The US Department of Energy (DOE) has proposed to suspend its current practice of issuing conditional decisions on applications to export liquefied natural gas (LNG) from the lower-48 states to foreign countries without free trade agreements (FTAs) with the United States. Instead, according to its May 29, 2014 Notice of Proposed Rulemaking (NOPR), the DOE proposes to act on applications only once an environmental assessment—typically conducted by the Federal Energy Regulatory Commission (FERC)—is completed. The NOPR represents a significant break from the DOE’s current procedures for approving LNG exports and has the potential to dramatically reshuffle the existing order of precedence for processing approvals.

As part of its responsibilities under the Natural Gas Act, the DOE may authorize exports of natural gas to foreign countries with which the United States does not have an FTA, where it finds those exports would be in the public interest. A party seeking approval for such a project must submit applications both to the DOE and, for permission to site, construct and operate the terminal, to either FERC, where the proposed LNG terminal is located onshore or in state waters, or to the Maritime Administration within the Department of Transportation if the terminal is located offshore beyond state waters.

Both applications require review of potential environmental impacts under the National Environmental Policy Act (NEPA). Thus, as part of their review, the DOE and FERC must typically prepare a comprehensive environmental impact statement (EIS) or environmental assessment (EA). Until now, because FERC has typically taken the lead in preparing the environmental report, the DOE has been willing to issue conditional authorization, before the environmental review is complete, tentatively indicating that it believes a project is in the public interest. This has provided some assurance of the DOE’s approval to the project developers and FERC before significant time and resources are expended in the detailed and time-consuming environmental review process. It has also allowed the DOE to act upon applications in the order in which they have received them: what is presently known as the “order of precedence” for processing applications for approval.

In the NOPR, the DOE has proposed to discontinue its practice of issuing conditional approvals and, going forward, to act on applications only after the environmental review is complete. The NOPR explains that a project will be deemed complete either 30 days after publication of a Final EIS, or, for projects where an EA has been prepared, upon publication of a Finding of No Significant Impact. A project may also be considered complete where the DOE has made a determination that the project is eligible for categorical exclusion from NEPA’s requirements.

The DOE explains in the NOPR that it believes conditional approvals are no longer necessary because both FERC and applicants appear willing to devote significant resources to the NEPA review process without upfront assurances from the DOE. Moreover, the new rule prioritizes applications that are final and, according to the DOE, thus facilitates more informed decisions and better allocates agency resources.

The NOPR is clear that the proposed rule will not affect any conditional approval currently in place; for those projects, once the NEPA review process is complete, the DOE will reconsider its conditional approval in light of the environmental review and take appropriate final action. In addition, the DOE will continue to consider new requests for conditional authorizations during the rulemaking period.

If adopted as proposed, the new rule will have ripple effects throughout the LNG-export industry. Affected projects will have higher and earlier upfront expenses and, as a result, developers may have greater difficulty attracting sufficient early-stage project financing. This may weed out some of the more speculative projects early on—to survive even the first level of regulatory review, projects must be much further along in their development—and it may place a premium on applicants receiving at least conditional commitments from customers upfront, with agreements in cost sharing. In addition, the proposed rule will reshuffle the current order of precedence, benefiting those further along in the environmental review process at the expense of those lagging behind, regardless of their place in line otherwise. It likely will also have the effect of slowing down the overall pace of approval for some time, as all participants involved adapt to the new regime.

Comments are due on the proposed rule no later than 4:30PM EST, July 21, 2014.