oversight

The New National Liquefied Natural Gas Import Policy Requires Further Improvements

Published by the Government Accountability Office on 1977-12-12.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                         DCCUMENT   ESUME

04257 - [B3494753]

The New National Liquefied Natural Gas Import Policy Requires
Further Improvements. EMD-78-1S; B-178205. December 12, 1977. 20
pp + 9 appendices (32 ppp.).
Report to the Congress; by Elmer B. Staats, Comptroller General.

Issue Area: Energy: Role of Fossil Fuels in Meeting Future Needs
     (1609).
contact: Energy and Minerals Div.
Budget Function: Natural Resources, Environment, and Energy:
    Energy (305).
Organization Concerned: Department of Fnergy; Energy Resources;
    Council; Department of State; Depirtrt-nt o Energy: Economic
    Regulatory Administration; Federal Energy Regulatory
    Commission; Department of Commerce; Federa EneZgy
    Administration; Federal Power Commission.
Congressional Relevance: House Committee on Ierstate and
    Foreign Commerce; Senate Committee on Energy and Natural
    Resources; Congress.

           Over one-fourth o our total energy consumption i.
supplied by natural gas. Oe approach to increasing the supply
of natural gas is tc develop supp.emental gas sources such as
imported liquefied natural gas (LNG). According to Government
and industzy statistics, imported LNG has the greatest potential
to add to our Nation's supplemental gas supplies by 1985. LNG is
natural gas converted to liquid form by lowering its temperature
to -259 degrees F. Despite the expense of special equipment for
liquefaction and oceangoing transportation and storage, the
great reduction in volume can make LNG economically feasible to
transport and store for subsequent regasification and use
elsewhere. As part of President Carter's National Energy Plan, a
new LG import policy was established. The limitation on LNG
imports imposed under the previous administration was replaced
by a more flexible policy providing for a case-by-case analysis
of each project.    Findings/conclusions: The new policy provides
for: national distribution to avoid a region being seriously
affected by a supply interruption, development of contingency
plans in case such interruption occurs, and prohibition of dock
construction in densely populated areas. This policy has not
alleviated uncertainties associated with imported LNG. Import
policy should be related to the overall energy program, and a
comprehensive energy proposal should learly indicate how nm"h
imported LNG will be needed and methods of obtaining it. There
is a need .'or adequate criteria defining what would constitute
overdependence on imported LNG. As LNG imports increase, the
United States increases its vulnerability to supply disruptions
and price hikes. The policy does not address the problems
associated with te lengthy regulatory process and curtailment
of low-priority LG users. Unclear, inaccurate, and misleading
s t atements add to the confusion regarding LG's future role in
supplying U.S. energy needs. Recommendations:   he Secretary of
Energy, in cooperation with other Federal agencies, snhould
revise the policy statement for imported LNG to: define clearly
goals and objectives for imported NG; establish riteria on
what constitutes national depenency for use in determining
project acceptability; specify curtailments to be applied for
low-priority users of imported LNG; and clarify or correct
ambiguous, inaccurate, or potentially misleading statements. The
Secretary of Energy should also initiate a study of the
regulatory process to identify what actions should, or could, be
taken to expedite decisionmaking. (Author/SW)
                       REPORT TO THE CONGRESS
tL

.'                -    BY THE COMPTROLLER GENERAL
     ',*y: s *,        OF THE UNITED STATES




                      The New National Liquefied
                      Natural Gas Import Policy
                      Requires Further Improvements
                      The new Presidential policy on imported
                      liquefiad natural gas is inadequate because it
                      does not have the elements needed to be com-
                      prehensive and effective. It should be im-
                      proved by

                           --defining clearly goals and ojectives for
                             importing natural gas and

                           --establishing criteria as to what consti-
                             tutes excessive dependency on import-
                             ed gas.

                      Until these and other improvements are made
                      to provide clear guidance, the appropriate role
                      for imported natural gas in the United States
                      will not be established or implemented.




                      EMD-78-9                                          DECEMBER 12, 1977
                      WAMINSTON, DC.   O0




B-178205




To the President cf the Senate and the
Speaker of the House of Representatives
     This report discusses the improvements needed to make
the national policy for imported liquefied natural gas com-
prehensive and effective. We made this review because sup-
plemental sources of natural gas, including imports, will
become increasingly important as our domestic reserves con-
tinue to decline.

     We made our review pursuant to the Budget ant Account-
ing Act, 1921 (31 U.S.C. 53), and Section 207 of ti.e Depart-
ment of Energy Organization Act, P. L. 95-91, 91 Stat. 565
(1977).
     We are sending copies of this report to the Acting
Director, Office of Management and Budget; the Secretary of
Energy; and the Chairman, Federal Energy Regulatory Commission.




                                 Co ptroller General
                                 of the United States
COMPTROLLER GENERAL'S                THE NEW NATIONAL LIQUEFIED
REPORT TO THE CONGRESS               NATURAL GAS IMPORT POLICY
                                     REQUIRES FURTHER IMPROVEtMENTS

        DIGEST
        Natural gas can be converted to liquid form by
        reducing its temperature to -259 ° F. This proc-
        ess reduces the gas to 1/600 of its normal
        volume, making easier its importation from
        overseas. On April 29, 1977, the President's
        imported liquefied natural gas policy was
        issued as a part of the national energy pro-
        gram. It replaces one which cortained guide-
        lines for total U.S. and per-country import
        levels with one which sets no limits. The
        new policy calls for a case-by-case analysis
        of each project to consider reasonableness of
        price, risks of dependence on foreign sup-
        plies, safety conditions, and costs. It pro-
        vides for
               -- national distribution to avoid a region
                  being seriously affected by a supply
                  interruption,
                -- development of contingency plans in case
                   such interruption occurs, and

                --prohibition of deck construction in densely
                  populated areas.  (See pp. 1 and 5.)

        CONCLUSIONS

        The policy is inadequate because it does not
        alleviate uncertainties associated with im-
        ported liquefied natural gas. Without clear
        guidance, GAO questions whether the most appro-
        priate role for imported liquefied natural gas
        will be established and implemented and whet er
        industry planning can be effectively accom-
        plished. (:ee p. 18.)

        NEED TO RELATE IMPORT POLICY
        TO THE OVERALL ENERGY PROGRAM

         The liquefied natural gas i:,port policy provides
         no clear indication of what role imports are
         to play in meeting future gas needs. The Pres-
         ident's proposed comprehensive national energy
         program has provided the framework for which
ILB'. Up       moval. thort                              EMD-7p8-19
       should be noted hron.     i
natural gas will be used in the future. With
this basis, specific goals and objectives should
be established for domestic and supplemental
gas sources. (See pp. 8 and 9.)
NEED TO ESTABLISH CR:TERIA
ON WHAT CONSTITUTES
NATIONAL DEPENDENCY
A National Energy Plan objective, with respect
to foreign oil, is to re.uce U.S dependency
and vulnerability to interruptions in supply.
The objective of reducing dependency should
also apply to natural gas imports. However,
the new policy does not consider adequately
those possibilities nor provide adequate cri-
teria defining what would constitute overde-
pendence on mported liquefied natural gas.
The policy should be revised to provide criteria
which, if effectively used, would protect the
United States from becoming overly dependent
on imported natural gs as an energy source.
(See pp. 10 to 14.)
LENGTHY REGULATORY PROCESS
NOT ADDRESSED
In developing a realistic liquefied a.urai gas
import policy, the time required to rule on
an import project must be recognized. This
was not done. Currently, the regulatory proc-
ess is lengthy and the costs of liquefied nat-
ural gas projects increase while this is being
carried out. It is not only difficult for
industry to make precise plans but contracts
that have expired have been renegotiated at
higher prices also. Imported liquefied iat-
ural gas cases have been pending before the
Federal Power Commission for years.  (See
pp. 14 and 15.)
THE PROBLEMS OF CURTAILMENTS
AND INCREMENTAL PRICING
FOR LOW-PRIORITY USERS

The policy does not address the complex issue
dealing with curtailments to low-priority users
of liquefied natural gas. Based on what curtail-
ment procedures are established, demand for im-
ported liquefied natural gas could be affected
significantly. Industry may not be willing to

                     ii
           accept this high-priced gas if its supply could
           be curtailed during shortages. Not to curtail
           its supply, however, would mean that low-
           priority users would receive gas during shortages
           when it is needed by high-priority users.  (See
           pp. 15 and 16.)
           TOPICS WITHIN TE POLICY SHOULD BE
           CLARIFIED AND INACCURATE OR
           MISLEADING STATEMENTS CORRECTED

           A clear and unambiguous policy is important for
           planning and implementation. Presently, the
           policy contains unclear, inaccurate, and mis-
           leading statements which add to the confusion
           over the future role in the United States of
           imported liquefied natural gas.   The statements
           concern the possible impact the new policy
           would have on increasing natural gas imports,
           the potential imports from a single country,
           and how the imported gas would be dis:ributed
           to avoid regional dependency.   (See pp. 16 to
           18.)

