FERC Bear Head, Jordan Cove rulings offer LNG market guidance

Mar. 11, 2016, FERC denied Jordan Cove Energy Project LP's application to site, construct, and operate an LNG export plant at Coos Bay, Ore.,³ the first time FERC rejected an LNG export plant. Denial of the Jordan Cove terminal was not predicated on a finding of inconsistency with the public interest. FERC instead denied the associated pipeline and reasoned that "without a pipeline connecting [the terminal] to a source of gas to be liquefied and exported, the proposed Jordan Cove LNG terminal can provide no benefit to the public to counterbalance any of the impacts which would be associated with its construction." ³

These orders, addressing projects from the East Coast of Canada and the US West Coast, point out what might be the most significant legal maxim currently affecting the LNG industry: both DOE/FE and FERC possess (and exercise) significant, discretionary authority under the NGA. Bear Head showcases a favorable outcome in circumstances where the agency had no established guiding policy or applicable procedures for processing applications. Jordan Cove, by contrast, exposes how an LNG export application may be denied even when longstanding policy favors the development of LNG infrastructure. This article examines the lessons learned and policy considerations revealed by both proceedings as they relate to LNG projects across North America.

Bear Head

In Order 3769 (In-Transit Order) DOE/FE determined it lacks jurisdiction under NGA Section 3 over Bear Head LNG's proposed imports of Canadian natural gas travelling by pipeline through the US on its way back to Canada. In this regard, DOE/FE dismissed Bear Head LNG's application seeking authorization to access Western and Central Canadian natural gas supplies that necessarily must cross the US-Canada border (due to transportation pipeline configurations) en route to the proposed Bear Head LNG project. In Order 3770 (Non-FTA Order) DOE/FE granted long-term, multi-contract authorization under NGA Section 3(a) to export US natural gas by pipeline to Canada for subsequent liquefaction and export (i.e., re-export) to non-FTA nations.

The Bear Head LNG proceedings presented legal issues of first impression and "an unusual factual circumstance," as DOE/FE described it. DOE/FE's legal determinations in the Bear Head LNG proceedings were significant. But the legal significance of the Bear Head LNG orders is dwarfed by the political implications of DOE/FE's announced policies of adopting a laissez-faire approach to applications for Canadian gas in-transit through the US and giving the green light to natural gas exports of US natural gas to Canada for liquefaction and export to non-FTA nations.

NGA Section 3 provides only two legal standards for authorizing exports of US natural gas and LNG. Section 3(a) involves a lengthy public interest analysis for exports to non-FTA nations, while Section 3(c) provides an expedited process whereby exports to FTA nations are granted without modification or delay. Before DOE/FE's Feb. 5 orders, it was unclear which of these standards the agency would apply to applications proposing exports of US-sourced gas to an FTA nation for liquefaction and subsequent re-export as LNG to a non-FTA nation.

To complicate matters, DOE/FE previously provided little guidance or procedural transparency regarding how it would review Canadian applications. The DOE/FE's Procedures for LNG Export Decisions apply only to non-FTA exports from the Lower-48 states and do not address exports from Canada.⁴ Similarly, DOE/FE had not considered Canadian LNG exports in its recently issued studies examining the cumulative impacts of LNG exports to non-FTA nations in 12-20 bcfd volumes.⁵

In reviewing Bear Head LNG's in-transit and non-FTA applications, DOE/FE had to determine which of the two legal standards under NGA Section 3 applied. The department opted to apply the discretionary, non-FTA standard, LNG produced at the Bear Head LNG being intended for delivery and end-use in non-FTA nations. It explained that its decision was rooted in Congressional intent that all exports destined for non-FTA nations be reviewed for their consistency with the US public interest. To do otherwise, DOE/FE reasoned, would permit potential exporters to evade the non-FTA public interest analysis simply by transiting natural gas and LNG through an FTA nation.

