Will the Trans-Pacific Partnership pump up U.S. natural gas exports?

LNG Tanker Setting Sail

Figure 1 – LNG tanker setting sail. Source: http://www.abc.net.au/news/2015-07-23/an-australia-lng-ship-sails-off-the-coast-of/6643028

Put simply, the Trans-Pacific Partnership (TPP) should have minimal impact on U.S. natural gas exports. To understand why, we must evaluate what the TPP constitutes, how it effects the U.S. regulatory process for natural gas exports, and market changes that are driving the U.S. towards becoming a net exporter of natural gas.

On October 5, 2015, the conclusion of negotiations for the TPP, a free trade agreement (FTA) between the United States and 11 other Pacific Rim countries—Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam—was announced by President Obama. The TPP is a massive FTA, with the countries involved contributing 40 percent of the global GDP. It aims to expand and accelerate trade by reducing and eliminating tariff and non-tariff barriers on goods, services, and agriculture. The TPP also includes an Investor-State Dispute Settlement (ISDS) mechanism, common in multilateral trade agreements, that grants foreign investors the power to sue governments that interfere with their business and reduce profits. However, the TPP has ISDS provisions that explicitly protect policies with legitimate environmental goals, even if those policies are unprofitable for foreign investors. In April, Congress approved “fast-track” legislation that surrendered its rights to amend the TPP once negotiated. The TPP is still awaiting Congressional approval.

The TPP can impact U.S. natural gas trade, even though there is no mention of an energy chapter or the words “climate change” in the TPP. In order to export U.S.-produced LNG, parties must file for export authorization of a specific volume of LNG from the Department of Energy (DOE) under Section 3(a) of the Natural Gas Act (15 U.S.C. §717b; 10 C.F.R. Part 590). However, if the importing nation has a FTA with the U.S., approval of the DOE application is automatically granted since it is deemed to be in the “public interest.” This essentially expedites the approval process for U.S. natural gas exports.

Japan is the world’s largest importer of LNG by volume, in part due to the Fukushima disaster in 2011. Japan is also the only non-FTA country in the TPP, and a secure supply of cheap U.S. LNG is suspected to be a reason for Japan entering the agreement. Upon Congressional approval of the TPP, Japan would have a FTA with the U.S. This would allow parties interested in exporting U.S. LNG to Japan to no longer have to wait for DOE approval, receiving automatic export authorization under the Natural Gas Act.

How significantly does the automatic DOE export authorization approval affect U.S. natural gas exports? Well, not as much as one might think. DOE approval is only one small hurdle of the rigorous regulations that U.S. natural gas exports must overcome. Approval of the siting of the export terminal falls under the Federal Energy Regulatory Commission (FERC) and the Maritime Administration (MARAD) for on-shore and off-shore sites respectively. In fact, three of the first four projects approved by both the DOE and FERC have already earmarked LNG exports to Japan with delivery expected to begin as early as 2017.[1] Furthermore, many more export terminals have already received FERC approval and are under construction, as shown in Figure 2. Regardless of expedited approval as a FTA country, the share of U.S. LNG imports to Japan is expected to grow to 20%.[1]

North American LNG Import Export Terminals - FERC

Figure 2 – Source: Federal Energy Regulation Commission, U.S. Department of Energy

Environmentalists, particularly the Sierra Club, are outspoken against the TPP saying it will encourage fracking, drive up domestic gas prices, and further contribute to climate change. A counterargument can be made that ensuring a secure supply of U.S. LNG to fossil-fuel dependent countries—particularly Japan and potentially China and South Korea if they join the TPP—may offset the use of coal-fired electricity generation and thus reduce overall GHG emissions. This thinking aligns with the U.S.’s own Clean Power Plan that primarily focuses on phasing out coal-fired electricity generation. A life-cycle analysis study of Japanese electricity generation underscores these gains as Coal has a life-cycle emission factor (LCE) of 975.2 g-CO2/kWh while LNGCC has a lower LCE of 518.8 g-CO2/kWh. [2] However, environmentalists may argue that these short term GHG reductions do not address the core-issue driving climate change, which is fossil fuel dependency. Ultimately, the export of U.S. natural gas is already in motion as export terminals receive FERC and MARAD approval, regardless of TPP passing Congress and Japan having FTA status.

Although the TPP may not significantly expedite the export of U.S. natural gas, it gives considerable power to participating nations through the ISDS mechanism by insulating them from restrictive U.S. energy and environmental policy changes. Such trade security can further encourage gas-dependent countries, particularly Japan, to pursue U.S. gas exports. However, provisions in the TPP limit such litigation if policies have legitimate environmental objectives at the expense of profits.

The TPP may play a role in pumping up U.S. natural gas exports; however, the TPP’s impact on U.S. exports can be expected to be minimal considering the need for FERC or MARAD approval, the numerous already approved export terminals, and the ISDS mechanism being limited by legitimate environmental objectives.

[1] Cutler, Tom. The Trans-Pacific Partnership as a Pathway for U.S. Energy Exports to Japan. The National Bureau of Asian Research (2015). Web. 22 Nov 2015.

[2] Hondo, Hiroki. Life cycle GHG emission analysis of power generation systems: Japanese case. Energy (2005): 30, 11-12. Web. 22 Nov 2015.