The Energy Department on Friday gave Freeport LNG conditional approval to broadly export domestically harvested natural gas, marking only the second time a U.S. company has won that authority and suggesting the Obama administration may grant similar licenses later this year.
The export license allows the Texas-based project to sell liquefied natural gas to Japan and other countries that do not have free-trade agreements with the United States. The company still must win approval from the Federal Energy Regulatory Commission to convert its existing Quintana Island, Texas import terminal into a facility capable of liquefying natural gas and shipping it overseas. And the Energy Department reserved the right to review Freeport’s application again before issuing a final export license.
The move is the first of its kind since the Energy Department granted a similar export license to Cheniere Energy in April 2012, giving that Houston-based company the right to export as much as 2.2 billion cubic feet of natural gas per day for the next two decades. The Energy Department had put other export applications on hold while it considered the economic effects of more broadly selling domestic natural gas overseas.
Benjamin Salisbury, an analyst with FBR Capital Markets, called the Energy Department’s move “a crucially important stepping stone,” because it clarifies the way the Obama administration will review the remaining 19 applications and puts the U.S. on track for additional approvals.
A federal law dictates that the Energy Department must affirm proposed exports are in the public interest before granting licenses to sell the fossil fuel to countries that don’t have free-trade agreements with the United States — a benchmark that tilts in favor of the foreign sales. Friday’s decision shows the administration is sticking with that process for vetting the applications and signals that it views at least a limited amount of exports as in the public interest.
The approval “validates the transparency and creates a path to move forward with additional approvals,” Salisbury said, even though “that’s not to say there’s zero uncertainty, or that they’ll be approved right away.”
The action comes just two weeks after President Barack Obama cast the decision on whether to allow more natural gas exports as an executive move under his control. Newly confirmed Energy Secretary Ernest Moniz — who has not yet been sworn into the post — also has signaled he supports broader exports of the fossil fuel.
Under the license granted Friday, the Freeport LNG project would be allowed to export as much as 1.4 billion cubic feet of natural gas per day over the next 20 years.
The export approval would cover LNG processed at all three of the liquefaction trains planned at Freeport’s facility, plus about 140 metric tons per annum in excess capacity. The first two trains are already fully subscribed by BP and two of the largest natural gas and electricity providers in Japan, Osaka Gas Co. and Chubu Electric Power Co.
Four limited partners are involved in the Freeport LNG expansion project, including Freeport LNG Investments, ZHA FLNG Purchaser, Dow Chemical Co. subsidiary Texas LNG Holdings and Osaka Gas subsidiary Turbo LNG.
Michael Smith, the chief executive officer of Freeport LNG, cheered the export approval as “a key development milestone for the initial phase” of the project.
“We applaud the DOE on its thorough and balanced analysis of the public benefits of LNG exports to the United States,” Smith said in a statement. “The overwhelming evidence in favor of LNG exports generated during the DOE’s two- and-a-half year review, definitively confirms that the DOE should act swiftly to approve additional pending LNG export applications.”
The Freeport facility launched operations in 2008 as an import terminal capable of regasifying LNG offloaded from tankers so that it could be used in the United States. But the company’s timing clashed with the market; the facility went online just as domestic natural gas production started to climb. Now, the United States has little need to import the fossil fuel and instead has a glut of natural gas, largely harvested using a combination of hydraulic fracturing and horizontal drilling techniques.
While industry leaders cheered the decision, energy analysts cautioned it was still unclear how quickly the Energy Department would vet the 19 remaining applications to export 25 billion cubic feet per day of natural gas to countries that don’t have free-trade agreements with the United States.
In a news release announcing the Freeport decision Friday, the Energy Department affirmed it would consider the application on a case-by-case basis, going in the order the proposals were filed with the government. Next up is Lake Charles Exports LLC, Carib Energy LLC and a proposed expansion of the Dominion Cove Point LNG terminal in Maryland.