In anticipation of this approach, Bear Head LNG had included a public interest analysis in support of its proposed LNG exports from Canada to non-FTA nations, although it expressly caveated that "nothing in [its] Application is intended as a concession...that NGA Section 3 jurisdiction extends to LNG exports from Canada."⁶

Bear Head LNG's proceedings required DOE/FE discharge its statutory mandate under the NGA without violating US obligations under the North American Free Trade Agreement (NAFTA) or aggravating a US-Canada energy relationship already strained by discord over the Keystone XL pipeline.⁷

DOE/FE's decision to exercise its NGA Section 3(a) jurisdiction extends beyond the US-Canada border (where the export of US natural gas by pipeline will occur) and follows the gas into Canada (where the export of LNG by vessel will occur). Accordingly, the non-FTA order arguably is an exercise of extraterritorial jurisdiction by DOE/FE, which is not to say it is impermissible.

To further complicate matters, before DOE/FE'S issuance of the in-transit order, there was uncertainty regarding which NGA Section 3 standard DOE/FE would apply to in-transit shipments of Canadian gas and whether DOE/FE would be legally consistent in exercising its NGA Section 3 jurisdiction when Canadian gas was in question, as opposed to US gas.8 DOE/FE opted to dismiss the in-transit application for lack of jurisdiction. Canada's National Energy Board (NEB) also had authorized, without restriction, the export of Canadian gas intended for liquefaction and export from US West Coast projects, including Jordan Cove.⁹

With the lawsuits stemming from the US decision to reject the Keystone XL as a backdrop, and a newly elected Canadian government looking for a fresh start with the Obama Administration, particularly in energy and climate change, DOE/FE's favorable determinations in the Bear Head LNG proceedings strengthened ties between the two nations.

NEPA

A secondary but significant legal issue arose under the National Environmental Policy Act (NEPA), which requires DOE/FE to consider the environmental impacts of its decisions on applications seeking authorization to export natural gas. In the past, DOE/FE could meet its NEPA obligations as a cooperating agency in the NEPA review process led by FERC for US LNG terminals and plants. In the case of the Bear Head LNG project, however, the environmental and safety review would be conducted by Canadian federal, provincial, and local authorities.

When Bear Head LNG filed its applications, relevant DOE/FE non-FTA precedent could be summarized in a single bullet:

• In applications involving the construction of new, or the modification of existing, LNG facilities subject to FERC jurisdiction, DOE/FE acts as cooperating agency in the NEPA review process led by FERC. DOE/FE then adopts the NEPA documentation prepared by FERC, be it an environmental assessment (EA) or environmental impact statement (EIS), provided DOE/FE has conducted an independent review of such NEPA documentation and determined its comments and suggestions have been satisfied. In those instances that an EA is prepared, DOE/FE issues a finding of no significant impact (FONSI). In other instances that an EIS is prepared, DOE/FE issues a record of decision.

Since then, relevant DOE/FE non-FTA precedent has evolved, culminating with the Feb. 5, 2016, decisions:

• In applications involving existing LNG facilities not subject to FERC jurisdiction, DOE/FE grants categorical exclusion under its regulations at 10 CFR Part 1021, Subpart D, Appendix 85.

• In applications involving the construction of new CNG facilities not subject to FERC jurisdiction, DOE conducts the NEPA review process and prepares NEPA documentation.

• In applications involving the construction of new LNG facilities in Canada (i.e., not subject to FERC jurisdiction), DOE/FE grants categorical exclusion in accordance with its regulations at 10 CFR Part 1021, Subpart D, Appendix 85, with authorized export volume in proportion with the level of existing US pipeline capacity.

In-transit shipments

DOE/FE dismissed Bear Head LNG's in-transit application on the grounds that in-transit shipments returning to the country of origin are not imports or exports within the meaning of NGA Section 3, such that they fall outside of DOE/FE's NGA Section 3 jurisdiction. In reaching this conclusion, DOE/FE noted Congress' likely intention that the terms import and export apply only to those categories of shipments that, by their nature, could have a material effect on the US public interest. Shipments of Canadian-sourced natural gas between Canadian points, according to DOE/FE, are "categorically unlikely" to have a material impact on the US public interest and therefore lie outside DOE/FE's NGA Section 3 purview.

In further support of its jurisdictional determination, DOE/FE cited a 1977 agreement-the Agreement Between the Government of the United States of America and the Government of Canada Concerning Transit Pipelines-which espouses a laissez-faire policy for in-transit shipments of hydrocarbons between the two countries.

Despite dismissing the application and disclaiming Section 3 jurisdiction, however, DOE/FE drew on its authority under Section 16 of the NGA to direct Bear Head LNG to file monthly reports and maintain records related to in-transit shipments.

