Natural Gas: Federal Approval Process for Liquefied Natural Gas Exports
Released: 2014-10-01T00:00:00

Letter

Background

This section describes the factors affecting recent LNG activities in the United States, the liquefaction process, DOE’s responsibilities for authorizing export applications, FERC’s responsibilities for authorizing export facilities, and positions of those supporting or opposing the export of LNG.

Factors Affecting Recent LNG Activities in the United States

According to the Congressional Research Service, in the early 2000s, natural gas production in the United States was declining as energy demand was increasing and, as recently as the mid-to-late 2000s the United States was projected to be a growing natural gas importer. In addition to four onshore import terminals that were already operational, natural gas companies built five LNG onshore import facilities in the latter half of the 2000s to meet the expected need for natural gas imports. However, technology enhancements improved the extraction of natural gas from shale formations and resulted in a dramatic increase in domestic natural gas production. These technology enhancements allow companies to extract natural gas from shale formations that were previously considered to be inaccessible because traditional techniques did not yield sufficient amounts for economically viable production. According to Energy Information Administration (EIA) data, between 2007 and 2013, domestic natural gas withdrawals increased by 22 percent, driven primarily by increased withdrawals from shale formations. According to EIA, increases in natural gas supplies generally cause prices to drop. Specifically, between 2007 and 2013, the price of natural gas in the United States decreased by nearly 50 percent. As the price of natural gas in the United States declined, prices in Europe and Asia remained considerably higher. In July 2014, FERC estimated that prices of LNG imported to Europe and Asia during August of 2014 would be about 100 and 250 percent higher than prices in the United States, respectively. These price differences have motivated U.S companies to apply to export natural gas.

The Liquefaction Process

The majority of U.S. trade in natural gas is by pipeline with Canada and Mexico; however, over long distances separated by water, natural gas is generally converted to LNG and transported by specialized tanker ship. To convert natural gas to LNG, companies pretreat the natural gas to remove components that would freeze during the liquefaction process and contaminate the LNG.through a complex system called a liquefaction train that cools the natural gas to -260 degrees Fahrenheit, converting it to a liquid state. This process reduces the volume of the gas by 600 times. Once liquefied, the After the gas is pretreated, it is processed natural gas is stored in large tanks until it is offloaded to a ship for transport. Once the ship reaches its destination, it is offloaded to tanks for storage or converted to natural gas for distribution by pipeline.illustrates some of the common components of an LNG export facility.

DOE’s Responsibilities

Under Section 3 of the NGA, the import or export of LNG and the construction or expansion of LNG facilities requires authorization from DOE. In 1984, DOE delegated the responsibility to approve or deny applications for LNG facilities to FERC. Under Section 3, an authorization is to be granted unless DOE finds that approving the export or import is inconsistent with the public interest. According to DOE, Section 3(a) of the NGA creates a rebuttable presumption that a proposed export of natural gas is in the public interest—that is, it places the burden on those opposing an application to demonstrate that an export is inconsistent with the public interest. The NGA also authorizes DOE to attach terms and conditions necessary to protect the public interest. DOE evaluates public interest under Section 3, and can conduct studies or other reviews to support its public interest determination.

In the Energy Policy Act of 1992, Congress amended the NGA to require DOE to use a different standard for the review of applications for export to countries with FTAs with the United States (FTA countries). Specifically, under Section 3(c) of the NGA, DOE must treat applications to export LNG to FTA countries as consistent with the public interest, and DOE is to approve these applications without modification or delay. These FTA applications therefore do not require the same public interest review as non-FTA applications. DOE started to receive applications to export LNG in 2010 and, since then, it has approved 37 of 42 applications to export LNG to FTA countries. During this same period, DOE approved 9 (3 final and 6 conditional) of 35 applications to export LNG to non-FTA countries. Most major importers of LNG are non-FTA countries such as Japan and India, among others. As previously mentioned, this report discusses DOE’s process to review applications to export to non-FTA countries.

FERC’s Responsibilities

In keeping with its obligation to authorize LNG facility siting and construction under the NGA, FERC reviews applications to construct and operate LNG export facilities. FERC’s review is considered a federal action and subject to the National Environmental Policy Act (NEPA).

NEPA requires federal agencies to assess the projected effects of major federal actions that significantly affect the environment. Prior to the NEPA review, the law requires applicants to communicate with FERC for a minimum of 6 months—known as pre-filing—before submitting an application. FERC acts as the lead agency for the environmental review required by NEPA, prepares the NEPA environmental documentation, and coordinates and sets the schedule for all federal authorizations. The outcome of this review is an environmental document, also called the NEPA document, which provides the commissioners with staff’s assessment of the environmental impacts from facility construction and operation.

