- Effect of Energy Policy Bills on Natural Gas Exports
- April 25, 2016 | Authors: Jacob Dweck; Paul F. Forshay; Daniel P. LeFort; Michael A. Stosser; Kyle E. Wamstad
- Law Firms: Eversheds Sutherland (US) LLP - Houston Office ; Eversheds Sutherland (US) LLP - Washington Office ; Eversheds Sutherland (US) LLP - Houston Office ; Eversheds Sutherland (US) LLP - New York Office ; Eversheds Sutherland (US) LLP - Atlanta Office
- Legislative Update. On April 20, the U.S. Senate passed broad legislation that covers many different aspects of the energy and environmental sectors, including changes to streamline the approval process for the export of natural gas from the United States. The bill is the most comprehensive statement on energy policy since the Energy Independence and Security Act was signed into law in late 2007. The Senate’s bill, known as the Energy Policy Modernization Act, or S.2012, is expected to go to a conference committee so that members of Congress may resolve differences between that bill and a bill passed by the House of Representatives late last year, known as the North American Energy Security and Infrastructure Act of 2015, or HR.8.
Effect on Natural Gas Authorizations. Both the Senate and House bills do not propose any changes to the standard of review; they simply propose to accelerate the existing timeline for issuing authorizations to export natural gas. The Department of Energy’s Office of Fossil Energy (DOE/FE) is responsible for authorizing exports of natural gas, whether the gas flows through a pipeline or is compressed natural gas (CNG) or liquefied natural gas (LNG) for export. In August 2014, DOE/FE finalized new procedures that said it would only act on applications seeking authorization to export natural gas to non-Free Trade Agreement (non-FTA) nations 30 days after completion of an environmental review. However, DOE/FE did not give itself a deadline to issue a final decision.
Congress is proposing to change that. For applicants that need approval of their export facilities from the Federal Energy Regulatory Commission (FERC) or the United States Maritime Administration (MARAD), the Senate bill would require DOE to issue a final decision no later than 45 days after completion of environmental review; the House bill would require DOE to issue a final decision in 30 days. The accelerated timeline—and DOE/FE’s revised procedures—reflect frustration over the amount of time that DOE/FE has taken, historically, to issue final decisions on an application to export natural gas to non-FTA nations. However, the compressed timeline may create a problem for DOE/FE because 30 or 45 days from the date of completion of an environmental review will not give DOE/FE sufficient time to complete its review.
Also, both the Senate and House bills would require applicants to report the names of the countries to which the exported LNG is delivered. It is not clear whether this requirement would extend to existing authorization holders or only to new applicants.
Why It Matters. Regulatory delay is not in the best interest of the energy industry, but the proposed changes will not significantly affect commercial decisions to develop natural gas exports in the short term. While necessary for export, an authorization from DOE/FE is not the most important factor facing U.S.-based developers. The broad application of technologies has permitted the economic recovery of natural gas from shale formations and, in less than 10 years, has changed the United States from a net importer of natural gas to a net exporter. With a surplus of domestically produced natural gas, commercial developers have sought to capitalize on the export of natural gas to overseas markets. They requested export authorizations from DOE/FE to offer assurance to potential offtakers for LNG and, to a lesser extent, CNG export facilities. Developers often ask for approvals seven years or more before a planned in-service date of a facility.
Market changes to the global LNG market over the past 18 months are far more significant to commercial developers. A rapid ramp-up of global liquefaction capacity—primarily in Australia—combined with a softening of demand in the Japanese, Chinese, South Korean and European markets, has resulted in a sharp drop in the price difference between U.S.-produced natural gas (despite its low price) and landed LNG on the global market. Low spot LNG prices—and not delays by DOE/FE in issuing a final decision on an export authorization application—are the biggest hurdle for commercial developers seeking to execute long-term offtake agreements to financially support the construction of export facilities. Applicants already in the regulatory approval process at FERC and MARAD have slowed down the process, especially after FERC rejected one project upon finding that there was an insufficient market for the proposed project.
In the long term, clearing delays from a regulatory process favors a dynamic industry. Export facilities being constructed now, as well as those being proposed, may find economic opportunities if demand tightens from global economic recovery, efficiencies in transportation following the expansion of the Panama Canal, opening new markets in the Americas, India and Europe, or new applications for the use of CNG and LNG. When opportunities arise, developers need to know that unnecessary delays will not prevent them from acting.