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How to Improve the LNG Export Approval Process

by Michael Levi
June 14, 2013

One of the odder aspects of how applications to export liquefied natural gas (LNG) are being handled is the “first come, first served” approach. The Department of Energy (DOE) has said that it will consider applications to export LNG to countries with which the United States does not have applicable free trade agreements (non-FTA countries) in the order that they are filed with the DOE, regardless of any other merits or weaknesses of the individual applications. This is led to a stampede of questionable applications driven by a desire to be first in line.

In a brief new paper for the Brookings Institution, David Goldwyn lays out several problems with this approach and proposes a thoughtful way to modify it.  Most simply, since the DOE appears to be planning to consider a new application every couple months, the current process provides an undeserved rent to whichever company is luckiest to have paid their fifty dollars and gotten in line earliest. At least as problematic, as Goldwyn notes, is what this approach will do to DOE analysis of the cumulative impacts of approved projects, and hence to future policy.  Imagine that the DOE approves 10 billion cubic feet a day (bcf/d) of notional export projects. It will then probably assess its next project application — including economic and volatility impacts — starting from a baseline in which it assumes 10 bcf/d of other exports. But there may be no good reason to make this assumption: it is quite possible that some of the approved projects will fail to get environmental and other approvals or to line up the contracts and financing that they need to proceed. The ultimate result of the current approach, then, may be to deny some attractive projects deep in the queue in deference to vaporware projects higher on the list.

Goldwyn’s paper proposes a simple change to help address this. Instead of handling applications on a first-come-first-served basis, companies would be assigned priority according when they’ve lined up contracts for their services and have formally filed for FERC approval (a costly step that indicates some level of environmental feasibility). This would raise the odds that those facilities that are approved would be ones that will actually be built. It would also put companies on a more level playing field in competing for overseas contracts (those high in the queue currently have an edge).

This is, to be certain, an imperfect solution. The requirement that companies have contracts for sale of the LNG is probably weaker than it appears, since companies would presumably be able to line up flimsy contracts in order to satisfy the requirement; if they later replaced those with other more solid ones, it’s hard to see DOE revoking their approval. Moreover, if the market anticipates restrictions on the amount of LNG exports that will ultimately be approved, the shift that Goldwyn proposes would transfer some of the rents currently accruing to companies high in the cue to overseas buyers. That’s because those buyers would be able to confer a benefit to a select set of potential LNG exporters (by contracting with them and thus moving them up the queue) – and would presumably be able to extract something for that.

These are poor reasons, though, not to adopt the reforms Goldwyn advocates. DOE would be wise to take a serious look at them as it moves forward.

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