Five theories on US LNG exports (and why they’re probably wrong)

In May, a high-profile energy analyst and former high-ranking Obama administration official told a standing-room-only shale gas conference that the Department of Energy wouldn’t be ruling on any pending applications to export liquefied natural gas for at least a month, probably longer.

There’s no way the DOE would give the go-ahead to an application before Ernest Moniz was sworn in as the agency’s new head and a review of applications would take weeks, the analyst told the conference with a degree of confidence that was rare in the ongoing gas export debate.

Three days later and before Moniz was sworn in, the DOE gave conditional approval for the Freeport LNG project to export up to 1.4 Bcf/d over 20 years to countries that do not have free trade agreements with the US.

The analyst was, of course, wrong. But anybody who said they knew the DOE was going to announce the approval of the Freeport project in mid-May was either lying or employed by DOE.

In fact, DOE’s approval of the Lake Charles LNG project earlier this month, its third such approval, again took most by surprise.

DOE officials have remained tight-lipped about when the next approvals may arrive, but that has not stopped the speculation. Sources have said they wouldn’t be surprised to see a half dozen or more approvals before the end of the year. Others have said it’s not outside the realm of possibility that there will be only one more approval in that time.

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In truth, no one may know for sure, but with rumors rampant, let’s take a look at five theories we’re hearing and look at why they may be wrong.

1. The Department of Energy is going to reject export projects due to environmental opposition.
One rumor that’s been making the rounds for the past few months is that Senator Ron Wyden, an Oregon Democrat and the chairman of the Energy and Natural Resources Committee, is opposing LNG export approvals because he does not want two proposed export facilities built in his pristine home state. The rumor is likely wrong for a couple reasons. First, Wyden’s views on LNG exports are far more nuanced than that. He’s not necessarily opposed to LNG exports, he just doesn’t want to grant exporters unfettered access to the world market, potentially driving up domestic prices and hurting the manufacturing sector, without a thorough review by DOE. Secondly, and most importantly, nearly everyone familiar with the LNG issue believes that DOE will not reject any application, unless the applicant is involved in a criminal conspiracy, the US energy market collapses or some equally unlikely scenario unfolds. While it’s still unclear when DOE might approve one of the 19 pending applications to ship LNG to countries without FTAs with the US, it’s almost guarantee that each will be approved at some point. Whether a project is approved by the Federal Energy Regulatory Commission? That’s another story.

2. The Department of Energy is going to revamp its export approval process.
By law, the DOE must approve applications to ship LNG to countries that have free trade agreements with the US, but may reject or modify applications to ship to non-FTA countries if the agency finds they are not in the public interest. This process is relatively uncontroversial, but the order the DOE has set up to consider these applications has drawn a lot of industry criticism, particularly from companies like ExxonMobil who have stakes in projects later on in the queue of 19 applications being considered. This week, Charles Ebinger, director of the Energy Security Initiative at Brookings, pitched an idea to revamp the process by ordering projects based on whether they’ve completed a pre-filing process with FERC and if they have some supply contracts in place. But the DOE’s order, which is based on when an application was filed and whether it has initiated pre-filing with FERC, appears unlikely to change. Moniz, for example, has said he has no interest in altering the process. In addition, academics and analysts have said, that if the agency were to alter the order to prevent a court challenge from an applicant stuck in the back end of the queue they would only open up themselves to a similar court challenge from an applicant currently near the front of the queue who may be bumped back when the order shifts.

3. The Obama administration will set a cap on LNG exports.
The current thinking among market analysts is that the world market can support about 6 to 8 Bcf/d of US gas, a relatively thin margin of opportunity for applicants who have proposed exporting a rough total of 30 Bcf/d to non-FTA markets. This has fueled speculation that the Obama administration could cap approvals in the 6-8 Bcf/d range in order to keep US gas from being sent out into global markets with limited demand. But Moniz has rejected the idea of a volumetric cap and it seems unlikely that an administration would freeze LNG projects which could take several years to build based on estimates of a world market which changes dramatically by the day.

