Time to Ease Unnecessary LNG Export Burdens

Time to Ease Unnecessary LNG Export Burdens
Samsung Heavy Industries LNG Carrier (Photo: Business Wire)
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The U.S. regulatory system for Liquefied Natural Gas (LNG) exports is robust and meticulous.

But the pandemic-driven fall in U.S. energy demand should spur the federal government to ease the natural gas industry’s unnecessary export burdens. The U.S. Department of Energy (DOE) is looking to do just that with a proposed rule change that will eliminate unnecessary red tape and increase exports while continuing to protect the environment. 

LNG shipments are critical to bringing American-produced energy to a global marketplace. LNG takes up 1/600 the volume of natural gas, so liquefying the gas allows a single LNG ship to carry large amounts of natural gas. ExxonMobil boasts that each ship full of its LNG can power 70,000 homes for an entire year. 

“A Tangled Web of Regulatory Processes”

In 2016, the D.C. Circuit Court described LNG export authorization as “a tangled web of regulatory processes.” Both DOE and the Federal Energy Regulatory Commission (FERC) must approve separate elements of export criteria, and companies face opposition from environmental groups throughout the proceedings. DOE has the final say on the exports themselves, while FERC approves or denies construction of export terminals.

The Natural Gas Act allows exporters to sidestep much of this process if the exports are going to countries that have free trade agreements with the United States. LNG exports to free trade countries earn prompt approval from DOE and FERC. Because of this, most of the United States’ diplomatic and economic partners in North America, Central America and the Caribbean, are able to quickly access and partner with U.S. natural gas companies.

The economic and environmental benefits of natural gas are significant. In the Caribbean, for example, increased use of natural gas will replace oil-based and other high-polluting electricity sources which are expensive and widespread.

But for non-free trade deals to pass DOE and FERC muster, the Natural Gas Act requires that exports and LNG terminals be in concert with the “public interest.” The agencies will evaluate both the economic and environmental effects of the project in accordance with this provision.

For example, the proposed exports cannot cause a price spike in electricity for domestic consumers. But economics has not been much of an authorization factor in recent years as natural gas prices have continued to fall. In 2017, increasing U.S. production amid the fracking boom outstripped American demand for natural gas. With hundreds of billions of extra cubic meters of natural gas per year, there is no longer any concern that exports will reduce domestic supply or raise domestic prices. 

Strong Environmental Protection

When it comes to the environment, DOE and FERC must follow the National Environmental Policy Act (NEPA) and assess the potential ecological impacts of the project. NEPA requires an environmental assessment, and if the exports are found to have a “significant impact” on the environment, a much more thorough Environmental Impact Statement must be prepared. Preparing an impact statement can lead to significant delays in an export project.

Environmental groups commonly seek to expand the NEPA scope of review and burden LNG exporters with an almost-unending regulatory process.

In a critical court case, the Sierra Club challenged FERC’s approval of Freeport LNG’s permit for terminal construction in 2016, arguing FERC violated NEPA by not looking at “indirect environmental effects” of the terminal. Rising LNG exports would “induce” more gas production, Sierra Club claimed, and lead to more adverse environmental impacts. The environmental group also charged that FERC did not look at the “cumulative” effects of the Freeport LNG terminal combined with all other approved terminals nationwide.

The D.C. Circuit rejected both claims, determining that such a review “draws the NEPA circle too wide for” FERC. The court held that there must be “a reasonably close causal relationship between the environmental effect and the alleged cause,” similar to the “doctrine of proximate cause from tort law.”

Even with the court’s limitations on NEPA reviews, it can take years for a project to commence. DOE and FERC evaluations, ensuring compliance with the Natural Gas Act, and the still-lengthy NEPA process can delay export efforts.

Proposed Rule Change on NEPA Implementing Procedures

DOE’s proposed rule change simplifies approval for non-free trade LNG exports.

It would limit DOE’s NEPA analysis in non-free trade LNG authorizations to environmental impacts only “at or after the point of export.” Section 3 of the Natural Gas Act only pertains to DOE’s ability to authorize exports, so the new rule would limit any NEPA reviews under this section to the actual act of shipping LNG.

The analysis would exclude upstream or downstream impacts such as effects from gas production or foreign consumption, since. This is appropriate as Section 3 does not give DOE authority to regulate such operations. The review would only examine maritime transport of LNG, which DOE says “normally does not pose the potential for significant environmental impacts.”

DOE’s interpretation appropriately narrows the scope of the department’s environmental evaluation. An expanded definition of “export” could lead to a never-ending bureaucratic examination of the supposed impacts of LNG shipments. Instead, the proposed change tracks closely with the D.C. Circuit’s 2016 proximate cause standard, which requires a clear, foreseeable cause-and-effect relationship before DOE reviews the issue.

This rule change will offer some needed relief to the natural gas sector. COVID-19 has led to collapsing energy demand, and it has forced many American gas producers out of business. Easing companies’ export regulatory requirements can help them better access global markets, especially in this time of economic distress. The process is clearly robust enough, with DOE and FERC both evaluating firms’ proposals.

With all the difficulties facing this important American industry, DOE is right to make the regulatory process more efficient.

 

John Cicchitti is a program manager at the Lexington Institute and a student at George Mason University’s Antonin Scalia Law School.



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