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DOE Releases LNG Export Study and Requests Public Comment


December 7, 2012

On December 5, 2012, the Department of Energy (DOE) issued the long-awaited second study on the economic impacts of exporting domestically-sourced liquefied natural gas (LNG). The study, which was prepared by NERA Economic Consulting (NERA) at the request of DOE, analyzed the impacts of LNG exports under a wide range of different assumptions about the level of exports, global market conditions, and domestic gas transportation and production costs.   Economic impacts were examined under a variety of domestic and global scenarios, including the 16 scenarios originally studied by the Energy Information Administration (EIA), the statistical and analytical agency within DOE, in a prior report on the subject released in January 2012.  NERA concluded that across all the scenarios studied, the US was projected to gain net economic benefits from allowing LNG exports.

DOE invited comments to be filed on the study within 45 days from the Federal Register notice date of the study, and reply comments to be filed 30 days after the close of the initial comment period.  DOE stated that all comments will be placed in the individual dockets of each of the 15 pending applications to export LNG to nations with which the US does not have a free trade agreements (FTA).  DOE will then review and act on each application on a case-by-case basis.   DOE also established a queue for its review of the pending applications based on the status of the LNG export project at the Federal Energy Regulatory Commission (FERC) and the order in which DOE received the export requests.   On December 7, 2012, DOE published the list showing the order in which it will begin processing the pending LNG export applications.  The list is located online, here.

BACKGROUND

Exports of natural gas, including LNG, must be authorized by DOE’s Office of Fossil Energy.  By statute, exports of LNG to FTA nations must be approved “without modification or delay”.  By contrast, before approving an application to export LNG to non-FTA nations, DOE must determine that the export is and will remain in the “public interest”.  DOE’s primary focus is upon the domestic need for the gas to be exported.   In May 2011, DOE conditionally authorized Sabine Pass Liquefaction, LLC (Sabine Pass) to export LNG to non-FTA nations.  The authorization was finalized in August 2012.  This remains the only long-term DOE authorization to export LNG from the lower 48 states to non-FTA nations.  In the Sabine Pass order, DOE determined that it had a continuing duty to protect the public interest, and announced that it would monitor gas supply/demand conditions in the United States and the world to ensure that the cumulative impacts of the exports authorized in the order and in future orders would not lead to a reduction in the supply of natural gas needed to meet essential domestic needs.  DOE also provided notice that it would take any action in the future, including amending or even revoking export authorizations, as appropriate or necessary to protect the public interest.

Following the Sabine Pass order, DOE announced that it would undertake a two-part study to assess the cumulative impacts of LNG exports.  The first part of the study was released by EIA in January 2012 and evaluated the potential impacts of natural gas exports on domestic gas supply, demand, and market prices under various scenarios of export growth rates.  DOE announced that the second part of the study would be undertaken by a private contractor and would evaluate the macroeconomic impact of the hypothetical scenarios examined in the first part of the study.  DOE stated that it would not render any final decisions on any pending non-FTA LNG export applications until the second part of the study was completed and subjected to a public comment process.  Click here for a summary of LNG export applications.

THE DECEMBER 2012 STUDY 

The second part of the study analyzed the macroeconomic impacts of LNG exports under 63 different scenarios, and includes a wide variety of different assumptions about export levels, global market conditions, and US gas production costs.  The analysis addressed the original scenarios for LNG exports analyzed by EIA in the January 2012 study, which reflected export levels between 6 Bcf/day and 12 Bcf/day, but also expands on the earlier work of the EIA by examining additional scenarios, including lower levels of exports and cases with no export constraints. The NERA study also examined market forces not considered in the original EIA study, such as whether the quantities of LNG exports could be sold at high enough world prices to support the calculated domestic prices. NERA found that in many cases, the world natural gas market would not accept the full amount of exports assumed in the EIA scenarios at export prices high enough to cover the US wellhead domestic prices calculated by EIA.

In all of the scenarios considered, the NERA study concluded that the US was projected to gain net economic benefits from allowing exports.  In fact, the study found that for every one of the market scenarios studied, net economic benefits increased as the level of LNG exports increased.

Among other key findings of the study are: 

  • Domestic natural gas prices will not rise to world prices, and will “not be linked to oil prices in any of the cases examined.”
  • Even “with exports reaching levels greater than 12 Bcf/d and associated higher prices than in the constrained cases, there were net economic benefits from allowing unlimited exports in all cases.”
  • Natural gas price changes attributable to LNG exports “remain in a relatively narrow range across the entire range of scenarios.”
  • Although LNG exports “raise energy costs, and in the process, depress both real wages and return on capital in all other industries”, “LNG exports have net economic benefits in spite of higher natural gas prices.”
  • While LNG exports produce net economic benefits for the country, “the electricity sector, energy-intensive sector, and natural gas dependent goods and service producers will all be impacted by price rises.”

