Part I-The Future of Liquefied Natural Gas Imports

Policy Background Policy Background

In recent years, the U.S. natural gas industry formulate the Carter administration’s import has shown considerable interest in importing policy. Critics of DOE argue that because of the liquefied natural gas (LNG) to supplement the lack of a clear policy, projects have been de- decline in domestic production. However, the layed, resulting in an increase in the cost of LNG lengthy and often confusing project approval and loss of potential supplies to other buyers. process has made the importation of LNG diffi- To assist in the overall understanding of LNG cult, if not impossible. Consequently, only four use in the United States, this chapter describes LNG import projects have been approved. both past and present LNG policy and the roles of participating Federal agencies in its formula- The Department of Energy (DOE) has only be- tion. gun to clarify the regulatory review process and

Administration import policy

President Ford proposed the first explicit ad- In response to President Ford’s request, ERC ministration LNG import policy during his en- created an LNG task force to recommend a new ergy message of February 1976. Out of a con- LNG import policy. The task force analyzed cern for our growing dependence on foreign such issues as the level of LNG imports, pricing energy supplies, Ford initially proposed to hold provisions, Government financial assistance, LNG imports to a maximum aggregate of 1 tril- contingency plans, and siting and safety. Public lion cubic feet (Tcf) per year and directed the hearings were also conducted in Washington, Energy Resources Council (ERC), which had D. C., and Los Angeles to obtain the views of in- been created to coordinate energy policy among terested parties. While some witnesses ex- Federal agencies, to develop a more refined na- pressed considerable concern regarding the sit- tional LNG import policy. At that time, Govern- ing and safety problems associated with LNG fa- ment agencies involved in the importation of cilities, others supported the importation of LNG included the Federal Power Commission LNG to supplement our own declining natural (FPC), the Maritime Administration (MarAd), the gas production. Export-Import Bank, and the Department of The results of the task force analysis were an- Transportation (DOT). Prior to the President’s nounced on April 5, 1976:1 message, several Federal agencies had expressed reservations regarding Government fi- ● LNG is needed to supplement our natural nancial assistance to LNG projects and advo- gas supplies, but it must be limited for sup- cated developing our domestic energy sources ply security reasons. ERC recommended a instead. A Federal Energy Administration issue limit for LNG imports from a single country paper, dated February 20, 1975, clearly discour- of 0.8 to 1 Tcf/yr and a total acceptable im- aged Government financial assistance for LNC port level from all countries of 2 TCf/yr. ventures,) an attitude also shared by the State The limitation was not intended to be a and Treasury Departments. However, MarAd strict quota but rather a means by which to viewed LNG as a useful addition to U.S. energy limit U.S. dependency on foreign energy supplies and supported LNG shipbuilding pro- supplies, and ERC avoided explicitly men- grams. According to MarAd, any Government tioning Algeria as the one nation likely to action to discourage LNG imports could result in unemployment and the loss of invested tax “’t’’(’(l(’l’iil h;llt’l-~j’ S(>\\ S,” t;t’(l(’l’iil 1<.ll(>i’~j’ ot t’i(x’ N’(’}% S K[’l(’ii M’, dollars. ALlg 5, I $176.

