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On February 5, 2016, the U.S. Department of Energy’s Office of Fossil Energy (“DOE/FE”) issued two orders to Bear Head LNG Corporation and Bear Head LNG (USA), LLC (together, “Bear Head LNG”),¹ formally announcing DOE’s comprehensive policy for considering applications involving liquefied natural gas (“LNG”) exports from Eastern Canada to global markets.

• In Order 3769 (“In-Transit Order”), DOE/FE determined that it lacks jurisdiction under Section 3 of the Natural Gas Act (the “NGA”) over Bear Head LNG’s proposed imports of Canadian natural gas travelling by pipeline through the United States on its way back to Canada (i.e., in‑transit shipments).²  In this regard, DOE/FE dismissed Bear Head LNG’s application seeking authorization to access Western and Central Canadian natural gas supplies that necessarily must cross the U.S.-Canada border (due to transportation pipeline configurations), en route to the proposed Bear Head LNG project.

• In Order 3770 (the “Non-FTA Order”), DOE/FE granted Bear Head LNG long-term, multi‑contract authorization under Section 3(a) of the NGA to export U.S. natural gas by pipeline to Canada for subsequent liquefaction and export (i.e., re-export) to nations with which the United States does not have a free trade agreement (“FTA”) requiring the national treatment of natural gas (“non-FTA nations”).³

The Bear Head LNG proceedings presented legal issues of first impression⁴ and “an unusual factual circumstance,”⁵ as DOE/FE stated.  Certainly, as discussed below, DOE/FE’s legal determinations in the Bear Head LNG proceedings were significant.⁶  However, the legal significance of the Bear Head LNG Orders is dwarfed by the political implications of DOE/FE’s announced policies of (i) adopting a laissez-faire approach to applications for Canadian gas in-transit through the U.S., and (ii) giving the green light to natural gas exports of U.S. natural gas to Canada for liquefaction and export to non-FTA nations.

The Legal Standard:  FTA or Non-FTA

Specifically, DOE/FE was called upon to determine which of the two legal standards found in Section 3 of the NGA (i.e., FTA or non-FTA) properly applied to Bear Head LNG’s applications filed for the purpose of securing gas supply for the Bear Head LNG project.  For diversity of supply, Bear Head LNG sought authorizations for in-transit shipments of Canadian natural gas, as well as pipeline exports of U.S. natural gas to Canada.  As described in Bear Head LNG’s applications, LNG produced at the project is intended for export to FTA and non-FTA nations.

In addressing this issue, DOE/FE opted to apply the discretionary, non-FTA standard (i.e., the NGA Section 3(a) public interest standard), inasmuch as LNG produced at the Bear Head LNG project is intended for delivery and end-use in non-FTA nations.  DOE/FE reiterated the rationale supporting its determination, previously unveiled in the FTA Order, in the Non-FTA Order.  It explained that its decision is rooted in Congressional intent that all exports destined for non-FTA nations be reviewed for their consistency with the U.S. public interest.  To do otherwise, DOE/FE reasoned, would permit potential exporters to evade the non-FTA public interest analysis simply by transiting natural gas and LNG through an FTA nation.⁷

Balancing NGA Mandates with U.S. International Trade Obligations

Undoubtedly, Bear Head LNG’s proceedings presented DOE/FE with the challenge of discharging its statutory mandate under the NGA, without violating U.S. obligations under NAFTA or trampling on an already strained U.S.-Canada energy relationship suffering from the highly politicized discord over the Keystone XL Pipeline.⁸

As a starting point, consider that DOE/FE’s decision to exercise its NGA Section 3(a) jurisdiction in effect extends beyond the U.S.-Canada border (where the export of U.S. natural gas by pipeline will occur) and follows the gas into Canada (where the export of LNG by vessel will occur).  In this regard, the Non-FTA Order arguably is an exercise of extraterritorial jurisdiction by DOE/FE—which is not to say it is impermissible.⁹  To further complicate matters, prior to DOE/FE’s issuance of the In-Transit Order, there was uncertainty regarding which NGA Section 3 standard DOE/FE would apply to in-transit shipments of Canadian gas, and whether DOE/FE would be consistent in its view of in-transit gas when Canadian gas was in question, as opposed to U.S. gas in transit for delivery to the Bear Head LNG project.¹⁰

Then consider that the NEB has authorized (without restriction) the export of Canadian gas intended for liquefaction and export from U.S. West Coast projects.¹¹

With the lawsuits stemming from U.S. decision to reject the Keystone XL Pipeline as a backdrop, and a newly elected Canadian government looking for a fresh start with the Obama Administration, particularly in energy and climate change, DOE/FE’s favorable determinations in the Bear Head LNG proceedings mark a positive step in strengthening ties between the two nations.