           RECOMMENDATIONS
           The Secretary of Energy should revise the policy
           statement for imported liquefied natural gas
           in cooperation with other Federal agencies,
           as necessary, so as to

                --define clearly goals and objectives for
                  imported liquefied natural gas;

                -- establish criteria on what constitutes
                   national dependency for use in deter-
                   mining project acceptability;

                -- specify curtailments to be applied for
                   low-priority users of imported liquefied
                   natural gas; and

                -- clarify or correct ambiguous, inaccurate,
                   or potentially misleading statements.

           He should also initiate a study of the regulatory
           process tc identify actions that should, or could,
           be taken to expedite decisicnmaking.  (See pp. 18
           and 19.)



Tur Sh t                        iii
AGENCY COMMENTS

The. Federal Energy Administration stated that
the National Energy Plan was intended to provide
a broad framework which would guide the develop-
ment, through a new extensive study, o a more
detailed and comprehensive policy n liquefied
natural gas imports. Although the Agency agreed
with the aim of the above recommendations, it
characterized this report as premature and not
to be issued. GAO, however, regards the current
policy statement as inadequate even as broad
policy guidelines and reaffirms that its con-
cerns should be considered in revising the cur-
rent policy statement and during the development
of a detailed policy.   (See p. 19.,

The Chairman, Federal Power Commission, sai 1
the report would make a valuable contribution
to the further development of the administra-
tion's position.   (See p. 19.) The Department
of Commerce proposed that the Presidential
policy statement be expanded to state that U.S.
flag vessels should carry a substantial portion
of U.S. liquefied natural y-s imports.  (See pp.
19 and 20.)

Other more specific comments provided by the
Federal Energy Administration, Departments of
State and Commerce, and the Export-Import Bank
are recognized throughout the report.
(See apps. V through IX.)




                     iv
                         Con t e n t s

                                                          Pagee
DIGEST                                                      i
CHAPTER

      1    INTRODUCTION                                     1
               Scope of review                              2
      2    THE CHANGING U.S. LNG IMPOkT POLICY              3
               President Ford's February 1976 import
                 policy                                    3
               The Energy Resources Council August 1976
                 import policy                             3
               President Carter's April 1977 import
                 policy                                    5
   3       ANALYSIS OF THE CURRENT LNG IMPORT POLICY       7
               Need to relate import polizy to the
                 overall energy program                    8
               Need to establish criteria on what con-
                 stitutes national dependency             10
               Lengthy regulatory process not addressed   14
               The problems of curtailments and incre-
                 mental pricing for low-priority users    15
               Topics within the policy should be clar-
                 ified and inaccurate or misleading
                 statements corrected                     16
               Conclusions                                18
               Recommendations                            18
               Agency comments                            19
APPENDIX

   I       The Liquefied Natural Gas Import Policy as
             contained in the National Energy Plan
             dated April 29, 1977                         21
  II       )Energy Resources Council Policy Statement
             on Liquefied Natural Gas Imports dated
             August 1976                                  22
III        LNG projects--approved, pending, and
             potential                                    28
 IV        Imported LNG costs                             30
APPENDIX                                                Page
       V   Letter dated September 16, 1977, from the
             Associate Administrator, Policy and
             Program An'.ysis, Federal Energy Admini-
             stration                                      32

      VI   Letter dated September 20, 1977, from the
             First Vice President and Vice Chairman,
             Export-Import Bank of the United States       38
  VII      Letter dated September 30, 1977, from the
             Chairman, Federal Power Commission            39
 VIII      Letter dated October 7, 1977, from the
             Deputy Assistant Secretary for Budget
             and Finance, Department of State              41
      IX   Letter dated October 17, 1977, from the
             Assistant Secretary for Maritime
             Affairs, Department of Commer.                44


                       ABBREVIATIONS

Btu        British thermal units

ERC        Energy Resources Council

FEA        Federal Energy Administration
FERC       Federal Energy Regulatory Commission

FPC        Federal Power Commission
GAO        General Accounting Office

LNG        liquefied natural gas

OPEC       Organization of Petroleum Exporting Countries
Tcf        Trillion cubic feet
                          CHAPTEP 1

                         INTRODUCTION

      Energy concerns are one of the Nation's most crucial
problems.   Because there is no product or service that does
not: directly or indirectly use energy, shortages can have
drastic effects on our lifestyle.   Over one-fourth of our
total energy consumption is supplied by natural gas. Largely
because of its lower cost, cleanliness, and ease of handling
compared with other fuel sources, ntural gas usage has risen
over 300 percent since 1950.   This increase, combined with
dwindling domestic production since 1973, has resulted in
a growing gas shortage. Curtailments have occurred during
every winter season since 1970.

     This growing natural gas shortfall could be lessened by
reducing the demand for gas, increasing the supply, or a
 omnination of these two measures.  The demand can be reduced
by switching to alternative domestic sources of energy, in-
cluding both conventional and nonconventional forms; increas-
ing oil imports, which could be substituted for domestic gas
use; or undertaking a gas conservation program.   Supply can
be increased through greater exploration and development
programs or developing supplemental gas sources. This report
will examine the current policy for one supplemental gas
source--imported liquefied natural gas (LNG).   On the basis
of Government and industry statistics, imported LNG has
the greatest potential to add to our Nation's supplemental
gas supplies by 1985.

     LNG is natural gas converted to liquid form by lowering
its temperature to -2539  F. In its liquefied state, natural
gas requires less than 1/600 of the volume in its gaseous form.
Despite the expense of special equipment for liquefaction and
oceangoing transportation and storage, the great reduction in
volume can make LNG economnically feasible to transport and
store for subsequent regasification and use elsewhere.

      The United States currently imports insignificant
amounts of LNG, less than 1/10 of 1 percent of our annual
-atural gas consumption which was about 20 trillion cubic
meet (Tcf) in 1976.   However, bdbed only on projects approved
and pending before the Federal Pow. r Commission (FpC) in
June 1977, LAG imports could ange fm     0.6 to 1.8 Tcf by
1985.   This would be 3 to 9 percent of 1976 gac consumption.
The National Energy Plan projects the 1985 consumption to
be about 19.2 Tcf, slightly below the 1976 level.



                              1
     The variance in the potential amounts of imported LNG
can be attributed to the uncettainty regarding LNG's role
in meeting U.S. energy needs. The U.S. LNG import policy
has been changed three times since early 1976. Critical siting
and safety criteria have not been established, and the
amount of LNG needed is unknown.

     On October 1, 1977, FPC, which regulated LNG imports,
was abolished and its functions transferred to the Federal
Energy Regulatory Commission (FERC) and the Economic Regula-
tory Administration, Department of Energy, establ7shed that
same day.
SCOPE OF REVIEW

     This report discusses the LNG import policy presented
by President Carter on April 29, 1977, as a part of the
National Energy Plan. (See app. I., We examined the policy
in light of the National Energy Plan, prior LNG import
policies, national dependency, and regulatory procedures and
practices. We consulted Government and industry reports and
conferred with officials of the Federal Energy Administration
(FiA), FPC, Maritime Administration, Export-Import Bank,
Department of State, Department of the Interior, Energy
Research and Development Administration, Central Intelligence
Agency, American Gas Association, and representatives of
several interested companies. We also specifically examined
the LNG policy statement and supporting documentation issued
by the Energy Resources Council (ERC) on Auqust 5, 1976. The
President's National Energy Plan supersedes the ERC LNG
policy statement. On October 1, 1977, ERC was abolished with
the establishment of the Drpartment of Energy.

     Although we have examined into all major issues with
respect to LNG import policy in this report, we are discussing
only those aspects of the current policy that we believe need
clarification or improvement. Also, we are conducting a
separate review of the safety of liquefied energy gases,
including LNG.




                             2
                          CHAPTER 2
             THE CHANGING U.S. LNG IMPORT POLICY
     The United States has had three significantly different
liquefied natural gas import policies i- the last 2 years.
The first, which was very basic, was established by President
Ford in his energy message of February 26, 1976. He also
directed ERC to more fully develop a national LNG import
policy which was formalized on August 5, 1976. (See app. II.)
The third policy was established by President Carter on April
20, 1977, as part of his national energy program and detailed
on April 29, 1977, in "The National Energy Plan."  (See app.
I.)
PRESIDENT FORD'q FEBRUARY 1976
IMPORT POLICY

     The first U.S. LNG import policy, issued by President
Ford, expressed strong concern about the growing dependence
on imported LNG. The policy provided that the United States
could import annually 1 Tcf of natural gas by 1985 without
becoming overly dependent on foreign sources. The gas indus-
try criticized this policy as being too restrictive in light
of our growing gas shortage.

