Wednesday, January 28, 2015

Business Groups Clamor For LNG Exports, Warn Of WTO Consequences

Posted: January 17, 2013

Leading U.S. business associations - including the Chamber of Commerce, National Foreign Trade Council (NFTC), National Association of Manufacturers (NAM) and Emergency Committee for American Trade (ECAT) - have joined together to call on the administration to allow their member companies to export liquefied natural gas (LNG), and are warning that failure to do so could have dire consequences for the international trading system.

These business groups are advancing a variety of arguments. Some argue that government restrictions on LNG exports would not only violate U.S. commitments under the World Trade Organization, but could also jeopardize U.S. efforts to convince other countries not to maintain export restrictions. Such restrictions would also hinder export growth, harm the overall U.S. economy and contravene U.S. pledges in various fora to avoid protectionism, they say.

But despite this chorus of opposition from leading groups, businesses are somewhat divided on the issue. Some companies - including those represented by the American Energy Advantage (AEA), which include Alcoa, Nucor and Dow Chemical Company - are critical of efforts to expand LNG exports, arguing that doing so will drive up prices for private citizens and companies that use LNG for personal or business purposes.

"We want a solution that is good for everyone - producers and consumers alike, including Americans who heat their homes with natural gas," AEA writes on its website.

Amidst all of this controversy, the Department of Energy (DOE) has yet to establish a firm policy position. There are 15 export applications currently pending, but DOE has said that it will not move forward on those applications until it completes its internal deliberations on how to handle this sensitive issue. A DOE official this week said the department does not have a specific timeline for completing this process.

The issue is coming to a head now because technological advances - particularly in the area of hydraulic fracturing, or "fracking" - are now allowing U.S. companies to extract greater quantities of natural gas for less money. This surge in domestic production has led U.S. companies to increasingly file export applications with DOE to take advantage of overseas markets that U.S. companies previously were not in a position to enter. According to DOE's Energy Information Administration (EIA), the U.S. is in a position to become a net exporter of LNG by 2016 and a net exporter of natural gas in general by 2020.

Under the Natural Gas Act (NGA), which has been on the books since 1938, the U.S. government must approve all exports of natural gas, and applications are granted pursuant to that law unless the government finds the proposed exports would be inconsistent with the public interest. Accordingly, DOE must conduct an analysis to determine whether LNG exports are consistent with the public interest before granting an export permit.

Under U.S. law, LNG exports are deemed to be in the public interest if they are to a "nation with which there is in effect a free trade agreement requiring national treatment for trade in natural gas." In essence, this means that U.S. companies are able to export to FTA partners without going through the permit process. But DOE is now working on refining its criteria for determining if LNG exports to a non-FTA partner are in the public interest.

As DOE mulls its position, business associations are insisting that any sort of export restriction could violate WTO rules and, furthermore, undercut U.S. efforts to convince other countries to scrap similar export restraints. Many of these associations are pointing out that the U.S. has mounted two separate WTO legal challenges against Chinese export restrictions on raw materials, which are materials needed by U.S. manufacturers for certain high-technology products.

"If the United States were at this point to impose its own restrictions, we would undercut the very clear trade policy position we have taken at the WTO, compromise the WTO's ability to build a common set of rules for the trading system and make it more difficult for us to obtain badly needed raw materials from other countries," NFTC President Bill Reinsch wrote in a Jan. 16 entry on the trade association's website.

Linda Dempsey, NAM's vice president of international economic affairs, made similar points in a Jan. 15 posting on NAM's website. "If the United States were to go down the path of export restrictions, even more countries would quickly follow suit and could easily limit U.S. access to other key natural resources or inputs that are not readily available in the United States," she warned, while also noting the two WTO challenges against China.

The WTO "generally prohibits the use of export bans and quantitative restraints," and the U.S. ability to challenge other countries' existing export restraints "will be virtually nonexistent if the United States begins imposing its own export restrictions," she added. Moreover, she pointed out that the U.S. and its G-20 partners "have repeatedly expressed their deep concern about rising protectionism, including, in particular, export restrictions."

