Although LNG imports were once economically advantageous, the marketplace shifted in favor of cheaper domestic natural gas production. U.S. annual dry production of natural gas skyrocketed from 18.5 trillion cubic feet (Tcf) per year in 2006 to more than 23 Tcf per year in 2011, an almost 25 percent volume increase that led to a 40 percent price decrease in spot-market trades.
With shale gas fields coming online, and the expansion of hydraulic fracturing and horizontal drilling, domestic gas production is at an all-time high and shows no signs of slowing. Given this new market reality, LNG imports have dropped off significantly. According to the U.S. Department of Energy (DOE), LNG import volume has fallen by almost 23 percent between 2009 and 2011. Some LNG facilities, however, have turned to exports as a way to continue operations, and many have already secured approval to do so. Since 2010, LNG re-exports (LNG that is imported and held in U.S. storage until a sale overseas) were sent to Japan, Spain, India, the United Kingdom, Brazil, China, and South Korea.
LNG trade: imports and exports
Under the Natural Gas Act (NGA) (15 U.S.C. § 717b), DOE is responsible for regulating international trade in natural gas, including LNG. Imports and exports have always been subject to a simple standard of review under the NGA: DOE must approve applications for imports/exports unless it finds that such imports/exports would not be consistent with the “public interest.” The application fee is surprisingly small at $50 (10 C.F.R. § 590.207).
Two decades ago, Congress amended the NGA to facilitate the United States’ involvement with international natural gas trading. In a not-unintentionally named amendment entitled “Fewer Restrictions on Certain Natural Gas Imports,” Congress’s Energy Policy Act of 1992 declared that “natural gas consumers and producers, and the national economy, are best served by a competitive natural gas wellhead market.”
To accomplish this goal, Congress stated that any imports or exports with LNG Free Trade Agreement (FTA) nations (e.g., many nations in the Americas, South Korea, Australia) “shall be deemed to be consistent with the public interest” and applications “shall be granted without modification or delay.” DOE recently approved twelve applications for exports to FTA nations, each within about two months, and another three are under review or “pending approval.”
Applications for LNG trade with non-FTA nations continue to be presumptively approved “unless” DOE finds such trade to be inconsistent with the public interest. DOE is allowed to “grant such application, in whole or in part, with such modification and upon such terms and conditions as the [DOE] may find necessary or appropriate.” However, after approving one non-FTA nation export request, DOE put an unofficial hold on new approvals—and decisions on the eight outstanding applications—until it determines whether these exports are consistent with the public interests.
Aside from DOE’s jurisdiction over the trade of LNG, the actual facilities to and from which LNG is traded can either be within state waters (“onshore terminals”—subject to the NGA) where FERC has approval authority, or they can be located beyond state waters (“offshore ports”—licensed under the Deepwater Port Act (DWPA)) where the Maritime Administration and the U.S. Coast Guard have jurisdiction.
Unlike the Congressional prohibition on modifying or delaying the approval of DOE import/export authorizations, for LNG onshore terminals, FERC is free to “approve an application . . . in whole or in part, with such modifications and upon such terms and conditions” FERC deems appropriate (15 U.S.C. § 717b(e)(3)(A)). FERC, in determining whether to approve or deny an onshore (or within-state-waters) terminal, asks whether the terminal will “improve access to supplies of natural gas, serve new market demand, enhance the reliability, security, and/or flexibility of the applicant’s pipeline system, improve the dependability of international energy trade, or enhance competition within the United States for natural gas transportation or supply” (18 C.F.R. 153.7(c)(1)(i)).
FERC licensing decisions balance the public’s interest against any identified adverse impacts (see 88 FERC ¶ 61,227 (1999)). Once FERC determines that there are no adverse impacts, FERC takes the position that the market is allowed to determine which gas infrastructure projects will actually be constructed. Thus, without substantial adverse impacts (such as environmental, noise, security), the decision rests on the economics of the proposed uses—here, imports or exports.
Recently, FERC has been very active with respect to LNG terminals, approving construction of an export facility in Louisiana, and reviewing pending applications for two facilities in Texas, one in Oregon, and another one in Louisiana. FERC has also identified three other export facilities as being in the pre-planning phase.
