DOE Announces Fundamental Shift in LNG Export Authorization Policy

5 June 2014 Practice Groups: Liquefied Natural Gas Oil & Gas Energy, Infrastructure and Resources Energy DOE Announces Fundamental Shift in LNG Export Authorization Policy By David L. Wochner, Sandra E. Safro and Michael L. O Neill On Thursday, 29 May 2014, the U.S. Department of Energy ( DOE ) announced a proposed change to the procedures it will use to process applications to export LNG to non-free trade agreement ( non-fta ) countries. This is a major development and could have significant impacts on the U.S. LNG export market. As described in greater detail below, DOE s announcement included three main features. Process Changes. DOE s proposed changes would (1) eliminate the current practice of issuing conditional orders, (2) no longer process applications based on the queue DOE established in December 2012, and (3) base the sequence in which DOE issued final decisions solely on a project s completion of the environmental review process required under the National Environmental Policy Act ( NEPA ) (which is usually done at the Federal Energy Regulatory Commission ( FERC ), although for offshore projects in federal waters at the U.S. Maritime Administration/U.S. Coast Guard). These proposed changes are being made available for public comment upon the issuance, with comments due by 21 July 2014. Economic Studies. DOE announced that it plans (1) to undertake a new economic study to gain a better understanding of how potential U.S. LNG exports between 12 and 20 billion cubic feet per day (Bcf/d) could affect the public interest and (2) to have the Energy Information Administration ( EIA ) update its previously prepared 2012 LNG Export Study, described below. Once they are completed, both of these studies will be made available for public comment. Environmental Reports. In addition, DOE announced and made available for public comment two new reports on environmental issues (namely, lifecycle GHG analysis and impacts of upstream hydraulic fracturing) that DOE states go beyond what is required under NEPA. These two environmental reports are being made available for public comment simultaneously with the May release and the proposed process changes described above, and comments also will be due by 21 July 2014. DOE s announcement has introduced new variables into the non-fta LNG export application process at DOE. For example, although DOE explains that the two new environmental reports consider potential impacts that are beyond the scope of what is required for an environmental analysis or environmental impact statement under NEPA, DOE also notes that it will consider the reports and comments it receives from the public in its public interest determinations in connection with every application to export LNG to non-fta countries, including those that already received conditional export authorizations. DOE s QUEUE To date, DOE has processed pending non-fta applications in accordance with the queue it established in December 2012. Under this regime, DOE has issued conditional orders for

projects based on that queue and added any new projects that file applications with DOE at the end of the queue. The agency then would render a final order following its issuance of an environmental review of the project and FERC s order. To date, only one final order has issued. Citing changing market dynamics, DOE s proposal would eliminate the existing queue; instead, DOE now proposes to only act on a non-fta LNG export application after the environmental review for the project required under NEPA is complete. DOE explains that the NEPA review process will be deemed complete either: Thirty days after the publication of a Final Environmental Impact Statement ( FEIS ); For projects requiring an Environmental Assessment ( EA ), upon publication by DOE of a Finding of No Significant Impact; or Upon a determination that an application is eligible for a categorical exclusion pursuant to DOE s NEPA regulations. The completion of the NEPA environmental review process would not mandate that DOE must act immediately, but rather it would permit DOE to issue a final order. This policy eliminates the conditional order procedure that LNG export project developers have relied on since December 2012, and focuses all attention on the environmental review process. As FERC is the lead federal agency for the environmental review for LNG terminals proposed onshore or in state waters, the FERC NEPA review process would become the critical hurdle nearly every pending project must clear before receiving an authorization to export LNG to non-fta nations from DOE. DOE s rationale is that it hopes to prioritize more commercially viable LNG export projects, noting that the proposed procedure will ensure that applications otherwise ready to proceed will not be held back by their position in the order of precedence. DOE reached this conclusion presumably because the prosecution of the NEPA review process is quite expensive, costing developers millions of dollars, so companies that can finance the NEPA review process are more likely to bring their projects to completion. DOE also hopes that by waiting for the completion of the NEPA process, its decision will be based on better information and data, including market impacts of the volumes proposed to be exported. DOE is accepting public comments on this proposed procedural change. Comments will be due by 4:30 p.m. on 21 July 2014. ECONOMIC STUDY Following its order authorizing LNG exports to non-fta nations from the Sabine Pass terminal in 2011, DOE commissioned two studies on the impacts of LNG exports on the U.S. economy: a microeconomic study performed by the EIA and a macroeconomic study performed by NERA Economic Consulting (collectively, the 2012 LNG Export Study ). Although EIA has issued updated supply, demand, and price information since the 2012 LNG Export Study, DOE had not commissioned a formal update of either study to date. Instead, DOE updated its analysis in the conditional non-fta orders it issued as new EIA data was released. The 29 May announcement explains that DOE plans to commission EIA to update its microeconomic study that was part of the 2012 LNG Export Study to expand the export cases from the 6 to 12 Bcf/d scenario previously evaluated to a 12 to 20 Bcf/d export 2