The NEPA Challenge

A secondary, but very significant legal issue, arose under the National Environmental Policy Act (“NEPA”), which requires DOE/FE to consider the environmental impacts of its decisions on applications seeking authorization to export natural gas.  In the past, DOE/FE could meet its NEPA obligations as a cooperating agency in the NEPA review process led by the Federal Energy Regulatory Commission (“FERC”) for U.S. LNG terminal facilities.  In the case of the Bear Head LNG project, the environmental and safety review would be conducted by Canadian federal, provincial and local authorities.

At the time Bear Head LNG filed its applications, relevant DOE/FE non-FTA precedent could be summarized in a single bullet:¹²

• Applications involving the construction of new, or the modification of existing, LNG facilities subject to FERC jurisdiction:  DOE/FE acts as cooperating agency in the NEPA review process led by FERC.¹³  DOE/FE then adopts the NEPA documentation prepared by FERC (be it an environmental assessment (“EA”) or environmental impact statement (“EIS”)), provided DOE/FE has conducted an independent review of such NEPA documentation and determined its comments and suggestions have been satisfied.  In those instances that an EA is prepared, DOE/FE issues a finding of no significant impact (“FONSI”).  In other instances that an EIS is prepared, DOE/FE issues a record of decision.

Since then, relevant DOE/FE non-FTA precedent has evolved as follows, culminating with the most recent decisions issued on February 5, 2016:

• Applications involving existing LNG facilities not subject to FERC jurisdiction: DOE/FE grants categorical exclusion under its regulations at 10 C.F.R. Part 1021, Subpart D, Appendix B5.

• Application involving the construction of new CNG facilities not subject to FERC jurisdiction: DOE conducts NEPA review process and prepares NEPA documentation.¹⁴

• Applications involving the construction of new LNG facilities in Canada (i.e., not subject to FERC jurisdiction):  DOE/FE grants categorical exclusion in accordance with its regulations at 10 C.F.R. Part 1021, Subpart D, Appendix B5, with authorized export volume in proportion with level of existing U.S. pipeline capacity.¹⁵

New Rules for In-Transit Canadian Gas Shipments

DOE/FE dismissed Bear Head LNG’s in-transit application on the grounds that in-transit shipments returning to the country of origin are not “imports” or “exports” within the meaning of NGA Section 3, such that they fall outside of DOE/FE’s NGA Section 3 jurisdiction.  In reaching this conclusion, DOE/FE noted Congress’ likely intention that the terms “import” and “export” apply only to those categories of shipments that, by their nature, could have a material effect on the U.S. public interest.  Shipments of Canadian-sourced natural gas between Canadian points, according to DOE/FE, are “categorically unlikely” to have a material impact on the U.S. public interest and are, therefore, outside of DOE/FE’s NGA Section 3 purview.

In further support of its jurisdictional determination, DOE/FE cited a 1977 agreement, the Agreement Between the Government of the United States of America and the Government of Canada Concerning Transit Pipelines, which espouses a laissez-faire policy for in-transit shipments of hydrocarbons between the two countries.

Definition of “In-Transit Shipment Returning to the Country of Origin.”

DOE/FE explained these are shipments of natural gas through the U.S. between points of a single foreign nation that are physical and direct.  “Physical” means transportation between two cross-border points, and excludes “exchanges by backhaul, displacement or other virtual shipments.” “Direct” means that the natural gas travels a commercially reasonable path between foreign points consistent with an intention merely to transit through the U.S. without being diverted for another purpose.  Lastly, citing U.S. Customs and Border Protection regulations, DOE/FE noted that the natural gas must enter and exit the U.S. within a 30-day period to qualify as “in-transit.”

Filing and Recordkeeping Requirements.