15 16 ● The Future of Liquefied Natural Gas Imports

exceed 1 Tcf. ERC categorized LNG-export- On completion of its initial recommendations, ing countries as either relatively secure or ERC identified several issues that required addi- insecure, based on the country’s political tional analysis and directed the LNG task force and economic interests. The relatively se- to conduct the analysis. These issues included cure supply sources were Indonesia and, LNG safety and siting, development and imple- ironically in retrospect, Iran. The relatively mentation of contingency plans, the identifica- insecure sources were Algeria, Nigeria, tion of State and local concerns, and mecha- and the U.S.S.R. At the time of ERC’S rec- nisms for implementing policy recommenda- ommendation, pending and approved Al- tions. While this analysis was being conducted geria projects could supply 1.1 Tcf/yr, President Carter introduced the National En- which was above the recommended import ergy Plan (NEP) and the Energy Organization level. Consequently, pending LNG applica- Act to Congress. tions would have to be evaluated carefully, Introduced in April 1977, NEP included LNG and only those projects that provided the import policy guidelines that replaced those most desirable pricing provisions and as- established by ERC in 1976. NEP places no up- sured uninterrupted supplies would be per limits on LNG imports, which is the major considered. difference from ERC policies. It provides for a ● The higher price of LNG should be passed case-by-case review of each LNG import applica- directly through to low-priority and new tion, with emphasis on security of supply, vul- users, and averaged with the lower cost of nerability to interruptions, safety and siting, domestic sources for high-priority users. and pricing. In addition, NEP calls for the “equi- This principle would assure reasonably table” distribution of supplies and the develop- priced gas for residential customers and ment of contingency plans for use in the event reinforce full energy resource costing for of a supply disruption. It also proposes siting industry. Implementation of pricing pro- criteria that would foreclose the construction of visions would be left up to FPC and State LNG facilities in densely populated areas. and local authorities, but pricing provisions The LNG task force was reestablished* under would be reviewed by ERC continually. the leadership of DOE to develop a more com- ● ERC recommended that contingency plans prehensive, detailed LNG import policy, based be submitted with each application to deal on guidelines set forth in NEP. DOE staff with supply interruptions. The plans prepared reports on LNG import policy issues should include underground storage, inter- with recommendations to then Energy Secre- pipeline transfers and exchange agree- tary Schlesinger. Dr. Schlesinger did not for- ments, and curtailments of lower priority mally endorse the staff findings and recommen- users. dations, preferring to establish LNG import policy by building case-by-case precedents. To ● No changes were recommended regarding date, Energy Secretary Duncan has not formu- Government financing. ERC believed that if lated a new LNG policy. The major findings and U.S. subsidies were not available, tankers recommendations made by DOE staff included:2 would be available elsewhere. Therefore, MarAd financial assistance for LNG tankers ● LNG is a low-priority gas source and as was not considered essential to LNG proj- such should generally be discouraged. The ects. mechanisms by which to discourage LNG imports except where economically justi- ● No recommendations were made regarding siting and safety issues. The task force expressed a willingness to cooperate with “The LNG (ask torce was abolished with the creation of DOE but continued to advise on 1,N(; matters as an ad hoc group. FPC and State and local authorities to re- ‘Inside DOE, Ma.v 8,1978, pp. 8-9; Aug. 7, 1978, p.3; and Aug. 28, solve these issues. 1978; persona] communication with DOE official, June 20, 1979. Ch. 2—Policy Background ● 17

