October 01, 2012

The U.S. Race to Export LNG

Hong N. Huynh

The world’s thirst for cheap energy and new domestic supplies of natural gas could enhance the United States’ position as a competitor in the energy export markets. And efforts taken to satisfy this thirst could arguably be a component in reviving the American economy. The recent rapid rise in the supply of natural gas in the United States is due mainly to the more widespread use of hydraulic fracturing technology, which allows for more efficient extraction of gas from shale. This gas can then be converted to liquid form through a cooling and compression process. Liquefied natural gas (LNG) can be stored and shipped more efficiently.

The growth in supply of natural gas has caused prices to plummet, making it more attractive relative to other fuel sources. Demand for natural gas has increased from economically growing Asian countries that see natural gas as being a more efficient fuel source than traditional coal and safer than the potential risks associated with nuclear power plants, as highlighted by the events at the Fukushima Daiichi plant in Japan.

Developers of LNG export facilities in other countries such as Canada and Australia are seeking to capture the growing worldwide demand. To capitalize on the increased cheaper supply of natural gas in the United States and to compete in the overseas market, a number of energy companies are stepping up efforts to develop LNG export facilities in the United States. There is no question that the regulatory processes to gain approvals from federal, state, and local agencies to site, construct, and operate an energy facility like an LNG export terminal are complex and require a significant commitment of time and money. Yet some developers have made the necessary calculations and concluded that the commitments pale in comparison to the potential return on investment. The key question for these developers is whether they can gain all approvals to site, construct, and operate an LNG export facility in a timely manner.

A number of developers were able to make an economic case to the U.S. Department of Energy (DOE) to justify exporting LNG, targeting markets in Europe and Asia. DOE readily approves exports to free trade countries but has halted approval of exports to non-free trade countries. It is waiting on the results of a study on the impact of exports on domestic energy prices before granting additional approval, which is expected to come out in late summer 2012. To date, only one facility has gained DOE’s approval to export LNG to free trade and non-free trade countries. This facility is located in Sabine Pass, Louisiana, and is being spearheaded by Cheniere Energy through Sabine Pass Liquefaction, LLC, and Sabine Pass LNG, L.P. (collectively, Sabine Pass).

After gaining DOE’s approval, developers can begin the environmental approval and permitting process. The first step, among many, is with the Federal Energy Regulatory Commission (FERC). FERC has jurisdiction over the siting, construction, and operation of LNG terminals and pipelines and has the primary responsibility over the facility’s compliance with the requirements of the National Environmental Protection Act (NEPA) and other environmental and natural resource protection laws.

FERC has received proposals for LNG export authority from at least give facilities—located in Lake Charles and Sabine Pass, Louisiana; Coos Bay, Oregon; and Freeport and Corpus Christi, Texas. Finally, developers have expressed some level of interest in locating export terminals at four additional sites—in Hackberry, Louisiana; Cove Point, Maryland; Astoria, Oregon; and Brownsville, Texas. Among them, Sabine Pass is the only facility to gain FERC approval to export.

Sabine Pass began the process of seeking exporting authority from FERC in October 2008 when it filed an application to amend an existing FERC Order, which at the time only authorized an LNG importing terminal, to allow for the additional purpose of exporting LNG. On May 29, 2009, FERC granted that request. 127 FERC ¶ 61,200. About 14 months later, in July 2010, Sabine Pass initiated the National Environmental Policy Act (NEPA) by entering into the FERC NEPA prefiling process. See FERC Docket FP10-24.

The prefiling process is part of FERC’s implementation of the Energy Policy Act of 2005 in which Congress amended the Natural Gas Act to require FERC to coordinate the environmental review and the processing of all federal authorizations relating to proposals for natural gas infrastructure under FERC’s jurisdiction and to maintain a consolidated record for any subsequent appeal or judicial review. The goal of the prefiling process is to allow for early project-development involvement with the public and agencies, so that no significant environmental opposition or surprises can stall the approval process. The formal application process takes place seven to eight months after prefiling has occurred.

In the case of Sabine Pass, it submitted its formal application to FERC in six months, at the end of January 2011, after initiating the prefiling process. Later that year, in December, FERC issued an environmental assessment (EA). On April 16, 2012, less than fourteen months after Sabine Pass submitted a formal application, FERC issued an order granting Sabine Pass authority for the export terminal. See 139 FERC ¶ 61,039. In sum, it took Sabine Pass about three and a half years, from October 2008 to April 2012, to get through the FERC approval process.

The empirical information on the timing of FERC’s process provides just a glimpse into what it took for Sabine Pass to secure the nation’s first FERC approval for an export terminal. Sabine Pass’s success was dependent in part on its having several key puzzle pieces already in place. First, it had an existing, active natural gas facility. That is, since 2004, it had authority to operate an import terminal with a total regasification and send-out capacity of 2.6 billion cubic feet (Bcf) per day and three storage tanks. In 2006, it received authority to increase the storage capacity with three additional LNG storage tanks, as well as expanded vaporization systems, that increased the terminal’s send-out capacity to 4 Bcf per day and its storage capacity to 16.9 Bcf.

Second, the addition of liquefaction capability to an existing import facility resulted in such minimal environmental impact that FERC issued an EA, rather than a full Environmental Impact Statement (EIS). The liquefaction capability includes four LNG liquefaction trains, two gas turbine generators and associated transmission components, additional infrastructure (including refrigerant tanks, gas compressors, and water systems), and new and remodeled buildings. FERC concluded in the EA that the impacts from these components can be sufficiently mitigated to support a finding of no significant impact.

Finally, Sabine Pass had key political support for its export project. The FERC docket is riddled with support letters from national and state lawmakers, including U.S. Senator Mary Landrieu; U.S. Representatives Rodney Alexender, Charles Boustany, Jr., and Steve Scalise; Louisiana Representative Chuck Kleckley; Louisiana Senator John A. Alario; and Louisiana Lieutenant Governor Scott Angelle.

Yet these key puzzle pieces could not fend off the environmental challenges that Sierra Club has mounted before FERC. On January 27, 2012, about one month after FERC issued the EA, Sierra Club filed a motion to intervene and comment on the EA, raising a number of issues, such as FERC’s failure to analyze the impacts of greenhouse gas emissions and pollution from “fracking,” an economical but controversial method of extracting gas from the shale. In response, Sabine Pass opposed Sierra Club’s motion on the ground that it was untimely. Despite granting Sierra Club’s late filing, FERC did not find the environmental arguments persuasive and granted Sabine Pass authority. A month later, on May 15, 2012, Sierra Club filed a motion for rehearing and for stay pendente lite, arguing that FERC had violated NEPA and demanding the preparation of a full EIS.

As of this writing, it remains to be seen when Sabine Pass will be able to overcome these environmental challenges to be the first to send LNG offshore. Opposition to the export of LNG has been vocal. Sierra Club and other environmental groups could mount judicial challenges that could further delay the United States’ entry into the world market. But the increased demand for a relatively cheap supply of natural gas in the United States, coupled with overseas demand for energy, ensures that developers will continue efforts to construct and operate LNG export facilities, despite regulatory obstacles and litigation.

Hong N. Huynh

Hong Huynh is a partner of Miller Nash LLP, in Portland, Oregon, and a member of the editorial board of Natural Resources & Environment