Implications of US Department of Energy Decision to ‘Pause’ Authorizations of Liquefied Natural Gas Exports May Extend Beyond Delays to Pending Projects

On January 26, 2024, the Biden-Harris Administration announced that it would place a temporary “pause” on pending decisions to export liquefied natural gas (LNG) to countries with which the United States has not entered into a free trade agreement (FTA) requiring national treatment for trade in natural gas (non-FTA countries). The pause will remain in place until the U.S. Department of Energy (DOE), the agency authorized to approve the export of LNG, has had time to update its analyses on whether LNG exports to non-FTA countries are in the “public interest.” The DOE has offered no timeline for its study process, but it has stated publicly that any analysis will provide for a public notice and comment period of at least 60 days. Practically speaking, any agency review process will push out several months, with no additional decisions on pending applications expected until after the November 2024 Presidential election. There are at least 4 pending large export projects whose applications may be impacted by this delay, representing approximately 12 billion cubic feet/day (Bcf) of natural gas, and includes projects that were set to reach a Final Investment Decision (FID) in 2024. Further, this action could expose the United States to an increased risk of challenges by trading partners at the World Trade Organization (WTO) via dispute mechanisms provide for in bilateral investment treaties (BITs) to which the United States is a party.

The White House Fact Sheet explaining the temporary pause stated that “the current economic and environmental analyses DOE uses to underpin its LNG export authorizations are roughly five years old and no longer adequately account for considerations like potential energy cost increases for American consumers and manufacturers beyond current authorizations or the latest assessment of the impact of greenhouse gas emissions.” It also referred to an “evolving understanding” of economic and environmental impacts associated with LNG, and a need to guard against health risks to those “frontline” communities adjacent to export terminals. In public statements made by DOE officials following the Fact Sheet’s release, the agency explained that a pause was necessary due to changes in the global markets since the agency last studied the macroeconomic effects of LNG exports in 2018. While the 2018 study marks the fifth macroeconomic review on LNG since 2012, the agency’s decision to commission an update previously never resulted in a public pause of pending applications.

The pause is certain to delay projects that anticipated imminent regulatory decisions. It is less clear whether the pause will result in a more challenging review process for pending and future projects, and to what extent DOE action dampens a vibrant and growing U.S. LNG export market.

DOE’s Statutory Authority Over LNG Exports

The DOE’s authority to regulate LNG exports arises from Section 3 of the Natural Gas Act (NGA), which governs the export and import of natural gas, as well as the construction of terminal facilities. The statute deems exports to FTA-counties to be in the “public interest,” and requires their approval by DOE without modification or delay. Exports to non-FTA countries are presumed to be in the public interest, but DOE’s authorization is not automatic, and subject to a “public interest” review. The NGA did not always differentiate between FTA and non-FTA countries. Section 3 was amended in the Energy Policy Act of 1992, around the time the United States was negotiating the North American Free Trade Agreement (NAFTA).

The NGA does not define “public interest,” and courts traditionally have deferred to the agency’s interpretation. This includes the DOE’s current policy of treating the relevant NGA section as creating a rebuttable presumption that a non-FTA application is in the public interest, absent a contrary factual finding. The DOE traditionally considered a broad range of facts, but largely comprised of economic and national security considerations, i.e., whether (1)  there is a domestic need for the natural gas; (2) the proposed exports pose a threat to the security of the domestic gas supply; (3)  the arrangement is consistent with the DOE’s policy of promotion market competition; and (4) a catchall concerning factors bearing on the public interest. The DOE’s public interest analysis is aided by macroeconomic studies commissioned by the agency that consider the effect of exports on domestic and international energy markets.

