January 01, 2017

LNG exports: NEPA challenges wind their way through court

Douglas M. Canter

The first liquefied natural gas (LNG) export terminal in the United States opened in 2016. Yet, legal challenges to LNG export projects continue. Four recent decisions of the U.S. Court of Appeals for the D.C. Circuit address these challenges.

LNG export growth

In early November 2016, the U.S. exported more natural gas than it imported for the first time ever, two years ahead of U.S. Energy Information Administration (EIA) estimates. EIA projections suggest that this net export will continue, as persistent improvement of shale gas extraction technologies supports higher production at competitive prices, stimulating both domestic and overseas demand. Most U.S. natural gas exported to overseas markets will come from LNG.

Against the backdrop of these interrelated technological and market trends exists continued environmental concerns about (a) the consequences of shale gas extraction using new hydraulic fracturing technologies, (b) new interstate pipeline construction to transport increased production, and (c) the expanded fleet of U.S. LNG export facilities to supply this foreign demand. Among other potential environmental issues raised by these activities is their impact on the climate.

Greenhouse gas and climate change challenges under NEPA

During the past five years, environmental groups have asserted challenges to LNG export projects on the ground that they will increase greenhouse gas emissions. While varied, these arguments have included claims that the Federal Energy Regulatory Commission (FERC), the federal agency with jurisdiction over siting and construction of on-shore LNG facilities, and the Department of Energy (DOE), the federal agency with jurisdiction over LNG exports, are failing to properly perform their respective environmental reviews under the National Environmental Policy Act (NEPA).

More specifically, challengers argued that FERC’s and DOE’s environmental reviews must address the concept of “induced production,” which suggests that increased LNG exports can lead to higher greenhouse gas emissions. These higher greenhouse gas emissions allegedly occur as new and expanded LNG projects increase aggregate U.S. natural gas demand, thereby causing natural gas prices to rise and encouraging electric generators to switch from natural gas to lower priced coal. Challengers also argued that FERC’s cumulative impact analysis under NEPA must look at FERC-regulated LNG projects nationwide. Both FERC and DOE have routinely rejected these arguments.

Recent D.C. Circuit decisions

On June 28, July 15, and November 4, 2016, the U.S. Court of Appeals for the D.C. Circuit issued decisions in four FERC LNG export cases. Sierra Club v. FERC, 827 F.3d 36 (D.C. Cir. 2016) (Sierra Club (Freeport LNG)), Sierra Club v. FERC, 827 F.3d 59 (D.C. Cir. 2016) (Sierra Club (Sabine Pass)), Earth Reports, Inc. v. FERC, 828 F.3d 949 (D.C. Cir. 2016) (Earth Reports), and Sierra Club v. FERC, Case No. 15-1133 (D.C. Cir.) (per curiam) (Cheniere). In each case, the court affirmed FERC’s authorization of the facilities and rejected petitioners’ NEPA arguments.

NEPA requires the deciding agency to consider three kinds of impacts—direct, indirect, and cumulative impacts—and three types of actions—connected, cumulative, and similar actions.

Regarding induced production, the court in all four decisions found that FERC was not required to consider the alleged impact as an indirect effect under NEPA. Agreeing with FERC, the court said that greater natural gas production from an LNG project is not affected by FERC’s decision to approve the export facilities. Rather, the court noted that DOE, not FERC, has jurisdiction over the export of the natural gas commodity. Regarding cumulative impacts, the D.C. Circuit in all four decisions rejected petitioners’ arguments that FERC should have performed a nationwide analysis of other pending or approved LNG export terminals across the United States before authorizing a particular facility.

Pending D.C. Circuit decisions  

The same or similar arguments raised in the above D.C. Circuit decisions applicable to the FERC proceedings were also recently raised in the D.C. Circuit through related challenges to the DOE orders authorizing LNG commodity exports to non-free trade countries from the very same LNG export facilities approved in the FERC proceedings: those operated by Freeport LNG Expansion, LP et al., Sabine Pass Liquefaction, LLC, Dominion Cove Point LNG, LP, and Cheniere Marketing, LLC et al. DOE, as had FERC, rejected these arguments. The Sierra Club has appealed the DOE export orders, and those appeals remain pending.

NEPA guidance on climate change considerations

Just as the series of D.C. Circuit cases will define the respective obligations of FERC and DOE to consider greenhouse gas emissions from induced production, the August 2016 Council on Environmental Quality (CEQ) final guidance for federal agencies on quantifying the impacts of greenhouse gas emissions and climate change may also affect how those agencies treat the issue. The guidance does not represent a binding regulation, and it preserves agencies’ discretion to implement the procedural requirements of NEPA. Nonetheless, the final guidance creates a framework for federal agencies to consider climate change impacts, using greenhouse gas emissions as a proxy in performing their NEPA-required environmental reviews.

In discussing the required “reasonably foreseeable” nexus associated with an indirect effect, CEQ described federal approval of coal extraction rights (arguably analogous to LNG export authority) and the effect that users of the extracted coal have on greenhouse gas emissions (analogous to greenhouse gas emissions from electric generation that are allegedly created by “induced production”). The CEQ guidance also points to DOE’s 2014 report on the life cycle impacts of greenhouse gas emissions caused by LNG exports as an example of the type of “existing, timely, objective, and authoritative analysis” that an agency should use to compare a project’s direct and indirect effects. The guidance also suggests that an agency need not perform a separate cumulative impacts analysis of greenhouse gas emissions if it evaluates the direct and indirect effects of the agency action in an individual project.

Legal and practical implications

The recent D.C. Circuit Court decisions dispose of the induced production and nationwide cumulative impacts arguments raised by challengers of the FERC LNG export facilities’ authorizations. These recent decisions, however, do not resolve the similar, if not identical, arguments that remain pending on appeal of the DOE cases involving the corresponding DOE commodity export authorizations. Moreover, the decisions do not address whether FERC’s role as lead agency for NEPA purposes, and the interrelated jurisdictional bases for FERC’s and DOE’s respective authority over LNG exports, could support the conclusion that the FERC facility and DOE commodity export authorizations should be jointly considered, for NEPA purposes, in FERC’s NEPA review.

The CEQ’s final guidance may influence FERC and DOE to provide more expansive explanations of greenhouse gas considerations in future LNG export cases, assuming CEQ’s interpretation of the law remains unchanged under the next administration. But even the current final guidance provides both agencies a great deal of discretion to continue rejecting challengers’ arguments related to induced production and nationwide cumulative impacts.

In the end, the D.C. Circuit has in recent decisions declined, for now, to resolve whether, under NEPA, an agency must consider if LNG exports indirectly induce greater natural gas production, cause power plants to switch from natural gas to coal, or lead to higher greenhouse gas emissions. Thus, whether DOE must consider induced production as an indirect effect in making export authorizations remains undecided, notwithstanding Supreme Court precedent on what suffices to show an agency action has caused an indirect effect and the D.C. Circuit export facility decisions referenced above. This uncertainty prevails even as LNG exports have already commenced under the challenged DOE authority. Practitioners would be well advised to review the D.C. Circuit’s forthcoming decisions on DOE’s NEPA obligations, which may help clarify these issues.

Douglas M. Canter

Mr. Canter is a partner in Post and Schell, P.C.’s Energy and Utility Group, located in the firm’s Washington, D.C., office. He is a Section member whose practice focuses on Federal Energy Regulatory Commission regulation and related Department of Energy permitting. The opinions expressed in this article are entirely his own and do not represent those of his firm or any client.