Statement of Christopher Smith
Deputy Assistant Secretary for Oil and Natural Gas
Office of Fossil Energy

before the

Senate Committee on Energy and Natural Resources

on

The Department of Energy's Role in Liquefied Natural Gas Export Applications

November 8, 2011

Thank you Chairman Bingaman, Ranking Member Murkowski, and members of the Committee; I appreciate the opportunity to be here today to discuss the Department of Energy’s (DOE) program regulating the export of natural gas, including liquefied natural gas (LNG).

DOE’s authority to regulate the export of natural gas arises under section 3 of the Natural Gas Act, 15 USC 717b, and section 301(b) of the DOE Organization Act, 42 USC 7151. That authority is vested in the Secretary of Energy and has been delegated to the Assistant Secretary for Fossil Energy.

Section 3(a) of the Natural Gas Act sets forth the standard for review of most LNG export applications:

• [N]o person shall export any natural gas from the United States to a foreign country or import any natural gas from a foreign country without first having secured an order of the [Secretary of Energy] authorizing it to do so. The [Secretary] shall issue such order upon application, unless after opportunity for hearing, [he] finds that the proposed exportation or importation will not be consistent with the public interest. The [Secretary] may by [the Secretary’s] order grant such application, in whole or part, with such modification and upon such terms and conditions as the [Secretary] may find necessary or appropriate.

Section 3(a) thus creates a rebuttable presumption that a proposed export of natural gas is in the public interest, and requires DOE to grant an export application unless DOE finds that the record in the proceeding of the application overcomes that presumption. Section 3(a) also authorizes DOE to attach terms or conditions to the order that the Secretary finds are necessary or appropriate to protect the public interest.

In the Energy Policy Act of 1992 (EPAct 92), Congress introduced a new section 3(c) to the Natural Gas Act. Section 3(c) created a different standard of review for applications to export natural gas, including LNG, to those countries with which the United States has in effect a free trade agreement requiring the national treatment for trade in natural gas. Section 3(c) requires such applications to be deemed consistent with the public interest, and requires such applications to be granted without modification or delay.

There are currently 15 countries with which the United States has in place free trade agreements that require national treatment for trade in natural gas. These 15 countries include:

• Australia, Bahrain, Canada, Chile, Dominican Republic, El Salvador, Guatemala, Honduras, Jordan, Mexico, Morocco, Nicaragua, Oman, Peru, and Singapore.

There also are two countries—Israel and Costa Rica—that have free trade agreements with the United States that do not require national treatment for trade in natural gas. Additionally, there are three more countries—South Korea, Colombia, and Panama—that have negotiated free trade agreements with the United States. While these three free trade agreements have recently been ratified by the U.S. Senate, the agreements have not yet taken effect. However, as negotiated, the agreements require national treatment for trade in natural gas, which will have the effect of bringing applications to export LNG to those three countries under section 3(c) of the Natural Gas Act.

Because applications under section 3(c) must be granted without modification or delay and are deemed to be in the public interest, DOE does not conduct a public interest analysis of those applications and cannot condition them by the insertion of terms which otherwise might be considered necessary or appropriate.

For applications requesting authority to export LNG to countries that do not have free trade agreements requiring national treatment for trade in natural gas, DOE conducts a full public interest review. A wide range of criteria are considered as part of DOE’s public interest review process, including:

• Domestic need for the natural gas proposed for export

• Adequacy of domestic natural gas supply

• U.S. energy security

• Impact on the U.S. economy (GDP), consumers, and industry

• Jobs creation

• U.S. balance of trade

• International considerations

• Environmental considerations

• Consistency with DOE’s long-standing policy of promoting competition in the marketplace through free negotiation of trade arrangements

• Other issues raised by commenters and/or interveners deemed relevant to the proceeding

DOE’s review of applications to export LNG to non-free trade agreement countries is conducted through a publicly transparent process. Upon receipt of an application, DOE issues a notice of the application in the Federal Register, posts the application and all subsequent pleadings and orders in the proceeding on its website, and invites interested persons to participate in the proceeding by intervening and/or filing comments or protests. Section 3(a) applicants are typically given an opportunity to respond to any such comments or protests and, after consideration of the evidence that has been introduced into the record, DOE issues an order either granting the application as requested, granting with additional terms or conditions, or denying the application.

Under the Natural Gas Act, DOE’s orders are subject to a rehearing process that can be initiated by any party to a proceeding seeking to challenge DOE’s determinations. Court review is available as well after the rehearing process is exhausted.

Over the last several years, domestic natural gas production has increased significantly, primarily due to the development of improved drilling technologies, including the ability to produce natural gas trapped in shale gas geologic formations. The most recent data and analysis prepared by the Energy Information Administration (EIA) within DOE shows an increasing volume of shale gas production. Specifically, EIA indicates that domestic gross gas production from shale increased to 3.4 trillion cubic feet (Tcf) in 2009, compared to 2.3 Tcf in 2008.(1) Further, in the Annual Energy Outlook 2011 (AEO 2011), EIA projected that, by 2015, annual dry shale gas production will increase to 7.2 Tcf and, by 2035, to 12.2 Tcf. Natural gas prices have declined and imports of LNG have significantly declined. Recently, the domestic price of natural gas at the Henry Hub for November 2011 delivery was $3.60 per million Btu.(2) International prices of LNG are significantly higher. Due in part to these changing market economics, DOE has begun to receive a growing number of applications to export domestically produced lower-48 natural gas to overseas markets in the form of LNG.