The DOE also must comply with the National Environmental Policy Act (NEPA) before issuing a decision and consider the environmental impacts of an authorization to a non-FTA country. For the most part, DOE will defer to the NEPA analysis prepared by the Federal Energy Regulatory Commission (FERC), the federal agency with NGA Section 3 jurisdiction to authorize the siting, construction and operation of LNG export terminal facilities. A FERC-prepared Environmental Impact Statement (EIS) will consider the environmental impacts of a specific project on environmental resources in the project’s vicinity. FERC, however, does not consider lifecycle greenhouse gas (GHG) emissions for LNG exports, nor the impact of downstream emissions. Rather, the federal courts have determined downstream uses to be outside of FERC’s control because DOE, not FERC, authorizes the physical export of the methane molecule. The same courts have also upheld the DOE’s use of broader macrolevel studies that consider lifecycle GHG emissions as opposed to project-specific studies. The most recent such study, prepared by the National Energy Technology Laboratory, was published in 2019. Otherwise, at the beginning of 2021, DOE updated its NEPA regulations to categorially exclude exports from terminals via ship from NEPA review when no new construction is required, to date limiting further consideration of downstream greenhouse gas emissions.

DOE Sends Mixed Signals Over LNG Exports

The DOE has stated that to date it has issued 41 long-term non-FTA orders, representing approximately 50 Bcf/d of domestic natural gas.¹ It acknowledges that some of these orders are associated with projects not yet completed or in service.² At present, the U.S. is exporting up to 12 Bcf/d, a volume that could double when projects now under construction enter service.

In June 2018, the DOE issued a policy statement strongly affirming its commitment to existing, pending and future non-FTA export authorizations. It included the statement:

The United States government takes very seriously the investment-backed expectations of private parties subject to its regulatory jurisdiction. In particular, DOE understands the far-ranging economic investments and natural gas supply commitments associated with these authorizations over their full term—affecting both U.S. and global interests. DOE emphasizes that it remains committed to the durability and stability of the export authorizations it has granted under the NGA, as well as to supporting the approved export of U.S. natural gas around the world.

This policy statement was one of several actions taken by DOE during the Trump administration that were intended to promote regulatory certainty for U.S. LNG customers, including a policy change that extended all natural gas export authorizations to non-FTA countries through the year 2050, as opposed to their prior 20-year deadlines, with service commencing within seven years of an order.

In April 2023, the DOE in policy statement, reaffirmed its position that export authorization holders would have seven years from their authorization date to commence export to non-FTA countries, or lose their authority without further agency approvals. In setting forth the considerations DOE would make for such extension requests, the DOE concurrently denied one exporter’s pending extension request on grounds that the rationale provided did not align with the new policy. These combined actions signaled that DOE would become more stringent in its oversight of LNG export authorizations. However, not long thereafter, in July 2023, the DOE affirmed its existing process for approving LNG exports as being responsive to domestic and international economic and environmental concerns, the very analyzes that the agency now claims to be outdated and unresponsive to global market changes, necessitating the current “pause.”

Interplay of DOE Decision with Ongoing FERC Reviews of LNG Export Terminals

As explained above, the DOE shares NGA Section 3 authority over LNG exports with FERC, which approves the physical infrastructure needed to facilitate exports. FERC tracks the projects approved and pending before it. Currently, there are eight LNG export terminals with a total LNG production capacity of approximately 14 Bcf/d in the United States.³ There are another seven approved terminals now under construction, and nine approved with minimal or no construction started, some of which are now entangled in the DOE’s pause due to expiring authorizations. Another four projects are pending, and two are in pre-filing at FERC.

Like DOE, FERC applies a rebuttable presumption to the public interest review under NGA Section 3. It has never denied a Section 3 authorization based upon a terminal’s independent inability to meet the agency’s interpretation of Section 3’s “public interest” test. There is only one instance of a FERC denial of an LNG export terminal facility, the Jordan Cove LNG Terminal in Coos Bay, Oregon in 2016.⁴ This denial was not due to a finding that the project failed Section 3 public interest review. Rather, it was due to the project’s associated feed gas pipeline’s inability to meet a separate “public interest” test that FERC applies under NGA Section 7, for which FERC requires a demonstration of market need. The pipeline developer was unable to show market support for its project because it had no executed contracts for the pipeline’s capacity. Because the terminal had no gas supply without the pipeline, FERC denied its application under Section 3.

