DOE’s Cove Point decision should govern all LNG export requests.

Lewis E. Leibowitz and C. Kyle Simpson, Hogan Lovells US LLP, Washington, DC

There has been much discussion and debate lately about liquefied natural gas exports. On Sept. 11, the US Department of Energy granted a petition from Richmond, Va.-based Dominion for the export of LNG from its Cove Point terminal on Chesapeake Bay. While the decision did not mention international trade rules, it should have. Under these rules, all LNG export requests should be granted without delay. If LNG exports were restricted, the United States would be violating its international trade obligations.

As we reviewed the statements from Capitol Hill and interested groups about the differences between exports to free trade agreement (FTA) and non-FTA countries, our attention was drawn to the international trade obligations of the United States. As trade lawyers and energy advisors, we think the record is clear: the restriction of natural gas exports for reasons not tied to national security or environmental degradation would violate US international trade obligations in the General Agreement on Tariffs and Trade and other World Trade Organization commitments. The Department of Energy should promptly grant all applications to export LNG to FTA and non-FTA countries.

After World War II, the GATT conference agreed to rectify the economic and trade battles that led to the war. In 1947, the original contracting parties, including the US, agreed to a number of rules to prevent a descent into protectionism. One such rule was to prohibit, with a few exceptions, quantitative restrictions on exports. Article XI of the GATT provides that member countries may not impose export restraints other than duties, taxes, or other monetary charges. In other words, quantitative export restraints are not allowed.

The United States was present at these discussions and agreed to this language. For the US, this was particularly significant, because our Constitution prohibits Congress from imposing any duty or tax on exports. Thus, the US agreed with the other GATT contracting parties, with certain exceptions, to impose no export restrictions whatever, since the only restraints permitted under the GATT agreements are, under our system, unconstitutional.

Under the Natural Gas Act (NGA), the DOE has approved a number of export applications, three of which are for exports to non-FTA countries. Apart from Canada and Mexico, exports from the US must be in the form of LNG, which can be transported by ship. Under the NGA, DOE must approve exports to countries that have FTAs with the US. By contrast, the NGA permits LNG exports to non-FTA countries to be evaluated to determine if they are in the “public interest.”

Some infer that DOE has the discretion to restrict of even prohibit exports to non-FTA countries. But this inference would be wrong because more than 150 countries that are members of the WTO have the right to equal treatment.

The structure of the NGA and its distinction between FTA and non-FTA countries came about because of the need to treat imported Canadian natural gas as equivalent to US-produced natural gas for regulatory purposes. LNG exports from the continental United States were not important at the time.

Now, thanks to new technology and new discoveries, LNG exports are very relevant. The arguments to restrict exports below free-market levels are almost always based on the desire of proponents to keep domestic gas prices lower than in other markets. Critics worry that large quantities of exported gas will raise the price at home and make our goods less competitive internationally.

But this very concern — that countries would limit exports of vital raw materials to gain a competitive advantage — is precisely why the GATT negotiators in 1947 decided to take export restrictions off the table as a trade weapon, except through transparent measures such as duties and taxes. Licensing and quantitative restrictions were considered too dangerous in the hands of governments that might want to favor certain industries or companies.

Now, a word about the valid reasons for limiting LNG exports of LNG. First, national security is clearly a valid reason to impose export restrictions. Prohibiting exports to Iran and Cuba, for example, would not likely to be challenged. But gas exports to Japan, India, the Philippines, or Haiti (all non-FTA countries, although Japan may soon have an FTA with the US) plainly turn on economic considerations, not national security.

Second, exports could be restricted to conserve an exhaustible natural resource. While in theory natural gas conservation could justify export restraints, recent WTO cases make clear that export restraints can be justified only if production for domestic sale is also restricted. Thus, the conservation argument is not likely to be available.

The granting of all the pending export applications before DOE does not mean that all proposed LNG export terminals will be built, or that all available supplies will be exported at high prices, denuding the US market. While the US is currently blessed with large natural gas reserves and low prices compared with much of the rest of the world, this situation will not last long. Because LNG export terminals cost billions of dollars each, export markets must command much higher prices than the US to justify the expense of liquefaction and export via specially designed ships and containers.

Within 5 to 10 years at the most, we expect market prices overseas to converge with US internal prices because other countries will ramp up their gas production, including Australia, Russia, China, and others. Delay in approving the LNG exports at the front end will cut the market benefits to US investors and gas producers at the back end.

And those benefits — should LNG export markets be opened — will be substantial indeed. In fact, a NERA study commissioned by DOE determined that for every level of exports, national wealth would expand. This is consistent with sound concepts of economic analysis and is hardly controversial. Simply put, the more natural gas we export, the richer we become as a nation. The NERA study and every other credible study confirm that the benefits from LNG exports will be significant and positive. DOE is to be congratulated for recognizing the economic benefit to the United States from allowing unrestricted exports of LNG.

Our trade balance will improve and the welfare of our trading partners will also improve. The national goal of substantially lessening our dependence on unreliable sources of energy would be within reach.

Developing countries will also benefit from lower energy costs. A country as poor as Haiti, which receives huge amounts of aid from the United States and other countries, will be able to put that aid to better use by reducing its energy bills. At present, Haiti has to generate electricity with diesel generators relying on expensive fuel oil. Gas-fired generators will sharply cut Haiti’s energy bills and let that country take better care of its people.

Reliable energy for our friends not only will benefit us, but it will benefit our trading partners and the global trading system. The US will stand as a reliable supplier of resources for the world. If we persist in delaying these approvals, we are likely to face trade actions by our trading partners in the WTO.

As we see it, there is a great risk that restricting exports will lead to the loss of dispute settlement cases, and benefit our economy less that if the market determined export levels and prices. The law leads to a winning scenario for the United States. Our best course is to follow the international rules, allow the opening of LNG export markets, and by so doing follow our own country’s self-interest.

Source: http://www.ogfj.com/articles/print/volume-10/issue-11/features/move-quickly-on-lng-exports.html