     The President also directed ERC to implement a national
LNG import policy and review an acceptable level of dependence
based on current estimates of natural gas production.

THE ENERGY RISOURCES COUNCIL
AUGUST97    1MPORT POLICY

     ERC was ebthlished to coordinate energy policy among
Federal agencies. I was an energy policy advisory board to
the President and the Congress, composed of the heads of
vario-s Federal depar#tents and agencies, certain White House
staff members, and others the President designated. After
an extensive 5-month study, ERC established a more definitive
LNG import policy, which included a significant change in
the acceptable level of LNG imports.

     ERC concluded that LNG imports were needed as a supple-
mental source of natural gas. However, it also concluded that
the United States must limit its longrun dependence on all
imported energy, including LNG. The thrust of the policy was
not one of discouraging LNG projects, but rather of (1) lim-
iting imports, as necessary, on national security grounds and



                               3
(2) lessening our vulnerability by diversifying sources and
mitigating the effects of supply disruptions or arbitrary
price hikes,

    This policy contained four basic recommendations:

    -- LNG imports from a single country should be limited
       to 0.8 to 1.0 Tcf per year for national security
       reasons. ERC concluded that about 2 Tcf per year
       was an acceptable level of total imports. This
       recommendation was aimed at encouraging diversifica-
       tion of sources and facilitating attainment of a
       national target level. The target of 2 cf was not
       intended as a quota, but represented an acceptable
       level of dependency, which could charge depending on
       domestic policy occurrences.
    -- Where administratively feasible, the price of imported
       LNG should be "rolled-in," or averaged, with other gas
       supplies for existing high-priority customers (resi-
       dential and small commercial), and "incrementally"
       priced, or based on actual costs, for lower priority
       'nigh-volume industrial and boiler uses with alternate
       fuel capability) or new users. ERC's preliminary
       analysis indicated that pricing methods could affect
       the size of the LNG import market and wou'd affect
       the sectoral composition of demand.    RC believed
       that expensive, relatively insecure ii.ipcrts probably
       should not be made available at rolled-in prices to
       lower priority domestic users, c in support of new
       growth. Such pricing, it thought, hides tht full
       economic and security costs cf the resource and can
       discourage development of domestic supply.
    -- ERC found no reason to recommend modifying ongoing
       policies f the Maritime Administration and the
       Export-Import Bank which have provided Government
       financial assistance to LNG projects. Also, it
       concluded that without subsidies from the Maritime
       Administration, LNG tankers would be available else-
       where and, therefore, such support was not essential
       to LNG ventures. Because Export-Import Bank loans
       and guarantees require approval from an interagency
       advisory committee with respect to national policy
       objectives, ERC believed that the security concerns
       of the executive branch were already adequately
       met. The First Vice President of the Export-Import
       Bank advised us that the Bank's authorizations do
       not require approval from the interagency advisory


                            4
       committee. However, he said that the advisory
       committee does provide guidance for authorizations
       over $30 million. He further stated that this does
       not alter the substance of the specific ERC conclu-
       sionrs.
     -- To guard against risks f supply disruption to high-
        priority users, contingency plans should be required
        of each LNG project prior to its approval. ERC later
        specified that the contingency plan should provide
        supply continuity to high-priority users durinq the
        5 consecu ive months of their estimated peak usage.

     The ERC policy statement was developed without the bene-
fit of a coordinated national energy policy. Considering
this and the uncertainties in the domestic natural gas situa-
tion, the ERC action in establishing a flexible target level
was reasonable under the circumstances.

PRESIDENT CRTER'S APRIL 1977
IMPORT POLICY

     As part of President Carter's National Energy Plan, a new
LNG import policy was established. The limitation on LNG
imports, imposed under the previous administration, was
replaced by a more flexible policy, providing for a case-by-
case analysis of each project.  Importation of LNG would not
be concentrated in any one region. Strict siting criteria,
yet to be established, would prohibit the location f future
tanker docks in densely populated areas. 1/ The President
also called for legislation allocating the cost of mre
expensive new gas, which would include impsLtes LNG, to in-
dustrial users, not to residential and commercial users.

     Of the four policy recommendations made by ERC, President
Carter's LNG import policy most directly affects the one
regardirg national dependency. Where ERC placed country-of-
origin limits and an acceptable national target level for
imports, the new policy ifted all such restrictions and
guidelines. As of June 1977, seven projects totaling 1.8
Tcf per year were approved (0.6 Tcf) or ending (1.2 Tcf)
before FPC.  (See app. III.) Of this, 1.6 is from Algeria
and 0.2 from Indonesia.




l/We are currently conducting a review of the safety of
  liquefied energy gases, including LNG.



                               5
     One effect of the new policy is the increased potential
reliance on imports from Algeria. Only Algeria has projects
approved and pending which surpass or even approach the 1 Tcf
per year country limit set by ERC. Other countries may be
be affected later as plans for imports from them progress.

     Additionally, projects under discussion but not submitted
for approval total about 2.4 Tcf per year.  (See app. III.)
This raises the total possible imports to about 4.2 Tcf per
year, or over twice ERC's national target levels.

     ERC strongly felt the need for contingency plans in
the event of a supply interruption. Although the National
Energy Plan's LNG import policy calls for "the development
of contingency plans," it was not specific as to details.
However, an FEA official advised us that there was no
change from the criteria ERC established.




                              6
                          CHAPTER 3

         ANALYSIS OF THE CURRENT LNG IMPORT POLICY
     An effective LNG import policy should clearly relate
to the overall national energy program by establishing
meaningful goals and objectives. It also should be stated
so that its meaning is complete and clear.
     To quote from the National Energy Plan:

     "Reasonable certainty and stability in Government
     policies are needed to enable consumers and pro-
     ducers of energy to make investment decisions.
     A comprehensive national energy lan should re-
     solve a wide range of uncertainties that have
     impeded the orderly de elopment of energypli.y
     and projects. Some uncertainties are inher   t in
     a market economy, and Government should not shel-
     ter industry from the normal risks of doing busi-
     ness. But Government should provide business
     and the public with a car and consistent state-
     ment of its own policies, rules, and intentions so
     that intelligent private investment decisions can
     be made." (Emphasis added.)
     In spite of this statement, the current policy has not
alleviated the uncertainties associated with imported LNG.
ERC felt that the need for an LNG import policy was apparent.
ERC concluded that te absence of such a policy

     -- increases uncertainty among suppliers and consumers;
     -- maintains divergent and often conflicting positions
        in the Federal Government;
     -- has allowed one Arab Organization of Petroleum
        Exporting Countries (OPEC) nation to emerge as a
        prospective dominant supplier; and

     --opens the possibility that we will repeat our oil
        import trends and be forced to change consumption
       patterns, causing future economic disruption.

We believe that these are still valid concerns which have
not been adequately addressed under the new policy. Specif-
ically, the policy has not

     -- been related to the overall energy program and
        has not specified goals or objectives;

                             7
     -- established criteria on what constitutes national
        dependency to be used to determine project accept-
        ability;

     -- addressed the lengthy regulatory process which has
        delayed projects and increased costs;

     -- addressed the problems of curtailments to low
        priority, incrementally priced LNG users; and

     -- contained ambiguities and some inaccurate or mis-
        leading statements.

These points are addressed below.

NEED TO RELATE IMPORT POLICY
TO THE OVERALL ENERGY PROGRAM

     The LN'; import policy provides no clea, indication of
what role LNG is to play in meeting future gas needs. Pres-
ident Carter's proposed comprehensive national energy pro-
gram has provided the framework within which natural gas
will be used in the future.   Specific goals and objectives
cou'd have been established for domestic and supplemental
gas sources, as was done with oil. Although such goals
should not be completely inflexible, we believe reasonably
firm and definitive goals should be set to guide project
planning.

     Prior to President Carter's energy plan, various FEA
scenarios for imported LNG ranged from 0.4 to 2.1 Tcf
by 1985, while the American Gas Association felt LNG imports
could provide 3 Tcf by 1990.  The new energy program plans
to reduce he use of i.-tural gas, while still predicting
a need for imports, but does not indicate any goals for
imported LNG.  With reduced consumption, 2 to   Tcf of
imported LNG could represent sizable portions of our total
gas supply.