Despite dismissing the application and disclaiming jurisdiction, DOE/FE drew on its authority under Section 16 of the NGA to direct Bear Head LNG to file monthly reports.  When in-transit shipments occur, Bear Head LNG is to report:  (1) the volumes of natural gas delivered into the U.S., (2) the entity that has title to the natural gas on first entry into the U.S., (3) the points of entry into the U.S., (4) the name of the U.S. pipelines used at the points of entry to and exit from the U.S., (5) the points of exit from the U.S., (6) the entity that has title to the natural gas at the point of exit from the U.S., and (7) the volumes of natural gas delivered to the points of exit.  Lastly, in the event of any discrepancy in volumes, Bear Head LNG must show that no deliveries into U.S. commercial markets occurred.

The In-Transit Order further directs Bear Head LNG to maintain “records of the pipelines used for each in-transit shipment for a period of one year after completion of each in-transit shipment.”  These records are to be provided to DOE/FE upon request.

In Conclusion

DOE/FE rendered Bear Head LNG’s Non-FTA Order in under 12 months.  Certainly, that processing time very likely would have been cut by more than half had DOE/FE applied the FTA standard instead.  Nonetheless, given the complexity of the legal issues and the political implications affecting the Bear Head LNG proceedings, having the benefit of a thoughtful and deliberate analysis carries many tangible benefits.

As to intangible benefits, considering that Bear Head LNG was the second applicant raising issues of first impression before DOE/FE, its chances of achieving timely resolution were not very high.¹⁶  Recognizing this, Bear Head LNG pulled together an experienced team of advisors to forge and implement a permitting strategy to improve its odds.  In the end, whether by fortune, miracle or design, Bear Head LNG managed to walk by the awakened snake without getting bitten.  It did not suffer the deluge of public comments that most proponents of LNG exports experience, and it did so in record time.

DOE/FE also is to be commended for resolving Bear Head LNG’s applications in a manner that preserves each sovereign’s interests in its natural resources, but also is consistent with international principles of free trade, reciprocity and comity.  To the extent the Bear Head LNG Orders may be viewed as bringing North American LNG a step closer to serving global demand, consider the words of President Dwight D. Eisenhower:  “Accomplishment will prove to be a journey, not a destination.”

© Copyright 2016 Cadwalader, Wickersham & Taft LLP

_{¹ Bear Head LNG is developing the proposed natural gas liquefaction terminal to be located on the Strait of Canso in Cape Breton, Nova Scotia, Canada.}

_{² Bear Head LNG Corporation & Bear Head LNG (USA), LLC, DOE/FE Order No. 3769, FE Docket No. 15-14-NG (Feb. 5, 2016), available here.}

_{³ Bear Head LNG Corporation & Bear Head LNG (USA), LLC, DOE/FE Order No. 3770, FE Docket No. 15-33-LNG (Feb. 5, 2016), available here. DOE/FE previously granted Bear Head LNG authorization under Section 3(c) of the NGA to export U.S. natural gas by pipeline to Canada for subsequent liquefaction and export to FTA nations.  See Bear Head LNG Corporation & Bear Head LNG (USA), LLC, DOE/FE Order No. 3681, FE Docket No. 15-33-LNG (Jul. 17, 2015) (the “FTA Order”), available here.}

_{⁴ See Non-FTA Order at 155.  DOE/FE further stated, “[t]his is among the first two proceedings in which DOE/FE has been asked to review an application to export U.S.-sourced natural gas by pipeline to Canada for liquefaction in Canada, for subsequent re-export of that natural gas in the form of LNG to non-FTA countries” (emphasis added).  Concurrent with Bear Head LNG’s Non-FTA and In-Transit Orders, DOE/FE issued an order to Pieridae Energy (USA), Ltd. granting it similar long-term authority for Non-FTA exports of U.S. natural gas.  See Pieridae Energy (USA) Ltd., DOE/FE Order No. 3768, FE Docket No. 14-179-LNG, available here.}

_{⁵ Id.  See also id. at 156 (“Most applications to DOE/FE for authority to export natural gas to non-FTA countries involve the ready availability of natural gas through an integrated grid of multiple interstate natural gas pipelines. This Application, by contrast, calls for the transportation of U.S.-sourced natural gas through a single interstate natural gas pipeline.”).}

_{⁶ As U.S. regulatory counsel to Bear Head LNG, we express no view herein on the merits of DOE/FE’s legal determinations.}

