energy (DOE) for LNG export authorization. Also, eight applications have been filed with the Federal Energy Regulatory Commission (FERC) for authorization to site and construct LNG export facilities. To date, only one facility has received full authorization for LNG export: the Sabine Pass Liquefaction Project [PDF] in Cameron Parrish, Louisiana. As the sole successful application, the Sabine Pass facility is currently the focus of the heated debates swirling about prospective US natural gas exportation.

Section 3 of the Natural Gas Act of 1938 (NGA) governs international transport and sale of natural gas in the US. Entities seeking to export natural gas must obtain authorization from the Department of Energy (DOE) before export activity may commence. Separate permitting must also be obtained from the Federal Energy Regulatory Commission (FERC) for the construction and operation of LNG export facilities. For DOE approval of proposed export activity, 10 C.F.R. § 590.202 requires that applicants provide “all applicable information” pertaining to the chain of supply and forecasted distribution network for the outbound natural gas. This expansive provision authorizes the DOE to consider not only the specific circumstances of the proposed export activity but also the broad impacts of LNG export on the larger US economy. In its consideration of these complex future market scenarios, 10 C.F.R. § 590.202 inherently requires prospective exporters to engage in a highly speculative examination of the evolving natural gas market. Thus, it is very difficult for applicants to achieve a truly accurate and comprehensive representation of the relevant information.

An additional point of contention arises in the export permitting process under 15 U.S.C. § 717(b)(a), which authorizes the DOE to deny a LNG export permit if the export activity “will not be consistent with the public interest.” Determining whether the proposed export activity complies with this public interest provision depends largely on whether a qualifying free trade agreement (FTA) exists between the US and the proposed export destination country. The DOE regularly approves exports to free trade countries, but often shies away from approval of exports to nations which have not signed a free trade agreement with the US. Thus, under NGA Section 3, LNG export to a non-FTA nation is not presumed to be consistent with the public interest. Accordingly, the full DOE application and hearing process applies, allowing opponents of the proposed LNG export ample opportunity to overcome this presumption. To date, the Sabine Pass facility is the only proposed LNG export project in the US to receive authorization for LNG export to non-FTA nations. At present, DOE review of all other LNG export applications for LNG export to non-FTA countries is currently suspended. This delay is due in part to the economic and environmental issues raised by opponents of LNG export, who argue that the DOE must account for all available measurable data when making determinations of LNG export permitting.

The issues raised by opponents of LNG export are an important consideration that must be adequately counted in the relevant policy debates. Certainly, activities surrounding natural gas extraction, transport and consumption create a number of serious environmental concerns. Accordingly, proposals to FERC for construction of LNG export facilities fall within the purview of the National Environmental Policy Act (NEPA) review process. As the lead agency for the purposes of NEPA appraisal of LNG exportation, FERC is charged with evaluating the environmental impacts of all proposed actions prior to filing for FERC authorization. NEPA requires preparation of a full environmental impact statement (EIS) unless the agency determines that the proposed action will not constitute “a major federal action significantly affecting the quality of the human environment.” Preparation of an EIS is an extensive process that may take months or years to complete. Should FERC determine that the environmental impacts of the proposed action are not significant or within a categorical exclusion contained within 40 C.F.R. § 1502.2(c), the agency is required to prepare an Environmental Assessment (EA), a much less expensive alternative to the time-consuming EIS. In its review of the Sabine Pass application [PDF], FERC determined that conversion of the Sabine Pass LNG export facility did not significantly affect the quality of the human environment and concluded that preparation of a full EIS was not required.

Entities aiming to export LNG from the US must also overcome various state regulatory hurdles. For instance, the Coastal Zone Management Act (CZMA) permits FERC to deny construction approval to proposed LNG facilities if a project fails to fit within the state-mandated approved coastal management policies and plans. Also, projects must comply with state water quality standards, permitting requirements mandated by the Clean Air Act, and other regulated standards.

Environmental and economic interest groups lean heavily on these statutory provisions to raise objection to DOE and FERC permitting of LNG export. Opponents of LNG export, including energy-dependent domestic industries, argue that exportation of domestic natural gas resources could dramatically increase domestic energy prices and hinder the use of natural gas as an alternative transportation fuel. Similarly, claims are made that the domestic retention of the newly accessible US natural gas reserves could provide some measure of energy independence for the US. Opponents also suggest that the LNG export could pose a number of significant environmental risks, including increases in domestic environmental degradation borne from hydraulic fracturing, the continued release of greenhouse gases due to continued reliance on fossil fuels and increased risk of explosion at LNG facilities. In a contrasting opinion, some commentators argue that increased domestic supply of natural gas would encourage the use of natural gas as an alternative fuel to coal and oil and provide society with a bridge to cleaner renewable energy sources.

While the debate over significance of these environmental impacts continues, entrepreneurs and corporations are scurrying to prepare for the seemingly inevitable expansion of the global market for natural gas. Supporters of LNG exports argue that LNG export would benefit long-run US employment rates (especially in the natural gas industry and many secondary employment markets), bolster tax revenues and improve US trade relationships with many nations. Economic studies estimate that one export facility alone could reduce the US trade deficit by $7.1 billion per year and provide 14,000 job-years in facility operation employment. Supporters also argue that a global free market for natural gas, however imperfect it may be, is the best allocator of resources that will bring the most widespread economic benefits to consumers.

Despite these contentions, there is no guarantee that US LNG export at present-day will bring long-term economic fortune to the US or its corporate constituents. Here, the timeliness of US export must also be considered. When will the comparative advantage of the US in the global natural gas market peak? More importantly, when will it fall away? In March 2013, Japanese scientists were the first to successfully extract methane hydrates from the Sea of Japan. Once these extraction techniques become commercially exploitable by various nations of the world, the trade balance in the natural gas market will turn upside down once again. Then, there will be no guarantee of any comparative advantage of the US.

In the sort-term, it remains to be seen whether environmental and economic challenges will stop exporters from widely offering US natural gas to the world market. Yet the ever-increasing global demand and cheapening of supply for natural gas in the US will inevitably ensure continued efforts to export LNG from the US for many years to come, despite the significant environmental threats and regulatory hurdles that stand in the way. As gas extraction and transportation technologies continue to develop and the global energy markets continue to liberalize, a day will certainly come when the powers and predictions of the natural gas market will be turned upside-down once again. Then, the US trade advantage in the natural gas market will have faded.

Mike Blackwell graduated from the Indiana University McKinney School of Law with a concentration in Environmental and Natural Resources Law. He was a Founders Scholar at Indiana University, where he graduated cum laude with a degree in economics

Suggested citation: Mike Blackwell, The Prospect of US Liquefied Natural Gas Exportation, JURIST – Dateline, Jul. 2, 2013, http://jurist.org/dateline/2013/07/mike-blackwell-gas-exportation.php