Increasing Export Efficiency for Liquefied Natural Gas Is a Win for the U.S. and Global Economies

Report Energy Economics

Increasing Export Efficiency for Liquefied Natural Gas Is a Win for the U.S. and Global Economies

November 5, 2018 15 min read Download Report
Nicolas Loris
Fellow in Energy and Environmental Policy
Nick is an economist who focuses on energy, environmental, and regulatory issues as the Herbert and Joyce Morgan fellow.

Summary

With plentiful reserves and innovative technologies that unleashed an American energy renaissance, the U.S. has become the world’s leading natural gas producer. Domestic production has also expanded opportunities for companies to export liquefied natural gas (LNG). Increased energy trade will have substantial, long-lasting economic and geopolitical advantages for the U.S. and its allies. As companies increase shipments abroad and grow their export capacity, Congress and the Administration should implement reforms to stimulate investment in U.S. energy markets and provide greater choices for energy consumers around the world.

Key Takeaways

The U.S. has significantly expanded its liquefied natural gas (LNG) export capabilities, providing affordable, reliable, and clean energy on a global scale.

Increased energy trade will have substantial, long-lasting economic and geopolitical advantages for the U.S. and its allies.

Congress and the Administration should work to remove anti-competitive trade policies and remaining bureaucratic obstacles to the efficient exporting of LNG.

In a recent speech before the United Nations General Assembly (UNGA), President Trump offered up U.S. energy exports as relief from dependence on politically manipulated energy markets. The President rightly noted, “Reliance on a single foreign supplier can leave a nation vulnerable to extortion and intimidation.”REF The European energy market’s dependence on Russian natural gas exemplifies such extortion. Diversification will loosen Russia’s grip on the energy market, and American liquefied natural gas (LNG) exports can be an integral source for Europeans pining for energy freedom.

The U.S. and its allies stand to receive substantial, long-lasting economic and geopolitical advantages from the liberalization of energy markets. President Trump emphasized in his UNGA speech that U.S. companies “stand ready” to export abundant natural gas to America’s allies.REF The Administration has taken productive action to expedite small-scale natural gas exports and relieve the permitting backlog at the Federal Energy Regulatory Commission (FERC), but steel tariffs and potential LNG import tariffs, as well as a lengthy permitting process, threaten opportunities to maximize energy export potential.

As companies increase both foreign shipments and export capacity, Congress and the Administration should implement reforms to stimulate investment in U.S. energy markets and provide greater choices for energy consumers around the world. Specifically, reform should expedite permit applications and completely remove the Department of Energy (DOE) from the application process.

The Present and Possible Future of LNG Exports

With plentiful reserves and innovative technologies, the U.S. has become the world’s leading natural gas producer. The substantial increase in supply has saved households and businesses tens of billions of dollars in lower energy bills and generated new jobs and investment across the country.REF Domestic production has also expanded opportunities for companies to export natural gas to America’s allies around the world. February 2016 marked the first time in more than 50 years that a company in the contiguous U.S. exported LNG; in 2017, the U.S. became a net exporter of natural gas. Through the first half of 2018, natural gas exports increased 58 percent from the 2017 average and are up 25 fold since 2015.REF

Eager to diversify and secure stable sources of energy, foreign governments and companies are investing in new LNG import infrastructure and expanding existing capabilities. Through July 2018, U.S. LNG companies exported 1,476.4 billion cubic feet (Bcf) to 30 different countries across five continents.REF

  • Europe has 28 large-scale LNG import terminals with several others planned, committed, or under construction.REF
  • The European Union co-financed a number of LNG projects, including in Lithuania, Poland, and Malta, and committed 120 million euros ($138.3 million) to a 250 million euro ($288 million) project in Croatia.REF
  • Asian markets serve as American companies’ top LNG customers. South Korea, China, and Japan are, respectively, the second through fourth largest importers of U.S. LNG.REF India, the sixth largest importer, is another key strategic partner of the U.S. that is diversifying its energy portfolio with eleven more LNG import terminals.REF
  • Canada and Mexico have been reliable energy trading partners. U.S. natural gas exports to Mexico (via pipeline) were more than double the total of U.S. LNG exports, and Mexico has emerged as a top market for U.S. LNG.REF U.S. capacity and investment in natural gas stands to become increasingly important for Mexico, as electricity generation and infrastructure are needed to help improve the nation’s standard of living. Numerous projects are in the works to expand cross-national and Mexican domestic pipeline infrastructure. The new North American trade deal retains protections for oil and gas investments in Mexico, liberalizes at least part of Mexico’s energy sector, and prohibits tariffs on raw oil and gas products.
  • The U.S. and Canada’s well-established energy partnership spans decades. The two nations have exchanged investments in oil and natural gas, refining, and other necessary materials and services supporting natural resource extraction.