fied include stringent regulatory require- import projects are in the public interest. FERC ments, such as requiring importers to con- has certain statutory functions regarding LNG tract directly with local distribution compa- terminal facility certification as well as the price nies before the project would be approved, and other terms under which regasified LNG is and encouraging States to require incre- sold in interstate commerce, pursuant to NGA, mental pricing. However, if need is suf- sections 4 through 7. ficiently demonstrated from a national As mentioned earlier, DOE has not formally standpoint, LNG projects should be ap- adopted an explicit LNG import policy. Each proved. case is resolved individually on its own merits, Price escalation provisions in supply con- and approval is based on whether or not the tracts should be based on broader eco- project is consistent with ‘(national energy pol- nomic indicators than world oil prices. icy. ” The national energy policy, as defined by the present administration, is to provide secure, LNG imports do not add to foreign depend- adequate energy at reasonable prices while re- ency but displace imported oil by serving ducing U.S. dependency on foreign supplies. as an alternative fuel. The extent to which an LNG project is perceived Although LNG viewed in isolation would to conform with this policy determines its ac- appear to have a slight negative balance-of- ceptability, and the precedents established in payments impact, the net payments effect import policy decisions illustrate the prevailing would likely be positive, a result of cost DOE attitude toward imported LNG. structure differences between LNG and While DOE recognizes the need for imported foreign oil. and unconventional energy like LNG to supple- OPEC influence on LNG prices would be ment our own supplies, the Department prefers limited because of the relatively small that our natural gas comes first from conven- amount of LNG in world energy markets tional sources within the United States. There- and the limited number of purchasers. fore, each LNG application is viewed cautiously in light of DOE’s order of preference for new LNG would have a less adverse impact natural gas supplies as outlined in ERA’s Tapco on the environment than other energy 3 decision: ‘(proximate, ” “intramarginal,” and sources, such as coal, oil, and nuclear ‘(marginal. ” Ranking criteria include generalized power. LNG accidents are unlikely, but ad- cost and proximity of the supply to U.S. mar- ditional safety analysis and reporting are kets, but not size or timing of development rela- needed. tive to demand. DOE also considers whether the DOE staff did not address pricing issues, be- import project has the potential to discourage cause natural gas pricing legislation was being the development of future domestic gas considered by Congress at the time. sources, such as Alaskan gas or synthetic gas from coal. As a result, DOE considers preferred On August 4, 1977, President Carter signed proximate sources to be those within the contig- into Iaw the Energy Organization Act (Public uous United States, including the Continental Law 95-91) which created DOE. This law abol- Shelf, which are within reach of conventional ished the Energy Research and Development drilling technology and located near established Administration, the Federal Energy Administra- pipelines. Intramarginal sources include gas tion, and FPC and transferred their functions to from Alaska; various supplies from advanced the new Department. The Economic Regulatory technology applied to domestic resources, such Administration (ERA) and the Federal Energy as coal gas, gas from unconventional sources, Regulatory Commission (FERC) were created and enhanced recovery; and over land supplies within DOE to perform regulatory functions, in- from neighboring sovereign countries, i.e., Mex- cluding the approval of LNG imports. ERA, pursuant to section 3 of the Natural Gas Act (NGA), ‘I) OF;IEXA opinion 1%0, 2, Piic II IdoIIes Ia I ,lN(; (k) and 11’estern is responsible for ruling on whether natural gas 1,N(; ‘1’f~rmlm] Associates, Rvhearing, SepI. 29, 1978 18 ● The Future of Liquefied Natural Gas Imports ico and Canada. The least preferred marginal the security of supply, national and regional supplies include synthetic natural gas from pe- needs, cost, the effect on the U.S. balance of troleum and LNG from overseas. payments, and the project’s consistency with DOE’s natural gas import policy. The capital intensiveness, long-term contract commitments, vulnerability to interruption, and Supply security implications are carefully relatively high price make LNG a marginal sup- weighed by ERA. ERA will consider the ade- ply in DOE’s view. In addition, long leadtimes quacy of the exporting country’s reserves to ful- needed to construct terminal facilities and tank- fill the sales contract and the degree of suscepti- ers as well as potential cost overruns on ship- bility to natural, political, or technical disrup- ping and liquefaction make it difficult to deter- tion within the country, along shipping routes, mine whether LNG will be competitive with or at the receiving terminals, Because uninter- other energy sources. In early 1979, the admin- rupted delivery of LNG supplies cannot be guar- istration began encouraging imports from Latin anteed, ERA requires that contingency plans be America, because transportation costs are submitted with the application. Before approv- lower and energy supplies from this region are al, ERA must be satisfied that the contingency considered politically more reliable. These plan is adequate to compensate for long-term short-haul imports are categorized somewhere supply interruptions. For example, one of the between “intramarginal” and “marginal” energy reasons the El Paso Algeria project application supplies. In addition, DOE expects the Natural was denied was that ERA felt the contingency Gas Policy Act of 1978 (NGPA) and the Power plan relied too heavily on voluntary conserva- Plant and Industrial Fuel Use Act of 1978 (FUA) tion measures. to make more gas available to high-priority mar- In determining need, ERA looks to the end- kets by establishing incentives for exploration user market, rather than to the interstate pipe- and production and by promoting long-term line company’s contractual obligation to deliver. conversion of oil- and gas-burning facilities to According to ERA, contractual obligations do coal. (Although FUA generally prohibits the use not always reflect the real need of a particular of gas for electric generation after 1990, LNG is area, and a good test for regional need is the de- excepted and may be burned in new power- gree to which gas distribution utilities will con- plants after that time for air quality reasons.) 