Originally published for customers August 25, 2023
The DOE announced a new policy on requests for authority to export LNG to non-FTA countries. Projects with the earliest commencement deadlines and the lowest subscribed capacity would appear to be most at risk.
What’s the issue?
On April 21, the U.S. Department of Energy (DOE) announced a new policy concerning requests for authority to export LNG to countries that do not have a free trade agreement with the U.S.
Why does it matter?
In the past, when the DOE would grant export authority to a proposed LNG facility, it typically required the facility to be in operation within seven years or the export authority would expire. That seven-year period was approaching for a number of facilities and some had obtained extensions of the seven-year construction window. The new policy makes obtaining such extensions more difficult if the project sponsor can not show it is making real physical progress on the project.
What’s our view?
On the same day that it announced the new policy, the DOE denied an extension request by Energy Transfer for its Lake Charles LNG project. Energy Transfer reacted harshly to the denial, but has since decided to simply apply for a new export authorization. The impact on other previously approved projects will be determined primarily by how much time they have left under their approval and whether they have made any progress commercially that would allow the project to move forward physically.
DOE Authority Over the Exportation of LNG
Under section 3(a) of the Natural Gas Act (NGA), the DOE is responsible for reviewing and approving applications to export natural gas, including LNG, from the U.S. to countries with which the U.S. does not have an existing free trade agreement (Non-FTA countries). Under that statute, the DOE is directed to authorize the exportation of natural gas unless the DOE determines that doing so ‘‘will not be consistent with the public interest.’’ The NGA and DOE’s own regulations allow it to include in its authorization orders “such terms and conditions as the [DOE] may find necessary or appropriate.’’ In the orders it has issued, the DOE includes a “commencement deadline” by which the project must have commenced the export authorized or the authorization expires. This time period is typically seven years from the date of the order, but some have been given longer periods. If the facility needed to export the LNG is not completed by this commencement deadline, the non-FTA authorization expires. If the exports have started by that date, the authority continues until December 31, 2050 and for three years thereafter to allow for a wind down of the facility.
Extension of the Commencement Deadline and a New Policy
All of the currently operating major LNG export terminals in the U.S. were able to meet the project’s commencement deadline without the need for an extension. But beginning in 2020, the DOE granted extensions of the deadline to three projects that had not yet begun commercial operation. Those three were Golden Pass LNG, Lake Charles LNG and Cameron LNG. Each of those extensions were granted, but in April of this year the DOE announced a new policy that it would begin to follow for granting such extensions. On the same day that it announced the new policy it granted an extension to Port Arthur LNG, but denied an additional extension to Lake Charles LNG.
Under the new policy, DOE will no longer grant extensions to the previously established commencement deadline for a project, unless the authorization holder submits an application prior to that deadline and demonstrates that two conditions have been met: first, that the authorization holder (or its affiliate) has physically commenced construction on the associated export facility; and second, that the inability to comply with the deadline is the result of extenuating circumstances outside of the authorization holder’s control, including but not limited to acts of God.
DOE explained that the new policy was a result of its concern about what it termed as a growing ‘‘authorization overhang” of approved projects, which it defined as approved non-FTA exports associated with facilities that are not currently operating or under construction. DOE asserted that this authorization overhang has widened, with detrimental effects. According to the policy statement release, as of October 2019, DOE had issued final orders authorizing exports of LNG to non-FTA countries totaling 38.06 Bcf/d of natural gas, with 15.54 Bcf/d of export capacity then operating or under construction—a difference of 22.52 Bcf/d.
As of April of this year, however, this gap had grown to 25.64 Bcf/d. DOE asserts in the policy statement that this overhang obscures an accurate picture of investment-backed commitments involving U.S. LNG. The DOE claims that when the overhang is greater than the current physical capacity, there is no assurance of when the full export capacity will be available, or whether it will become available at all. This uncertainty is becoming increasingly disruptive to DOE’s planning, economic forecasting, and market analysis of the U.S. LNG export market as it reviews newer non-FTA export applications. Therefore, it felt the need to clearly set forth a policy that requires demonstrated progress before an extension is granted.
Even if the project can establish these conditions have been satisfied, however, the DOE is not committing to granting an extension. Instead, the policy simply requires it to put the request out for comment and then consider the application under the “good cause” standard provided by the NGA, with appropriate “consideration of the public interest.” The new policy will only apply to extension requests filed after its announcement, which means an extension request that was previously filed by Magnolia LNG will be processed under the prior case by case analysis used by the DOE.
Energy Transfer Responds to Denial of Lake Charles LNG Extension Request
Energy Transfer, which is the owner of the developer of the Lake Charles LNG project, was decidedly displeased with the decision to deny its extension request, which would have extended its commencement deadline from December 16, 2025 to December 16, 2028. In its request for a rehearing of that denial it asserted that “approval of the extension is required under NGA section 3. DOE’s denial of the extension violates the Administrative Procedure Act and raises concerns regarding lack of due process and impermissible takings.” Energy Transfer also asserted that the DOE’s reliance on a “good cause” standard for granting an extension is inconsistent with its statutory authority under the NGA and that denying the extension request would “likely result in [the] project’s demise.”
Most significantly, Energy Transfer noted that it has “fully-executed long-term LNG offtake contracts for 7.9 million tons of LNG per annum—approximately half of the FERC-approved LNG production capacity of the facility—and is in advanced discussions with several other LNG customers that it expects will result in long-term offtake contracts for substantially all of the remaining uncommitted LNG production capacity.” But apparently those contracts were put at substantial risk by the DOE’s denial. Energy Transfer noted that while the project was anticipating reaching FID by the end of 2023, the denial would cause a “classic bank run, [as] would-be customers and investors will become spooked, pull out of the Project, and the Project will fail.” It even noted that the run had already begun with the loss of one potential customer.
Despite its impassioned plea for reconsideration of the denial, on June 21, the DOE issued an order reaffirming its denial. Although the pleadings of Energy Transfer were clearly designed to support an appeal to the courts of the denial, it appears that the company has decided to take a more conciliatory approach. Press reports indicate that just last week, Energy Transfer has instead chosen to file a new request for non-FTA authorization from DOE and has requested that the decision be issued by February 19, 2024, with a new seven-year commencement deadline which would extend until 2031.
Potential Impact of the DOE’s New Policy
As discussed above, the DOE’s new policy for granting an extension of the commencement deadline is primarily focused on the physical progress of the facility. If there is no such physical construction, it seems that the likelihood of obtaining an extension is remote. As indicated by the response of Energy Transfer to the denial, the key commercial issue that must be addressed before construction typically begins is getting a sufficient amount of offtake contracts to support reaching FID and obtaining the financing to begin construction.
We have set forth above the currently approved Gulf Coast projects that have yet to reach commercial operation. These projects all have an established commencement deadline that will either need to be met or must be extended by satisfying the new standards set forth in the new DOE policy. Our friends at East Daley Analytics have provided us with their current calculation of the percentage of each project’s capacity that has been subscribed by offtake agreements. Those projects with the earliest commencement deadlines and the lowest subscribed capacity would appear to be most at risk of not meeting the commencement deadline and also not being able to meet the new standard for an extension under the DOE’s policy. Therefore, they are the ones most likely to face a demise like that outlined in Energy Transfer’s pleadings where the approaching deadline leads to a cascading problem with their ability to sign offtake agreements, which may ultimately lead to their commercial demise.