scenario. Once the EIA update is complete, DOE notes that it will again contract an external analysis of the economic impact of this increased range of LNG exports and other effects that LNG exports might have on the U.S. natural gas market. Importantly, DOE points out that it only has issued final authorization for 2.2 Bcf/d of LNG exports to non-fta countries (Sabine Pass s LNG Liquefaction Trains 1-4). DOE emphasizes that all of the other approvals are conditional. This is an apparent change in the way that DOE is considering the volumes that go into its analysis of the cumulative impacts. In each of the conditional non-fta orders previously issued, DOE has included the conditionally authorized non-fta export volumes in its sum when discussing cumulative market impacts. As of its most recent order for the Jordan Cove project, the cumulative volumetric total was 9.27 Bcf/d. Based on DOE s announcement, the volumes that will go into the cumulative impacts consideration at DOE are now effectively reset to 2.2 Bcf/d and only volumes authorized in a final DOE order on a non-fta application will be added to that sum. This appears to be consistent with DOE s stated intention of basing final approvals for non-fta exports on the most contemporary data. It is not clear at this time how long it will take for these new economic studies to be finalized, but DOE will make the studies available for public comment. There is no indication from DOE that these studies will disturb the findings of the 2012 LNG Export Study for exports up to 12 Bcf/d that in all scenarios examined, export of U.S. domestic natural gas as LNG will have a net positive impact on the national economy. ENVIRONMENTAL REPORTS DOE also simultaneously released two environmental studies. The first study, authored by the National Energy Technology Laboratory ( NETL ), is entitled Life Cycle Greenhouse Gas Perspective on Exporting Liquefied Natural Gas from the United States. This report was filed in all pending non-fta LNG export application dockets. This study examines the lifecycle emissions of greenhouse gases for U.S. LNG export projects by comparing emissions from U.S. LNG exports with those of regional coal for the electric power sectors in Europe and Asia. The report concludes that when compared to regional coal fuel, U.S. LNG exports will not increase greenhouse gas emissions, but does not come to any firm conclusions as to the relative emissions of U.S. LNG compared with, for example, Algerian LNG or Russian gas supplies. The second study was authored by DOE staff and is entitled Draft Addendum to Environmental Review Documents Concerning Exports of Natural Gas from the United States. This report was filed in all pending non-fta application dockets that are also either in pre-filing or under formal review at FERC. The draft addendum compiles previously existing studies and reports, relying in part on the NETL study described above. Confirming that it was not required by NEPA or any other statute to create this study, DOE stated that it released this study in order to respond to past public comments about the potential environmental impacts of LNG export projects. The study includes treatment of potential effects on water resources, air quality, greenhouse gas emissions from production of natural gas, induced seismicity associated with unconventional gas and oil activities, and potential land use impacts. In its releases, DOE continues to state, as it has in the conditional orders issued to date, that the environmental impacts resulting from production activity induced by LNG exports to non- FTA countries are not reasonably foreseeable within the meaning of the Council on 3

Environmental Quality s (CEQ) NEPA regulations, and therefore will not be considered in their analysis of non-fta LNG export applications. Nonetheless, DOE explains that it will consider both of these reports in its public interest analysis. Therefore the review and response process may delay the issuance of future final orders authorizing LNG exports to non-fta countries. DOE will accept public comments regarding these two environmental studies for 45 days. Comments are due by 4:30 p.m. on 21 July 2014. IMPLICATIONS FOR PENDING APPLICATIONS If DOE s proposal is implemented, it would adjust the industry s understanding of how the non-fta process at DOE would work. Although there is no indication that DOE plans to directly reopen the comment period for any of the projects that have received conditional non-fta authorization, comments on the proposed process, the environmental reports, and likely the economic studies as well, will be filed directly in each of the dockets listed in DOE s Federal Register notices. In addition, DOE has stated it will review all of this new data and information in making its public interest determination for each project, including those that already have a conditional order. At this time, it is not clear how much new analysis DOE will include in the final orders that it issues for projects that already have conditional non-fta authorizations. As of 29 May, there were 24 projects pending in the non-fta queue at DOE. If DOE s proposed changes are implemented, several projects that are further down in the DOE queue may be processed by DOE earlier than anticipated based on their position in the FERC NEPA review process. However, projects that have not filed yet at FERC but are higher in the DOE queue will not receive the same benefit. These projects may remain pending at DOE, unprocessed, until they have completed the robust FERC process. Open questions remain following DOE s announcement, particularly in how DOE will treat comments on the two environmental studies and whether DOE s analysis and consideration of these comments will occasion significant delay in the issuance of final non-fta LNG export authorizations. DOE s treatment of pending conditional non-fta authorizations scheduled to complete the NEPA environmental review process in the near term will provide significant guidance in answering these outstanding questions. Authors: David L. Wochner david.wochner@klgates.com +1.202.778.9014 Sandra E. Safro sandra.safro@klgates.com +1.202.778.9178 Michael L. O Neill mike.o'neill@klgates.com+ 1.202.778.9037 4

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