4 tract directly for preferred gas. It is the appli- Furthermore, the import reduction program in- cant’s responsibility to provide ERA with an troduced by president Carter in July 1979 pro- analysis of the region’s particular requirements vides new incentives for the development of and to assess whether these requirements can synthetic fuels, unconventional gas, heavy oil be satisfied by an alternate energy source resources, and oil shale and establishes an oil within a reasonable time. Only those projects import quota of 8.5 million barrels per day are approved in which the need for gas cannot (MMbbl/d) for 1980 and a goal of 4 to 5 MMbbl/d be met by more conventional sources. in 1990. LNG was not included explicitly under the import quota, so if the import quota cannot Pricing has often overshadowed other issues be met, the administration may look more fa- in the application approval process. To be ad- vorably on the importation of LNG. If, on the vantageous to the Nation, the cost of LNG other hand, the administration chooses to in- should be competitive with alternative fuels or clude LNG in the quota, expanded imports may conservation measures over the lifetime of a be impossible. project. The fact that a gas wholesaler could market LNG under past pricing policies has not Each LNG project application is jointly sub- necessarily meant that LNG was the least costly mitted to ERA and FERC. While ERA conducts alternative. The reason was that the cost of LNG an analysis to reach DOE’s initial decision, FERC or other relatively expensive sources was aver- begins preparation of the environmental impact statement (EIS) but does not otherwise act on 41 X) E:,’ F; R/\ opinion INO, 3. opinion and order on I mporlat km o! the application during this initial phase. ERA re- 1.N(; trom ,Algf’1’la t)y ‘1’enlw(’() Atlan[i(’ l]ipt~lilltl (h. aId ‘1’ CIIINXSO views each application in light of such issues as (LIS Pipelinfl (h., a [)liiswn of” ‘I”vnntw), lm~ , I)fx’. 18, 1978, Ch. 2—Policy Background . 19 aged or rolled-in” with the less expensive flow- large industrial customers, whether or not they ing gas from old domestic sources. Therefore, benefit from or receive the incremental gas sup- the price to the consumer was less than the ac- plies. However, if the price paid by these pur- tual cost of the LNG. The arguments against chasers reaches the price of the equivalent “rolled-in” pricing were that it masked the true amount of oil, the higher cost of unconventional cost of some forms of new energy and provided gas is shared by other users. Thus, NPGA shields fewer incentives to conserve or to convert to residential consumers from the higher cost of other less costly fuels. Rolled-in pricing also new resources as long as industrial gas prices served to expand the use of gas, thereby im- do not reach a level that would induce industry proving the utilization of the gas transmission to switch to foreign oil. and distribution system, and spreading the asso- Of utmost importance to ERA is the protection ciated fixed costs over a larger number of cus- of consumers from unwarranted costs and tomers. Because rolled-in pricing encouraged risks. The project must show an equitable distri the sale of LNG, investors have felt that it was bution of risk between project sponsors and both appropriate and necessary to secure fi- consumers regarding unexpected shipping nancing. On the other hand, the Council on costs, project failure, f.o.b. cost escalation, and Wage and Price Stability and others have ar- 5 long-term future prices of alternatives. Because gued that the projects should fail if the gas can- the characteristics of LNG import projects make not be sold when potential buyers must pay the them more risky than conventional energy full cost . sources, ERA expects the applicants to bear Historically, elements of FPC and DOE staff some of the risk of supply interruptions. There- have favored “incremental” pricing, at least in fore, extraordinary circumstances must prevail theory, and industry has opposed it. Under this for ERA to entertain recovery of equity on non- pricing mechanism, gas from each category is delivered supplies under minimum bill provi- sold at a price that reflects its specific cost. The sions in supply contracts. In genera], ERA finds main argument against incremental pricing is it inconsistent with public interest for con- that there is no perfect mechanism for deciding sumers automatically to bear the risk of supply which customers may buy the less expensive interruptions, although the consumer does in gas and which must pay the incremental cost of effect guarantee through tariff provisions some supplemental supplies. Another argument is of the debt portion of the financing and possible that incremental pricing would be difficult to return of equity if the applicants can show good administer during a shortage. Under NPGA, in- and just cause. terstate pipelines and distribution companies Energy imports involve at least some outflow may contract for gas from any producer, intra- of dollars from the United States. Therefore, state pipeline, or distribution company to meet ERA also requires a detailed analysis of the proj- high-priority user requirements during a short- ect direct impacts on the balance of trade. age. However, if the shortage is not alleviated through purchase authority, Government allo- If ERA determines that the application or com- cation of gas supplies will result, and some seri- ponents of the application are not consistent ously doubt that a purchaser of LNG at its incre- with the public interest, a rehearing and judicial mental price would continue to receive the gas review may be scheduled under section 19 of under these conditions. Consequently, LNG pur- NGA. If ERA decides favorably, FERC then be- chasers may find themselves questioning the gins proceedings to decide on the remaining is- value received for the price paid. sues: safety, siting, construction, and operation of port facilities, and prices charged for the re- The pricing issue has been resolved at least sale of the gas in interstate markets. FERC can for the present by NGPA which stipulates that reject the entire application if it determines that LNG from projects planned after May 1, 1978, ; ERA’s decision is inconsistent with FERC S pol- and gas from other unconventional sources be priced incrementally and paid for by certain ‘It)l[l 20 ● The Future of Liquefied Natural Gas Imports icy, but it cannot reject components of the deci- FERC also approves prices for the resale of in- sion. terstate gas. Prior to NGPA, if FERC had ruled in favor of incremental pricing for interstate re- Although DOT is responsible for formulating sales, it was up to the State regulatory commis- minimum safety standards, FERC has the au- sions to decide whether or not costs should be thority to impose more stringent ones if neces- rolled-in or incrementally priced to the ultimate sary and to require that LNG facilities be located consumer. If FERC ruled in favor of rolled-in away from densely populated areas. The siting pricing, direct users were not confronted with issues in the El Paso H and Tenneco projects incremental prices. Recently, FERC has pro- were decided by ERA, because the division of posed procedures for interstate pipelines and responsibility between ERA and FERC had not distributors to pass through increased costs of been formalized until the project approval proc- unconventional natural gas, including LNG, to ess was well underway. Siting decisions in the large industrial users as required by NGPA. This Pac Indonesia project are shared by ERA and will reserve for high-priority users the benefits FERC. ERA has expressed a willingness to coop- of access to less expensive gas sources, at least erate with States in deciding siting issues and for the time being. FERC also established three recommended the use of independent technical incremental price ceilings, based on No. 2, and experts to judge the quality of design and con- high- and low-sulfur No. 6 fuel oils, for each re- struction of terminal facilities to assure project gion of the country in an attempt to prevent safety further. G customers from switching from gas to imported oil.7 6D0E/ERA opinion No. 6. opinion on Rehearing—Issues Related to Treatment of Costs, Safety, and Siting, Pac Indonesia LNG Corn- 7“Prt)cedures SW to Pass on Incremental Gas (: Os[)” Oil and Gas pany and Western LNG Terminal Associates, Apr. 24, 1979. .Journa/, June 11, 1979, p.47.

