As unlikely as it once seemed, the United States may soon become a net natural gas exporter, if only it does away with outdated regulatory barriers. Largely due to shale gas development, domestic production has increased by about 25 percent since 2006, from 18.5 trillion cubic feet (“tcf”) to 23 tcf in 2011. As a result, domestic prices are far below those overseas. Gas prices in the United Kingdom are more than double those at Henry Hub in Louisiana. In Japan, the world’s largest liquefied natural gas (“LNG”) importer, prices are even higher. Such price differentials help explain a wave of permit applications for LNG export terminals filed with federal regulators in Washington, D.C.
Existing price differentials should make natural gas exports a reality, but existing trade rules are not so simple. Unlike ordinary exports, energy exports are subject to a permitting system under the Natural Gas Act that differentiates between free-trade area (“FTA”) and non-FTA destinations. These rules simplify export licensing to 18 of the 20 countries with which the United States has the closest trade ties. Licensing exports to other countries is more difficult. In the past two years, the Energy Department has approved 23 of 25 applications for LNG exports to FTA countries while approving only one non-FTA export request. It took Cheniere Energy’s Sabine Pass Liquefaction’s non-FTA application 29 months to win approval. Operators of LNG export terminals undergo other complex administrative hurdles to ensure compliance with environmental and safety requirements, whether they are proposing to build or modify existing facilities.
Unsatisfied with the current regulatory process, domestic producers have increased pressure on government agencies and Congress to reform export and terminal licensing procedures. There are four such bills pending in Congress. Some have bipartisan support, and all are designed to expedite the export licensing process. Yet some domestic gas consumers and distributing industries are fighting such reforms, fearing natural gas exports could increase domestic prices. Some environmental groups have also raised fears that greater exports will lead to more drilling and environmental impacts, though others recognize the environmental benefits of encouraging greater use of natural gas to displace coal and provide a much needed bridge to future expansion of renewables (solar, wind, etc.) here and abroad. President Obama’s recent speech on climate change gave another big boost to the replacement of coal with natural gas as a way to reduce emissions.
There are good economic and environmental reasons to allow natural gas exports. There are good legal reasons to permit such exports too. To put it bluntly, the U.S. government cannot go on limiting natural gas exports (formally or otherwise) while domestic production and consumption increase. As a member of the World Trade Organization (“WTO”), the United States has committed to a number of obligations, including the GATT Article XI prohibition against adopting quantitative restrictions on exports. This makes it difficult to justify restrictions on exports.
Unlike domestic gas producers who must resort to lobbying (and political contributions), the sovereign members of the WTO can challenge the current operation of the U.S. FTA/non-FTA system as a de facto export limitation. Furthermore, in light of current and projected increases in domestic gas production and consumption, the United States will not be able to rely on the traditional exceptions to Article XI, such as adopting export limitations in tandem with measures designed to conserve exhaustible natural resources or measures necessary to protect human health (Article XX).
Worse, limiting exports would be profoundly inconsistent with the United States’ overall stance on free trade, and, especially, with the litigation positions it has often taken before the WTO. Take, for instance, the recent United States successful challenge to China’s export restraints on raw materials and its pending case against similar Chinese restraints on rare earths. In both cases, the United States specifically targeted the Chinese government’s formal and informal export restricting measures, including protracted export licensing procedures, that seemed designed to curtail foreign consumption while increasing domestic supplies and consumption.
Natural gas exports put the United States in an important crossroads, where it can show leadership when it matters. It must consider the overlapping, though not always consistent, goals of upholding its free trade diplomacy by allowing a greater flow of gas exports and addressing a new set of national and global environmental concerns, especially climate change. Washington knows its trade partners are watching. It is time to reconcile sound economic policy with pro-environment and WTO-compliant trade positions.
Juscelino Colares authored this post.
Colares is a law professor at Case Western Reserve University. He is a specialist in the intersystemic aspects of the law on international trade, climate change and civil procedure.