DOE REVIEW OF LNG EXPORT APPLICATIONS

In a press release issued along with the NERA study, DOE described how it would proceed to evaluate the pending and any subsequent applications to export LNG to non-FTA countries. DOE indicated that it would not take any action on the applications until it had received public comments on the study.  DOE also stated that it would place all comments in the administrative record in each of the 15 currently-pending export application dockets, and would then act on each application on a case by case basis.

Importantly, DOE established a queue which will determine the order in which DOE will review and act on each of the applications.  The first criteria DOE will use is the status of the related applications at the Federal Energy Regulatory Commission (FERC) for approval to site, construct, and operate the export liquefaction facilities.  DOE will first consider applications for which applicants have begun the FERC pre-filing process as of December 5, 2012. DOE will generally evaluate this group of export applications in the order they were received at DOE.  Following the disposition of those applications that have pre-filed at FERC, DOE will act on the rest of the remaining export applications and any subsequent applications in the order received by DOE.

IMPLICATIONS

The release of the NERA study is a positive development for the future of LNG exports.  The principal conclusion of the study – that across all of the scenarios considered the US would gain net economic benefits from allowing LNG exports – decreases the likelihood that DOE will impose restrictions on the amount of LNG it will authorize for export to non-FTA countries.  Since the Sabine Pass decision, the industry has been concerned that DOE might impose some sort of limit, such as a volumetric cap, on the amount of LNG that could be exported.

The results of the study itself do not mean that DOE will approve all of the pending export applications or that all of the LNG export projects approved by DOE and FERC will be constructed and placed in operation.  DOE will decide each application on a case-by-case basis, and comments – both pro and con – on the study will be placed in the administrative record of each application.  Thus, opponents of each individual project will have the opportunity to criticize the study and perhaps present studies of their own to counter the favorable conclusions.  Opponents also have the right to seek judicial review of a DOE decision authorizing exports.

Interest groups, like producers of chemicals and fertilizers, have expressed concerns that increased LNG exports will raise domestic gas prices and undermine competitive advantage.  A number of environmental groups, like the Sierra Club, are also concerned that increased LNG exports will mean increased drilling activities with significant adverse environmental impacts that must be considered by DOE, as well as FERC, before approving the exports or the facilities needed for the exports to take place.  While the second study notes that technological and regulatory developments could affect the amount and pace of gas development and hence the amount of LNG that can be exported, it does not address in any detail these environmental concerns.

These interest groups can be expected to maintain their opposition to exports.

In addition, some members of Congress have expressed growing concerns about the economic consequences of LNG exports.  For example, Senator Ron Wyden, who will become the Chairman of the Senate Energy and Natural Resources Committee when the next Congress convenes in January 2013, recently sent a letter to DOE Secretary Chu, requesting information on the criteria DOE will use to make the required public interest determinations for pending and future export applications, what factors DOE will consider in revoking existing export authority, and how DOE will promulgate such criteria.[1]  In light of the possibility of increased LNG exports, Senator Wyden has also stated that it might be necessary for Congress to reconsider existing export policies, including the automatic approval of exports to FTA countries under current law.[2]  The study may address some of these concerns, but US export policies will be the subject of congressional action in the next Congress.[3]

The completion of the second part of the LNG export impact study is a step forward in the regulatory process, but hurdles remain for LNG terminal developers.  We anticipate that there will be Congressional hearings on the study, as well as DOE’s review process.  We expect continued policy debate about the merits of exports from economic, energy security, trade, and environmental perspectives.  Van Ness Feldman is closely monitoring the policy and political dynamics of these issues, and provides regulatory counseling on the DOE and FERC process.



[1] October 23, 2012 Letter form Senator Ron Wyden to Secretary of Energy Chu.

[2] “Wyden: US Should Reconsider Rubber-Stamping Exports As Part of A 21st Century Energy Policy”, November 2, 2012 Press Release.

[3] Senator Wyden issued a “Statement on Energy Department Natural Gas Export Study” on December 5, 2012, stating that he will examine it closely, but noted that the study appears to confirm that LNG exports will raise domestic gas prices. He noted that, regardless of the conclusions of the study, he will continue to call on DOE to ensure that exports do not harm US consumers and manufacturers, and do not “squeeze out” new, natural gas-related investments that have been proposed in the US chemical, industrial, and electric generation sectors.

 

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