U.S. LNG Exports: Regulatory and Policy Developments

1. University of Pittsburgh School of Law 2013 Energy Law and Policy Institute August 2, 2013 U.S. LNG Exports: Regulatory and Policy Developments Sandra E. Safro, Associate Washington, DC

2. Overview • Basics of LNG • Federal Regulation of LNG • Federal Energy Regulatory Commission • FERC basics • FERC authorization of import/export terminals • Department of Energy • DOE basics • DOE LNG exports regulatory process • Other issues • Environmental pressures • Congressional issues • Geopolitics klgates.com

3. LNG Basics • Liquefied natural gas (LNG) = Natural gas • Cooled to -260° Fahrenheit • LNG occupies 1/600th of the volume as natural gas in its gaseous state • Increased technically recoverable U.S. natural gas reserves has spurred interest in LNG • Exports • Transportation fuel: Marine, locomotive, vehicles • In the US, 4 LNG import terminals were built in the 1970s • Only one (in Boston, Massachusetts) has operated continuously since then • In 2000s, 6 additional projects were built plus expansions at 3 of the 4 existing terminals klgates.com

4. FEDERAL REGULATION OF LNG klgates.com

5. Basics of Federal Regulation of LNG • Federal Energy Regulatory Commission • Regulates siting, construction, and operation of facilities used for the import/export of natural gas/LNG • Primarily an environmental and safety review • Does not regulate rates, terms or conditions for service at LNG import/export facilities • Department of Energy • Regulates the import and export of the natural gas (via pipeline) or LNG (via vessel or truck) commodities • Focuses on adequacy of domestic supply and demand, impact on domestic natural gas prices, and other energy resources klgates.com

6. FERC Basics • Independent agency • 5 Commissioners, 5-year terms, US Senate confirmed • 3 from President’s political party (now Democratic) • 2 from the opposition party (now Republican) or Independent • FERC regulates: • Transportation and sale of natural gas for resale in interstate commerce • Transportation of oil and oil products by pipeline in interstate commerce • Transmission and wholesale sale of electricity in interstate commerce • Other matters related to the operation of oil, natural gas, electric, and hydro-projects klgates.com

7. Section 3 Import/export of natural gas LNG facilities Section 4 Pipeline and storage rate filings Terms and conditions of service “Just and reasonable” rates Section 4A Market manipulation Section 5 Complaint oversight Section 7 Construction and operation of facilities Section 21 General enforcement Section 23 Transparency Reporting requirements Natural Gas Act of 1938 Basis of FERC’s authority to regulate the facilities used for imports and exports, as well as the transportation and wholesale sale of natural gas in interstate commerce klgates.com

8. FERC Authorization of Import/Export Terminals By law, FERC has exclusive authority to approve the siting, construction, operation and maintenance of LNG import and export facilities FERC process There is a robust process for FERC to review and assess a proposal for a new or expanded LNG terminal and associated pipeline expansion Review is primarily environmental and safety Involves many other federal, state and local government agencies that cooperate with FERC, including: US Coast Guard Department of Transportation, PHMSA Environmental Protection Agency The public has the opportunity to participate in the FERC process klgates.com klgates.com 7

9. FERC Authorization of Import/Export Terminals FERC timing FERC process results in a Final Environmental Assessment (EA) or Final Environmental Impact Statement (EIS) and authorization order Under the law, there is no deadline for FERC to issue an order approving or rejecting an LNG terminal or natural gas pipeline project There is a minimum 6-month period of pre-consultation that a project developer must engage in with the FERC prior to filing the formal application (“pre-filing process”) Historically, FERC approval for LNG import terminals took between 18-30 months Sabine Pass LNG export project received approval in 15 months (plus the 6 months of the pre-filing process) klgates.com klgates.com 8

10. FERC Authorization of Import/Export Terminals • If FERC approves a project, its order will contain dozens of environmental mitigation measures some of which could effectively kill a project • If the project developer has satisfied all of the conditions in FERC’s order, it will be able to continue construction of the project throughout any legal challenge to the project from project opponents (e.g., Sierra Club) klgates.com

11. LNG Exports: FERC Process klgates.com

12. DOE Basics • Executive Branch agency • Secretary is appointed by President and sits on President’s Cabinet • Political by nature • Office of Fossil Energy has authority over imports and exports of the natural gas and LNG commodity klgates.com

