Subtle Shift in U.S. LNG Export Authorizations

U.S. liquefied natural gas (LNG) exports have been essential to global energy security in the past 18 months, but policymakers are grappling with the economic, climate, and energy security dimensions of much larger LNG exports. U.S. LNG exports rose from zero in early 2016 to 10.6 billion cubic feet per day (Bcf/d) in 2022—placing the United States on par with Australia and Qatar last year and poised to be the global leader in 2023. A massive buildout of U.S. LNG export capacity is underway and three new projects have reached final investment decision (FID) already this year. LNG exports add supply that moderates global gas prices and supports coal to gas switching. But with the LNG export industry poised for more growth, the Department of Energy (DOE) is reconsidering its role in authorizing new export projects, from issuing blanket approvals and extensions to a more deliberate, time-bound approach.

The Natural Gas Act requires the DOE to determine whether it is in the public interest to allow LNG exports from facilities to countries with which the United States does not have a free trade agreement (non-FTA countries). These determinations involve an economic and environmental review of the impact of exports from each facility. They also consider potential effects on the security of U.S. natural gas supply. Since its first conditional long-term export authorization was issued to Cheniere’s Sabine Pass in 2011, the DOE has allowed authorization holders a period of seven years to commence export operations. In several cases, the DOE has granted extensions of these export commencement deadlines. As of April 21, the DOE had approved a total of 41 long term LNG export authorizations (more than two years, per the DOE definition), with a total export capacity of 49.8 Bcf/d. Following FID at Rio Grande LNG phase 1, the gap between authorized exports to non-FTA countries and LNG export capacity currently in operation or under construction is now about 23 Bcf/d.

In its April 21 policy statement, the DOE noted it will no longer consider extensions beyond initial seven-year export commencement deadlines unless the authorization holder “has physically commenced construction on the associated export facility” and has encountered extenuating circumstances. The DOE provided examples of acceptable evidence that construction has begun.

This statement took the industry by surprise. Incumbents like Cheniere and Sempra Energy had few public objections, but single-venture project promoters and new entrants voiced concerns. Concurrent with its April 21 policy statement, the DOE also denied “an unprecedented second extension” of the export commencement deadline for Energy Transfer’s Lake Charles LNG project in Louisiana. The DOE cited a lack of progress since the company’s first extension was granted in 2020 and concluded that Energy Transfer’s “generalized statements do not demonstrate with specificity” how global events had delayed its construction. Energy Transfer requested a rehearing, pointing to Lake Charles LNG’s offtake agreements for 7.9 million tons per year of LNG as an example of substantial progress (the project has since signed several nonbinding offtake deals). The DOE denied this rehearing request, and for now Energy Transfer plans to develop the project under the current export commencement deadline of December 16, 2025.

DOE Rationale and Related Concerns

The DOE offered two main reasons for its policy shift. First, it claimed that clearing up the “authorization overhang” will improve marketplace clarity over future export capacity. The DOE suggested that uncertainty over the project slate creates obstacles for new market entrants, including “those that seek to utilize newer technology and to adopt better environmental practices.” The latter statement suggests a preference for future liquefaction projects that will include carbon capture and storage as well as design elements such as electrification and use of renewable energy to reduce emissions intensity. Second, the DOE argued that the large gap between permitted export projects and existing capacity makes it difficult to conduct economic planning and forecasting. It noted the large number of U.S. LNG export projects that have been fully authorized by the DOE and permitted by the Federal Energy Regulatory Commission (FERC), which issues permits for siting and construction of facilities.

Pros and Cons of New Policy

The DOE policy statement raises a fundamental question: is it necessary to adjust the rules for a mature and still fast-growing LNG export industry? The DOE is implicitly suggesting that regulators must grapple with new questions when deciding whether to issue export authorizations or extensions. Should the DOE continue to take a permissive approach? Or, since there are so many projects in the queue, should regulators now consider different market, economic, and climate factors?

The DOE has valid concerns over the authorization overhang, and the April policy statement does not signal a radical change. Seven years seems a reasonable amount of time for project promoters to prove their commercial viability. As the DOE pointed out, all of the large-scale LNG export projects currently in operation began commercial operations before their seven-year commencement deadline. It is also understandable that the DOE wants to cull the list of projects with little momentum and dim commercial prospects. The department wants to avoid issuing perpetual extensions for zombie projects.