One LNG terminal has already fallen victim to changes in the LNG marketplace. In 2009, FERC found that the LNG import market weighed in favor of the public need for new natural gas sources and approved an Oregon terminal. Since then, before construction began, the LNG import market collapsed “beyond mere fluctuations in economic projections of prices and supply.” Jordan Cove Order Vacating Authorization, FERC Docket # CP07-441-001 (2012). Citing FERC’s need to rely on “the usually valid assumption that a project sponsor will not go forward with construction of a project (in this case, an import terminal) for which there is no market,” and upon the applicant’s own application to forgo construction due to the lack of import need, FERC vacated the authorization. The Oregon applicant, Jordan Cove Energy, LP, has a separate export terminal application pending at FERC for the same site, having already secured authorization from DOE to export to FTA nations.
LNG deepwater ports
For offshore ports (located in federal waters), the DWPA sets forth nine requirements that must be met. Those conditions run the gamut from an applicant’s fiscal responsibility to environmental, navigation, and public interest concerns. 15 U.S.C. § 1503. The DWPA gives the governors of coastal states adjacent to a proposal’s location veto authority over the issuance of a license to construct, own, and operate a port. In transmitting imported LNG to land from a deepwater port, either the port must tie into an offshore pipeline, where the Maritime Administration and the Coast Guard retain jurisdiction over the application, or the port must connect with an onshore pipeline, triggering the need for a FERC pipeline approval under NGA section 7(c).
The DWPA was, quite vaguely, enacted to promote safe “importing of natural gas” into the United States and “transporting . . . natural gas from the outer continental shelf.” While the DWPA does not explicitly say that “exports” are allowed from deepwater ports, exports are not prohibited and are not inconsistent with the main purpose of the DWPA: to provide for the safe siting and construction of ports. While this issue has not yet been examined by the courts, the statutory structure suggests that Congress intended DOE to be the arbiter of whether LNG can be exported while the Maritime Administration and the Coast Guard decide where LNG can be imported (through DWPA has jurisdiction over siting, constructing, and port operations).
Declining imports, rising exports
At a November 2011 Senate Committee on Energy and Natural Resources hearing on LNG Exports, Chairman Bingaman began the proceedings with an apt observation: “We had a hearing in 2005 on the future of LNG . . . however, in 2005 we were thinking about anticipating need to import growing quantities of LNG. Today, we’re thinking about what role LNG exports might play in our energy future.”
The senator’s statement was timely. In just the past year, DOE data show that LNG imports into U.S. terminals and deepwater ports are down by a third while the price is up by 20 percent. In contrast, over the same period, the price of LNG re-exports rose 73.3 percent. In 2007, LNG import facilities were operating at over 11 percent capacity; in 2011 that had fallen to 5 percent. According to data from FERC and the U.S. Energy Information Administration (EIA), between 2007 and 2011, the ratio of imports to re-exports fell 98 percent, a harbinger of upcoming trends.
DOE has already approved a substantial volume of LNG exports from lower-48 states’ domestically produced natural gas, representing 23 percent of the United States’ non-Alaskan daily production. The EIA’s Annual Energy Outlook 2012 Early Release projects that the United States will become a net exporter of natural gas in 2021. Given that one of four units of domestically-produced gas is already licensed to be exported as LNG, Senator Bingaman was right to state that “understanding how exports might affect domestic prices is also critical.” In the first in a series of reviews on the subject, DOE and EIA estimate that projected exports could lead to wellhead-natural gas price increases by as much as 54 percent in the first few years of exports. In all cases (including low-export and high-production scenarios) EIA anticipates that “increased natural gas exports [will] lead to increased natural gas prices.” LNG exports are also anticipated to lead to an increase in activities like hydraulic fracturing (to create more exportable supply) and even increases in the use of coal for domestic power generation.
As the LNG market shifts, LNG terminal and port operators are scrambling to provide economic evidence that export facilities are in the public interest while some project proponents are still trying to claim that import facilities are in the public interest. For now, however, the only sure thing for LNG traders, terminals, and ports is that under NGA section 3, export applications to send LNG to our free-trade partners will be approved without modification or delay. Everything else likely will take both regulators and the marketplace a while to sort out.