     The American Gas Association position is one of pessi-
mism toward the total gas supply situation during all of
the 1980s as a result of the National Energy Plan.  However,
various Government and industry officials, including ones
from FEA, indicate that if the National Energy Plan is success-
ful, domestic gas supplies may temporarily be adequate
during the 1980s.  Also, we note that high-priority uses
of natural gas comprise only about one-half of the current
usage,  If the National Energy Plan's objectives to reduce
low-priority uses of natural gas are successful, significant


                                8
amounts of as could be freed for high-priority use. The
question would then arise on what to do with the high-priced
imported gas. LNG projects require years of planning an4
construction, huge capital investments, and long-term
commitments. 1/ Therefore, it would be unreasonable to
expect LNG facilities to shut down if domestic gas is
sufficient to meet our needs. Allowing industry and
utilities to use the gas would contradict a National
Energy Plan strategy of converting them to more abundant
fuels to reduce imports and thereby make natural gas more
widely available for household use.

     Since a comprehensive national energy program has now
been proposed, decisions can and should be made regarding
the future role of imported LNG. A comprehensive energy
proposal should clearly indicate how much imported LNG will
be needed and methods of obtaining it.
     In our report on the National Energy Plan (EMD-77-48,
July 25, 1977), and a subsequent report (EMD-78-5, October
15, 1977), we indicate that, by itself, the Plan will not
achieve the President's oil import goals. Since LNG can
be used to reduce oil imports, we believe it is even more
important that the administration clarify the LNG import
policy.
     The Associate Administrator, Policy and Program Analysis,
Federal Enerqy Administration (see app. V) and the Assistant
Secretary to- Maritime Affairs, Department of Commerce (see
app. IX), in commenting on our proposed report, agreed with
us on the desirability of .-elating import policy to the
overall energy program, but Commerce objected to setting
quantitative goals now. We believe that to wait to set
goals could allow uncontrolled approval of projects and
result in increasingly high levels of LNC imports. Once
large investments have been made in these costly projects,
it will be difficult to reverse the trend, even if lower
levels are recognized as an appropriate goal.   In this
regard, Commerce implies that  the existence of planned
projects for imports from Algeria, which would exceed the
ERC goal of 1 Tcf per year, was reason enough to remove
the ERC quantitative goal rather than disapprove the proj-
ects which would exceed the goal.




1/See app. IV for an analysis of the cost of imported LNG.


                              9
NEED TO ESTABLISH CRITERIA ON WHAT
CONSTITUTES NATIONAL DEPENDENCY
     When the United States imports ernergy, it bcomes
dependent on occurrences and situations outside is borders
and often beyond its control. As LNG imports increase,
the United States increases its vulnerability to supply
disruptions, for political or technical reasons, and price
hikes. Such occurrences have both national security and
economic implications.

     The new LNG import policy does not adequately address
the concerns of dependency. A National Energy Plan objective
is to reduce U.S. dependency and vulnerability to supply
interruptions. This principle was stated with respect to
oil. However, without adequate criteria defining what woull
constitute overdependence on imported LNG, this principle
is ineffective for imported gas.

     Such criteria, if effectively used, would prevent the
United States from becoming overly dependent on imported LNG
as ar energy source. The new LNG import policy does not state
what the specific criteria should be. In this regard, ERC's
principal actions were to limit the amount of LNG that could
be imported from any one country and to require that contin-
gency plans be established for each LNG project to guard
against risks of supply disruptions.

     ERC concluded that an LNG supply disruption could have
a great effect on high-priority consumers. Disruptions for
political or technical reasons could be for significantly
longer periods than the gas industry has ever experienced.
The issue of politically induced supply cutoff emerged as
a result of the 1973-74 oil embargo. An LNG embargo is
easier to target than an oil embargo because the LNG export-
ing and importing infrastructure is tailored to specific
projects involving large capital investments, long-term
contracts, sophisticated technology, and dedicated markets
in the consuming countries. Therefore, no significant
"spot market" exists for LNG as it does for oil, and little
opportunity exists for nations to share L1 3 as oil was shared
during the 1973-74 embargo. ERC believed that Government
involvement is warranted since a possibility exists of an
embargo in which there would be little flexibility to cushion
its impact.

     With regard to the possibility of cutoff for technical
reasons, a study done for ERC concluded that planning should
allow for construction delays and operating problems in


                             10
liquefaction plants of the size and complexity being built
today. Even though the liquefaction process has performed
successfully, an unpredictable mechanical failure in some
key items of equipment is always possible, Poor communica-
tions of management and local plant operators with U.S. or
European equipment manufacturers and process designers can
increase the severity of technical problems. The ERC study
stated that the simplest problems can cause serious delays;
often equipment that cannot be repaired onsite has to be
shipped thousands of miles back to the manufacturers.

     Price increases are also a real possibility; they can
be due to contractual adjustments or arbitrary price hikes.
Most LNG contracts now link the base price to currency
fluctuations and the price of imported fuel oil. In a deci-
sion approving such pricing, FPC noted that its staff argued
that these provisions violate the Natural Gas Act which
requires rate increases to L - ost based.

     In addition, there is no insurance against arbitrary
price hike_. Most of the countries that are entering the
LNG trade, or have the sizable gas reserves to support, LNG
projects, are also major exporters of oil. Price increases
of imported oil have become a standard event during the last
several years and are expected to continue.
     The oil trade experience over the last few years gives
little justification for placing much reliance on the hope
that OPEC countries will not hike LNG prices unilaterally.
The established pattern is for those countries to abrogate
or unilaterally modify supply contracts at will. This kind
of behavior on the part of LNG supplier countries would
become more likely as our dependency on LNG imports increases
and would be of more concern for several reasons.

     Given that a supplier country may wish to force con-
tractual modifications on companies, its leverage is stronger
with respect to LNG than it is with respect to crude oil.
LNG delivery interruptions would have serious consequences
for receiving companies. Their large regasification facility
investments in the United States will be based on, and tie
them to, particular supply sources, with a consequent inabil-
ity to draw on alternative sources if deliveries are inter-
rupted. That lack of flexibility will make companies more
prone to accept country demands for contractual modifications.
At the same time, recognizing the companies' bind, supplier
countries will be more likely to use such threats to gain
their ends.



                             11
      It can be argued that the same physical facts--large
paired facilities in both the exporting and importing coun-
tries for liquefaction and regasification--will also tie the
supplier country to particular customers. This could reduce
the country's degree of freedom to terminate deliveries to
particular customers, making its threat to do so less credible.
Importing companies would perceive the country's limited
ability to switch its LNG output to other purchasers. However,
a ccuntervailing factor exists when a country's LNG output
is based significantly on gas from nonassociated gas fields
-- that is, wells that produce only gas. Unlike oil or gas
produced in conjunction with oil, production of nona3sociated
gas fields can b reduced or stopped     thout damage to the
field or significant loss in ultimate    covery. However,
technical problems associated with shutting in gas fields
for extended periods of time are significant. Resuming
service is a complex and costly procedure which could
2ead to further loss of income to exporters. A large share
of LNG exports will be based on nonassociated gas. For
example, about 80 percent of Algeria's reserves is nonasso-
ciated gas. Although the heavy economic investments (sup-
ported by long-term financing) provide significant incentives
to avoid revenue disruptions by imposing an embargo, we
believe that these economic restraints would receive little
consideration when an embargo is being considered for polit-
 ical reasons. We also believe that losses sustained during
a short-term embargo to achieve price increases would be
recovered over the longer term the higher prices would be in
effect.
     The impact of supply interruptions or price increases
depends upon many factors, including each region's dependence
on imports. Areas with high dependencies could experience
significant reductions in natural gas supply in the event
of a supply cutoff and significant increased cost impacts
in the event of an LNG price increase. According to a
consultant's study prepared for ERC, the potential areas
that could become highly dependent on imported LNG are the
New England States, Alabama, Georgia, South Carolina, New
Jersey, and a number of other isolated sub-State market
areas.
     Dependency upon imported gas from approved and pending
projects, if all come to fruition, could range from 15 to




                             12
30 percent in areas receiving LNG imports; 1/ some individual
gas distribution companies could have even igher dependence.
For example, on the basis of a recently approved project be-
fore FPC, by 1984 approximately 50 percent of a gas distribu-
tion system's supply will be from imported LNG.  Even with
imported LNG, the company projects that it will be able to
serve only 75 percent of its highest priority customers, with
no gas available for lower priorities.
     Price increases would affect the cost of producer goods,
increase costs to homeowners and businesses, and could result
in a loss of market for LNG importers. A loss of market
could be serious in view of the substantial fixed investment
for those gas utility companies importing LNG.