4. New free trade agreements will make any pending LNG export moot.
Outside of South Korea, the countries seen as most economically attractive to potential US gas exporters do not have FTAs with the US. This makes exporting to Japan, for example, subject to this separate DOE approval process and in a state of arrested development. But, some fervent pro-trade proponents have argued, two sweeping free trade agreements currently under negotiation could make this approval process moot. Rather than needing DOE approval, exports to Japan or the UK, would fall under the Trans Pacific Partnership with Asia and the Trans-Atlantic Trade and Investment Partnership with Europe. This view, however, takes an extremely optimistic, even unrealistic view of international trade agreements. Take the Colombia FTA with the US. Formal negotiations began in May 2004, but the trade pact did not go into effect until May 2012. The North American Free Trade Agreement among Canada, the US and Mexico? That also took eight years. While it remains unclear when the DOE will approve the pending LNG export applications it’s probably a safe bet that it will take place before either trade agreement currently under talks enters into force.

5. DOE is going to approve a couple more projects and then take a pause.
Secretary Moniz has indicated that DOE will approve a couple more applications before the end of this year, but has not said anything about what happens in 2014. A prevailing theory is that the DOE will wait until the release of the Energy Information Administration’s annual energy outlook at the end of the year and then take a “pause” on approvals as it weighs this fresh data. Many sources on both sides of the issue say there’s a pretty high probability of this pause taking place, although it remains unclear how long it might last. For his part, Moniz has said he’s not looking for any new data or reports on LNG exports as the agency goes forward, which may indicate that report will have little if any influence on future application rulings. Of course, it all depends on what the report says. A dramatic market shift could shift the DOE’s plans for LNG markets.

You never know.

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  1. John Kingston at August 30, 2013 6:21 pm

    Government regulations always tend to change markets in unintended ways. So Brian’s points are well-taken about the “Singapore loophole,” or possibly, the “South Korea loophole.” But what wouldn’t then violate any regulations is that South Korea, Singapore and Chile end up taking a disproportionate amount of US LNG exports if the licenses to non-FTA countries dry up. And then, of course, the supplies they would have taken in an otherwise unregulated market, like from Australia, get backed out and shipped elsewhere. It adds to inefficiency, but you could see something like that happening.

  2. Brian Scheid at August 30, 2013 10:09 am

    To build on this a bit further, if an exporter were shipping to a non-FTA market without DOE approval and got caught the DOE could revoke the export license, a pretty severe consequence considering the billions of dollars that would already be spent before the first shipment leaves US shores. There would probably be civil and criminal fines too, so it would be a colossally expensive mistake. Secondly, the DOE would have discretion to revoke a license at any time and using Singapore as a simple transfer of title before shipping that LNG to a non-FTA market would likely violate the license.

  3. John Kingston at August 30, 2013 9:26 am

    But if a US company specifically sells to a non-FTA country, and it is discovered, that seller can face hefty fines. But yes, obviously, you can imagine a situation where a cargo of LNG is exported to a place like Singapore, a Singaporean buyer takes title, immediately passes title to a buyer in a non-FTA country, and the cargo heads out to its new home. One thing I wonder: would the amount of this that can be done be limited by the LNG plant’s capacity? I would assume not. Title would just need to change hands in Singaporean waters. Maybe the people in Washington approving the non-FTA exports realize the futility of trying to slow it.

  4. William Powell at August 30, 2013 5:12 am

    How enforceable is the prohibition on exports to non-FTA countries anyway? The terminal is the exporter; the buyer may take the cargo to wherever he wants. The example above, of Singaporean traders selling on LNG from its (modified) storage tanks, exposes the weakness. Once the LNG has left US shores, it can end up anywhere.

  5. Graeme Bethune at August 23, 2013 5:03 pm

    Thanks for an excellent analysis Brian and John, that’s a very relevant point about Singapore, which is keen to establish itself as an LNG trading hub. Having an FTA with the US gives it tremendous flexibility to import from the US and then to on-sell to any country.

  6. Larry LNG at August 23, 2013 2:21 pm

    Once the TPP is approved, there will be additional export options into Asia.

  7. John Kingston at August 23, 2013 6:45 am

    Brian, one other possible FTA LNG importer would be Singapore. It is supposed to open its LNG terminal either by the end of this year or sometime early next year. I did an informal count of countries that have FTA deals with the US and are LNG importers, and South Korea is by far the biggest. Panama has plans to import LNG, and Chile imports LNG; both those countries have FTAs with the US. But the list of countries with both is not long.


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