Positions Surrounding the Export of Natural Gas

DOE and FERC consider comments from the public during the application review process, and these comments reflect a range of perspectives on the potential benefits or harm from exports. Proponents maintain that LNG exports are consistent with U.S. free trade policies and will provide an economic boon for the United States, resulting in increased employment and an improved trade balance among other things. They assert that the increased availability of natural gas resources will prevent a significant increase in natural gas prices. Opponents have expressed numerous environmental and economic concerns about LNG exports. For example, opponents have expressed concern that exports will increase hydraulic fracturing and its associated environmental effects, as well as increase greenhouse gas emissions from the production and consumption of natural gas.that exports will increase domestic natural gas prices, hurting the public and the growing industrial and manufacturing sectors that are sensitive to natural gas prices. Opponents have also stated that the primary beneficiaries of LNG exports will be a small segment of society involved in natural gas development and trade, and that most segments of society Other opponents have expressed concern will lose economically. Evaluating whether exports of LNG to non-FTA countries are consistent with the public interest is beyond the scope of this report.

DOE Has Approved 9 Applications to Export LNG through a Review Process That Considers a Range of Factors to Determine Whether Approval Is in the Public Interest

Since 2010, DOE has granted final approval to 3 applications and conditional approval to 6 others. DOE considers a range of factors to determine whether approving an export application is in the public interest.

DOE Has Approved 3 Applications and Conditionally Approved 6 Others

As of mid-September 2014, DOE has granted 3 final approvals for applications to export LNG, including the Sabine Pass application in 2012 and the Cameron LNG and Carib Energy applications in September 2014. Sabine Pass is the only LNG export facility currently under construction in the United States and is expected to begin operations in late 2015. In August 2011, after DOE conditionally approved exports from Sabine Pass, DOE commissioned a study of the cumulative effects of additional LNG exports on the economy and the public interest.approve any conditional applications during the 16-month period of the DOE did not study. The study was completed in December 2012. Since then, DOE has conditionally approved 7 applications, including the Cameron LNG application that it granted final approval in September 2014 (See fig. 2). DOE also approved the Carib Energy application in September 2014. DOE’s export approvals, as of late August 2014, amount to 10.56 billion cubic feet of natural gas per day in the form of LNG; for comparison, Qatar, the world’s largest exporter of LNG, exported about 10 billion cubic feet per day in 2012.

DOE Reviews Each Application Separately and Considers a Range of Factors to Determine if Approval Is in the Public Interest

According to DOE, when determining whether approval of an application is in the public interest, DOE focuses on (1) the domestic need for natural gas, (2) whether the proposed export threatens the security of domestic natural gas supplies, and (3) whether the arrangement is consistent with DOE’s policy of promoting market competition along with other factors bearing on the public interest, such as environmental concerns. In passing the NGA, Congress did not define “public interest;” however, in 1984, DOE developed policy guidelines establishing criteria that the agency uses to evaluate applications for natural gas imports. The guidelines stipulate that, among other things, the market—not the government—should determine the price and other contract terms of imported natural gas. In 1999, DOE began applying these guidelines to natural gas exports.

DOE’s review of export applications is not a standardized process, according to agency officials; rather, it is a case-by-case deliberation, where each application is considered separately from others. DOE’s review process begins when an applicant submits documentation to DOE requesting permission to export LNG. DOE examines applications one at a time, and it issues a notice of application in the Federal Register to invite persons interested in the application to comment, protest, or Applicants are then given an opportunity to respond to intervene.comments. DOE’s internal review includes an examination of the application and analysis of public interest using public comments and applicant responses, the criteria outlined in its policy guidelines, the NGA, DOE’s study of the effects of additional LNG exports, and past DOE authorizations. As discussed above, the NGA authorizes DOE to attach terms and conditions necessary to protect the public interest. To further inform its public interest review, DOE commissioned the study of the potential effects of additional exports on the economy. Since the study was released in December 2012, DOE has used it to support its public interest review for each of its application approval documents, including referencing the study’s conclusion that LNG exports would have a net positive effect on the economy.

After considering the evidence, DOE issues an order denying the application or granting the application on condition of a satisfactory completion of the NEPA review by FERC. DOE includes the reasoning behind its decision in each order. DOE may also modify the request in an order, such as by limiting the approved export amount or duration. Once DOE conditionally approves an application, it does not grant a final approval until it has reviewed FERC’s NEPA document and reconsidered its public interest determination in light of relevant environmental information. Under NEPA, DOE must give appropriate consideration to the environmental effects of its decisions; FERC’s NEPA document provides the basis for this consideration.