Obstacles to Expanded LNG trade

Both in the U.S. and abroad, a number of legislative, regulatory, and political obstacles threaten LNG trade. Those obstacles include:

The Role of the Department of Energy in Approving LNG Exports. If the U.S. does not have a free trade agreement (FTA) with the country receiving or sending the natural gas, the DOE must make a public interest determination.REFNo concrete definitions exist for public interest determinations. In effect, the DOE could arbitrarily deny a permit if bureaucrats in the agency believe the total volume of natural gas exported is not in the public’s interest.

Currently, the DOE’s role has not been a major obstacle as nearly half the total of all U.S. LNG exports have traveled to non-FTA destinations. Out of the 30 countries receiving LNG, 22 of them are non-FTA. Nevertheless, natural gas is not a public good nor should it be treated as such.REF The DOE serves an unnecessary role in the process as a mechanism for the federal government to make decisions better left to the individuals buying and selling the gas.

Complex Regulatory and Permitting Process for LNG Export Facilities and Increase in Applicants. In recent testimony, FERC Chairman Kevin McIntyre spoke to the challenges that FERC faces in completing applications for constructing LNG facilities, noting that the number of applications increased from four in 2007 to 14 in 2018.REF Chairman McIntyre also emphasized that the size and complexity of new LNG facilities is growing and a greater number of facilities means more on-site constructing inspections conducted by the regulators.REF

The environmental reviews for LNG facilities are comprehensive and involve multiple federal agencies. The Natural Gas Act of 1938 grants FERC the authorization to conduct environmental assessments for both import and export facilities.REF States can veto any approval decision by FERC by denying the facility’s environmental permits. The applicant must also satisfy requirements under the Maritime Transportation Security Act of 2002 as well as the Department of Transportation’s (DOT) Office of Pipeline Safety requirements. The Pipeline and Hazardous Materials Safety Administration (PHMSA) is a cooperating agency in the siting process, establishing and enforcing safety standards for onshore LNG facilities, including standards governing conversion, transportation, and storage of liquefied natural gas.REF The U.S. Coast Guard (USCG) oversees the safety of LNG vessels and the marine transfer area for waterfront LNG facilities. The USCG also manages the navigation safety and port security from LNG ship traffic.REF

Despite delineated roles and responsibilities among the different agencies and stated goals of efficient interagency coordination, the intricacy of the approval process is inhibiting the ability of U.S. companies to export LNG. Failed interagency coordination, a dearth of resources and technical expertise, administrative bottlenecks, and duplicative processes all contribute to regulatory delays.REF According to a July 2018 article in Bloomberg, the permit-approval process could be delayed by 18 months.REF Moreover, as the CEO of Commonwealth LNG remarked, it could take 18 months to two years to conduct an environmental impact assessment compared to the six to eight months it used to take on these projects.REF

Anti-competitive Trade Policies. The Trump Administration’s anti-competitive trade policies weaken U.S. companies’ competitive advantage to export LNG. Steel and aluminum tariffs increase the cost of pipelines, LNG terminals, and other energy infrastructure. After the Trump Administration imposed a 10 percent tariff on another $200 billion of Chinese imports, the Chinese Ministry of Commerce retaliated with its own 10 percent tariff on 3,571 goods, including LNG.REF

European Dependence on Russian Gas. In Europe, the cost differential between imported LNG and Russian gas is shrinking. Mark Mills, a Senior Fellow at the Manhattan Institute, underscored this point in recent testimony:

[I]t bears noting that based on the current price spread between U.S. LNG and Russian natural gas, even if Europe were to use all of its idle LNG import capacity to buy American gas, Europe’s overall annual energy import costs would rise by less than 10%. In the long run, that could be the cheapest resilience hedge EU leaders could buy.

Existing LNG terminals scattered throughout Europe and newly constructed and planned facilities in places like Poland, Lithuania, Malta, and Croatia will provide strategic geographic diversity.

However, industrial and household customers in Europe should have concerns about trading dependence on Russian natural gas for dependence on state-owned energy projects. The latter is certainly preferable to the former, and government financing may be necessary to overcome Russia’s ability to undercut the price to make non-Russian energy projects uneconomical. Yet state-managed financing and ownership should be narrow in scope in order to foster competition and choice among energy projects and suppliers. Free markets should be the rule and exceptions should only be made in limited circumstances for credible national security needs.

Unshackling Europe from Russian gas dependence is of utmost priority. European governments should make a concerted effort to subject their energy companies to the rigors of the marketplace. Technology and energy source-neutral competition in energy markets allow innovative, entrepreneurial companies to meet customer needs and preferences and also protect customers from unwise investments. Conversely, a subsidy-dependent or state-owned company profits less by understanding and meeting customer needs and more by influencing politics to protect its narrow interests. A state-owned energy company can similarly manipulate energy prices (either upward or downward) to maintain control and crowd out private-sector competition. Granted, government-controlled energy enterprises still respond to the incentives of generating revenue streams in order to bring money into the government’s coffers. However, because they do not operate in an influence-free market environment, state-owned oil and gas companies suffer from economic inefficiencies, reduced foreign investment, higher rates of pollution, wasteful spending, less technological innovation, and aging infrastructure. Furthermore, governments that rely on energy sales to fund other sectors of the economy end up diverting resources that otherwise would be available to invest in new energy technologies or potential new areas of energy exploration and development.REF

