By Karen Boman, December 04, 2013, Rigzone
The United States’ delay in permitting liquefied natural gas (LNG) and coal export facilities could run counter to U.S. international treaty obligations under World Trade Organization (WTO) agreements, former WTO Appellate Body Chairman James Bacchus argues in a recent report.
The United States cannot argue against trade restrictions by other countries while it delays the export of LNG and coal from the United States, Bacchus told reporters during a press conference Tuesday.
“It is strange to me that some in the energy industry see oil and gas as excluded from WTO obligations,” said Bacchus. “There’s nothing in the treaty that excludes oil and gas from WTO rules and obligations.”
As a WTO member, the United States must comply with WTO agreement trade rules. A key provision, the General Agreement on Tariffs and Trade (GATT) 1994, forbids export restrictions, including those made effective through licenses or other measures.
Bacchus and Rosa Jeong with Greenberg Traurig LLP conducted the study for the National Association of Manufacturers (NAM). The report, “LNG and COAL: Unreasonable Delays in Approving Exports Likely Violate International Treaty Obligations”, examined whether unreasonable delays by the U.S. Department of Energy in issuing LNG export licenses violate the United States’ obligations under the WTO.
The report also seeks to answer whether efforts by Pacific Northwest state and local authorities to broaden the environmental review process scope for coal export terminals beyond federal scope – and the resulting delay – violate U.S. international obligations under the WTO.
The United States has never exported significant quantities of LNG, but has a long history as a coal exporter to overseas markets. According to the report, LNG export projects currently undergo two separate phases of federal government approval by the Federal Energy Regulatory Commission (FERC) and the U.S. Department of Energy (DOE). FERC oversees the siting, construction and operation of LNG export facilities, while DOE grants licenses for the export of a limited volume of LNG over a certain period of time.
The FERC process appears to be a relatively straightforward evaluation of a facility’s direct local impact on human health and the environment. FERC is required to consult with the public and other federal and state agencies, but approvals are granted on well-understood principles of safety and immediate local environmental impacts.
However, the DOE process is substantially more ambiguous, Bacchus noted. The Natural Gas Act creates a rebuttal presumption that LNG exports are in the public interest. However, DOE has interpreted this language to require individual determinations by the agency whether the export of LNG in the requested volumes will be consistent with the public interest.
“By law, export licenses to countries with a free trade agreement with the United States are subject to a different standard; such export licenses are deemed consistent with the public interest and must be approved without delay,” Bacchus said in the report.
Exports to countries without a free trade agreement are purportedly judged on factors such as economic, energy security and domestic supply considerations, “but there has been very little clarity on how these factors are analyzed.”
Requiring export licenses in and of itself does not violate the GATT. Export licenses constitute restrictions if they pose a limitation on action, , a limiting condition or regulation.
“In particular, if export licenses are granted or denied based on discretionary criteria, such that the possibility to deny the license is always present, then the system by nature has a restrictive or limiting effect,” Bacchus said in the report.
The amount of time that lawmakers are taking to approve LNG export facilities – with some project applications waiting more than two years for approval – also goes against WTO rulings on similar cases. Bacchus referenced a 1988 case against Japan over its export restrictions on semiconductors. A GATT panel ruled that Japan’s delays of up to three months to issue export licenses for semiconductors constituted restrictions inconsistent with Article XI:1 of the WTO agreements.
Since 2011, FERC has approved four LNG export terminals – three of those project approvals were made this year, according to FERC’s website. Given the delays, a WTO could find the current delays of two years or more for LNG projects could violate Article XI:1.
“Just because you’ve approved a few doesn’t excuse all the others that have not been approved through a process that’s supposed to be more or less automatic,” Bacchus noted.
The United States may also find it difficult to convince a WTO panel that restrictions on LNG exports relate to the conservation of exhaustible natural resources nor that restrictions are made effective in conjunction with restrictions on domestic production or consumption, Bacchus noted in the report. WTO regulations would permit restrictions only if the restriction was related to conservation, but legislative history indicates the Natural gas Act was passed to regulate monopolistic practices in the U.S. natural gas market.