79 Fed. Reg. 32261 (June 4, 2014). The change would also supersede the precedence order. According to the DOE notice, DOE could still choose to implement the policy of issuing conditional orders at a later date. According to DOE officials, this change would allow them to use agency resources more efficiently because they would conduct a single review of each application instead of separate reviews for conditional and final approvals. In addition, the proposal would allow projects that are more commercially advanced to be reviewed by DOE once FERC has issued a NEPA document.

FERC Has Approved 3 Facility Applications and Is Reviewing 14 Others Using a Technically Complex Process That Involves Other Agencies

Since 2010, FERC approved 3 facility applications, including 2 in 2014, and is currently reviewing 14 applications. FERC’s reviews of LNG export facility applications are a multiyear analysis of the potential environmental and safety effects of the facility that involves other federal, state, and local agencies.

FERC Approved 3 Facility Applications and Is Reviewing 14 Applications

FERC approved applications to construct and operate the Sabine Pass LNG export facility in April 2012, the Cameron facility in June 2014, and the Freeport facility in July 2014. As of late August 2014, FERC was reviewing 14 applications (See fig. 3). FERC has issued three final NEPA documents in 2014, including for the Cameron and Freeport facilities, and expects to complete one more by the end of 2014. FERC officials said that they could not discuss when the Commission would act on these facility applications.

As shown above, FERC’s review of applications to construct LNG export facilities can take 2 to 3 years or more.reviews are lengthy because of the complexity of the facilities and number of permits and reviews required by federal and state law. For example, applicants must model the effects of LNG spills from pipes and storage tanks on areas around the facility under a variety of scenarios. One of the applicants we spoke with said that the number of variables involved in modeling a single scenario could require up to a week of computer processing.

FERC’s Reviews of Applications to Construct LNG Export Facilities Are Technically Complex

FERC’s review process is technically complex and includes the following three phases.

Pre-filing. According to FERC officials, the pre-filing phase is intended to allow applicants to communicate freely with FERC staff and stakeholders to identify and resolve issues before the applicant formally files an application with FERC. Under Commission regulations issued pursuant to the Energy Policy Act of 2005, applicants are required to pre-file with FERC a minimum of 6 months before formally filing. The pre-filing phase can vary significantly depending on project specifics; the Freeport and Lake Charles applications were in the pre-filing phase for over 19 months, while the Cameron application was in the pre-filing phase for about 7 months. FERC officials said that the duration of each phase can vary depending on the site specific characteristics of the proposed facility and responsiveness of the applicant to requests for information from FERC. The pre-filing period also involves public outreach by the applicant and FERC, and FERC allows public comments during this period. An applicant completes the pre-filing period when it has submitted the required documentation to FERC and formally filed. This documentation includes a series of 13 resource reports that consist of, among other things, detailed information on project engineering and design, air and water quality, and fish and wildlife, as well as a description of the anticipated environmental effects of the project and proposed mitigation measures. One applicant told us that the resource reports it submitted to FERC consisted of over 12,000 pages.

Application review. The application review phase includes FERC’s review of the application and development of the environmental document required by NEPA. FERC officials told us that they start the review phase after an applicant has successfully completed the pre-filing process and submits an application. FERC reviews, among other things, facility engineering plans and safety systems identified by the applicant; environmental effects from the construction and operation of the facility; and, potential alternatives to the proposed project. FERC develops a NEPA document with input from relevant agencies that elect to participate, called cooperating agencies, as well as other stakeholders. FERC officials told us that, depending on the location of the proposed facility and amount of construction, FERC prepares either an environmental impact statement (EIS) or environmental assessment (EA). FERC will prepare an EA if it believes the review will find no significant impact on the environment from the project. For example, FERC prepared an EA for the Sabine Pass facility because the proposed facility was within the footprint of an existing LNG import facility and previously the subject of an EIS. FERC officials told us that the agency generally prepares an EIS for proposed facilities that would extend beyond the footprint of an existing import facility. After an EIS or EA is drafted, FERC solicits comments from federal agencies and the public on the document.those into a final EIS or EA, as necessary. The final EIS or EA will recommend any environmental and safety mitigation measures to be FERC reviews agency and public comments and integrates completed during various stages of the project. FERC staff submits the final NEPA document and other staff analyses to FERC commissioners for consideration. FERC commissioners consider the entire record of the proceeding, including the NEPA document, to determine whether to approve a project.

Post-authorization. The post-authorization phase includes FERC oversight of plant construction and operations. After FERC approves a project but before an applicant can start construction, the applicant must develop a plan describing how it will meet any conditions and mitigation measures identified in FERC’s approval. FERC oversees construction and ensures that these conditions are met. The Coast Guard and DOT also oversee construction to ensure compliance with their respective regulations. FERC conducts compliance and site inspections during construction at least every 8 weeks. Following construction, the applicant must receive written authorizations from the Commission to begin operations at the facility. Once the facility is operational, FERC conducts annual inspections and requires semiannual status reports from the facility operator.

