Haynes and Boone, LLP
  September 13, 2004 - District of Columbia

Open door to LNG imports closes bit as developers seek new sites
  by Kenneth G. Hurwitz

As natural gas commodity prices continue their near-term climb, and new domestic sources become harder to find, many oil and gas producers and large gas users such as chemical companies are looking abroad for a cheaper and more readily available source of supply. Tapping into natural gas stranded in Libya, Algeria, and other countries -- "stranded" because the gas cannot be sold in local markets for lack of demand or inaccessibility to pipelines -- and liquefying it for shipment to the United States is for many the solution of choice. The U.S. currently has four operating LNG terminals-- in Massachusetts, Maryland, Georgia and Louisiana -- and the federal government has projected that nine to 12 more will come on line within the next 20 years. Among these are 10 terminals planned to be located -- regulators willing -- on Texas' Gulf Coast. Using state-of-the-art technology, natural gas from abroad can be economically imported -- first converting the gas to liquid form (by supercooling it to minus 260 degrees F), then shipping it in specialized vessels to LNG terminals in the United States, and finally regasifying it for delivery by pipeline to domestic markets. With strong encouragement from Congress and federal policymakers, the Federal Energy Regulatory Commission -- the agency that authorizes LNG imports through onshore terminals -- has opened the doors wide to private developers who want to site and build onshore LNG facilities in the U.S. But largely as a result of federal policy and the rise in natural gas prices, the field is now crowded with potential projects. Opposition from local communities and some key states is growing, and the number of suitable sites is shrinking fast. In short, developers' lives are becoming more complicated. Open-door policy FERC's open-door policy had its genesis in 1992, when President George H.W. Bush signed into law the Energy Policy Act, one of whose provisions requires the Department of Energy to approve applications to import LNG. Despite this statutory provision, which, read literally, would seem to have gutted the agency's discretion, in 2001 FERC decided that it continued to enjoy jurisdiction to impose conditions on the siting, construction and operation of LNG facilities. Having preserved its turf, one year later FERC decided to exercise its jurisdiction in a lighthanded fashion. In December 2002, FERC issued the landmark Hackberry LNG decision, in which it decided not to impose open access requirements on LNG terminals and not to regulate prices for storage, withdrawal or regasification of liquefied natural gas. In other words, the LNG facility owner could provide LNG terminal service at the rates, terms and conditions mutually agreed to with a customer. Further lightening the developer's load, FERC has also recently declared that it no longer will attempt to discern whether there is a market for the proposed LNG service. The upshot is that FERC's review process will be, as these things go, relatively simple and straightforward. It will be confined to environmental and safety issues, and it will ordinarily be conducted through environmental impact statement review rather than through the more cumbersome process of trial-type hearings. Roadblocks Several potential obstacles for LNG developers have recently appeared at or around the threshold of FERC's "open door." Perhaps of greatest concern is a looming court battle between FERC and the State of California. The California Public Utility Commission has argued before FERC that it has jurisdiction to authorize the construction of an LNG terminal in Long Beach harbor that would provide service to the intrastate California gas market. FERC, on the other hand, has rejected California's argument, continuing to assert that its jurisdiction over foreign commerce trumps the California PUC. If the California PUC's view prevails, LNG developers could face multiple high hurdles in obtaining authorizations to site, construct and operate LNG terminals as well as numerous conditions imposed by federal, state and even county authorities. A California victory would, at a minimum, have a severe chilling effect on LNG facility development not only in California, but perhaps also in Texas, which is home to numerous intrastate pipeline systems. While Texas has not stepped forward with its own LNG facility regulations, at a recent meeting of the Texas House Committee on Energy Resources, a railroad commissioner sought authority to promulgate rules to govern siting, safety and environmental protection and licensing for LNG facilities proposed for the Lone Star State. Terrorists' target Also of concern to developers are growing perceptions on the part of local communities that LNG facilities could become targets for terrorists. Fierce local opposition has confronted LNG facilities proposed to be sited near population centers, such as proposed terminals in Long Beach, Calif., and near Providence, R.I. The terrorism debate has been especially heated (but not especially well "lit") in Massachusetts, where opponents of the proposed Weaver's Cove LNG facility, which would be located in Fall River, have likened this risk to the explosion of the atom bomb over Hiroshima. Science, on the other hand, holds that LNG in its liquid state does not burn or explode, and in vapor form only becomes flammable if the vapor to air mixture is 5 percent to 15 percent vapor. While the science is not definitive, FERC is in the midst of preparing a study on quantitative modeling of the safety risks of LNG facilities, and it appears that FERC will employ the methodology in pending cases. The near-term slowdown in processing applications will not be significant, according to FERC Commissioner Joseph Kelliher, who claims that FERC can fully review safety issues and still approve LNG projects in a timely manner. Desirable sites Finally, because an LNG terminal needs to be reasonably close to an existing natural gas pipeline and onshore terminals need to be located in a port area, the number of desirable sites is in decline. In some cases, there has been intense competition for the better sites or, as is the case in some parts of Texas, proposed sites are not far apart. This could be a sign that project proponents could soon invoke the longstanding "Ashbacker" doctrine, under which truly competing proposals must undergo joint consideration by the regulator before either can be authorized to proceed. As far as government policy and marketplace dynamics go, LNG facility development is still a favored child. But LNG facility development has entered a new phase. Developers must now deal with greater political, regulatory and competitive risk than before. As any power plant, pipeline or Wal-Mart developer might say to its LNG counterpart, "welcome to the real world." John Eldridge is a partner in the Houston office of Haynes and Boone LLP, and Ken Hurwitz is a partner in the international law firm's Washington, D.C., office.