     In addressing the dependence question (see app. IX),
Commerce looks favorably on an LNG import level of 10 percent
of national natural gas consumption, while viewing with alarm
the present dependence on imported oil now approaching 50
percent of oil consumption. The National Energy Plan did
express proper concern about the level of regional dependency,
and we are aware of an LNG import project that received
preliminary FPC approval which would make the receiving pipe-
line system about 50 percent dependent upon imports.
     Further, Commerce said that the dependency question
relates to the reliability of LNG producers and, "This
may be, but the relevant comparison is between the reli-
ability of OPEC oil producers versus LNG producers, because
realistically these are the competitive energy suppliers."
As noted earlier, however, the major LNG producer countries
are also members of OPEC.

     Commerce recognizes the possibility of an LNG embargo,
but argues, on the basis of economics, hat it is less likely
than an oil embargo. However, in its arguments it does not
address the change in the likelihood of an embarao should
our level of imports, ungoverned by clear goals, reach a
high level of dependency and thereby give the exporting
country a more powerful position than it now enjoys.



1/These figures are based on information prior to the release
  of the National Energy Plan, and could be higher if the
  Plan's gas-reducing proposals are accepted since there could
  be the same total amount of LNG, but less total gas consump-
  tion.



                             13
     FEA concurred on the need for criteria on what consti-
tutes dependency and stated that an interagency task force
on LNG, created to develop the detailed elements of the
policy, would address the matter.                       LNG
                                   (See app. V.)
LENGTHY REGULATORY PROCESS
NOT ADDRESSED

      A realistic LNG import policy must recognize the
of time required to rule on an LNG project. As stated length
                                                         in
a National Energy Plan principle, "* * * unwieldy and con-
fusing regulatory procedures have resulted in major bottle-
necks in the evelopment of energy resources." This issue,
in relation to LNG imports, has not been addressed. The
                                                           time
is especially significant if the thrust of this policy is
encourage LNG imports. Currently, the regulatory process to
is lengthy and the costs of LNG projects increase during
the process. (See app. IV.)    LNG cases
before FPC and now FERC for as long as 4have  been pending
                                          years. Much of this
time can be attributed t the development of an Environmental
Impact Stat'ment.   It is not only difficult for industry to
make precise plans, but contracts signed with potential
LNG exporters have expired and have been renegotiated at
higher prices also. Furthermore, some potential exporters,
recognizing the lengthy process, may be wary of entering
into contracts with U.S. importers.
     The new Department of Energy will have the authority
to review and appr:ve the export and import of natural gas.
In its comments (see app. V), FEA stated that it is now
reviewing the various procedures available to implement
the new authority. One of the major factors that will
be used to select the preferred procedure will be the
capability to expeditiously handle these requests to
import natural gas.
     In addition, in a new and developing policy area, such
as imported LNG, cases are likely to lead to court review
since considerable controversy exists about importing LNG,
particularly the siting and safety issue. An appeal from
an FPC decision must, by statute, be taken to a United
Circuit Court of Appeals. The second and final chance States
court review is the Supreme Court.                     for




                             14
     With regard to nuclear power, the National Energy
Plan states:
     "The President has directed that a study be made
     of the entire nuclear licensing process. He has
     proposed that reasonable and objective criteria
     be established for licensing and that plants which
     are based on a standard design not require exten-
     sive individual licensing * * *"

A similar type of study is needed for LG imports.
THE PROBLEMS OF CURTAILMENTS
AND INCREMENTAL PRICING
FOR LOW-PRIORITY USERS

     The new policy has not addressed the complex issue
dealing with curtailments of low-priority LNG users. The
National Energy Plan would allocate most of the cost of
the more expensive LNG to industrial users who are classified
as low priority. The policy does not state if this gas
would be subject to curtailment during shortages. If the
gas is subject to curtailment, industrial users might be
reluctant to accept imported LNG. However, if it is not
subject to curtailment, the gas would g to lower priority
users during shortages. The demand for imported LNG could
be significantly affected depending on the resolution of
this issue.

      In an April 29, 1977, decision on one project, PC
decided to incrementally price LNG and make it free of cur-
tailments. Two months later, FPC reversed itself and ordered
that rolled-in pricing be used.

     FEA in its comments (see app. V) stated that

          "The Administration's new incremental pricing
     policy would not alter these curtailment priori-
     ties, and would only partially tie the cost of LNG
     to specific consumers.    * * *   The problem addressed
     by the GAO would only arise it a strict marginal
     pricing policy had been adopted which tied a spe-
     cific customer to a specific high-priced supplemen-
     tal gas stream. The Administration did not adopt
     this policy."




                               15
     From these comments, we conclude that the dilemma has
not been resolved. Either high-priced imported LNG will
not be incrementally price. to low-priority industrial
users as other high-priced new gas would be or low-priority
industrial users paying the full higher price of imported
LNG would be subject to curtailment from use of it during
periods of shortage. As indicated in the Departmert of
Commerce's comments (see app. IX), this problem will have
to be resolved by the Department of Energy.

TOPICS WITHIN THE OLICY SHOULD BE
CLARIFIED AND INACCURATE OR
MISLEADING STATEMENTS CORRECTED
     A clear and unambiguous policy is important for both
planning and implementation. The current policy contains
unclear, inaccurate, and misleading statements which only
add to the confusion regarding imported LNG's future role
in supplying U.S. energy needs. The purpose of any policy
statement should be to clarify administration position.

     The policy states that:
     "This &etion could ada as much as 500 billion to
     1 trillion cubic feet annually to U.S. gas supply
     through the 1980s, without making an open-ended
     commitment for large volimes of this expensive
     resource."  (See p. 21.)
It is unclear whether "this action" refers to a change from
ERC's policy, which was referred to in the beginning of
the paragraph, or whether it refers to the new policy
itself. By removing import guidelines, thereby setting no
upper limit, the new policy appears to favor additional
LNG.  However, this is never stated (terms such as "an
important supply option" are used). However, according
to the American Gas Association, the above figures have
worried some gas companies because it implies that a
potential new limit may be imposed. In its comments on our
proposed report, FEA said that the statement refers to the
increase in LNG supply that could be allowed above what
has been allowed under the ERC policy.

     The varying views by the American Gas Association and
FEA reinforced our opinion that this statement is unclear.

    The policy also states that     "* * * the previous
administration proposed guidelines to limit imports of




                               16
liquefied natural gas to 2 trillion cubic feet per year."
However, the ERC policy specifically stated that 2 Tcf
" * * * is not a quota."   This point was further emphasized
in previous testimony bfore FPC. 1/

     The policy further states that:
     "Applications for LNG contracts now pending before
     the Federal Power Commission already approach the
     2-trillion-cubic-feet limitation, with over 1.2
     trillion cubic feet proposed to come from
     Algeria."  (Emphasis added.)
This sentence is both inaccurate and inconsistent.    The
actual figures per year are shown below.

                              Algeria     Indonesia         Total
                                             (Tcf)
Applications approved             0.4           -             0.4
  (note a)
Applications pending              1.2         0.2             1.4
    Total                         1.6         0.2             1.8
a/A project approved April 29, 1977, for 0.15 Tcf/year
  is shown, for consistency, as pending since it was approved
  after the National Energy Plan was issued.

Actual applications pending, as of April 20, were 1.4 Tcf.
Pending projects would have to increase over 40 percent to
reach 2 Tcf. Furthermore, a more accurate policy statement
would not only discuss applications pending, but would also
account for projects approved when implying totals.

     The policy also states that LNG imports would be dis-
tributed throughout the Nation so that no region would be
seriously affected by a supply interruption. The policy
gives no indication how this will be done. Two possible
methods would be an actual physical distribution or distri-
bution by displacement. Physical distribution could result



l/See Federal Power Commission Testimony; Docket No. CP74-138,
  Trunkline LNG Company, et al; Vol. No. 19, pp. 2521-2522.




                             17
in transportation problems as well as increased costs.
Displacement does not require the actual LNG to be shipped
throughout the country. However, all regions would receive
less domestic gas in case of an LNG supply interruption.
The meaning and implementation of this statement should
be clarified.
     FEA's comments (see app. V) on our proposed report indi-
cated that LNG would not be physically distributed throughout
the Nation. FEA is currently reviewing this issue to deter-
mine what further action other than the contingency planning
requirement, if any, is warranted.

CONCLUSIONS
     We believe the National Energy Plan is inadequate with
respect to the LNG import policy. The LNG import policy
has not been related to the overall nationial energy plan so
as to identify LNG import goals. Without clear guidance,
we question whether the most appropriate role for imported
LNG will be established and implemented and whether indus-
try planning can be effectively accomplished.