Maritime Administration

MarAd is part of the Department of Com- Like DOE, MarAd reviews financial assistance merce. -Its primary purpose is to promote the applications on a case-by-case basis. Before sub- development of the U.S. shipbuilding industry sidies/guarantees are granted for LNG tankers, and U.S. shipping capabilities through various MarAd must be convinced that the LNG project financial assistance programs: construction and is economically sound and be assured that, at operating subsidies, mortgage guarantees, and the very least, the cost of the vessel will be re- tax deferral via the capital construction fund. paid. MarAd will no longer finance LNG vessels Of these four programs, mortgage guarantees on a “no guarantee required” basis as it did for (title XI) for U.S. owned and operated LNG the Algeria I project. This policy developed out tankers are the most significant. By mid-1979, of a concern that MarAd was concentrating too MarAd had guaranteed mortgages amounting to large a portion of its total funds in one area— $1.24 billion for 16 LNG tankers under title XI; LNG tankers. Title XI guarantees for LNG tank- the interest rate for such mortgages was then ers represent 22 percent of total MarAd com- 9.35 percent. MarAd had also provided $270.5 mitments. Concern over long delays in the LNG million for 11 LNG tankers in construction dif- application approval process and lower esti- ferential subsidies under title V.8 However, mates of the market for LNG tankers also con- MarAd does not provide operating subsidies for tributed to the development of the debt assur- LNG tankers because the operating expense dif- ance policy. 9 Because of the long delays, some ferential between U.S. owned and operated and tankers have been idle. Although section 905(a) foreign-flag vessels is insignificant. of the Merchant Marine Act, amended, allows

“Personal commun icat ion with Mar Ad official, Mav 9, 1979. ‘1’hest~ figures do not include tht~ required national d~ft+nse tea- tures or engineering changvs. ‘Inside DIIE, hla.v 15, 1978, Ch. 2—Policy Background ● 21 the use of LNG tankers for other purposes, al- liquid petroleum gas trade, because the tankers ternative employment is not practical, except in are specially built for their unique cargo.

Export-Import Bank

The Export-Import Bank aids in financing and hibited from extending credit to the U. S. S. R., a facilitating export sales to foreign countries. potential supplier of LNG, and other Communist This is accomplished through direct lending at countries unless the President determines the favorable interest rates or issuance of loan guar- transaction to be in the national interest. Addi- antees and insurance to foreign purchasers of tional Presidential approval and congressional U.S. goods. notification are required for loans of $5o million or more. Furthermore, Congress must be noti- Export-Import Bank policy regarding LNG fied of loans of $25 million or more to the projects has been to consider loan applications U.S.S.R. for goods or services involving the re- for U.S.-made liquefaction equipment and port search, exploration, or production of fossil fuel facilities only after the project has been ap- energy resources. These limitations on trade proved by DOE/ERA and FERC. Each project is and economic assistance to Communist coun- assessed in terms of the financial conditions of tries are clearly linked to human rights and emi- the foreign borrower, the viability of the proj- gration policies. Given the present political cli- ect, and the economic and political situation of mate, potential LNG ventures with the U.S.S.R. the country in which the project is located. Be- may not receive Export-Import Bank financing. fore approving a loan, the Bank must be satisfied that the project is economically, financially, By mid-1979, the Export-Import Bank had pro- and technically sound and be reasonably as- vided $715.7 million to Algeria and Brunei in sured of repayment. The Bank requires security overseas LNG-related loans and guarantees to either in the form of a guarantee from the gov- promote American exports. (It should be noted ernment, a bank, or a parent company or based that Export-Import Bank loans/guarantees are on the financial strength of the borrower. Be- not necessarily tied to U.S. trade. For example, cause Algerian LNG facilities are State-owned, Algeria and Brunei export LNG to Europe and the Export-Import Bank requires that the guar- Japan.) Out of this total, $674.3 million was still antees be from the government. 10 outstanding (all to Algeria). In addition, the Export-Import Bank has tentatively approved a Section 2(b)(3) of the Act (amended) requires that Congress be notified of any proposed loans $313.5 million loan at an annual interest rate of 8.5 percent to Sonatrach for the construction of or guarantees for $100 million or more. Notifi- its third LNG terminal at Arzew. Because of the cation must generally be at least 25 days of con- size of the loan, Congress must be notified be- tinuous session prior to the date of final ap- fore final approval. No loans have been made to proval, with certain exceptions covering long Indonesia, because the project has only recently adjournments. If either House is adjourned for a cleared all of the major regulatory hurdles. 11 period of 10 days after notification, the Bank The Export-Import Bank’s commitments for may approve the loan after 35 calendar days un- LNG projects have increased due to contractor less Congress dictates otherwise. problems in Algeria. The Bank, thus far, has fi- Under the Trade Act of 1974 and the Export- nanced $67 million out of $167.5 million in cost Import Bank Act Amendments, the Bank is pro- overruns for Algeria’s Arzew I project.