_{⁷ Significantly, the transiting concept is not ingrained in NGA jurisprudence, but it does arise in the context of marking rules and country of origin rules under the North American Free Trade Agreement (“NAFTA”), and in U.S. Customs and Border Protection regulations, as referenced below . Unlike the U.S. legal framework, the Canadian National Energy Board Act and its implementing regulations specifically address gas that is in transit.  But even in instances involving National Energy Board (“NEB”) “in transit” orders, the recently issued corresponding DOE/FE orders have been silent on the “in transit” concept. See, e.g., Terasen Gas Inc., Order Authorizing the Exportation of Gas for Subsequent Import, NEB Order GOL-07-2010, File OF-EI-Gas-GOL-T101 01 (Jun. 7, 2010) and corresponding Terasen Gas Inc., Order Granting Blanket Authorization to Import and Export Natural Gas from and to Canada, DOE/FE Order 2619, FE Docket No. 09-11-NG (Feb. 19, 2009).}

_{⁸ See Maritimes & Northeast Pipeline, L.L.C., Order Amending Presidential Permit and Authorization Under Section 3 of the Natural Gas Act, 128 FERC ¶ 61,070, P10 (Jul. 21, 2009) (stating that approving exports in addition to imports on the Maritimes & Northeast Pipeline would “promote national economic policy by reducing barriers to foreign trade and stimulating the flow of goods and services between the United States and Canada, both of which are signatories to the North American Free Trade Agreement, providing for fewer restrictions on natural gas imports and exports.”).}

_{⁹ While there is an extensive body of domestic and international law instructive on this issue, our discussion herein—like DOE/FE’s analysis in the Non-FTA Order—is controlled by the NGA.}

_{¹⁰ See Notice of Application, Bear Head LNG Corporation and Bear Head LNG (USA), LLC; Application for Long-Term, Multi-Contract Authorization To Import Natural Gas From, for Subsequent Export to, Canada for a 25 Year Term, 80 Fed. Reg. 20,484 (Apr. 16, 2015)  In an unprecedented move, DOE/FE requested comments on whether section 3(c) of the NGA, 15 U.S.C. § 717b(c), or section 3(a) of the NGA, 15 U.S.C. § 717b(a), provides the appropriate standard for review of Bear Head LNG’s in-transit application.}

_{¹¹ See e.g., Jordan Cove LNG L.P., DOE/FE Order No. 3412, FE Docket No. 13-141-NG (Mar. 18, 2014) (granting long-term, multi-contract authorization to import natural gas from Canada); Jordan Cove Energy Project, L.P., DOE/FE Order No. 3413, FE Docket No. 12-32-LNG (Mar. 24, 2014) (granting long-term, multi-contract authorization to export LNG to Non-FTA nations); LNG Development Company LLC (d/b/a Oregon LNG), DOE/FE Order No. 3465, FE Docket No 12-77-LNG (Jul. 31, 2014) (granting long-term, multi-contract authorization to export LNG to Non-FTA nations).}

_{¹² In reviewing potential environmental impacts of a proposal to export natural gas, DOE/FE considers both its obligations under NEPA and NGA Section 3(a).}

_{¹³ While DOE/FE authorizes the export of LNG pursuant to NGA Section 3, under the same section, FERC exercises exclusive jurisdiction over the siting and construction of LNG terminal facilities (to be located onshore or in state waters). Under the NGA, FERC also serves as the lead federal agency for conducting NEPA analysis for LNG terminal facilities.}

_{¹⁴ To date, DOE (through its National Energy Technology Laboratory) has issued only one EA. The final EA, FONSI and order granting export authorization were issued contemporaneously.}

_{¹⁵ In denying a motion filed by Pieridae Energy (USA) Ltd., DOE/FE affirmed well-established NEPA precedent.  DOE/FE stated, “we must deny Pieridae US’s Motion to Lodge because the Goldboro Project, to be located in Nova Scotia, Canada, is outside the scope of our environmental review under NEPA in this proceeding, which necessarily focuses on potential environmental impacts within the United States.”  See Pieridae Energy (USA) Ltd., DOE/FE Order No. 3768 at 190.}

_{¹⁶ By way of illustration, consider the two-year gap (minus three days) between the issuance of the first Non-FTA LNG export authorization from the Lower-48 and the second one. Applications for the two projects were filed 3 months and 10 days apart.}