Why Are Permits Needed for LNG Export Terminals?
Liquefied Natural Gas (LNG) Export Terminal Approval
Last year, the Department of Energy (DOE) granted Cheniere Energy a permit to export liquefied natural gas (LNG) from a terminal at Sabine Pass in Louisiana. The terminal is currently used as an LNG import terminal, but the company has plans to convert it into an export terminal, with exports beginning by 2015. The permit has been challenged by the Sierra Club, but is expected to be approved.
However, there are about 15 total other permit applications outstanding, with only the one permit accepted. After approving exports from the Sabine Pass terminal, the Obama administration put a hold on further approvals until a Department of Energy study on the economic implications of exports is completed. That study was originally due out in March, then the DOE said it would be released by the end of the summer, now the study is expected before the end of the year. (Read more: Investment Opportunities in Natural Gas)
Complicating the picture further, there have been 18 permit applications to export LNG to countries with which the US has a Free Trade Agreement, of which 13 have been approved and 5 are pending.
When looking through all this, it was not clear to me why the Department of Energy needs to approve the building of export terminals for LNG. After all, there is no federal permit necessary to export coal or, for that matter, almost any other good or service (note: crude oil exports require a permit too – I will cover that in a future post).
History of Natural Gas Imports and Exports
After some digging, I learned that, under the Natural Gas Act of 1938, the Federal Power Commission (now defunct, with its powers transferred to the Secretary of Energy or the Federal Energy Regulatory Commission) was given jurisdiction over interstate trade of natural gas. As part of this act, it was made illegal to import or export natural gas without a permit. The law says the Department of Energy “shall issue” such a permit unless it finds the proposal to “not be consistent with the public interest.”
The reason for interstate regulation for natural gas when the bill was passed was that natural gas was a ‘natural monopoly’ similar to electric utilities or phone companies and therefore required government regulation. Because of the high infrastructure costs of building pipelines (akin to building power lines or telephone lines), the sellers of natural gas could exert monopoly power since they were usually the sole seller of gas to customers.
Exports to countries with which the U.S. has a Free Trade Agreement are subject to a lower level of regulatory scrutiny. Under the Energy Policy Act of 1992, Congress deemed that exports to countries with which the U.S. has a free trade agreement “shall be deemed to be consistent with the public interest, and applications for such importation or exportation shall be granted without modification or delay.” This provision was inserted to bring the US into compliance with the provisions of NAFTA, then being negotiated among the U.S., Canada, and Mexico. (Read more: What’s So Bad About Exporting Gasoline?)
The Energy Policy Act of 2005 further updated the Natural Gas Act to include regulation of LNG import and export terminals – a technology that did not exist when the original legislation was being considered in 1938. The legislation included certain provisions meant to speed the approval process for LNG terminals. Ironically, the reasoning at that time was that the U.S. was due to begin importing LNG, and they would need to rapidly build new terminals.
So – while companies require a permit to export natural gas, coal was never considered for such regulation because it is not a ‘natural monopoly.’ On the contrary, coal companies in the 19th Century suffered from the monopolistic tendencies of the railroad companies, one of the major factors leading to the creation of the Interstate Commerce Commission (ICC) in 1887, and the ensuing ‘Trust Busting’ progressive era, led by Teddy Roosevelt.
It is interesting that a legislative history regarding monopoly power has created very different regulatory regimes for the exports of coal and natural gas. Each deserves government scrutiny to determine what is in the national interest, but current law only gives an opportunity for such scrutiny to gas exports, giving a regulatory boost to coal exports over gas. My preference would be to give gas exports a priority over coal, but current law leaves it with gas.