““’l; kpol’t 1“’lnanclng iin[l the HOI(” of 111(’ F:x])ol’t-llll] )ol’t” lkirlh of I pel.sona] (.omnl Lllll[.atlo[l i~,ith ~jx~~or-t-lrlll]o].t Bank official, th[’ ( I s ,“ Journal of Intfv-nafion;]l I,;lw and Ikonomif-st 101.2, No. 1, 1 I 976 , p 123. June 21, 1979

59-406 0 - 80 - 3 22 ● The Future of Liquefied Natural Gas Imports

Department of Transportation

DOT formulates the general minimum Fed- vals and to conduct safety boardings prior to eral safety standards for LNG facilities. In April entry into a U.S. port. 13 1979, DOT and FERC drafted an agreement that USCG and the Materials Transportation Bu- allows FERC to override and tighten DOT’s reau (MTB) cooperate to ensure the safety of safety regulations for LNG facilities if the situa- LNG facilities and participate in technical con- tion warrants. The agreement will settle a dis- ferences with LNG import applicants. Within pute between FERC and DOT over LNG safety DOT, primary responsibility for establishing standards. 12 standards for siting LNG facilities rests with The U.S. Coast Guard (USCG) is responsible MTB unless otherwise stated. Under the terms for vessel traffic management. To ensure the of a memorandum of understanding dated Feb- safety of vessel movements the Coast Guard has ruary 7, 1978, MTB and USCG agreed to a divi- authority to escort tankers to and from the ter- sion of regulatory responsibility with regard to minal facilities and establish security zones waterfront LNG facilities. USCG is responsible around or near a vessel or facility. In addition to for establishing regulations for facility site selec- traffic control, USCG establishes regulations tion as it relates to vessel traffic management in governing the design, construction, inspection, and around a waterfront facility, fire preven- and operation of U.S. and foreign-flag LNG car- tion and protection methods used at waterfront riers. USCG also works with the Inter-Gov- facilities, and security of waterfront facilities. ernmental Maritime Consultative Organization On February 8, 1979, MTB proposed more (IMCO) in developing uniform worldwide stand- stringent safety standards for the design and ards for the safe transport of liquefied gases. If U.S. or foreign-flag vessels do not appear to be construction of LNG facilities, which include establishing a thermal exclusion zone around an in compliance with the IMCO standards and U.S. requirements, USCG has authority to re- LNG terminal to protect individuals and prop- erty from heat radiation caused by vapor igni- view the vessel’s technical plan to ensure such 14 compliance. Furthermore, USCG has authority tion. MTB also expected to propose new opera- to examine vessels prior to authorizing the tion and maintenance standards for LNG facilities by the end of 1979. transport of liquid gases and at specified inter-

“1350 LJ. S.C. 191. #Z/n~jde DOE, Apr. 23, 1979, p, ~ 14Federa/ flq+.~ter, vol. 44, No, 28, Feb. 8, 1979, p. ~ 142.

Department of Defense —

The Army Corps of Engineers reviews and is- trochemical, chemical, and fertilizer plants, are sues permits for work performed in U.S. naviga- located. Trunkline along with the other indus- ble waters. Any major obstruction that would tries will benefit from this project, which was interfere with navigation requires the approval authorized by Congress. 15 Based on a 1960 of Congress as well. The Corps also issues (with cost/benefit analysis, the Corps estimated that the concurrence of the Environmental Protec- savings of $0.28 per ton and $590 per round trip tion Agency) permits for the disposal of dredge (1960 dollars) would accrue to larger tankers us- or fill material in U.S. waters. Other Corps activ- ing the channel. 16 This savings represents a very ities may indirectly affect LNG projects. For ex- small fraction of the Trunkline project’s ship- ample, the Corps has dredged a ship channel Isper.Wnaj ~ommulllcatlon ~i,it h Army (:orps of” Engineer official, from the Gulf of Mexico to Lake Charles, La., Net4 orleans District, June 19, 1979; Aug. 21, 1979. where the Trunkline LNG terminal and many IGl{ouse I)ocllmt?nt g6.A36) (;a lcasi[w R it’er and Pass, La., 1960, p. other industries, such as oil refineries, and pe- 24. Ch. 2—Po/icy Background ● 23 ping costs. In 1978, Congress requested the local interests because of increasing oil tanker Corps to conduct a cost/benefit analysis of fur- traffic and impending LNG tanker traffic.17 ther improving the channel. These proposed im- provements include the construction of a pass- 17[J,s, ,l,.nl}, (:(Jrps of Engjllf,[>I.$, Prdirninary Report, Lake Charles ing lane and holding area which are desired by (Ihannel. ‘

