Exports on the Rise? Potential LNG Litigation Constraints

LNG Projects
March 31, 2017

The pipeline industry is not alone in its battle with litigants who aim to stall the construction of energy infrastructure development. Liquefied natural gas (LNG) terminal operators are facing the same onslaught of opposition in federal court. And these suits, unlike those faced by their pipeline counterparts, are aimed at federal agencies rather than the developers themselves. During oral arguments last month, Sierra Club asked the D.C. Circuit to overrule the Department of Energy’s (DOE) authorization to export liquefied natural gas from three separate terminals. At the same time LNG terminal developers continue to pursue opportunities to expand facilities and enter new markets. While many believe that LNG may be the savior to an increasingly oversupplied gas marketplace, one critical constraint, outside of market fundamentals, may hinge upon a new litigation strategy that could tie up key projects.

Last September, the D.C. Circuit denied the Sierra Club’s appeal of the FERC’s decision to approve the construction and operation of two LNG terminals, Cheniere Energy’s Sabine Pass and Freeport LNG terminals. Sierra Club, alongside other environmental groups, argued primarily that the FERC failed to consider the indirect environmental effects of increased US natural gas production induced by greater exports of US-produced LNG, and the increased air pollution resulting from rising coal use due to inflated natural gas prices caused by increased LNG exports. The D.C. Circuit ruled that FERC was correct in not addressing the indirect effects of the anticipated exports, because the DOE, not the FERC, has sole authority to license the export of LNG.

Failing to gain traction with its claims against the FERC, Sierra Club more recently pursued claims against the DOE. The Sierra Club filed its case challenging DOE’s approval to export 1.4 Bcf/d from the Freeport Terminal, but waited several months to pursue similar actions against the Sabine Pass (2.2 Bcf/d) and Corpus Christi (1.41 Bcf/d) Terminals. According to the Sierra Club, “exports will increase households’ energy bills and decrease wages.” Sierra Club is relying on a similar argument in its latest round of suits, alleging that DOE failed to adequately consider the indirect and cumulative environmental impacts stemming from increasing LNG exports. The Sierra Club is relying on both the National Environmental Policy Act, which requires environmental reviews of major federal actions, and the Natural Gas Act, under which DOE has to find that the proposed exports would be in the public interest to make its claims. If terminals are approved by the FERC than why pursue the DOE?

While terminals, like pipelines, are subject to Certificate review under the Natural Gas Act, they are subject to additional regulation, as well. Terminal projects must engage in pre-filing review, a voluntary measure for pipeline applicants. But more importantly for Sierra Club, the import and export of LNG from the terminal must be approved by the DOE. And as the D.C. Circuit noted, the DOE rather than the FERC controls the availability of additional LNG to global markets. The DOE’s review and the FERC’s review are conducted independently, but the terminal operator relies on both approvals coming through in a timely fashion to meet contractual needs.

Despite these efforts to stymie the growth of exports, 11 applications for Certificate review and 6 applications for pre-filing review have been filed with the FERC during the past year. The applications for Certificate review include new terminals, expansions of existing terminals and the pipelines intended to serve these facilities. Assuming the 17 projects are built, these projects would add about 7 Bcf/d of capacity. Among these are applications for the recently resuscitated Jordan Cove Terminal and Pacific Connector Pipeline Projects, which were pre-filed for the second time following the FERC’s denial of the Certificate application one- year ago.

Is this litigation likely to have any effect on the operations of LNG terminals? Maybe. While appeals  have not brought Sierra Club much success in the past, perhaps their latest claims will have more traction, as they are in line with the D.C. Circuit’s own reasoning – that it is the DOE, and not the FERC that authorizes LNG exports. But this week DOE approved Sabine’s request to commence expanded operations, signaling, perhaps, that DOE is poised to support LNG infrastructure expansion. With oral arguments complete in the Sierra Club  case, an opinion is forthcoming that may indicate whether LNG development will be constrained by  additional environmental analyses.

U.S. LNG Exports (2016)