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FERC & DOE LNG Primer

The black, the white, and the gray area

ConocoPhillips exports liquefied natural gas to Japan from its Kenai LNG facility.

ConocoPhillips exports liquefied natural gas to Japan from its Kenai LNG facility.

Photo courtesy of ConocoPhillips

Forget for a moment the challenges for an Alaska North Slope natural gas pipeline project—whether buyers in Japan or China will sign long-term contracts to buy the gas—whether an Alaska project can offer gas at competitive rates overseas—or maybe whether prices in North America will rebound.

Forget the other hurdles —avoiding construction cost overruns, permitting delays and litigation.

Cast aside the never-ending debate over oil and gas taxes in Alaska.

Assume all that is resolved in favor of building a multibillion-dollar, large-diameter, large-volume North Slope gas pipeline. What about federal approval for moving the gas (the pipeline and possibly a gas liquefaction plant) and federal approval for selling the gas?

Welcome to the Federal Energy Regulatory Commission and the U.S. Department of Energy.

First, let’s talk about getting the gas to customers. That means a pipeline and, if the customers are overseas, a liquefaction plant and terminal to load the liquefied natural gas aboard tankers for delivery across the ocean.

FERC will have jurisdiction over the liquefaction terminal. That is a matter of federal law. It was a bit ambiguous until Congress passed the Energy Policy Act of 2005, which settled the issue and gave FERC jurisdiction to license onshore LNG import and export facilities nationwide.

The law states that FERC “shall have the exclusive authority to approve or deny an application for the siting, construction, expansion or operation of an LNG terminal.” The law goes on to define an LNG terminal as “all natural gas facilities located onshore or in state waters that are used to receive, unload, load, store, transport, gasify, liquefy or process natural gas that is imported to the United States from a foreign country, exported to a foreign country from the United States, or transported in interstate commerce by waterborne vessel.”

That pretty much covers everything. The only thing outside FERC jurisdiction is the LNG tanker itself.

In its role under the law, FERC would take the lead on a terminal’s environmental impact statement, coordinate reviews by other federal agencies, set deadlines for environmental analysis, and maintain a consolidated record for the project application.

Although FERC would take the environmental-review lead, it would not regulate the LNG facility’s rates. That’s between the private parties operating the plant and paying for the services.

Step outside the LNG terminal’s perimeter, start walking the pipeline, and FERC jurisdiction is uncertain. The commission could assert jurisdiction over the pipeline or not, depending on several factors.

And FERC jurisdiction will remain uncertain until the commission has an application in hand, with project details.

 

Hypothetical Variables

If the pipeline moves natural gas across state lines, FERC is definitely in charge under the Natural Gas Act of 1938. But the pipeline itself doesn’t have to cross state lines to come under FERC jurisdiction. (It’s important to note that FERC’s authority over a pipeline would go beyond the environmental review, routing, construction and operation. It would extend to regulating the rates charged customers that use the pipeline to ensure that the rates, or tariffs, and the pipeline owner’s profit are fair.)

If the pipeline carries gas that moves into an interstate system, that’s good enough to bring in FERC oversight—such as an Alaska North Slope natural gas pipeline that runs into Canada and then connects with the North American pipeline grid. Or a pipeline that feeds a liquefaction plant at Nikiski or Valdez, where the gas is loaded aboard tankers for U.S. West Coast or even Hawaiian ports.

Those are no-doubt-about-it examples. But what about a pipeline that serves only in-state customers? Or a pipeline that serves in-state buyers and connects to an LNG plant for overseas shipments, without sending a single molecule of methane to another state? That’s one easy question and one hard question.

The easy one first: If a developer builds a pipeline that serves only Alaska customers, with no gas crossing state lines and no gas leaving the country for export, FERC would not have any jurisdiction over the pipeline. Another federal agency would take the lead on the environmental review, such as the Bureau of Land Management or Army Corps of Engineers. The builder also would need to obtain permits from federal regulatory agencies—such as the Fish and Wildlife Service—but FERC would have no role.

Now the hard question: The Energy Policy Act of 2005 allows FERC to assert jurisdiction over a pipeline feeding gas into an LNG export terminal—or not. The law does not specify a minimum volume of gas, or a percentage of total flow, or size of the pipe, or provide any specific, measurable benchmarks to determine FERC’s authority.

