The Nickel Report

On August 15, 2017, the US Court of Appeals for the DC Circuit (DC Circuit) issued its decision in Sierra Club v. Department of Energy (Freeport),[1] denying Sierra Club’s challenge to the Department of Energy’s (DOE) order authorizing export under the Natural Gas Act of 1938 (NGA) from the proposed Freeport Liquefied Natural Gas (LNG) Terminal in Freeport, Texas. The decision marks yet another victory in a string of successes for supporters of LNG export.

By way of background, NGA § 3 empowered the now-defunct Federal Power Commission to authorize the export or import of natural gas. That authority was subsequently transferred to the DOE,[2] who, in turn delegated a portion of it to the Federal Energy Regulatory Commission (FERC).[3] As such, NGA § 3 import/export authorization is now divided between the DOE, which is responsible for authorizing the import or export of natural gas, and FERC, which is responsible for authorizing the facilities that import/export such natural gas.[4]

NGA § 3 is essentially an energy security trade control. However, it positions the government more to monitor, rather than tightly regulate, natural gas import and export. Notably, § 3 establishes a rebuttable presumption in favor of authorizing natural gas import and export, directing that the DOE and FERC “shall issue such order upon application, unless” the proposed import or export is not “consistent with the public interest.”

Indeed, Congress later amended NGA § 3 in the Energy Policy Act of 1992[5] to encourage free trade of natural gas by adding a subsection (c), which deems the import or export natural gas to a country “with a free trade agreement requiring national treatment of natural gas” as consistent with the public interest.[6] Thus, the DOE authorizations under NGA §3 are now broken up into two categories: (1) import from or export to countries with an applicable free trade agreement, or “FTA Authorizations;”[7] or (2) import from or export to countries without such an agreement, or “Non-FTA Authorizations.” Since they are automatically in the public interest, applications for FTA Authorization are automatically granted. On the other hand, applications for Non-FTA Authorizations must first undergo DOE consideration.[8]

The DC Circuit’s decision in DOE (Freeport) involved a Non-FTA Authorization issued by the DOE in late 2014.[9] It represents the latest in a series cases dealing with challenges to the first two facilities authorized to export LNG from the lower contiguous United States—the Freeport LNG Terminal and Cheniere Energy’s Sabine Pass LNG Terminal—that have established important precedent for LNG export under NGA § 3.

Sierra Club challenged the DOE and FERC NGA § 3 authorizations on National Environmental Protection Act (NEPA) grounds, arguing that the agencies had inadequately considered the potential indirect impacts of the projects in granting the authorizations. Specifically, in Sierra Club v. FERC (Sabine Pass) and Sierra Club v. FERC (Freeport), issued last summer, the DC Circuit ruled that because FERC lacked authority to deny the authorization based on the indirect environmental impacts of the exported LNG, FERC was not required to extend its analysis to such impacts.

In the DC Circuit’s decision in DOE (Freeport) last week, the court again deferred to the DOE, which argued that trying to predict where and how much natural gas production would be induced by the LNG export facility, and where and how LNG exported from the facility would be used, “would be far too speculative to be useful.”^[10] The court found that the DOE’s analysis was reasonable because these indirect effects were not “reasonably foreseeable.”[11] (A future Nickel Report blog post will examine the NEPA-specific aspects of these and related cases.)

The court also dismissed Sierra Club’s argument that the DOE’s consideration of environmental impacts failed NGA § (3)’s public interest standard. The court noted that “Congress enacted the Natural Gas Act with the principal purpose of encouraging the orderly development of plentiful supplies of . . . natural gas at reasonable prices, and that other subsidiary purposes include respecting conservation, environmental, and antitrust limitations.”[12] Given the NGA’s overall intent, the subsidiary role of environmental limitations in the NGA, and the rebuttable presumption in NGA § 3’s to approve authorizations, the court concluded that “even if the Department determined the impacts were significant, it could still find that the public interest weighs in favor of allowing the exports.”[13]

What are the implications of the DC Circuit’s decision? For the Freeport LNG Terminal, both its FERC and DOE authorizations have survived judicial scrutiny. It is possible that DOE (Freeport) will be appealed to the entire en banc DC Circuit, or even the Supreme Court. However, such petitions are rarely granted, and there are no obvious grounds for reversal. Thus, Freeport LNG’s projected start-up date of September 2018 looks viable.

From a wider perspective, Sierra Club has filed challenges to Non-FTA Authorizations for other LNG export facilities. While the claims asserted by Sierra Club in these cases are slightly broader than the arguments struck down by the DC Circuit, the tandem decisions in FERC (Freeport) and DOE (Freeport) remove a key argument from challengers’ quiver.

Ultimately, these cases may embolden the DOE—already expected to be more proactive on LNG export under the Trump Administration—to move faster on Non-FTA Authorizations. While the DOE has issued a number of Non-FTA Authorizations, it still has a long list of pending applications. Regardless, LNG export, which already has increased by 558% from 2015 to 2016, will continue to grow. Indeed, with the construction of the Sabine Pass and Freeport LNG Terminals, as well as three other terminals now under way, the U.S. would see its LNG export capacity increase by another 9.2 Bcf/day.

Along with increasing development of shale plays and low natural gas prices, DOE (Freeport) likely portends continued growth in LNG export from the contiguous United States.

Notes:

[1] No. 15-1489 (D.C. Cir. Aug 5, 2017).

[2] DOE Organization Act of 1977 § 301(b), Pub. L. No. 95-91, 42 U.S.C. § 7101 et seq.

[3] DOE Delegation Order No. 00-044.00A (May 16, 2006).

[4] Relatedly, under separate authority in NGA § 7, FERC also approves the construction and operation of interstate natural gas pipelines providing natural gas to an LNG export facility.

[5] Pub. L. No. 102-486, Oct. 24, 1992.

[6] “National treatment” in the context of free trade means treating foreigners and locals equally. Thus, NGA § 3(c) requires that the U.S. not only have entered into a free trade agreement with a country, but that natural gas is a subject of that free trade agreement. For example, the U.S. has a free trade agreement with Costa Rica, which has banned natural gas exploration in its borders, under the Central American Free Trade Agreement (CAFTA). However, because CAFTA does not provide “national treatment” to natural gas, NGA § 3(c) does not apply to LNG exports to Costa Rica.

[7] Current FTA countries are as follows: Australia, Bahrain, Singapore, Dominican Republic, El Salvador, Guatemala, Honduras, Nicaragua, Chile, Morocco, Canada, Mexico, Oman, Peru and Jordan.

[8] Applicants often apply for FTA and Non-FTA Authorization for exports from the same facility. However, the DOE has stated in authorization orders that export volumes authorized under a Non-FTA Authorization are not additive to those authorized from the same facility under a FTA Authorization.

[9] The DOE granted Freeport two separate Non-FTA orders, one for an application submitted in 2010 and another for an application submitted in 2011. Because Sierra Club only requested rehearing of the 2011 application, and not the 2010 application, under the NGA it could only challenge the Non-FTA Order related to the 2011 application in court.

[10] Sierra Club v. DOE (Freeport), slip op. at 16.

[11] DOE (Freeport), slip. op. at 15.

[12] Id. at 23 (internal quotations removed) (citing NAACP v. Fed. Power Comm’n, 425 U.S. 662, 669-70 & n.6 (1976)).

[13] Id. at 24.