Sen. Ron Wyden, D-Ore., the head of the Senate Energy and Natural Resources Committee, said he expects the Energy Department will use those case-by-case reviews “to assess the market impacts of each export decision after it announced, to ensure American consumers are not harmed by large-scale exports.”
Bill Cooper, president of the Center for Liquefied Natural Gas, noted that Freeport’s approval comes nearly two and a half years after the company first applied for an export license.
“It is significant, because they have acted,” Cooper said. “The industry as a whole has waited a long time for this.”
“What I really find encouraging is the issuance of an order that adheres to the statutory regulatory framework” for reviewing these applications, Cooper said. “They convey regulatory certainty in this order — in the way they view these applications — but knowing the timelines would provide the additional regulatory certainty that the applicants needed.”
Christopher Smith, the acting assistant secretary for fossil energy, has stressed that in reviewing the export applications, regulators were considering a wide array of factors, including trade, jobs, energy security, environmental issues, the effects on price and the impact on businesses that heavily use the fossil fuel.
A study commissioned by the Energy Department last year concluded that the United States would score a broad net economic gain even if regulators allowed unlimited natural gas exports. Critics said the report relied on old data and papered over the potential job losses and economic damage to domestic manufacturing and other sectors.
On Friday, Rep. Ed Markey, D-Mass., cast the Energy Department’s decision as premature.
“The Department of Energy still doesn’t even know what the impact of natural gas exports will be on domestic businesses and consumers, but they are approving more exports anyway,” Markey said. “We need a robust debate about whether it is in the public interest to reduce one of our biggest competitive advantages in the global economy by exporting American natural gas before we move forward with approving exports. Right now, we’re driving blind.”
A coalition of manufacturers, led by Dow Chemical Co., have argued that unfettered exports could boost the price of natural gas blunting the advantage for U.S. companies that rely on the fossil fuel as a power source and as a component in products they make.
In a statement on Friday, Dow called the Energy Department’s decision “a prudent step in pursuit of a measured and balanced approach to liquefied natural gas exports that will benefit producers and consumers.” Dow added:
“This incremental, thoughtful approach supports an increased level of natural gas production and adds certainty for domestic manufacturers who seek to invest in the U.S. and grow jobs.”
Because the company has about a 15 percent stake in the Freeport LNG facility, Dow has drawn criticism for its position against unlimited LNG exports. Some have said that if policymakers heeded the company’s position, it could translate into just a few approvals for a handful of projects, including the one in which Dow is involved.
On Friday, industry representatives argued that exports would cause only a modest lift of U.S. natural gas prices — enough to sustain continued domestic drilling.
“Exporting natural gas to countries that need it will encourage production, while strengthening the U.S. trade balance and creating thousands of jobs for Americans,” said Barry Russell, president of the Independent Petroleum Association of America.
While the United States already sells some natural gas to some of the country’s free trade partners, including Brazil, Canada and Mexico, American producers have their eyes on Japan and Europe, where the fossil fuel fetches prices three to five times higher than it commands in the United States.
Some economists have argued that the costs of liquefying natural gas, shipping it by tanker across the globe, and regasifying it would eat into potential margins and ensure a market-based limit on how much LNG the U.S. ends up selling overseas. To transform natural gas into a liquid for transport, it first must be chilled to 256 degrees below zero.
Kenneth Medlock, senior director of the Center for Energy Studies at Rice University, told senators in February that fears of excessive exports as overblown, especially since the current global market for liquefied natural gas is around 30 billion cubic feet per day, roughly the same amount companies are seeking to export from the U.S. Even if every pending license were granted, those requested exports would never fully materialize, Medlock said.
Export supporters urged the Energy Department to move quickly through remaining applications.
“One export permit is a step in the right direction, but many more job and revenue creating projects are still waiting for approval,” said Erik Milito, upstream director for the American Petroleum Institute. “DOE should now move forward with the approval of the remaining applications without delay because the law presumes that all applications should be granted.”