Department of Energy Approves Freeport Application to Export LNG to Non-Free Trade Agreement Countries

After a nearly two-year freeze on processing applications to export liquefied natural gas ("LNG") to countries that do not have a free trade agreement ("FTA") with the United States, on May 17, 2013, the United States Department of Energy ("DOE") announced that it had conditionally authorized Freeport LNG Expansion, L.P. and FLNG Liquefaction, LLC (together, "Freeport") to export domestically produced LNG from the Freeport LNG terminal on Quintana Island, Texas, to non-FTA countries. Subject to environmental review and final regulatory approval, the terminal will be authorized to export up to 1.4 billion cubic feet of natural gas per day ("Bcf/d") for 20 years. This approval marks only the second time that the DOE has granted authorization to export LNG to non-FTA countries; the first occurred in May 2011, when Cheniere Energy's Sabine Pass LNG Terminal in Cameron Parish, Louisiana, received authorization to export up to 2.2 Bcf/d to non-FTA countries.

Natural gas production in the United States has boomed in recent years, largely fueled by the rapid growth in shale gas output. The U.S. Energy Information Administration forecasts a record production rate of 69.3 Bcf/d in 2013, a 12.9 percent increase from 61.4 Bcf/d in 2010. Contemporaneous with the increase in natural gas production, global demand for natural gas is rising. The U.S. Energy Information Agency projects that global natural gas demand will increase from 298 Bcf/d in 2007 to 342 Bcf/d in 2015.

Further, according to the U.S. Federal Energy Regulatory Commission, natural gas prices outside of the United States are significantly higher than inside the United States; LNG currently costs around $4 per MMBtu in the United States, $10 per MMBtu in Europe, and $15 per MMBtu in Asia and South America. These developments have increased the United States' energy independence and spurred economic development and job creation, but they have also led to debate surrounding the issue of LNG exports, in particular with respect to exports to non-FTA countries.

Under the Natural Gas Act of 1938, as amended (15 U.S.C. §717) ("Natural Gas Act"), LNG exports to FTA countries are viewed as presumptively "in the national interest," and therefore the approval process for such exports is generally expedited. For LNG exports to non-FTA countries, however, the Natural Gas Act directs the DOE, after extensive and thorough review, to grant such authorizations unless it is determined that the proposed exports "will not be consistent with the public interest." In reviewing these applications, the DOE considers, among other factors, the potential economic, security, and environmental consequences.

Following the approval of Cheniere Energy's application to export LNG to non-FTA countries in May 2011, a fierce debate ensued, causing the DOE to delay approving additional applications while it studied the potential impact of LNG exports on the United States' economy. A report commissioned by the DOE released in December 2012 suggested that allowing greater gas exports would lead to greater economic benefits. In the meantime, Congress, the natural gas industry, lobbyists, activists, and other stakeholders have debated the merits and potential consequences of exporting LNG to non-FTA countries. While critics argue that LNG exports could drive up domestic gas prices, lead to reduced international security, and cause environmental disruption, proponents emphasize the significant economic benefits of LNG exports.

The authorization granted to Freeport is a significant milestone for proponents of increased LNG exports to non-FTA countries; however, the ongoing debate will continue to have an impact on the 19 pending applications awaiting a decision from the DOE. In granting this approval, the DOE has stressed that it will continue to review each application on a case-by-case basis in the order in which they were filed. Nonetheless, the Freeport decision, along with public remarks by DOE representatives, suggests that additional authorizations to export LNG to non-FTA countries could soon be on the horizon.

A link to the authorization for Freeport to export LNG to non-FTA countries can be found here.

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Omar Samji, an associate in the Houston Office, assisted in the preparation of this Alert.

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