13. LNG Exports: DOE Process DOE authorization process is different under the NGA for exports to FTA countries v. non-FTA countries Free Trade Agreement Countries Non-FTA Countries Application Short Robust Public Notice/Comment Not required • Notice of application must be published in the Federal Register • Interested parties must be given opportunity to comment on the application Approval Deemed to be in the public interest and must be approved “without delay” Rebuttable presumption that application is in the public interest, but will only be approved after full agency review – this is the area of current uncertainty DOE Status Currently processing in about 90 days Ongoing – 20 applications pending, some for more than 2 years klgates.com

14. LNG Exports: DOE Process • DOE’s regulations require an applicant submit its application to export LNG at least 90 days prior to the proposed export • Two types of export permits may be obtained from DOE • Short-term (blanket) authorizations • For two years or less, generally for spot market transactions • Simple, routine process • Long-term • Any period greater than two years • Requires significant documentation and supporting evidence • DOE’s current policies require parties with long-term supply agreements to file for long-term export applications klgates.com

15. LNG Exports: DOE Process • Currently, there are 20 non-FTA applications pending at DOE • DOE issued an order approving exports from Cheniere’s Sabine Pass LNG terminal in May 2011 • After this, DOE informally suspended processing all pending applications for exports to non-FTA countries for two years • Increased political concern surrounding impacts on domestic supply and natural gas prices from large-scale exports of LNG • DOE commissioned the LNG Export Study, a two-part study assessing the micro- and macro-economic impacts of exports • Solicited comments on LNG Export Study • Findings: U.S. LNG exports result in net economic benefits regardless of how much LNG is exported klgates.com

16. LNG Exports: DOE Processing Queue klgates.com

17. LNG Exports: DOE and Freeport LNG • On May 17, 2013, DOE authorized exports from the proposed Freeport LNG export terminal • Affirmed LNG Export Study and benefits of LNG exports • Affirmed its continued use of a public interest analysis and that such analysis is flexible and based on a market-driven approach • Opponents have argued that the public interest analysis should be updated and that DOE should establish specific, proscriptive criteria for exports • Since then, new Energy Secretary Ernie Moniz has said that he understands the commercial need for expedited review • Deputy Assistant Secretary Smith testified on Capitol Hill that he expects future authorizations to take approximately two months • But … we are still waiting on Day 76 Post-Freeport klgates.com

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20. LNG Exports: DOE Process • Other issues • Revocation authority • DOE asserted in May 2011 Sabine Pass order that it has authority to revoke or modify an export license under the Natural Gas Act (NGA) • Unclear whether DOE actually does have such a right • DOE has stated that it would revoke only in “extraordinary circumstances” and recognized the “good-faith investment-backed expectations of private parties”; • DOE to Congress: The agency will not use license revocation or modification as a form of natural gas price control • Senators Wyden and Murkowski seeking additional information • DOE has made clear that it will dismiss proposed exports if the applicant cannot show • Availability of a pipeline to transport gas to a liquefaction plant; • Source of the natural gas supply for the plant; and • An actual site for the liquefaction plant klgates.com

21. LNG Exports: Other Issues • Mounting environmental pressure • Keystone XL pipeline is a “line in the sand” for the U.S. environmental movement • Movement has shifted to hydraulic fracturing and LNG exports • Sierra Club is leading the opposition to LNG exports • Filed protests at DOE and FERC of multiple LNG export proposals • Argues that agencies must consider the environmental impacts of upstream hydraulic fracturing since it is “reasonably foreseeable” klgates.com

22. LNG Exports: Other Issues • Support from Congress • In Aug/Sept 2012, two bipartisan letters from US Congressmen to Energy Secretary Chu urged him to expedite LNG exports approvals • In July 2013, 34 senators sent a similar letter to Secretary Moniz, including 11 Democrats • Congressional opposition is only from the most liberal wing of the Democratic party • Geopolitics: Increasing focus on impacts on US trade relations with strategic partners • Trans-Pacific Partnership (TTP) • Transatlantic Trade and Investment Partnership (TTIP) klgates.com

23. QUESTIONS? klgates.com