There are few, if any, looming decisions that could have a more profound impact on US energy policy than the Department of Energy’s ruling on liquefied natural gas exports.
The decision, which sources expect will be announced this summer, could alter US relations with Japan, diminish Gazprom’s share of the European market and cause a dramatic swing in US gas prices.
But for all the potential consequences and the growing number of theories over the outcome, relatively nothing is known about how the DOE will ultimately make its decision.
During a little noticed House subcommittee hearing last month, Christopher Smith, DOE’s acting assistant secretary for fossil energy, said that pending LNG-export applications based in part on the “cumulative impact” that those exports would have on the gas markets.
For example, global demand for US LNG is expected to dip if the next two applications in DOE’s queue — Trunkline LNG’s project in Lake Charles, Louisiana, and Freeport LNG’s project in Freeport, Texas — are approved and the companies actually export the 3.4 billion cubic feet of gas per day they have collectively proposed.
Theoretically, the impact of a new LNG export facility will be different depending on the status of export facilities which have been approved and built before it. This means that the cumulative impact will likely change every time a new facility is approved.
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But how DOE will measure that cumulative impact remains a mystery. For example, if the DOE waits until certain facilities are constructed and begin shipping LNG to measure the impact, the next facility may not be approved until President Barack Obama is out of office.
Does this mean that it could be a decade or more before some LNG facilities in the back of DOE’s queue are even considered? Sources claim it’s a possibility.
During last month’s hearing, Representative James Lankford, an Oklahoma Republican, pressed DOE’s Smith over whether the Obama administration had a “magic number” in mind for LNG exports. But Smith gave no insight on such a number, or even if DOE was attempting to calculate one.
Smith outlined six criteria that DOE is considering as part of its public interest review. They include domestic need for the gas proposed for export; supply adequacy; US energy security; impact on the economy, including domestic gas prices; international considerations; and environmental considerations.
“These non-statutory criteria have been developed over several decades and supplemented and refined by subsequent agency adjudication,” Smith said. “It is important to emphasize, however, that these criteria are not exclusive. Other issues raised by commenters and/or interveners or DOE that are relevant to a proceeding may be considered as well.”
Smith said that the review process is based on the order in which the companies filed their applications, as well as which firms have “pre-filed” with the Federal Energy Regulatory Commission. Under US law, while DOE must approve LNG export facilities on policy grounds, FERC has jurisdiction to approve the safety and the operations of the export terminals themselves.
But Smith said it would be ill-advised to judge applications according to other criteria, such as trying to gauge how “serious” a company is about actually building a proposed project, or the likelihood that a firm will security its needed financing.
“There are any number of algorithms one could try to come up with and say, ‘Well, this company’s more serious than that one,’ or ‘They’ve got a better project than that one,’ ” Smith said. “We opted not to do that. We said we’re not going to try and judge the seriousness of companies or their business model or their probability of financing, because that’s not our job.”
Paul Cicio of Industrial Energy Consumers of America, a group that believes that approving LNG exports without limits will cause US gas prices to skyrocket, called on DOE to make its LNG application process more transparent. He also urged the department to stagger the approval of any export applications in order to prevent domestic gas prices from spiking. Cicio warned that if DOE approves all of the 16 or so pending export applications at once, the impact on the overall US economy could be devastating.
“If export terminals are approved over a longer period of time, the domestic market place may have time to adjust, so as to avoid a price spike for domestic consumers,” Cicio said in his testimony at the hearing. “On the other hand, approval of several terminals and shipments starting all at the same time could shock the domestic market, and prices could spike for all US consumers. Under this scenario, prices would increase right away in anticipation of the future demand.”
Under current law, DOE must quickly approve applications to export LNG to countries that have formal free-trade agreements with the US. But DOE can reject or impose limits on proposed exports to non-FTA nations, such as gas-hungry Japan, if it believes they are not in the US’ public interest.
To date, DOE has approved just one non-FTA LNG export project: Cheniere Energy’s Sabine Pass facility in Louisiana, which aims to export a total of 2.2 Bcf/d. DOE has created a process for considering the next 16 non-FTA applications in its queue.