Yet there are some downsides to the new rule. First, projects headed toward the end of their seven-year authorization period may now face doubts from prospective buyers and financial backers. This is a cyclical industry. The past four years have been especially volatile, encompassing the Covid-19 demand shock and the burst of buyer activity since Russia’s war on Ukraine. DOE noted in its April 21 Lake Charles LNG decision that a seven-year export commencement timeline can accommodate both positive and negative business cycles. But as the export commencement deadline approaches, wariness from prospective buyers could make it harder for pre-FID projects to get over the line.

Second, and more important, is the issue of uncertainty over how the DOE will conduct future economic planning and forecasting. To be clear, the department’s policy statement concerns extensions, as opposed to initial applications for LNG export authorizations. But some critics now perceive a backdoor policy goal of capping long-term LNG export capacity, without constraining the project pipeline at the front end. The concern is that this is an effort to manage the potential climate and price impacts of larger U.S. LNG exports.

Climate hawks concerned about the cumulative emissions impact of proposed U.S. LNG export volumes often argue that exporting more gas is incompatible with U.S. climate and net-zero commitments. The sheer number of approved LNG export projects could lead to mistaken assumptions that all those projects will move ahead, suggesting that the United States will enable projects entailing substantial emissions. Price impacts could also be increasingly important. When the U.S. LNG export industry was just getting off the ground, industrial gas consumers and others worried that exports would drive up domestic gas prices, harming industrial and residential consumers. The DOE conducted several studies on this issue, generally concluding that the impact on domestic prices would be minimal. But as the scale of U.S. LNG exports has grown, the linkage between exports and domestic prices has become hard to ignore. The best example is the Freeport LNG outage in June 2022, which knocked out some 2 Bcf/d in domestic gas demand, thereby causing gas prices to slump in the United States and rise in key export markets.

The DOE policy statement does not state explicitly that barring extensions of export authorizations will address these climate and price concerns. But it does suggest that the new rule will “allow DOE to better assess whether any new non-FTA applications are in the public interest.” Public interest determinations for individual projects are not the easiest way to signal policy changes. But the DOE is suggesting that one way or another, it will take these factors into consideration.

Importance of Clear Messages on Value of U.S. LNG Exports

Since early 2022, U.S. LNG exports have boosted global energy security. Two-thirds of U.S. LNG export volumes were directed to Europe last year, illustrating the timely growth in U.S. export volumes and the flexible nature of U.S. LNG. Natural gas trade was an important plank of U.S.-EU energy cooperation after Russia’s war on Ukraine, and DOE officials have noted the importance of U.S. LNG to European energy security.

Overall, the Biden administration has supported U.S. LNG exports, with policymakers setting clear policy signals for the natural gas industry to cut its emissions intensity and mitigate methane emissions. The DOE is leading international efforts to improve measurement, reporting, and verification of greenhouse gas emissions associated with gas trade, and to enhance emissions data transparency “at cargo, portfolio, operator, jurisdiction, and basin level.” The DOE is also funding numerous methane mitigation initiatives. New domestic regulations and reporting requirements should strengthen the case for “cleaner” or less emissions-intensive gas from the United States.

Since the inception of the U.S. LNG export industry, there has been competition among prospective projects and some degree of uncertainty over which would reach the finish line first. For more than a decade, the list of projects queuing for DOE and FERC approvals and vying for offtake agreements and project finance has grown. It has sometimes been hard to forecast which projects were closest to a commercial breakthrough. Generally, the DOE has taken a liberal approach to approving proposed projects, letting the market decide which will eventually win out. This system is somewhat opaque but has generally worked well.

The new DOE policy seems designed to address criticism over the scale of U.S. gas exports. That worries some LNG companies that feel the Biden administration is sending mixed messages on the importance of U.S. LNG exports and increasing rather than alleviating confusion in the marketplace over future export volumes. To be sure, this is a subtle policy change. But it is linked to broader themes about the longer-term role of gas in the energy transition and the U.S. position as a major energy exporter.

The shale oil and gas boom overturned longstanding assumptions on energy security and energy markets. Many anticipated that the shale revolution would free the United States from dependence on oil imports and from market manipulations by the Organization of the Petroleum Exporting Countries. But the true geopolitical benefits of the shale boom arguably center on gas, not oil. Policymakers should support continued exports—especially as new methane regulations demonstrably reduce emissions from gas production and exports. The revised DOE policy on export authorizations is a relatively small change in itself, but the move underscores the need for clear messaging on the importance of U.S. LNG exports.

Ben Cahill is a senior fellow with the Energy Security and Climate Change Program at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Sophie Coste is an intern with the CSIS Energy Security and Climate Change Program.