On Tuesday, August 15, 2017, the U.S. Court of Appeals for the District of Columbia Circuit rejected Sierra Club’s petition for review of a U.S. Department of Energy (“DOE”) order authorizing long-term exports of liquefied natural gas (“LNG”) to Non-Free Trade Agreement (“non-FTA”) nations from the Freeport LNG terminal.¹  This decision marks the first time the D.C. Circuit has addressed challenges to DOE’s review of long-term, non-FTA LNG export applications under the National Environmental Policy Act (“NEPA”).  The court also addressed related arguments under the Natural Gas Act (“NGA”).  

Last year, the D.C. Circuit rejected challenges that the Federal Energy Regulatory Commission (“FERC”) violated NEPA by, among other things, failing to adequately consider the indirect environmental effects of increased natural gas exports (e.g., induced domestic natural gas production and increased use of coal-fired electric generation) when approving applications to construct and operate LNG facilities.²  The D.C. Circuit held that, because DOE has the legal authority to approve natural gas exports, FERC is not required in its NEPA review to consider the possible environmental effects of increased natural gas exports.³  The court directed that such effects should be addressed instead in a proceeding challenging DOE’s authorization.⁴

DOE’s NEPA Analysis

In its August 15 decision, the court first considered Sierra Club’s challenges to DOE’s NEPA review.  Sierra Club made three “indirect effects” arguments, each of which the court rejected.⁵

First, Sierra Club challenged DOE’s review of the indirect effects of induced domestic natural gas production that may result from increased exports.  While the DOE has commissioned a generalized study of the potential effects of increased gas production,⁶ Sierra Club faulted DOE for declining to consider the indirect effects that the specific level of exports from the Freeport LNG facility will have on induced production and, in turn, on specific environmental resources.  The D.C. Circuit upheld DOE’s determination that such indirect effects are not “reasonably foreseeable” for purposes of a NEPA analysis.  The DOE noted as a preliminary matter that it is difficult to predict the quantity of natural gas that may be produced in response to an incremental increase in exports from the Freeport LNG terminal.  Moreover, DOE argued, it could not determine where exactly gas production would occur, given the interconnected nature of the U.S. pipeline system.  As a result, DOE concluded that the localized environmental effects of increased gas production are not reasonably foreseeable, and, therefore, analysis of specific levels of exports is not warranted under NEPA.⁷

Next, Sierra Club contended that DOE failed to consider the indirect effects that might arise if increased exports raise gas prices and ultimately cause the electric power sector to switch from gas-fired to coal-fired generation.  The court rejected this argument, agreeing with DOE’s assessment that the causal chain between the authorized exports and the potential effects of increased coal usage was “even more attenuated” than the effects of induced gas production.

Finally, Sierra Club challenged DOE’s review of potential greenhouse gas emissions.  With respect to upstream emissions, Sierra Club argued that DOE failed to discuss greenhouse gases that may result from export-induced gas production as part of the Environmental Impact Statement for the project.  The court pointed out, however, that this information was, in fact, disclosed in DOE’s Life Cycle Report.  Regarding downstream emissions, Sierra Club argued that DOE should have evaluated additional variables in its methodology, such as the potential for LNG to compete with renewable energy sources in certain markets.  The court affirmed DOE’s determination that, for foreseeability and feasibility reasons, an analysis of the effects on each fuel source in every LNG-importing nation is not required under NEPA.

DOE’s Public Interest Analysis

After upholding DOE’s NEPA analysis, the court turned to the adequacy of DOE’s “public interest” analysis under NGA section 3.  Sierra Club’s only contention here was that DOE failed to conduct an adequately thorough analysis of environmental effects.  Having already rejected Sierra Club’s environmental arguments with respect to NEPA, the court found no basis for reevaluating these issues under the NGA.  Moreover, given the NGA’s presumption in favor of exports, the court found that DOE is well within its statutory discretion to conclude that the non-environmental benefits of the application outweigh the potential environmental harms:

. . . [E]ven if the Department determined the [environmental] impacts were significant, it could still find that the public interest weighs in favor of allowing the exports.  “[I]t is . . . well settled that NEPA itself does not mandate particular results, but simply prescribes the necessary process.” Thus, “[i]f the adverse environmental effects of the proposed action are adequately identified and evaluated, the agency is not constrained by NEPA from deciding that other values outweigh the environmental costs.”⁸

Other Pending Petitions

This decision is positive precedent for the LNG industry, but some additional challenges remain pending.  Sierra Club has filed four other petitions for review of DOE LNG export authorization orders, all of which are currently pending before the D.C. Circuit.⁹  These petitions repeat similar NEPA-related arguments, which the court likely will decide consistently with its August 15 decision.  However, they also include certain additional challenges to DOE’s public interest analysis, including that DOE ignored the disproportionate economic effects of increased exports, which will benefit a minority of Americans and leave a majority of the population worse off.¹⁰

_{¹   See Sierra Club v. U.S. Department of Energy, No. 15-1489 (D.C. Cir. Aug. 15, 2017).  Sierra Club challenged the DOE Office of Fossil Energy’s November 14, 2014 order granting Long-Term Multi-Contract Authorization to Export LNG from the Freeport LNG Terminal to Non-Free Trade Agreement Nations, as well as its December 4, 2015 order denying requests for rehearing.}

_{²   See Sierra Club v. FERC, 827 F.3d 36 (D.C. Cir. 2016); Sierra Club v. FERC, 827 F.3d 59 (D.C. Cir. 2016); EarthReports v. FERC, 828 F.3d 949 (D.C. Cir. 2016).}

_{³   Under section 3 of the NGA, authority to approve exports of natural gas lies with the DOE.  FERC, on the other hand, is charged with authorizing the siting, construction, operation, or expansion of LNG terminals.}

_{⁴   See Sierra Club v. FERC, 827 F.3d at 46.}

_{⁵   The court noted that its analysis applies equally to DOE’s cumulative effects analysis.}

_{⁶   The DOE has issued two environmental reports examining the environmental effects of LNG exports: (1) the Addendum to Environmental Review Documents Concerning Exports of Natural Gas from the United States (“Addendum”), which examines the impacts of export-induced natural gas production in the United States; and (2) the Life Cycle Greenhouse Gas Perspective on Exporting Liquefied Natural Gas from the United States (“Life Cycle Report”), which evaluates the indirect effects of LNG exports on global greenhouse gas emissions.  Although the DOE argued that these environmental reports are supplemental to its NEPA review, the court considered these materials to be part of DOE’s environmental review.}

_{⁷   Similarly, DOE responded that the shale play-level regional analysis requested by Sierra Club would not be meaningful due to the expansive size of the various shale plays and the local nature of the environmental issues associated with unconventional gas production.}

_{⁸   Sierra Club v. DOE, Case No. 15-1489, slip op. at 24 (citations omitted).}

_{⁹   See Sierra Club v. DOE, Case No. 16-1186; Sierra Club v. DOE, Case No. 16-1252; Sierra Club v. DOE, Case No. 16-1253; and Sierra Club v. DOE, Case No. 16-1426.}

_{¹⁰  See, e.g., Final Opening Brief of Petitioner Sierra Club, Sierra Club v. DOE, Case No. 16-1253 (D.C. Cir. Mar. 31, 2017) (challenging DOE’s May 12, 2015 order granting authorization to export LNG from the Corpus Christi Liquefaction Project).}