Impact of new US LNG exports policy unclear

The DOE will now only require that holders of export licenses report the initial destination of such exports — the same requirement it had before implementing the end-user requirement in February 2016. It also will remove from any export licenses it issued since February 2016 the requirement to report end-user countries.

The DOE said it is "impractical, if not impossible" for holders of export licenses to track molecules of US pipeline gas or LNG after such supplies arrive at an initial foreign destination.

The end-user requirement was primarily implemented to prevent proposed Canadian or Mexican LNG export facilities from gaining unfair advantages over LNG export terminals in the contiguous US. The DOE said in today's policy statement that "there is currently insufficient concern" that Canadian or Mexican LNG projects would attempt to game the new policy, or that any other LNG exporter would try to circumvent the spirit of US export policy.

"Right now, the US is growing its position as a global leader in LNG exports and is projected to be the third-largest in the world behind Australia and Qatar by the end of 2019," said DOE assistant secretary for fossil energy Steven Winberg. "Today's action is another way the Trump Administration is working to advance American energy dominance."

But the language of the order confused some US LNG developers as to whether Mexican and Canadian projects could be advantaged. The DOE said today it needed more time to answer Argus questions about the order.

Under the US Natural Gas Act the DOE is required to quickly and without modification approve pipeline gas or LNG exports to countries that have free trade agreements (FTAs) with the US, as such exports are presumed to be in the national interest. But the DOE can deny or modify exports to non-FTA countries if such exports are shown to be against the national interest.

Most LNG-consuming nations, including Japan, China and all European countries, do not have FTAs with the US, so US LNG exports to such countries would normally require non-FTA licenses. Primarily because of massive US shale gas reserves, the DOE has never denied or altered a non-FTA license based on concerns that such exports would increase domestic gas prices or otherwise harm the US. Some US LNG developers have said potential importing countries can be wary of signing long-term US LNG supply deals because of concerns that the DOE would rescind or modify non-FTA licenses if domestic gas prices spike unexpectedly. The DOE has said it would not alter non-FTA licenses to try to control domestic prices.

Since Canada and Mexico have FTAs with the US, the DOE under the Obama administration was concerned that US pipeline gas could be sent to those countries under irrevocable FTA licenses, and then that gas would be liquefied in Canada or Mexico for export to any country, including non-FTA nations. The DOE previously required the proposed Goldboro and Bear Head LNG export projects in eastern Canada to get non-FTA licenses to import US pipeline gas and then re-export it as LNG to non-FTA nations.

But with today's change it is unclear if new LNG projects in Canada or Mexico could just use an FTA license. Even if the DOE would require non-FTA licenses, it is not clear how it would enforce that provision if the end user country is not required to be reported.

San Diego-based Sempra Energy has proposed using US feed gas for its planned first-phase Energia Costa Azul LNG export project in northwest Mexico. The project is scheduled to come on line in 2023 with capacity of 2.4mn t/yr, equivalent to 309mn cf/d (3.3bn m³/yr) of gas. It has signed preliminary 20-year deals for all that output to France's Total and Japanese firms Tokyo Gas and Mitsui.

Sempra did not respond to an Argus inquiry as to whether it believes it would need a non-FTA license to export the US gas as LNG out of Costa Azul to all countries. Sempra has said it plans to procure feed gas from the Permian and San Juan basins in the US southwest using existing pipeline infrastructure.

Alfred Sorensen, chief executive of Goldboro LNG owner Pieridae Energy, told Argus that under the new policy nothing would prevent new LNG projects in Canada or Mexico from just using an FTA license.

"I guess they could not do that but run the risk," he said. "We thought about doing just that several years ago and customers would not take that risk so we got the permits instead."

He added that he "would be surprised if anyone with a reputation would go against the spirit of the law."

Bear Head LNG owner Liquefied Natural Gas Limited told Argus it will cooperate with the DOE to comply with requirements and is examining the policy change.

The DOE pointed out today that the US-based LNG export projects would not likely circumvent the spirit of current regulations as no busy LNG storage trading hub has been established in an FTA nation and LNG re-exports are typically not economic. But sending cheap US pipeline gas to Mexico or Canada for liquefaction and export likely would be economic.

The Washington-based industry advocacy group Center for LNG praised the DOE for the change, saying it would provide "greater certainty in a fast-growing global industry." But it did not immediately comment as to whether projects in Mexico or Canada could gain competitive advantages.