Existing regulations that govern exploration production and transportation of gas are not related to conserving gas, but are focused on the transportation and distribution of natural gas to ensure smooth and efficient functioning of natural gas markets.
Additional port facilities will need to be constructed to allow exports of coal mined in the Power River Basin areas of Montana and Wyoming to flow to Asian markets. The siting and construction of these facilities must be reviewed and permitted by the Army Corps of Engineers under the authority provided in the Rivers and Harbors Act, the Clean Water Act and the National Environmental Policy Act. Various state laws also allow state and local agencies to review and evaluate port facilities.
Three marine terminals are currently under various stages of permitting and review in the U.S. Pacific Northwest. Environmental advocacy groups that opposed the projects and coal exports in general have pushed for regulators to study the cumulative effect of all the pending projects, including environmental concerns as well as the impact of coal burned in other parts of the world. The scope of the environmental review for one of the projects in Washington State has been expanded to consider the global impacts of the transportation and ultimate use of the coal.
“Prolonged delay, according to supporters of the projects, will have detrimental impacts on the economy without considerable environmental benefits,” Bacchus noted in the report. “Already, the potential delays have contributed to at least three terminal projects being scrapped.”
Delays Raise Questions about US Commitment to Free Trade
Bacchus noted in the report that ongoing delays and licensing requirements and processes are starting to raise questions about the United States’ own commitment to key principles in the WTO that bind not only the United States, but also 158 other countries.
Bacchus wouldn’t speculate on what countries might challenge the United States on its progress approving LNG and coal export facilities, but he noted that countries in need for natural gas and coal resources would be the most likely candidates to challenge the United States on the matter. Once a trading partner decides to bring forth a case against the United States for WTO violations, the United States would not be able to prevent that case from moving forward.
Bacchus, who served eight years on the WTO and was twice elected chairman, noted that most attention relating to GATT since its establishment in 1947 has been on disputes related to imports. However, WTO restrictions also can be applied to exports. Disputes over exports have been an increasing phenomenon in WTO-related disputes, with one third of the 159 WTO member countries and territories currently imposing export restrictions of some kinds.
These export restrictions as a matter of policy are of increasing concern for the United States, with the U.S. government urging restrictions on exports to be placed high on the post-Bali WTO agenda. The United States currently has several cases of significance before the WTO.
Recently, the United States won a case before the WTO against China because of export restraints on natural resources; the United States also has another case against China before the WTO on rare earth exports. Rare earth minerals are critical components to technologies manufactured in the United States.
“We’re seeing the same types of actions in countries around the world on a lot of different products that are inputs for U.S. manufacturers,” said Linda Dempsey, vice president of international economic affairs with NAM, during the press conference.
However, the United States cannot have it both ways, with calls for restrictions on exports from other countries while not allowing exports of LNG and coal from the United States to move forward.
Bacchus concluded that the United States’ delay in approving LNG and coal export facilities could mean the tables will be turned on the United States directly in the WTO, but also through other countries walking away from core principles that have long been critical to U.S. success in the global economy.
“It doesn’t matter if federal, state and local government is violating WTO agreements,” Bacchus noted. “Countries are responsible for what their state and local government and courts do. This may cause internal wrangling in the U.S. given its federalist structure, but it’s a matter of international law.”
Bacchus, who was active on trade issues while representing Florida in U.S. Congress and was a founding member of the WTO’s appellate lobby, said the report’s conclusions are his own.
In regards to the likelihood of a partner challenging the United States on its LNG and coal imports, the report’s real intent is to alert policymakers to the fact that the United States needs a system that functions, said Dempsey.
“It’s not only good for U.S. national interests and manufacturers, but it’s also something we need to do in order to abide by international rules and not further the cascade of export restraints.”