Jordan Cove

In its Mar. 11 Jordon Cove order, FERC considered both Jordan Cove's application under NGA Section 3 for the terminal, and Pacific Connector's application under NGA Section 7 for the pipeline. FERC first evaluated and rejected the proposed pipeline, finding that Pacific Connector was unable to adequately demonstrate a market need. FERC next denied Jordan Cove's Section 3 application on the grounds that, without a supply source, the terminal could provide no benefit to the public that would justify the impacts of building it.

FERC's order marked the first denial of an LNG export project in the Lower-48 states. But as discussed in the Jordan Cove order, FERC's rationale for denying the Pacific Connector pipeline is not without precedent. Any applicant who has not entered into binding precedent agreements for a significant portion of a proposed pipeline's capacity and is faced with significant landowner opposition will be challenged to satisfy FERC's public convenience and necessity requirement.

In looking at stand-alone interstate pipelines (pipelines not proposed to directly interconnect with LNG terminals and that do not cross the US border into Canada or Mexico), FERC typically has no basis for considering the public interest served by the import-export of natural gas or LNG in its consideration of public convenience and necessity under NGA Section 7. FERC also "has not previously found a proposed pipeline to be required by the public convenience and necessity under NGA Section 7 on the basis of a DOE finding under NGA section 3 that the importation or exportation of the commodity natural gas...is consistent with the public interest."9

FERC, however, had never before predicated approval of an LNG export plant on the associated pipeline's ability to satisfy the public convenience and necessity requirement under NGA Section 7. In fact, in most (if not all) orders considering both LNG terminals or plants and interstate pipelines, FERC has first considered the LNG terminal (which benefits from the Section 3 presumption in favor of approval) and then the pipeline, which under Section 7, does not benefit from a presumption in favor of approval.

In the Jordan Cove order, however, FERC reversed that sequencing and first considered the pipeline, followed by the export plant. FERC therefore never reached a favorable public interest determination on the plant. Without this favorable determination, the possibility of relying on generalized market conditions supporting the export of LNG to substantiate, even in part, the need for the pipeline, was removed. The stage then set for FERC to consider the Pacific Connector pipeline on a stand-alone basis under the more exacting Section 7 standard failed to meet the requirements needed for approval, its reliance on generalized market demand deemed insufficient to counterbalance landowner opposition.

The authors express no opinion with regard to the likelihood of a different outcome for the Jordan Cove project had FERC followed the same approach taken in other LNG proceedings and allowed Pacific Connector to enjoy the cushioning a favorable public interest determination on the plant may have provided. But it is clear that FERC's discretionary authority may be exercised without advance warning.

Section 7(c) of the NGA requires companies seeking to build and operate an interstate pipeline to apply to FERC for a certificate of public convenience and necessity.10 In determining whether an application meets this standard, FERC balances the benefits of the project against potentially adverse effects on economic interests.

To satisfy the "necessity" aspect of the Section 7 standard, an applicant must demonstrate a market need for a pipeline's services. Applicants can do this in a variety of ways, such as submitting precedent agreements, demand projections, potential cost savings to consumers, or a comparison of projected demand with the amount of capacity currently serving the market. Although FERC considers all of the information provided by an applicant, precedent agreements constitute "significant evidence of need or demand for a project."9

Indications of market need are then weighed against a project's potentially adverse economic impacts. FERC assesses whether the applicant can financially support the project without relying on subsidization from existing customers, and whether there is an adverse impact on the interests of the applicant's existing customers, competitors and their captive customers, and landowners and surrounding communities.9

Here, according to FERC, is where Pacific Connector failed to adequately demonstrate evidence of market need for the proposed pipeline.

The application also faced opposition from landowners, who identified several possibly detrimental impacts on their economic interests, such as land valuation, tax revenue, and business operations. Because Pacific Connector had acquired only a small portion of the easements required to develop the project, FERC noted that some rights of way would have to be obtained by eminent domain. FERC denied the application, finding that the "generalized allegations of need proffered by Pacific Connector do not outweigh the potential for adverse impact on landowners and communities."