Congressional interest

Thus far, congressional interest in LNG has H.R. 1414—Liquefied Gas Marine focused on the hazards of transporting LNG, Transportation Safety Act of 19?9 siting and safety of LNG facilities, and the reg- Introduced by Congressman Biaggi, January 24, 1979 ulatory process. The 96th Congress is no excep- Referred to Subcommittees on Energy and Prover, Coast tion. Five LNG-related bills have been intro- Guard and Navigation, Merchant Marine, and duced in the 96th Congress and fourteen in the oceanography 95th Congress. Joint hearings held on July 18-19, 1979. Recently, substantial interest has emerged in 1. Prohibits ownership, design, construction, and operation of an LNG facility without establishing a liability and compensation fund for the repayment of claims arising out of an certificate of safety or license. LNG accident and setting forth a liability limit 2. Directs DOT to prescribe siting, safety, en- for such an accident, unless caused through vironmental, and operation standards for gross negligence or violation of safety, construc- both onshore and offshore LNG facilities. tion, or operation standards. 3. Establishes a liquefied bulk gas incident lia- Brief summaries of bills before the 96th Con- bility and compensation fund in the Treas- gress are presented below: ury and limits liability for an accident to $50 million, except for accidents deter- H.R. 51 —Fuels Transportation Safety mined to be caused by gross negligence or Amendments Act of 1979 violation of safety, construction, or operating standards. Introduced by Congressman Markey, January 15, 1979 Referred to Subcommittees on Energy and Power, Surface Transportation H.R. 3749—Coastal Area Liquefied Gas Hearings held March 1 and June 8, 1979 Facility Safety Act Passed House September 18, 1979 S. 411, as amended, passed in lieu, September 18, 1979 Introduced by Congressman Murphy, April 25, 1979 Referred to Subcommittees on Energy and Power, Coast 1. Provides for the safe operation of pipelines Guard and Navigation, Oceanography, and Merchant that transport natural gas and liquefied pe- Marine troleum gas. Joint hearings held on July 18-19, 1979. 1. Establishes a coordinated Federal-State reg- 2. Requires DOT to establish minimum siting, ulatory approach related to siting, con- construction, and operation standards for struction, and operation of LNG facilities in new LNG facilities and to promulgate or near the coastal zone. standards for existing LNG facilities. 2. Sets forth minimum siting, construction, 3. Establishes civil and criminal penalties for and operation standards for LNG facilities. the violation of safety and financial responsibility standards and the willful destruc- 3. Prohibits siting, construction, or operation tion of pipeline or gas facilities. of an LNG facility within or near coastal 24 ● The Future of Liquefied Natural Gas Imports

zones unless the State has applied for or 2. Provides standards for siting, construction, been granted exempt status. and operation of LNG facilities. 4. Imposes civil and criminal penalties for vio- 3. Establishes a comprehensive liability and lations of the Act. compensation fund in the Treasury de- rived from tax on LNG sales and limits lia- s. 4 11 —Fuels Transportation Safety bility for an accident to $100 million except Amendments Act of 1979 for accidents caused by gross negligence or violation of safety, construction, or operat- Introduced by Senator Cannon, February 9, 1979 Referred to Senate Committee on Commerce ing standards. Hearings held April 25-26, 1979 *** Passed Senate June 4, 1979 Passed House September 18, 1979 (in lieu of H.R. 51) To assist Congress in debating LNG-related Became Public Law 96-129 November 30, 1979. legislation, several reports have been prepared 1. Provides for the safe operation of pipelines by OTA, the General Accounting Office (GAO), that transport natural gas and liquefied pe- and the Congressional Research Service (CRS). troleum gas. The OTA report, Transportation of Liquefied Natural Gas, reviews the major areas of concern 2. Requires DOT to conduct a cost/benefit in transporting LNG, such as tanker construc- analysis of increased fuels transportation tion, operation, and safety, and the siting of LNG safety regulations and study the risks asso- facilities. OTA staff also testified at oversight ciated with the production, transmission, hearings on liquefied energy gases held by the and storage of LNG or liquefied petroleum Senate Committee on Commerce, Science, and gas. Transportation during December 1978. These 3. Requires DOT to establish minimum siting, hearings focused on siting and safety issues, construction, and operation standards for regulatory delays, jurisdictional conflicts, liabil- IS new LNG facilities and to promulgate mini- ity, and compensation. GAO reviewed safety mum standards for existing facilities. issues, LNG import policy, and the regulatory process under the Carter administration. In 4. Requires an LNG facility operator to submit February 1978, CRS conducted a seminar enti- a contingency plan in the event of an LNG tled “Liquefied Natural Gas: Safety, Siting and accident prior to operation of the facility. Policy Concerns” which provided Congress with 5. Established civil and criminal penalties for background information on public policy issues violation of safety or financial responsibil- associated with the importation of LNG. ity standards and willful destruction of in- ln(;}~(), ~jque~jed ~rler%v (ja.ye,$ ,sa/~:1 V, 3 i’olunws, JuI-v 31, 1978; terstate pipelines or LNG facilities. . . . Need 10 improve lie~ulatfwv Reb’icwf Process fi)r Liqo@ied Natural Gas Imixwts, JuI}I IJ, 1978;”The New l\Ia[ior]al”Liqu~ fi”t:[i Natural Gas S. 666—Comprehensive Liquefied Import Policy Requires [’ur-ther Irl]/>r{Jb,f~rf]er)t.s, [Mc, 12, 1977, Energy Gas Siting, Safety, and Liability Act of 1979