When it comes to the substance of possible WTO legal arguments, John Murphy, the Chamber's vice president for international affairs, has argued previously that even the current DOE approval process - which establishes a discretionary, or non-automatic, export licensing requirement - is inconsistent with U.S. obligations under the General Agreement on Tariffs and Trade (GATT).

GATT Article XI:1 article prohibits WTO members from imposing prohibitions or restrictions on imports or exports other than duties, taxes or other charges. "[T]he very notion that the U.S. Department of Energy has discretion with regard to the approval of the proposals to export U.S. LNG is at odds with the prohibition on export restraints," Murphy said last October (Inside U.S. Trade, Oct. 19).

One congressional source questioned, however, whether current U.S. law violates WTO obligations. This source noted that the NGA was passed in 1938, several years before the GATT was originally negotiated in 1947, and posited that it was unlikely that Congress would have approved an international trade agreement that was inconsistent with previously existing domestic law.

In order to inform its internal deliberative process, DOE has commissioned two reports to gather more information about how LNG exports might affect the U.S. economy.

The first report, completed by EIA, looked at the impact additional exports would have on domestic energy prices, production and consumption under different export scenarios. The second study, completed by an outside group called NERA Economic Consulting, looked at the macroeconomic impact that would result from an increase in U.S. LNG exports. Comments on this second report are due to DOE by Jan. 24.

The second report, released on Dec. 5, found that exporting LNG would have an overall positive impact on the U.S. economy. "[F]or every one of the market scenarios examined, net economic benefits increased as the level of LNG exports increased," the report concluded. "In particular, scenarios with unlimited exports always had higher net economic benefits than corresponding cases with limited exports."

At the same time, however, the report did find that increased LNG exports would lead to domestic price increases for natural gas, based on the assumption that there will be no increase in imports. Using that assumption, the report concludes that if U.S. companies ramp up LNG exports, that additional demand would have to be met by additional production. This would lead to higher costs for reasons such as the need for more drill rigs, as well as the need to potentially produce from less productive areas.

During the first nine months of 2012, the U.S. imported a total of 2.47 trillion cubic feet of natural gas, of which the vast majority was not LNG, according to data from DOE's Office of Fossil Energy. Most natural gas imports - 2.33 trillion cubic feet - came by pipeline in gas form from Canada. Only 133 billion cubic feet were imported as LNG, of which most came from Trinidad and Tobago. The U.S. also imported smaller amounts of LNG from Qatar and Yemen and very small amounts from Egypt and Norway.

The majority of U.S. exports of natural gas - 1.15 trillion cubic feet - were also by pipeline to Canada and Mexico. In the first three quarters of 2012, the U.S. shipped 7.6 billion cubic feet of LNG to Japan. Domestically produced LNG was not exported anywhere else in that time, although 10.6 billion cubic feet total of LNG was re-exported to Brazil, India and Japan - meaning it was imported to the U.S. and then re-shipped to those countries.

Sen. Ron Wyden (D-OR), chairman of the Senate Energy and Natural Resources Committee, has been leading efforts in the Senate to question DOE's policies toward LNG exports. In an Oct. 23 letter to Energy Secretary Steven Chu, he asked for the specific criteria DOE uses in order to determine whether to approve LNG exports to countries with which the U.S. does not have an FTA.

On Dec. 11, Deputy Energy Secretary Daniel Poneman responded with a non-exhaustive list of criteria that the DOE considers. The criteria listed specifically were domestic need for the natural gas proposed for export; adequacy of the domestic natural gas supply; U.S. energy security; impact on the U.S. GDP, consumers, industry and domestic prices; job creation; U.S. balance of trade; international considerations; and environmental considerations.

In that letter, Poneman said DOE has approved 17 long-term applications to export LNG to FTA nations and one long-term application to export LNG, from one of the lower 48 states, to non-FTA countries. The approved application was from Sabine Pass Liquefaction. "DOE ... will evaluate the cumulative impact of the Sabine Pass authorization and any future authorizations for export authority when considering subsequent applications," he wrote in the letter.

Wyden more recently criticized the NERA report in a Jan. 10 letter to Chu, charging that "the shortcomings of the NERA study are numerous and render this study insufficient for the Department to use in any export determination."

Public Content - World Trade Online, Vol. 31, No. 3  
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