Having denied Pacific Connector's application to construct and operate its proposed interstate pipeline, FERC then rejected the Jordan Cove plant's Section 3 application. FERC noted that the Pacific Connector pipeline was the only proposed transportation path for natural gas to reach the Jordan Cove LNG plant and that it could not operate absent the pipeline. Asserting that it "has not previously authorized LNG export terminal facilities without a known transportation source of natural gas," FERC concluded that permitting Jordan Cove to site, construct, and operate the LNG terminal would be inconsistent with the public interest. FERC made this decision, notwithstanding that DOE/FE already made a favorable public interest determination with regards to Jordan Cove's plant.11

On Apr. 8, 2016, Jordan Cove and Pacific Connector filed a request for rehearing of the Mar. 11 order, asking FERC either grant the application or permit Jordan Cove and Pacific Connector to supplement their public convenience and necessity findings. Specifically, Jordan Cove and Pacific Connector requested FERC to grant rehearing and grant their Section 3 and Section 7 applications. Alternatively, they requested FERC grant rehearing and (1) grant the applications, subject to a condition that would prevent the initiation of condemnation proceedings until executed precedent agreements are submitted to commission staff; or (2) stay the Mar. 11 order and re-open the record for 6-months to receive additional evidence of customer support. On May 9, FERC issued on order granting rehearing of the Mar. 11 order and extending the time by which FERC must act on the request for rehearing.

References

1. Office of Fossil Energy, "Bear Head LNG Corporation & Bear Head LNG (USA), LLC," DOE/FE Order No. 3770, FE Docket No. 15-33-LNG, Feb. 5, 2016.

2. Office of Fossil Energy, "Bear Head LNG Corporation & Bear Head LNG (USA), LLC," DOE/FE Order No. 3681, FE Docket No. 15-14-NG, Feb. 5, 2016.

3. FERC, "Jordan Cove Energy Project, L.P. and Pacific Connector Gas Pipeline, LP, Order Denying Applications for Certificate and Section 3 Authorization," 154 FERC, Mar. 11, 2016.

4. "Procedures for Liquefied Natural Gas," 79 Federal Register 48, 132, Aug. 15, 2013.

5. "Macroeconomic Impacts of LNG Exports Studies," 80 Fed. Reg. 81, 300, Dec. 29, 2015.

6. Office of Fossil Energy, "Bear Head LNG Corporation & Bear Head LNG (USA), LLC: Application for Long-Term Authorization to Export Natural Gas to Canada and to Export Liquefied Natural Gas from Canada to Free Trade Agreement and Non-Free Trade Agreement Nations," Feb. 25, 2015.

7. FERC, "Maritimes & Northeast Pipeline, L.L.C.: Order Amending Presidential Permit and Authorization Under Section 3 of the Natural Gas Act," 128 FERC 61,070, p. 10, July 2l, 2009.

8. "Notice of Application: Bear Head LNG Corporation and Bear Head LNG (USA) LLC, Application for Long-Term, Multi-Contract Authorization To Import Natural Gas From, for Subsequent Export to, Canada for a 25-Year Term," 80 Fed. Reg. 20,484, Apr. 16, 2015.

9. Office of Fossil Energy, "Jordan Cove LNG L.P.," DOE/FE Order No. 3412, FE Docket No. 13-141-NG, Mar. 18, 2014.

10. 15 US Code § 717f, "Construction, extension, or abandonment of facilities."

11. Office of Fossil Energy, "Jordan Cove Energy Project, L.P.," DOE/FE Order No. 3413, FE Docket No. 12-32-LNG, Mar. 24, 2014.

The authors
Tania Perez ([email protected]) is a partner at Cadwalader, Wickersham & Taft LLP, focused on development of US and international energy infrastructure projects. She also participates in proceedings before FERC and DOE. Tania received her JD (2002) from Fordham University School of Law, New York, NY, and BA from Columbia University, also in New York City. Tania is a member of the natural gas and renewable energy committees of the Energy Bar Association and the New York Sub-Chapter founding committee of the Association of International Petroleum Negotiators.
Lamiya Rahman ([email protected]) is an associate at Cadwalader, Wickersham & Taft, focused on representing energy and commodity companies, financial institutions, and trade associations. Her work includes representing clients in enforcement matters before the Commodity Futures Trading Commission (CFTC) and FERC, advising on regulatory matters, and assisting with transactions. Rahman received her JD from the Georgetown University Law Center and her BS from Georgetown University's Edmund A. Walsh School of Foreign Service.