“We don’t want the United States to lead other countries to break the core principle on which our country and the WTO system is founded,” Dempsey added.
Free Trade Seen as ‘Critical Tool’ for Job Creation
NAM, which was founded in 1895 during a deep economic recession to promote free trade, sees free trade as a means of creating jobs in the United States, said Aric Newhouse, senior vice president of policy and government relations with NAM, during the press conference Tuesday. Free trade will be a critical tool in creating jobs in the United States at a time that the nation is experiencing sluggish economic growth and unemployment.
The organization, which has 12,000 members today, intends the report as a wake-up call both for lawmakers on Capitol Hill and state legislators in the Pacific Northwest to take action on LNG and coal export facilities.
U.S. LNG and coal exports offer the United States a “unique chance” to impact global trade and jobs through the energy space.
“However, delays in permitting projects such as the Keystone XL pipeline means that NAM member companies find themselves more times than not a permitting burden to move projects from inception to completion,” Newhouse commented.
“We’re at a place now where every delay in permitting energy infrastructure projects threatens our ability to create jobs and to grow the economy,” said Newhouse, adding that state and officials should green light energy projects and put people to work.
Exports of U.S. manufactured goods have increased dramatically over the past few decades. Last year, over $1.3 trillion in U.S. manufactured goods were exported. However, the United States can do much more, said Linda Dempsey.
“We’re seeing rising incomes and middle classes globally, and $11 trillion in manufactured goods traded globally,” Dempsey commented. “U.S. manufacturers have a lot of gain with export opportunities overseas.”
However, allowing or embracing export restraints will create a “beggar thy neighbor” policy.
The United States is a major contributor to global exporters, but U.S. manufacturers face a highly challenging global economy and competition near and far. To succeed, U.S. manufacturers need a level playing field internationally, which means U.S. legislators should embrace the principles of free trade.
“Our founding fathers understood that exports and the freedom to export are the core principle of the U.S.” said Dempsey.
The principle of free trade can be seen throughout the United States’ history, including its co-founding in 1947 the international trading system upon which GAAT was founded. Article one of the U.S. Constitution also prohibits export tariffs, Dempsey noted.
Dempsey notes that China, Russia and India are imposing their own forms of export restraints on a variety of products. Recently, the United States won a case before the WTO against China because of export restraints on natural resources; the United States also has another case against China before the WTO on rare earth exports. Rare earth minerals are critical components to technologies manufactured in the United States.
“We’re seeing the same types of actions in countries around the world on a lot of different products that are inputs for U.S. manufacturers,” Dempsey noted.
The report serves as a stark reminder that the United States needs to adhere to the same rules that other WTO members do in order to be successful.
“Allowing or embracing export restraints is a downward spiral that will only hurt manufacturers throughout the U.S. Respecting and fully implementing export principles is critical to America’s success.”
While the United States lacks an energy policy, the nation’s status as a free trade country is allowing companies like Cheniere Energy to benefit U.S. shale gas resources, Cheniere CEO Charif Souki told reporters. Over the past 15 months, Cheniere has spent $5 billion in LNG infrastructure, and will spend up to $25 billion. The company, which employees 2,000 people in Texas and Louisiana, will hire another 2,000 workers to work on its LNG export facility projects.
“We have always been cognizant of the fact is that we live in a free trade country,” Souki commented. “When it was a question of LNG imports, free trade was attractive to everyone.”
The same free market in the United States allowed “brilliant people” to unlock U.S. shale resources and to create and abundant supply of shale gas.
“This energy policy has worked out well for the United States and extremely well for Cheniere.”
Texas has benefited greatly from free trade, and LNG exports present a capital investment opportunity that brings good jobs with good wages and benefits to the state, said Bill Hammond, president and CEO of the Texas Association of Business. The delay in LNG exports is another example of the Obama administration saying one thing and doing another.
“They say they want jobs but would delay projects in Texas and the northwest that would create jobs. They need to get their act together and approve these projects.”