DOE’s authorizations to export natural gas, including LNG, from the U.S. impose reporting requirements regarding the destination of the exported gas and certain contracts regarding its supply and sales. DOE recently modified one of those requirements in a significant way and proposed sharper guidelines for complying another to minimize regulatory burdens and reduce administrative uncertainty. These changes in DOE policy will be of interest to LNG export authorization holders and their counterparties in gas sales contracts, and to proposed LNG export projects that are now seeking or will seek such authorizations from DOE.
“End use” country reporting provision dropped
Section 3 of the Federal Power Act requires DOE to approve natural gas exports that are in the public interest. Exports to countries with whom the U.S. has a free trade agreement (FTA) are deemed in the public interest and are routinely approved. For exports to non-FTA countries, DOE conducts informal adjudications regarding the public interest determination that are sometimes contested and lengthy. In 2011, DOE began to condition export authorizations to require a clause in the holder’s sale contracts requiring purchasers to resell or deliver the gas only to countries included in the authorization (FTA or non-FTA), and to report to the authorization holder the country into which the gas or LNG “was actually delivered.” Authorization holders are required to include this information in monthly reports to DOE.
In 2016, DOE became concerned that gas could be exported to a neighboring FTA country and then re-exported to a non-FTA country, thereby circumventing DOE’s non-FTA public interest review. To address this, DOE revised the resale provision to apply to the country where the gas “was actually delivered and/or received for end use.” DOE more recently has become aware, however, that authorization holders have limited visibility into the final end use country once a cargo of LNG is delivered, and hence it is impracticable, if not impossible, for holders to comply with the end use reporting requirement. Holders are understandably concerned that the end use reporting requirement could jeopardize their authorizations if they cannot comply with it.
To address this problem, DOE issued a policy statement giving notice that it will no longer include the end use provision in export authorizations and will revert to the prior practice of requiring reporting of the country where the gas was “actually delivered.” DOE says there is now insufficient concern about authorization holders circumventing the public interest review process for non-FTA exports to justify the end-use reporting requirement because: (1) all U.S. LNG export terminals operating or now under construction have long-term authorization to export to both FTA and non-FTA countries, (2) there is no LNG ‘‘hub’’ in an FTA country providing an opportunity to transit U.S.-sourced natural gas to a non-FTA country, and (3) re-exports of all LNG cargoes represent a very small percentage of LNG trade.
The policy statement applies only to future authorizations. However, DOE also issued a blanket order that removes the end use provision from affected existing authorizations. The order includes a list of the 42 affected export authorizations.
Proposed guidance on contracts
DOE’s regulations require natural gas and LNG export authorization applicants to submit copies of all “relevant contracts and purchase agreements” and require authorization holders to provide changes to the information that was provided during the application process, including relevant contracts, “as soon as practicable.” The regulations provide no specificity on the terms “relevant contracts and purchase agreements” or “as soon as practicable.” DOE has issued a proposed interpretive rule to provide specificity to these terms.
DOE proposes to interpret the term ‘‘relevant contracts and purchase agreements’’ to include the following types of executed long-term (two years or longer) binding commercial agreements associated with the export of natural gas:
- Natural gas supply agreements
- Terminal service agreements
- Purchase and sale agreements
- Liquefaction tolling agreements, liquefaction and regasification tolling capacity agreements, and similar types of agreements
- Other natural gas export contractual agreements associated with the first sale or transfer of natural gas at the point of export and specify the volume of natural gas under contract.
DOE also proposes to interpret the phrase “as soon as practicable” to mean within 30 days of the execution of the agreement.
Comments on the proposed interpretive rule are due January 18, 2019.