      We also believe that additional issues should have been
handled. The policy does not adequately address the concerns
of vulnerability. Criteria defining overdependence were not
established. In addition, the policy did not address the
problems associated with the lengthy regulatory process and
curtailment of low-priority LNG users.

     Finally, we believe the policy contains numerous ob-
scure statements which only add to the confusion regarding
LNG's future role in supplying U.S. energy needs. Clarifying
the policy would simplify planning and implementation.
RECOMMENDATIONS

     We recommend that the Secretary of Energy, in cooperation
with other Federal agencies, as necessary, revise the policy
statement for imported LNG to

     -- define clearly goals and objectives for imported LNG;

     -- establish criteria on what constitutes national
        dependency for use in determining project accepta-
        bility;




                             18
      -- specify curtailments to be applied for
                                                low-priority
         users of imported LNG; and
      -- clarify or correct ambiguous, inaccurate,
                                                   or poten-
         tially misleading statements.
      We also recommend that the Secretary of
 a study of the regulatory process to identify Energy initiate
                                                what actions
 should, or could, be taken to expedite decisionmaking.

 AGENCY COMENTS
      PEA, in commenting on our proposed
 stated that the National Energy Plan was report (see app. V),
                                           intended to provide
 a broad framework which would guide the
                                         development of a
 more detailed and comprehensive policy on
 said that the policy statement would be    LNG imports. FEA
                                         supplemented by a
 new extensive study to develop the detailed
                                              elements of
 broader and more flexible policy. It suggested
 report is premature and should not be issued.    that this

      We believe, however, that the report should
now because the current policy                     be issued
                                statement is inadequate even
as broad policy guidelines. We believe our
valid and should be considered in revising   concerns are
statement and during the development of     the current policy
By letter dated September 30, 1977 (see  a detailed  policy.
                                         app. VII), the Chair-
man, Federal Power Commission, stated that
make a valuable contribution to the further this report will
the administration's position. According     development of
                                           to the Chairman,
he is confident that this report's specific
will be given serious consideration by the recommendations
                                            Secretary of
Energy.
     The Department of Commerce, in its general
(see app. IX), expressed unresolved ambivalent comments
recommendations, stating that there will         views on our
                                          be
to build on and amplify the present statement time enough later
while conjecturing that a policy statement      of policy,
by the President's Inter-Agency Task Force   to be issued
                                             on LNG may well
cover the primary areas of concern to us.

     Commerce was concerned that future LNG projects
not contemplate U.S. flag vessel participation.       may
Commerce proposed that, " * * * the policy        Therefore,
the value and benefits to the nation as     should recognize
                                        a  whole and endorse
a policy that U.S. flag vessels carry a
                                        substantial portion




                             19
of U.S. LNG imports." We believe that this issue would be
appropriate for consideration by the President's Inter-
Agency Task Force on LNG.

     Specific agency comments have been recognized throughout
the report, where appropriate.




                            20
APPENDIX I                                              APPENDIX I

             THE LIQUEFIED NATURAL GAS IMPORT POLICY
             AS CONTAINED IN THE NATIONAL ENERGY PLAN

                      DATED APRIL 29, 1977
     The Energy Resources Council in the previous administra-
tion proposed guidelines to limit imports of liquefied nat-
ural qas to 2 trillion cubic feet per year. Of that, no
more tan 1 trillion cubic feet could be imported from any
one country. Applications for LNG contracts now pending
before the Federal Power Commission already approach the
2-trillion-cubic-feet limitation, with over 1.2 trillion
cubic feet proposed to come from Algeria.

     Due to its extremely high costs and safety problems,
LNG is not a long-term secure substitute for domestic natural
gas. It can, however, be an important supply opti a through
the mid-1980's and beyond, until additional gas supplies may
become available.

     The previous Energy Resources Council guidelines are
being replaced with a more flexible policy that sets no
upper limit on LNG imports. Under the new policy, the
Federal Government would review each application to import
LNG so as to provide for its availability at a reasonable
price without undue risks of dependence on foreign supplies.
This assessment would take into account the reliability of
the selling country, the degree of American dependence such
sales would create, the safety conditions associated with
any specific installation, and all costs involved. This
action could add as much as 500 billion to 1 trillion cubic
feet annually to U.S. gas supply through the 1980's, without
making an open-ended commitment for large volumes of this
expensive resource.

     The new policy further provides for distribution of
imports throughout the nation, so that no region would be
seriously affected by a supply interruption. It also
provides for the development of contingency plans for use
in the event of a supply interruption. In cases where the
proposed supplier retains a unilateral right to cut off
supply, consideration should be given to conditioning FPC
certification on recognition of a reciprocal right to cancel
on the part of the U.S. purchaser.

     Finally, strict siting criteria would foreclose the con-
structlon of other LNG docks in densely populated areas.




                              21
APPENDIX II                                          APPENDIX II

             ENERGY RESOURCES COUNCIL POLICY STATEMENT

               ON LIQUEFIED NATURAL GAS IMPORTS
                        DATED AUGUST 1976

BACKGROUND
     In his February Energy Mecsage, the President announced
a strong concern about the nation's growing depende-.ce upon
imported liquefied natural gas (LNG) and directed the Energy
Resources Council (ERC) to implement a national LNG policy.
The policy announced in February would enable the U.S. to
import one trillion cubic feet (Tcf.) of LNG by 1985 without
becoming overly dependent on foreign sources. The ERC was
also directed to review the acceptable level of dependence
based upon current estimates of natural gas production.
     Since the Energy Message, the following nas developed:
     -- The ERC LNG Import Task Force has completed an in-
        depth analysis of the dependence issue, need for
        natural gas, and economic criteria for assessing
        dependence.

     -- The ERC held public hearings in Wihington, D.C.,
        and Los Angeles to ascertain the views of business,
        consumer, environmental, labor, and government
        officials.
     -- The Federal Power Commission (FPC) has now approved
        0.4 Tcf of LNG import projects, and over 3 Tcf of
        additional projects are pending or in the planning
        stage.
     -- No long-term legislated natural gas price deregula-
        tion has been forthcoming.

SUMMARY OF KEY CONCLUSIONS

     The ERC analysis focused on a number of key risks
associated with LNG imports. Some of these risks would
tend to discourage new projects, while others would lead
to greater acceptability.

Risk of supply disruption

     The ERC concluded that the risk of a supply disruption,
either as a result of political action (such as an oil and


                                22
APPENDIX II                                      APPENDIX II


gas embargo or gas embargo only) or because of technical
problems, warrants government action. There are only a
limited number of countries lkely to export significant
volumes of JNG to the U.S. in the next ten years. These
nations have a diverse set of political and economic inter-
ests. Thus, supply diversification would reduce the impact
of a disruption.
     The Task Force believes that it would be easier to
target an LNG embargo to one particular country than to
target an oil embargo. This possibility exists because
there are large capital investments, long-term cntracts,
sophisticated technology, and dedicated markets involved with
LNG projects.
     While the large capital costs of LNG projects ordinarily
would exert pressure on producers to meet contracted deliv-
eries to satisfy debt service obligations, such economic
considerations may not prevent a politically motivated cut-
off. In some countries, financial needs may make it difficult
to sustain an LNG embargo over a long period.
     While LNG is a reasonably difficult substance 'o process,
handle, store, and transport, long-term disruptions of supply
for technical reasons are not likely. Terhnical problems
experienced earlier have been largely ovrcome; however,
startup problems could occur in countries that are not
experienced with LNG technology. Technical problems in the
U.S. handling of LNG are possible, but highly unlikely.
     The impact of a supply disruption depends upon many
factors, including import dependence in each region. Depen-
dency upon imported gas from approved and pending projects
(if all come to fruition) could range from 15-30 percent
in each region receiving LNG imports; however, some individ-
ual gas distribution companies could have higher dependence.
If natural gas prices remain regulated, most of the LNG
imports would be needed to serve high priority (residential
and small commercial) customers and very little, if any,
for new growth. On the other hand, quick deregill tion would
require little of the imported LNG for high priority needs
and considerable amounts for new growth.

Risk of arbitrary price hikes
     The price of recently negotiated LNG projects has been
about $1.30 per million Btu (MMBtu) at the exporting country,
with escalators. After adding transportation and regasifica-
tion costs, the LNG delivered price is typically about $2.50-
$3.00/MMBtu.