FERC’s record of authorizing LNG export terminals does not mean that it is immune from the same outside pressures to rethink the impacts of its policies on GHG emissions and environmental justice communities. The agency has been criticized in court and in public on these grounds. In response, in May 2023, FERC held an environmental justice roundtable and Chairman Willie Phillips has suggested that a new policy statement specifically tailored to environmental justice communities is under consideration. However, in early 2022, the agency tried to propose a new policy for public interest reviews under NGA Section 7, the section applicable to interstate pipeline projects, that would have tilted the agency’s considerations away from economic and market considerations and more heavily towards environmental ones, particularly GHG emission impacts and environmental justice community impacts. The proposed policy was met with considerable political blowback in the U.S. Senate, resulting in the agency recanting the policy within a month and deeming it to be a draft.

There is no immediate interest amongst FERC’s current leadership to revise or finalize the now draft 2022 policy update. If a new DOE public interest policy does take hold under NGA Section 3, FERC may find itself under new pressure to make substantive changes to its own policies. Unlike DOE, however, FERC is an independent agency comprised of a bipartisan five-member commission, and its leadership is not supposed to be beholden to Presidential policies. Hence, while the White House may direct action at the DOE, which is led by a cabinet secretary, it is unable to task FERC as directly. One twist is that the five-member commission currently has two vacancies awaiting presidential nominations. Nominees must be confirmed by the Senate, and any future nominee’s position on the DOE’s “pause” is certain to determine whether they will be confirmable in a nearly evenly split Senate chamber.

Political Implications of the LNG Export “Pause”

By announcing the “pause” through the White House press office, and with the DOE following the Biden-Harris Administration’s explicit lead, LNG exports have become a 2024 election year issue for both the Presidential and down-ballot races. We expect the DOE’s decision to create both risks and opportunities for several vulnerable members of Congress seeking reelection in 2024. Most notably, competitive Senate races will be held in both Pennsylvania and Ohio, two major natural gas producing states, with production seeking access to the export markets. Decades of natural gas production, and the economic tailwinds of the shale boom, have shifted some attitudes, even among moderate Democrats, possibly making Senators Bob Casey and Sherrod Brown more vulnerable to their Republican opponents. As these states are also considered “swing” states in the Presidential election, putting natural gas exports on the ballot also may carry up-ballot risks to the Democratic party.

It is unlikely, however, that the White House supported this “pause” without doing its own political calculations. The winner of the election may be determined by the party that is able to do a better job of getting their base to show up at the voting booth. To the extent an enthusiasm gap exists over either party’s ultimate candidate, the White House likely believes that young voters are motivated by concerns over climate change, and that more voters will be motivated by the Biden-Harris’s position on climate change than voters who might be turned off by actions towards LNG export approvals.

Political fallout is expected to occur immediately in Congress. Senate Energy & Natural Resources Chairman Joe Manchin announced that he will be organizing hearings over the “pause.” Hearings are not likely to convince the DOE to retract the “pause,” but may provide an opportunity to shape the eventual outcome of the DOE’s process.

Geopolitical and Trade Implications of the DOE’s “Pause”

There are also significant potential geopolitical implications to the extent the “pause” extends for more than a few months, or results in a new policy approach that limits export authorizations to non-FTA countries. For example, the “pause” may expose the DOE, and by extension the whole of the U.S. government, to challenges by trading parties (especially those without FTAs with the United States) at the WTO, as well as through dispute mechanisms that exist in BITs with the United States. Two of the United States’ largest international LNG customers, the European Union and Japan, are WTO members, but not FTA partners. The DOE likely recognizes the risks it runs with disrupting international trading relationships. On background, and without providing further details, the DOE has stated that it is in touch with U.S. allies in Europe and Asia who have raised concerns about the impact of the “pause.”