The decision, in my opinion, would come down to whether:

  • The pipeline in an integral part of the LNG project.
  • The pipeline and LNG terminal are built at the same time with some of the same owners.
  • The public’s interest would be served best by a single environmental review and decision rather than separate reviews and possibly conflicting decisions.
  • The project could serve interstate customers at some point in the future.
  • The combined project could affect U.S. energy markets and prices.

 

Personally, I expect FERC would choose to take jurisdiction over a large-diameter pipeline feeding into an LNG export plant. But that decision would be up to the staff and commissioners at the independent agency after they see the specifics of a project.

In addition to FERC and the usual environmental and regulatory permits and authorizations, an LNG project would need two federal approvals to ship North Slope gas to overseas customers. The Department of Energy and the president would each have to determine that Alaska gas exports would not hurt the public interest —such as by driving up domestic natural gas prices.

Because Alaska is not connected to the Lower 48 gas pipeline grid, it’s hard to argue that shipping North Slope gas to Asia would affect U.S. prices. However, Alaska gas exports could get caught up in the political debate simmering over Lower 48 exports. Several congressmen have objected to any U.S. exports, fearful that it could cause price increases at home if surplus gas production leaves the market.

But a lot of that political protest against exports stems from opposition to hydraulic fracturing for shale gas—not an issue for production from Prudhoe Bay, a conventional gas field and not a shale play, at this time.

Some electric utilities and large-volume gas customers, such as petrochemical companies, have complained about U.S. Gulf of Mexico export projects, fearful that supply and demand would rebalance in U.S. gas markets and they would have to pay more for their supply.

 

What Do We Know?

The Department of Energy has approved one export project—Cheniere Energy, at Sabine Pass, La.—but eight others are on hold while the department waits for a consultant’s report on the economic effects of U.S. LNG exports.

Export authority to countries that have a free-trade agreement with the United States is just about automatic—and sort of economically meaningless for project developers. The Department of Energy quickly says yes to all applicants for free-trade-nation sales.

Free-trade nations, however, are not big purchasers of LNG. The list includes Canada, Oman, Jordan, Bahrain, Australia and others. The United States does have a new free-trade agreement with South Korea, but that one market is not large enough on its own to underwrite financing for a multibillion-dollar LNG export project.

It’s permission to sell to the non-free trade nations of Japan, China and India that export terminal developers want, and that is being held up while the Energy Department awaits the economics report. Those are the sales contracts that a developer can turn into financing.

As for getting the liquefied gas to market, there are several hundred tankers in operation around the world and more under construction. Pay the bill and a tanker could be yours for delivering Alaska gas to overseas customers. But moving Alaska gas to a U.S. port could be a problem.

A provision known as the Jones Act—part of the Merchant Marine Act of 1920—requires use of U.S.-built, U.S.-owned, U.S.-registered and U.S.-crewed ships when moving commercial cargoes between U.S. ports. The act was named for Sen. Wesley Jones of Washington state, who wanted to protect the shipyards and ports of his state.

No U.S. shipyard has built an LNG tanker since the late 1970s, and those were subsidized by the federal government. Some industry estimates place the cost of a new U.S.-built LNG tanker at double the price tag from South Korean shipyards, the world leader in the trade.

In addition to building a new tanker, another option would be pushing for congressional action to grant a waiver for a specific tanker—such as a formerly U.S.-flagged tanker—and then putting together the commercial deal and regulatory approvals to reflag the vessel to operate between U.S. ports.

Not impossible, but not easy. U.S. shipyards and maritime unions are protective of their jobs. But it could be an option, assuming there is enough profitable work to keep the ship busy on U.S. deliveries. The laws of economics will always apply, even with a waiver from the laws of government.          

Larry Persily is Federal Coordinator for Alaska Natural Gas Transportation Projects. Persily, who was appointed by President Barack Obama in December 2009, served almost 10 years with the Alaska Department of Revenue, governor’s office and as a legislative aide on oil and gas issues before taking a turn at federal service. He previously worked as a newspaper reporter, editor and owner in Alaska for almost 25 years.

This article first appeared in the October 2012 print edition of Alaska Business Monthly magazine.

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