Introduced by Senator Durkin, March 14, 1979 Referred to Senate Commerce Committee 1. Prohibits construction of new LNG facilities without DOT’s approval. Ch. 2—Po/icy Background . 25

States

Because of the controversy surrounding the terminal site. However, the judge’s ruling was Pac Indonesia project proposed by Pacific Gas & subject to final approval by both FERC and ERA. Electric Company and Southern California Gas On September 26, 1979, ERA reaffirmed its ap- Company, attention has been focused on Cali- proval of the importation of LNG and the price fornia’s response to the LNG issue. To improve at the point of importation into either Oxnard or the site selection process, the California LNG Point Conception. However, ERA made no de- Terminal Siting Act was signed into law in 1977. termination as to the appropriateness of Point The keystone of this law is remote siting, Under Conception as a site for LNG-receiving facilities. the law, the California Public Utilities Commis- In October 1979, FERC was given authority to sion (PUC) has exclusive authorization to issue approve/disapprove applications for the con- permits to construct and operate an onshore struction of LNG facilities at Point Conception LNG terminal and thus is the final arbiter of the and ERA retained authority to approve the con- site location. The law also requires the Califor- struction of facilities at Oxnard. The final deci- nia Coastal Commission to evaluate and rank sion by FERC in October 1979, was to approve proposed terminal sites and report their find- the Point Conception site. ings to PUC, and it authorizes the California En- ergy Commission to study the natural gas sup- Other States ply and demand picture to determine whether Other States have established guidelines or not LNG is needed. and/or councils to deal with the energy facility The siting law was first applied in the Pac In- siting issue. For example, Massachusetts has es- donesia LNG project. The major impact of the tablished an energy facilities siting council. Its law was to eliminate Oxnard, which had already purpose is to establish guidelines for the siting been approved by an FPC Federal administra- and safety of LNG facilities. The Council pro- tive Iaw judge, in favor of Point Conception as a posed guidelines that would require a demon- terminal site. But before the judge’s decision stration of facility need, a cost analysis, a com- could be reviewed by the five-member FPC, it parison of alternative sites, and an EIS. In addi- was stripped of its authority to rule on import tion, the guidelines specify thermal radiation 8 matters and the case was transferred to the and vapor performance standards, * new ERA. ERA found Oxnard to be an accepta- The State of New York established an LNG ble site but expressed reluctance to approve program which is assigned to the Bureau of Point Conception without new hearings. The Mineral Resources in the State Department of Agency, however, was not opposed to the other Environmental Conservation. Also, the State of site and expressed willingness to cooperate with New Jersey has formally expressed positions on State authorities in selecting the best location. the siting and safety of LNG facilities. The State The applicant requested that Point Concep- opposed the Tenneco project out of concern for tion be considered as a terminal site, and the ap- the safety of its citizens and claimed that the proval process began once again. FERC staff project was contrary to sound energy policy. prepared an EIS on Point Conception and as- According to the State, LNG should be limited to serted that the site was unsuitable because of peak-shaving and very low-priority baseload earthquake hazards. In addition, Native Ameri- use. cans opposed the Point Conception site because of its spiritual significance. FERC staff again recommended Oxnard and Rattlesnake Canyon as lg(:(lmmolltt,ea]t h of’ kfassac.husf~tts Energ~~ Faciiit if?s Siting (~OUn-’ an alternate. Hearings were held on the EIS and cil, “liquefied Natural (;as Siting (;uiclelines, An F;xplanati{)n ,“ at- tachmrnt to trstimonlf gif en hJ James (kmnellj’, I)q]ut: IIirwtor, on August 13, 1979, a FERC administrative law tfiiss;ichusetts I-lwrg}, of’ficr, I)t]f’ol’f” thf’ S(>lliitf’ (:ommittf~e 011 judge approved Point Conception as a suitable (:ommerw, Science, ilIl(l ‘l’ I’iiIISpoI’tiiti oil,” tk-. 12-13, 1978, p. 332.