Whether concerns today could lead to WTO challenges in the future is yet unknown. As a forum, the WTO adjudicates whether member nations act in a discriminatory or arbitrary manner with respect to their trading partners. It is arguably problematic under international treaty obligations if the only difference in treatment over exports is whether a country has an FTA with the United States, especially when the United States is not engaging in active FTA negotiations. However, it is too soon to predict whether the result of the pause will be significant financial impacts to certain countries, but not others.

Most of the international agreements on which the United States is a signatory have an environmental exception that arguably could support a differential treatment based on environmental concerns like climate change. However, such exceptions are only permissible if applied in a non-arbitrary matter and not as a disguised restriction on trade. Such agreements may also have more general “essential security” or “public morals” exception. It is not clear that a “public interest” rationale would fit under any of these exceptions as a defense to a WTO challenge. Hence, the DOE may need to consider international treaty obligations in greater detail before extending any LNG export “pause” or finalizing any LNG export restriction.

In addition, officials from the DOE were among the dozens of U.S. government officials who participated in the 28th Conference of the Parties to the U.N. Framework Convention on Climate Change (COP 28) in December 2023, which concluded with global commitments to phase-down of unabated coal power. Because renewables cannot be scaled up quickly enough to become a one-for-one replacement for coal-fired electricity, any policy decision that reduces the U.S.’s ability to export natural gas could jeopardize these international commitments.

Next Steps for Impacted Stakeholders

The DOE’s “pause” is likely to have implications throughout the domestic and international markets for natural gas. Most directly impacted may be those commercial arrangements dependent upon DOE approving the pending export applications, including loan agreements, construction contracts and offtake and supply agreements. Moreover, while exporters are negotiating these agreements, they also may be interfacing with pipeline developers to assure gas supply, which requires an independent set of permits. The DOE provides a seven-year timeframe from authorization to in-service because of the complex sequencing that must be undertaken to bring LNG to market, and a delay at the front-end could reverberate up and down the value chain. For those entities transacting around pending projects—including impacted exporters, terminal developers and their lenders and vendors—may want to review their commercial arrangements, particularly around force majeure and project delays to ascertain whether new or additional protections should be negotiated. Similarly, stakeholders in projects not directly impacted by the pause may experience changes in the value of their contracts if competitors are unable to bring LNG to market. A review of these contracts also may be appropriate.

Stakeholders also should consider their advocacy positions in advance of a DOE notice and comment period related to an updated macroeconomic or environmental study expected to arise out of this pause. Any tilt towards a greater emphasis on environmental impacts in the “public interest” review process is likely to face similar challenges to those raised when FERC proposed similar changes to its policies interpreting NGA Section 7. The DOE may be particularly vulnerable to a statutory interpretation that strays too far from its current policy given the U.S. Supreme Court’s recent and pending administrative law cases that are less deferential to agencies, including two cases under review this term. Advocates seeking to influence the DOE should be cognizant of all legal and political pressure points facing the agency.

Akin’s Energy Practice

With approximately 250 energy lawyers globally, Akin is one of the premier firms for both traditional and renewable energy matters, including LNG. Leveraging decades of precedent-setting experience throughout the energy value chain, we help clients succeed in this evolving market. Our cross-disciplinary energy team provides a collaborative approach that draws upon the resources of full-service law firm. Through our integrated corporate, regulatory, environment, trade and lobbying & public policy practices, we provide top legal counsel to public and private energy companies, private equity sponsors, portfolio companies, management teams, credit and other market participants worldwide.

Please reach out to any of the contacts below for more information about the implications of the DOE’s decision and our ability to support you.

^{1 See https://www.energy.gov/sites/default/files/2023-07/DOE%20Response%20to%20Sierra%20Club%27s%20Petition%20for%20Rulemaking%207.18.2023%20%28002%29.pdf.}

^{2 See https://www.energy.gov/fecm/articles/policy-statement-export-commencement-deadlines-natural-gas-export-authorizations.}

^{3 https://www.ferc.gov/media/us-lng-export-terminals-existing-approved-not-yet-built-and-proposed.}

^{4 Id.}