                                23
APPENDIX II                                       APPENDIX II


     Since LNG contracts are long-term, with dedicated
facilities, there is a risk of arbitrary price hikes (which
grows over tme a   facilities are put in place).  The base
price for most LNG contracts is now being linked to currency
fluctuations and the price of substitute fuels.  Previous
contracts have been renegotiated as energy prices have in-
creased, and there is no insurance against price hikes,
except the commercial integrity of the producer country.

Risk of   insufficient natural aas supply

     All analytical work points to the high probability of
significant shortfalls of natural gas in the next ten years.
The uncertainties associated with price, reserves, leasing
policy, and the delivery of Alaskan natural gas make it
difficult to project domestic production.  Natural gas is
a vital fuel, used by over 40 million residences and 200,000
industrial consumers.   Continuing and growing curtailments
in the interstate market will lead to further elocation
of industrial users, and possibly residential cutoffs. Fur-
thermore, significantly reduced volumes of natural gas in
pipelines will lead to greater unit costs as pipeline
capacity would be underutilized.
     LNG imports could alleviate, but not eliminate, these
expected shortages. Some of the LNG imports may be needed
to supply residential and small commercial users. However,
the use of LNG f   such customers presents a policy dilemma.
The impacts of interruption on the residential market are
potentially severe, but the lack of gas can have similarly
severe effects on a market without alternate fuel capability.
POLICY SUMMARY
Level of Dependence

     The ERC concludes that LNG imports are needed as a
supplemental source of natural gas, but also that the United
States must limit its long-run dependence on all energy
imports, including liquefied natural gas.
     After consideration of a range of alternatives, the
ERC has decided to recommend to the Federal Power Commission
that LNG imports from a single country should be limited to
0.8-1.0 Tcf./yr. for national security reasons. Further,
about 2 Tcf./yr. are n acceptable national level of import
dependency within the specific country limits set above.




                              24
APPENDIX II                                      APPENDIX II


     This policy is aimed at encouraging div¢csification of
sources and at facilitating attainment of the national
target level. The target of 2 Tcf./yr.   s not a quota, but
represents an acceptable level of national dependency (about
10 percent of expected natural gas demand), which could change
depending upon domestic policy occurrences.

     The ERC also recommends that those projects with the most
desirable pricing and price escalation provisions for U.S.
consumers and projects which afford the greatest assurance of
uninterrupted supply flow should be acted upon expeditiously
by the FPC, provided that they are sound ventures in all other
respects.
     The lRC's recommendation does not represent a mandatory
requirement for the Federal Power Commission. Rather, the
Executive Branch would present testimony at FPC hearings on
proposed LNG import projects. Although use of Section 232
of the Trade Expansion Act was rejected as a means for
controlling LNG imports, it could be applied if future im-
port project approvals appear to threaten the nation's
security.
Pricing
     The ERC concludes that rolled-in pricing for existing
high priority customers and incremental pricing for lower
priority or new users are desirable where administratively
feasible. This policy statement is intended as a recommenda-
tion for the FPC and State and local authorities. The ERC
will continue to review the pricing issue in the context
of all natural gas supplemental fuels.
     New natural gas supplies have traditionally been priced
on a "rolled-in," or averaged basis to the consumer. An
alternative approach would be to price the supplies to the
consumer on a marginal or "incremental" basis, in ordcr to
present the consumer with the full economic cost of each new
supply source.
      Preliminary analysis shows that the method of pricing
could affect the size of the LNG import market, and would
affect the sectoral composition of demand. It is clear that
LN G imports needed for existing high priority residential
and commercial customers cannot realistically be priced on
an incremental basis at the retail level. Such a pricing
treatment might not be administratively feasible, and social




                             25
APPENDIX II                                     APPENDIX II

inequities would inevitably appear to result from any attempt
to draw distinctions, such as forcing some existing residen-
tial customers to pay for LNG at a multiple of the price of
domestic gas experienced by other residential customers.

     The ERC believes that expensive, relatively insecure LNG
imports probably should not be made available at rolled-in
prices to lower priority domestic users, or in support of
new growth. Rolling-in prices masks to the users the full
economic and security costs of the resource, and provides
disincentives to domestic supply development.

     There remain several complex issues dealing with inter-
mediate categories of users, provisions for curtailment, and
coordination with State and local authorities. Incrementally
priced gas would probably have to be kept free from curtail-
ment in order to have a viable market; yet, such a policy
would force gas to lower priority users and could result in
inequities. Moreover, unless incremental pricing were man-
dated all the way to the burner tip, which means consistent
policies at the state and local levels, its effectiveness
as a means to control import quantities could be largely
offset.

Government Financial Assistance
for LNG Ventures
     The Maritime Administration (MarAD) and Export-Import
Bank have provided Government financial assistance to LNG
projects. MarAd may grant ship construction subsidies and
guarantees for U.S. built LNG tankers. It has approved al-
most $200 million in tanker subsidies and about one billion
dollars in mortgage guarantees. In the absence of U.S.
subsidies tankers would be available elsewhere; thus, MarAd
support is not essential to LNG ventures. Its suppport is
used to assist the U.S. shipbuilding industry in competi-
tion with other nations. The ERC finds no eason to recom-
mend modification of the on-going MarAd policies with respect
to LNG tankers.

     The Export-Import Bank provides loans and guarantees
for overseas LNG facilities. Loans have been granted for
gas field facilities and pipeline compressor stations,
with a total exposure of about $350 million. Its support
for transactions is conditioned by approval from an inter-
agency advisory committee to insure that lending meets
national policy objectives. The ERC believes that this
mechanism is sufficient for providing a timely and informed
project review which will meet the concerns of the Execu-
tive Branch.


                             26
APPENDIX II                                      APPENDIX II


Contingency Planning
     The ERC believes that there is a need for contingency
plans prior to the FPC's approval of prospective projects,
and that such plans should be required by the FPC. A project
contingency plan would ensure continuity of gas supply to
high-priority customers for a specified period. The plans
could consist of any one or a combination of underground
and LNG storage, exchange agreements through interconnections,
curtailments or cutoff of predetermined lower priority users
on the system, availability of standby supplemental sources
of natural gas including synthetic gas, conservation, or
any other appropriate mechanism or procedure.

Siting and Safety Concerns
     Although the Federal Power Commission has jurisdiction
over site selection of LNG import facilities, there are frag-
mented and overlapping responsibilities for LNG siting and
safety among Federal agencies and to a certain extent among
state governments. The ERC has agreed to address the adminis-
trative and legal problems associated with this issue.
Working with the FPC and state and local authorities, the
ERC LNG Import Task Force will report to the ERC on any
expediting actions that can be taken, or any further analy-
sis needed.




                             27
APPENDIX III                                                                                                                                                                                                                     APPENDIX III


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                                                                                                                             28
APPENDIX III                                                                                                                                            APPENDIX III




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                                                                                         29
APPENDIX IV                                            APPENDIX IV


                        IMPORTED LNG COSTS

     The high cost of imported LNG delivered to this country
is an important issue.  A major element of this cost is due
to the high and escalating capital costs of an LNG project.
An 8,000-mile round trip project, such as Algeria to the
United States, which delivers 1 billion cubic feet daily,
would involve a liquefaction plant in the exporting country,
eight 125,000 cubic meter tankers, and a terminal facility
on the east coast.  The table below gives cost estimates of
two similar projects--excluding producing and gathering costs
in the exporting country.  The first  stimate was made in
1972, the second in 1975.

   LNG Project Capital Costs--l Billion Cubic Feet per Day

     Project element                 1972 estimate     1975 estimate

                                                (millions)

Liquefaction facility                 $   600                $1,000

Tankers   (8)                             800                1,300

Receiving terminal (including
  regasification facility)                175                   300

    Total                             $1,575                 $2,600

     Recent projects have continued to demonstrate escalation.
A project approved April 29, 1977, for instance, is scheduled
to use a  -billion-cubic-fooL-per-day liquefaction facility
that is scheduled to be completed in 1980, at a cost of $2.3
billion.  This is more tiian twice the cost of the similar-
sized facility shown above.   The receiving facility's esti-
mated costs have also increased substantially since 1973.

     The shipping distance is an important project character-
istic.   If the project in the above example involved a 16,000-
mile round trip--such as an Indonesian-U.S. project--twice
as many tankers would be necessary to maintain a 1-billion-
cubic-foot daily flow.   The one proposed Indonesian project
is about half this size.   Ocean shipping and the foreign
based liquefaction facility are the major capital cost items.
The domestic receiving and regasification facility's cost
is minor relative to total project cost.   These figures have
implications for balance of payments and vulnerability to
embargo or debt payment, depending on U.S. economic involve-
ment in, and control over, the project's liquefaction and
shipping.