FERC’s Review Process Involves Other Federal, State, and Local Agencies

As the lead agency responsible for the environmental and safety review of LNG export facilities under NEPA, FERC works with federal, state, and local agencies to develop the NEPA document. In some cases, such as with the Corps and DOE, agencies will adopt and use the NEPA document in issuing their respective permits related to the export facility. In addition, FERC regulations require applicants to consult with the appropriate federal, state, and local agencies to ensure that all environmental effects are identified.obtains the appropriate federal permits or consultations with these agencies. Major federal participants in FERC’s LNG facility review include the following: FERC ensures that the applicant

Coast Guard. The Coast Guard requires applicants to assess the effects of a new facility on a bordering waterway. The applicant provides the assessment to the Coast Guard for validation and review before filing its FERC application, and the Coast Guard advises FERC on the suitability of the waterway for the LNG marine traffic associated with the facility. The Coast Guard and DOT also assist FERC’s review of safety and security of the facility.

PHMSA. PHMSA is an agency within DOT responsible for establishing national policy relating to pipeline safety and hazardous material transportation, including the authority to establish and enforce safety standards for onshore LNG facilities. To assist FERC’s assessment of whether a facility would affect public safety, FERC regulations require applicants to show that their facility design would comply with PHMSA regulations for hazardous liquids vapor dispersion and fires. Applicants submit models of vapor dispersion to FERC, and FERC consults with PHMSA to ensure that the models comply with PHMSA regulations.

The Corps. Under section 404 of the Clean Water Act, operations that discharge dredged or fill material into U.S. waters are required to obtain a permit from the Corps. Discharges under this permit must have a state certification to ensure the discharge meets water quality standards. In addition, under section 10 of the Rivers and Harbors Act of 1899, the Corps has regulatory authority to oversee construction activities within the navigable waters of the United States, and applicants may be required to obtain a permit from the Corps.

Environmental Protection Agency (EPA). Applicants may be required under the Clean Air Act (CAA) to receive air permits for the construction and operation of LNG facilities. State environmental agencies generally issue these permits, but EPA can issue the permits if a state is not authorized to issue permits, or under other limited circumstances. EPA also comments on the FERC draft and final EIS, as required by the CAA.

Applicants may also be required by law to consult with these and other federal agencies, such as the National Oceanic and Atmospheric Administration and the Fish and Wildlife Service, to ensure their applications comply with federal laws such as the Endangered Species Act, the Migratory Bird Treaty Act, the Magnuson-Stevens Fishery Conservation and Management Act, and the Fish and Wildlife Coordination Act.

In addition to federal permits and consultations, applicants may also be required to obtain other permits under state and local law. Because of the wide variety of projects, locations, and state and local laws, permitting requirements vary by project. The applicant is responsible for identifying the necessary permits and consultations and reporting these to FERC as part of the pre-filing process. In addition to issuing most air permits and water quality certifications, states and local agencies have other permitting and consultation responsibilities, such as to consult with applicants to ensure compliance with the Coastal Zone Management Act and the National Historic Preservation Act.

Agency Comments

We provided a draft of this product to FERC and the DOE for their review and comment. DOE and FERC provided technical comments, which we incorporated throughout the report as appropriate.

As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 5 days from the report date. At that time, we will send copies to the appropriate congressional committees, the Chairman of FERC, the Secretary of Energy, and other interested parties. In addition, this report will be available at no charge on the GAO website at http://www.gao.gov.

If you or your staff members have any questions about this report, please contact me at (202) 512-3841 or ruscof@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix II.

Appendix I: Application Names Used by the GAO

For the purposes of this report, GAO developed table 1 below to allow us to use a single name to refer to related applications to the Federal Energy Regulatory Commission (FERC) and the Department of Energy (DOE). Table 1 lists (1) the names of applicants that submitted requests to FERC to construct liquefied natural gas (LNG) export facilities, (2) the names of applicants that submitted requests to DOE to export LNG from those facilities, and (3) the name GAO used to refer to these applications. In some cases, multiple companies filed jointly for one application.

Appendix II: GAO Contact and Staff Acknowledgments

GAO Contact

Staff Acknowledgments

In addition to the individual named above, Christine Kehr (Assistant Director), Cheryl Harris, and David Messman made key contributions to this report. Important contributions were also made by Mark Braza, Michael Kendix, Alison O’Neill, Dan Royer, and Barbara Timmerman.