Actions for Congress and the Trump Administration

Republican and Democratic Members of Congress as well as top officials from foreign governments have pleaded for a more efficient permitting process for LNG exports.REF In response, the Trump Administration has reduced the regulatory burden of LNG companies. However, Congress and the Administration can and should take additional steps to provide an efficient system, absent unnecessary bureaucratic impediments, for LNG exports. Concrete reforms include:

  • Eliminating the DOE’s role in the authorization process and prohibiting any federal agency from determining natural gas exports based on so-called public interest. In July 2018, the DOE finalized a rule that deemed small-scale exports of natural gas (51.75 Bcf per year of natural gas) to be in the public interest.REF Therefore, small-scale natural gas exports that qualify for a categorical exclusion under the National Environmental Policy Act (NEPA) no longer have to be subject to DOE consideration.

    Given the economic and geopolitical benefits of LNG exports, the DOE should apply similar regulatory relief to all LNG export applicants. The DOE, FERC, or other federal agency should not be responsible for determining what amount of exported natural gas is in the public’s interest. Energy producers should be able to benefit from economic opportunities with LNG-recipient nations if they deem it in their interest. The DOE’s authorization requirement is a pointless obstacle to the permitting process and Congress should eliminate it altogether.

  • Improving and codifying regulatory streamlining. FERC has taken action to relieve the backlog of applicants and resource strains the agency currently encounters. On August 31, 2018, FERC and PHSMA signed a Memorandum of Understanding (MOU) to “maximize the exchange of relevant information, avoid duplication of efforts, and provide for an overall increase in the efficiency and effectiveness of the LNG application review process that will reduce expenses for LNG project applicants and operators and the U.S. taxpayer.”REF FERC hired additional LNG experts, contracted with third parties to conduct parts of the assessment that include non-proprietary information, and moved to allow electronic sharing and issuing of documents—all of which will reduce the time schedule for an applicant without jeopardizing environmental protection.REF

    Rachel A. Meidl, a fellow at the Center for Energy Studies at Rice University, contends that simply shifting resources and responsibilities from one agency to another through an MOU will not solve the underlying problems that contribute to a regulatory backlog.REF Meidl offers practical next steps:

    One of the first tasks in determining the process boundaries, ownership, and responsibilities should be a high-level evaluation and mapping of the overall FERC/PHMSA review process where overlap, redundancies, delays, deficiencies, and insufficient staffing exist. This should be coupled with a needs assessment to identify resource and capability gaps and generate a roadmap that explains how weaknesses will be managed and which agency is best.REF

    Once FERC and PHMSA develop an efficient and transparent pathway that reduces bureaucratic obstacles to permit approval, Congress should codify the streamlined process. Doing so will have enduring effects in liberalizing energy markets and prevent future administrations from stalling applications for political purposes.

  • Providing alternative pathways for regulatory review. To relieve LNG applicant congestion, Congress should empower state regulators to manage the environmental review and permitting process of offshore and near-shore export facilities, while maintaining FERC involvement. States should play a predominant role in authorizing the construction of LNG terminals, rather than simply holding veto authority (as is their current status). Congress should specify that a state’s environmental review and permit approval satisfy all NEPA and other federal environmental requirements for an LNG project. Authorizing state regulatory departments to conduct the environmental assessment would ease the resource constraints faced by FERC and could lead to innovative process reforms that the federal government or other state regulatory bodies could replicate.

    Empowering a state environmental agency would not necessarily eliminate federal involvement. A state regulator could request technical or safety expertise from the FERC as necessary. In addition, state regulators could work in conjunction with the Coast Guard for its maritime safety and security assessment as well as the DOT’s Office of Pipeline Safety requirements.REF However, the state in which the facility is built should be permitted to defer to FERC, if such a step is in the state’s and the facility’s best interest. Deepwater offshore projects should remain under the jurisdiction of the Maritime Administration and the Coast Guard.

Conclusion

Increased efficiency to export LNG will enhance the U.S.’s role as the world’s leading natural gas producer. Higher levels of exports will generate economic growth both domestically and globally. Furthermore, LNG exports would bolster U.S. national security and the security of America’s allies by reducing the ability of any one nation to use its control of energy resources to threaten U.S. interests. Opening energy markets to both imports and exports fosters innovation as companies encounter more competition and meet challenges to retain or expand their market share. The result is competitive businesses, high-quality products, and an improved standard of living for Americans and citizens around the world.

—Nicolas D. Loris is Herbert and Joyce Morgan Research Fellow in Energy and Environmental Policy in the Thomas A. Roe Institute for Economic Policy Studies, of the Institute for Economic Freedom, at The Heritage Foundation.

Authors

Nicolas Loris
Nicolas Loris

Fellow in Energy and Environmental Policy