It’d hardly be a stretch to say that the Obama administration is on the wrong side of most energy issues. But when they get something right, we should give them credit. The US Department of Energy’s recent decision to require FERC approval before being awarded liquefied natural gas export licenses is a case in point.
It’s no secret that there’s been a stampede of companies seeking to export LNG. The US shale boom has made natural gas cheap and readily available domestically. If the Department of Energy approved every proposed LNG export project today, the United States would have the capacity to export 36 billion cubic feet of natural gas every day. Conversely, supply is low and demand is astronomically high in Asia—the IEA projects natural gas to grow in China by 90% over the next five years, with LNG meeting most of this demand. A glut of companies are waiting for approval from the Department of Energy to take advantage of this demand imbalance, requiring that something be done to streamline the process. This is exactly what the Department’s recent changes are designed to do.
Prior to the release of the Notice of Proposed Rulemaking (NOPR) on May 29, the process for obtaining permission to export LNG was long, uncertain, and convoluted. Companies could begin exporting gas by first obtaining “conditional approval” from the Department of Energy. Only then were they expected to seek environmental approval from FERC, and a final decision from the Department of Energy. This process was extremely beneficial to smaller ventures. An energy export application costs about $20,000 to file, with approval often bolstering investor confidence and allowing forward movement in planning and construction. Completing the FERC process, on the other hand, runs about $100 million. This cost, prohibitively high by most standards, means that only very commercially advanced projects are able to apply successfully for FERC approval—blocking out smaller operations.
So why is limiting access to LNG exports a good thing? The short answer is that it’s not, but that’s not what the DOE’s policy change actually does. By placing FERC approval ahead of DOE permitting and doing away with the notion of conditional approval, the Department of Energy is ensuring that it reviews the projects with the best chances of becoming commercial realities before smaller, more questionable ones. Under the new system, only corporations that have made it through the $100 million FERC process may apply for DOE export permits, which ensures that the only projects sitting on the Department of Energy’s desk are those with substantial investor confidence and financial backing.
Ending the process of conditional approval also clarifies a blurry area in LNG export permitting, in which companies are allowed to export natural gas without environmental approval from FERC. At a point early on in the North American shale boom, conditional approvals made sense as a way for the Department of Energy to indicate to the rest of the world that the US was willing to export LNG. Now, with that question put to bed by the explosive growth in US shale gas exports, it makes sense that the DOE would move toward a more permanent system of LNG permitting.
One key takeaway from all of this is that even prior to the DOE’s announcement of its new permitting process, LNG export projects required both DOE and FERC approval. Consequently, the pace of LNG project approvals is not expected to change. This undercuts most arguments against the DOE’s permitting change, many of which are grounded in the notion that the administration is trying to slow the export of LNG. To the contrary, the prioritization of more commercially advanced projects will actually boost US LNG exports as projects with a greater likelihood of success will be realized more quickly. Indeed, processing applications on a “first come, first serve” basis seems more appropriate for seating an auditorium than growing the LNG export industry of the largest economy on earth.
A Better System
Like any policy change, the NOPR will create winners and losers. It’s clear that the winners are larger, more commercially advanced and better funded operations like Cheniere Energy. The losers, on the other hand, are smaller corporations that required DOE conditional approval to attract investors and instill confidence in their projects. Yet the Department of Energy made the correct decision in prioritizing larger projects over smaller ones. The Asian appetite for natural gas is voracious, and is only growing larger. For the United States to begin to take advantage of this disparity between supply and demand, the Department of Energy must approve projects that can export as many billions of cubic feet of gas as possible.
Of course, a great deal of the success of the DOE’s policy change will hinge on how the NOPR is implemented. Moving efficiently through projects that have already been granted approval by FERC will be necessary to expand LNG exports. But it’s too easy to simply object to every move the Department of Energy makes—after all, there’s value in appreciating when they’ve made the right decision, and saving criticism for when it’s actually warranted. The NOPR isn’t meant to allow cutting in line, nor is it meant to slow LNG exports. It’s meant to make the Department of Energy’s permitting process more efficient, and requiring FERC approval before granting export permits is a concrete step towards this goal.