Could any limits on the US export of LNG violate the law?

The battle over expanding US exports of liquefied natural gas has long centered on a debate over supply and demand fundamentals: whether exports would cause domestic prices to skyrocket; whether limits would quell US production; or whether the industry may face flat demand without new markets.

But the debate ventured into some new ground recently when the US Chamber of Commerce began ramping up its argument that limiting LNG exports may violate the trade law.

“Export restraints not only violate the letter of US trade law and international trade agreements but also their spirit,” Karen Harbert, president and CEO of the Chamber’s Institute for 21st Century Energy, wrote in a January 24 letter to the Department of Energy. “In fact, export restraints implemented by the United States would likely be emulated by other countries and could easily limit US access to key natural resources that are not readily available from domestic sources, undermining US competitiveness.”

The letter was one of hundreds the department received last month on a study that the DOE is expected to rely on in determining whether to approve large-scale exports to countries that doe not have free trade agreements with the US. The study by New York-based NERA Economic Consulting, found that expanded LNG exports would be a boon to the US economy despite moderately raising domestic gas prices.

The bulk of letters received focused on price or environmental impact, but the Chamber’s letter was apparently the only one that delved into the trade law ramifications.

The chamber argues that barring any LNG exports would violate the free-trade commitments that the US has made in both the US Constitution and as a member  of the Geneva-based World Trade Organization.

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In a recent interview with Platts, Christopher Guith, a chamber vice president, said any LNG export restrictions would be hypocritical for an Obama administration that already has filed WTO complaints against China for limiting sales of rare earth metals and other raw materials that are used in energy applications.

“We’ve already brought an international trade complaint against China for doing precisely what is happening right now with LNG, which is picking one country over another,” said  Guith.

Guith said allowing DOE to exercise that kind of “discretion” between countries that have FTAs with the US, and those that don’t, constitutes “a violation of WTO obligations.”

The US can not limit exports of LNG — or anything — to countries with FTAs. Among the nations that have FTAs with the US, and LNG import facilities, are Chile, Singapore (LNG plant coming online soon), and South Korea.

“We can’t go around the world lecturing and encouraging other countries to open up their markets and then turn around and close ours on a raw material that we have boatloads of,” Bruce Josten, the chamber’s executive vice president for government affairs , said during a press conference last month.

Cheniere Energy, a Houston-based gas company that wants to export LNG from facilities in Cameron Parish, Louisiana and Corpus Christi, Texas, made this argument in the LNG-export application that it filed with DOE in 2010. To date, Cheniere’s Sabine Pass terminal in Louisiana is the only US facility that DOE has cleared to export LNG to all countries, including those that do not have formal FTAs with the US, such as gas-hungry Japan.

Alan Dunn, a Washington-based trade attorney with the law firm Stewart and Stewart, helped Cheniere make the WTO-related argument in its application. In an interview, Dunn said DOE’s current restrictions on LNG exports to non-FTA countries are clearly inconsistent with obligations the US agreed to under the WTO and the General Agreement on Tariffs and Trade, or GATT.

According to Dunn, those agreements require the US to freely export almost all non-military goods, including natural gas. DOE’s approach to LNG exports may also run afoul of bilateral investment treaties that the US has with specific trading partners, Dunn said.

Under current US law, DOE must quickly approve applications to export LNG to countries that have formal free-trade agreements with the US. But the agency can restrict or entirely block would-be LNG exports to non-FTA countries if it determines they are not in the public interest.

Last week, Senator John Barrasso, a Wyoming Republican, along with eight Republicans and two Democrats, introduced a bill allowing DOE to quickly approve LNG exports to Japan and NATO nations.

According to Dunn, the restrictions that the Obama administration has imposed on LNG exports are not unlike the limits that China has instituted on the export some of its raw materials, limits that that US and other counties have challenged at the WTO.

The US,  European Union and Mexico all have brought successful WTO challenges against China’s export restrictions on various raw materials, including bauxite and zinc. The US, EU and Japan have also launched separate WTO cases over China’s export restrictions on various forms of rare earth metals, as well as tungsten and molybdenum.

GATT does allow countries to impose export restraints in order to conserve an “exhaustible” natural resource, but Guith said the Obama administration cannot claim that exemption in the case of LNG exports, since it is routinely approving exports to FTA countries.

“You can’t say, ‘Well, we want to conserve so we’re only going to export to our friends, but not to other people,’ ” he said.

Senator Ron Wyden, an Oregon Democrat and the incoming chairman of the Senate Energy and Natural Resources Committee, has argued  that expanded LNG exports could cause domestic gas prices to soar and imperil the already-struggling manufacturing sector.

Through a spokesman, Wyden dismissed the chamber’s argument that the US would be running afoul of its WTO commitments by limiting LNG exports.

“The reality is, there currently is no policy for how the US will approve or limit LNG exports,” said Wyden spokesman Keith Chu. “This effort by the chamber and others to litigate international treaties over policies that don’t exist is clearly a ‘straw man.’ ”

Chu noted that Congress set forth conditions for exporting gas in the Natural Gas Act of 1938, which was later amended to give DOE’s Office of Fossil Energy the authority—and the discretion—to approve or deny LNG exports to non-FTA countries. Therefore, US gas exports “have been conditioned upon government approval since before GATT was signed, and long before the WTO was created,” Chu said.

“To suggest that the government’s disapproval of an application for a gas export would run afoul of WTO rules would be to suggest that US trade negotiators have sought, and Congress approved, trade commitments that are inconsistent with 75 years of domestic law,” he said. “That’s not what trade negotiators do, and it is not what Congress approves.”

Nevertheless, the trade-related argument for LNG exports being pushed by the chamber and others remains largely a theoretical one at this point, since no WTO-member country has claimed their trade rights have been impaired by US restrictions. Indeed, no countries have even requested consultations on the matter, the first step in pursuing a WTO case.

Guith speculated that Russia and China would be the only countries with the “wherewithal and temerity” to pursue an LNG-related case in the WTO. But he said that that would make little sense for Russia, whose own energy industry would be negatively impacted by an expansion of US LNG exports.

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