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Kevin Keenan, partner at Baker Botts

Commentary: The shale gas revolution demands change on export policy

By Kevin Keenan, partner/Baker Botts L.L.P.April 16, 2013/Houston Chronicle

North America has seen nothing short of a revolution in natural gas production over the lastseveral years. Evidence of this revolution can be found in the dramatic shift in projections fromthe U.S. Energy Information Administration (EIA) during that timeframe. In 2005, the EIAprojected US imports of LNG natural gas cooled to -160o C (-256o F) to enable it to be

transported by ocean-going tankers would hit 12 Bcf/day by 2030. Seven years later, the EIAprojected that by 2030 exports of LNG could be as high as 12 Bcf/day. To see a swing of 24Bcf/day in official projections over the course of seven years is nothing short of remarkable.

With US natural gas production at an all-time high, and US gas prices at an all-time low, there isnow a dash to liquefaction (the process of cooling natural gas to produce LNG) in an effort tomonetize cheaply produced shale gas and join other major natural gas producing countries asan exporter of this abundant and clean hydrocarbon, the effects of which could have far-reaching implications, geopolitically and economically, and could put the US on a playing fieldalongside Qatar (now the worlds largest producer) and Australia (which could eclipse Qatar atthe top spot, if current projects all pan out) as a world-class exporter of LNG.

At the moment, however, the US Department of Energy (DOE) has approved only one LNGproject for non-FTA exports (by law, the DOE must approve all export applications to countrieswith which the US has free trade agreements (FTAs), but no such requirement exists for exportsto non-FTA countries such as Japan). What is the likelihood that more non-FTA export permitswill be granted? Given that we only have one approved to date, I would say the prospect formore is very good indeed. The DOE issued its first non-FTA export permit to Houston-basedCheniere Energy almost two years ago. The DOE is currently considering applications from atleast 19 other proposed export projects. So whats the big deal? Isnt this a no-brainer?

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Some point to Canadas National Energy Board (NEB), which has already approved threesimilar projects for exporting Canadian LNG to Asian markets. If the Canadians are onboardwith this, why is the DOE so hesitant? One reason is that the NEB in Canada has overseen fordecades an energy sector operating on a strong export footing, Canada having exported crudeoil and natural gas in huge quantities to the US for many years (unknown to most, Canada is thelargest supplier of crude oil and natural gas to the US and has been for decades). In contrast,

the DOE has overseen an energy sector in the US which has, for largely the same amount oftime, stood solidly on an import footing. Change is difficult. The US is now grappling, I believe,not with whether to export more gas but with how much more gas to export.

Of the 19 applications presently in the DOEs queue for non-FTA export approval, while Ibelieve all economically viable projects (those that have lined up customers, secured financing,etc.) should be approved, I question whether all will be approved. That said, the DOE may notbe able to overcome the statutory presumption that each application must be approved unlessDOE proves on the record that approval would be contrary to the public interest. And therein liesthe dilemma. Environmentalists oppose exports because exports mean construction alongcoastlines. Some industry groups oppose exports because they believe their feedstock costswill rise. There are no shortages when it comes to competing interests. Fear not, however.

Somehow the DOE will manage to leave at least 60% of us disappointed and the other 50% ofus elated but wondering where they went wrong with their math.

Kevin Keenan is a Partner in the Global Projects practice of Baker Botts Houston office.His practice focuses on LNG project development, with a particular emphasis on LNGshipping and floating LNG applications.