Insofar as these applications have involved exports to free trade agreement countries, they are by statute, deemed consistent with the public interest and DOE is required to grant them without modification or delay. To the extent the applications involve non-free trade agreement countries, as I have indicated above, DOE conducts a thorough public interest analysis and attaches terms and conditions which are necessary or appropriate to protect the public interest.

DOE received the first application for long-term (greater than 2 years) authority to export LNG produced in the lower-48 States to non-free trade agreement countries on September 7, 2010, from Sabine Pass Liquefaction, LLC (Sabine Pass), a subsidiary of Cheniere Energy, Inc. This followed on DOE’s earlier issuance of authority to Sabine Pass to export a like volume of natural gas to free trade agreement countries on September 7, 2010. A notice of the non-free trade agreement export application was published in the Federal Register and the public was provided 60 days to intervene and/or protest the application.

Sabine Pass’ non-free trade agreement export application sought authority to export the equivalent of up to 2.2 billion cubic feet per day (Bcf/d) of natural gas, equivalent to about 3.3 percent of current domestic consumption. In its application, Sabine Pass pointed to several economic and public benefits likely to follow on a grant of the requested authorization, including:

• Creation of several thousand temporary and permanent jobs, both through direct and indirect job formation; and

• Improvement in U.S. balance of payments valued at approximately $6.7 billion from LNG exports and the impact of increased production of natural gas liquids.

Additionally, Sabine Pass addressed the question of the domestic need for the gas to be exported; the volume of domestic supplies; and the likely impact of the proposed exports on natural gas prices. To this end, it included with its application several economic and technical reports indicating that any increase in natural gas prices from the proposed exports would be relatively modest and not detrimental to domestic energy security.

Sabine Pass’s application was opposed by the Industrial Energy Consumers of America and the American Public Gas Association. Those groups challenged Sabine Pass’ claims of economic benefits and no detrimental impact on domestic energy security. However, neither opponent of the application introduced economic or technical studies to support their allegations.

DOE closely analyzed the evidence introduced by the applicant and by those opposing the application. Mindful of the statutory presumption favoring a grant of the application, the agency found that:

• The studies introduced by applicant indicated LNG exports will result in a modest projected increase in domestic market price for natural gas, which reflects the increasing marginal costs of domestic production; and

• The public record supported the conclusion that the requested authorization will yield tangible benefits to the public whereas the allegations of negative impacts submitted by interveners opposing the application were not substantiated on the record. In particular, the interveners failed to offer any rebuttal studies of natural gas supply, demand and/or price analysis to support their claim the application was not consistent with the public interest.

Following a review of the record in this proceeding, DOE concluded that the opponents of the application had not demonstrated that a grant of the requested authorization would be inconsistent with the public interest, and DOE granted the requested authorization subject to several terms and conditions.

As indicated above, applicants are increasingly seeking authorization from DOE to export domestic supplies of natural gas as LNG to higher priced overseas markets. The Natural Gas Act favors granting applications to export to non-free trade agreement countries unless it can be demonstrated that a proposed export is inconsistent with the public interest. In the case of exports of LNG to free trade agreement countries that require national treatment for trade in natural gas, DOE is without any authority to deny, condition, or otherwise limit such exports.

Mindful of the growing interest in exporting domestically produced LNG, DOE recognized in the Sabine Pass order that the cumulative impact of Sabine Pass and additional future LNG export authorizations could pose a threat to the public interest. DOE stated that it would monitor the cumulative impact and take such action as necessary in future orders.

DOE presently has before it four long-term applications to export lower-48 domestically produced LNG to countries with which the United States does not have a free trade agreement that requires national treatment for trade in natural gas. The volumes of LNG that could be authorized for export in these non-free trade agreement applications, including the 2.2 Bcf/d authorized for export in Sabine Pass, would total 6.6 Bcf/d, which represents 10 percent of total current domestic natural gas daily consumption in the United States. Consistent with the Natural Gas Act, DOE already has granted authorization from these five facilities to export this same volume to free trade agreement countries.

In order to address the potential cumulative impact of a grant of the pending applications, DOE has commissioned two studies: one by the EIA and the other by a private contractor. Taken together, these studies will address the impacts of additional natural gas exports on domestic energy consumption, production, and prices, as well as the cumulative impact on the U.S. economy, including the effect on gross domestic product, jobs creation, and balance of trade, among other factors. We anticipate that these studies will be completed in the first quarter of calendar year 2012. In this regard, we are mindful of the need for prompt action in each of the proceedings before us. However, we believe that a sound evidentiary record is essential in order to proceed to a decision and that the studies being undertaken are important elements of such a record.

I am happy to answer any questions that you may have.

(1) EIA, Natural Gas Gross Withdrawals and Production, Release Date: October 29, 2011 http://www.eia.gov/dnav/ng/ng_prod_sum_dcu_NUS_a.htm

(2) The November 2011 contract price as of October 24, 2011, was $3.60 per million Btu.