                                30
APPENDIX IV                                         APPENDIX IV


Cost comparisons
     Comparing imported LNG costs to domestic natural gas
prices shows that LNG's expected costs are much higher. The
unit cost from three LNG projects filed before FPC are listed
chronologically in the table below. The cheapest cost deliv-
ered to the pipeline is for the El Paso I project--$1.66
per million British thermal units (Btus). 1/ More recent
projects have substantially higher unit costs than the El
Paeo project.

                Pipeline Costs of Imported LNG

     Project       Date filed            Cost to pipeline

    El Paso I         1970           $1.66/million Btus

    Trunkline         1973           $3.37/thousand cubic feet

    Tenneco           1977           $4.57/thousand cubic feet

     LNG import ,prices are usually much higher than other
sources of gas. The regulated rate for interstate gas at the
wellhead is $1.45 per thousand cubic feet, less than half
the cost for the Trunkline and Tenneco projects. President
Carter has proposed new gas prices of $1.75 per thousand
cubic feet. LNG can also be compared to the cost of produc-
ing electricity. In this case, on the basis of information
provided by the American Gas Association, the cost to produce
electricity is about two times the cost of the highest pro-
posed delivered LNG price per unit of energy.




l/One million Btus is roughly equivalent to 1,000 cubic feet.


                                31
APPENDIX V                                            APPENDIX V


                  FEDERAL ENERGY ADMINISTRATION
                           WASHINGTON, D.C.   20461




                             SEP 16 1977

Mr. Monte Canfield, Jr.
Director
Energy and Minerals Di' tsion
United States General Accounting
  Office
Washington, D.C. 20548

Dear Mr. Canf/ela:

On behalf of Mr. O'Leary, I want to thank you for the
opportunity to review your draft report entitled "Improvements
Needed in the National Liquefied Natural Gas Import Policy,"
which you forwarded on August 31, 1977. Before proceeding to
comment on the report's contents, I would like to make the
following observations. The draft report stresses the need
for a comprehensive LNG policy which is related to the Nation's
overall energy program. I agree with this view. However, the
report then proceeds with the assumption that the statements
in the Administrationis National Energy Plan (NEP) on LNG,
at page 57, constitute the complete new policy on LNG and
criticizes these statements as being insufficient.

The LNG statement in the NEP was intended to provide a
broad framework which would guide the development of a more
detailed and comprehensive policy on LNG imports. In view of
the new overall energy plan proposed by the Administration
in the NEP, it was felt appropriate to review the previous
work done by the Energy Resources Council and institute new
policy decisions and recommendations which would be consistent
with the new energy plan.

It was never intended that the NEP contain a fully detailed
exposition of the new LNG policy and it is incorrect for the
GAO to have assumed that this was the case. In fact,




                                 32
APPENDIX V                                            APPENDIX V

representatives of GAO were advised that such a detailed
review and analysis had been authorized, was being undertaken,
and would be completed y the end of this clendar year.

As you know, since the third quarter of 1976, members of the
Interagency LNG task force, originally created by the ERC and
headed by the Federal Energy Administration (FEA), have
discussed with representatives of GAO, the detailed review and
analysis which went into the formulation of the ERC policy
on LNG and provided the GAO representatives with copies of
all reports which were used in the development of the recom-
mendation made to the ERC.   In May of this year, the task force
informed your representatives, in an interview requested by
GAO, that the NEP statement on LNG would involve a new, extensive
study by the task force to develop the detailed elements of
a broader and more flexible policy.

In view of this I recommend that GAO not issue the draft report
since it would be premature for your office to criticize the
Administration's LNG policy before it has had an oppcrtunity
to fully formulate and integrate it into the overall energy
plan.

Specific comments on the draft are:



                   [See GAO note, p. 37.]



o   Page 12 - The discussion on this page addresses the need
              to develop criteria on what constitutes national
              dependency. As previously stated, the interagency
              task force on LNG is now reviewing possible dependency
              criteria which may be used along with developing
              other criteria or guidelines to evaluate the
              reliability of the exporting country in individual
              cases. It is premature at this stage to discuss
              the outcome of this effort; however, FEA certainly
              concurs o the need for such criteria and would
              welcome any suggestions which the GAO staff may
              have on this matter.




                                33
    APPENDIX V                                           APPENDIX V




                       [See GAO note, p. 37.]




o     Page 17 - The discussion on this page addresses the need to
                streamline the review process to reduce unnecessary
                delays and eliminate unwieldy and confusing
                regulatory procedures.  Here again FEA completely
                concurs in this recommendation.   However, the GO
                report concludes this discussion by asserting that
                the Administration ignored this issue since it
                was not contained in the NEP. This conclusion
                does not take note of one of the major actions
                proposed by the Administration on LNG and endorsed
                by Congress when it passed the legislation estab-
                lishing the Department of Energy.

                 Specifically, the authority to review and approve the
                 export and iaport of natural gas will be transferred
                 from the Federal Power Commission (PC)  to the
                 Secretary of Energy when that Department comes
                 into existence.  This action was based on the
                 realization that such important national energy
                 issues, such as the dependency created by approving
                 imports of natural gas, required political/diplomatic
                 considerations which a regulatory process could
                 not adequately address.

                 We are now reviewing the various procedures available
                 to implement this authority, and one of the major
                 factors which will be used to select the preferred
                 procedure will be the capability to expeditiously
                 handle these requests to import natural gas.




                                   34
APPENDIX V                                           APPENDIX V


              On this page, the GAO report states that "the time
              [required to approve these ventures] is especially
              significant if the thrust of the new policy ! to
              encourage imports."  For clarification the thrust
              of the ne/ policy is to provide timely approval
              for those import projects which are deemed acceptable.
              As with the ERC policy, the new policy recognizes
              that natural gas imports are needed as a supplemental
              supply, but unlike the previous ERC policy, the new
              policy ill determine this need on a case-by-case
              basis.
o   Page 18 - The discussion on this page on the use of LNG by
              low priority users appears to be confused. The
              existing FPC priority of service schedules for
              periods of curtailment ranks the major classes
              of end users according to their ability to use
              alternative fuels. All natural gas that is
              available to the interstate pipeline system, regard-
              less of source or cost, is distributed in conformity
              with the priority schedule or an FPC approved curtail-
              ment plan. The Administration's new incremental
              pricing policy would not alter these curtailment
              priorities, and would only partially te the
              cost of LNG to specific consumers. The actual
              physical distribution of LNG would not be related
              to the allocation of costs or the selection of
              candidates for service curtailment. The problem
              addressed by the GAO would only arise if a strict
              marginal pricing policy had been adopted which tied
              a specific customer to a specific high-priced
              supplemental gas stream. The Administration did
              not adopt this policy.




                        [See GAO note, p. 37.1




                               35
    APPENDIX V                                            APPENDIX V

c     Page 20 - The discussion on this page addresses the statement
                made in the NEP that the new policy could add as
                much as 500 billion to one trillion cubic feet
                annually to U.S. gas supply in the 1980's.   This
                statement refers to the increase in LNG supply
                that could be allowed above what has been allowed
                under the ERC policy.   As noted subsequently in your
                report (page 22) LNG projects approved and/or pending
                before the FPC include a total of 1.6 Tcf/yr.
                from Algeria.   Under the ERC policy 0.6 to 0.8
                Tcf/yr. would have been   oregone since they would
                otherwise have exceeded the country of origin
                limitation.   The difference between the approved
                numbers and the figures contained in the NEP
                take into account the possibility of an additional
                Algerian project or an expansion of an approved or
                pending one occurring in the near-term.

                 Under the new policy these projects can now be
                 considered on a case-by-case basis and not be
                 denied by an inflexible limitation.  This, however,
                 does not mean and should not be interpreted as implying
                 a readiness to approve all of these projects.
                 The criteria, now being developed, would still
                 need to be satisfied in the evaluation of these
                 individual projects.




                        [See GAO note, p.   37.]




                                    36
APPENnIX V                                                  APPENDIX V


o    Page 23 - The discussion on this page on the possible methods
               for distributing LNG throughout the Nation, while
               not incorrect, requires some clarification.  The
               new policy did not mean to imply that LNG would be
               physically redistributed, since as you correctly
               note, this Would be cumbersome and unduly expensive.
               Rather the NEP highlights the need to ensure that
               LNG imports would not be approved and allowed to
               be distributed in such a manner that one or a
               limited number of U.S. regions would be inordinately
               affected by the supply disruption.  FEA is currently
               reviewing this issue to determine what further
               action other than the contingency planning require-
               ment, if any, is warranted to ensure that this does
               not occur.

 o   The report does not address some of the new initiatives
     contained in the NEP, particularly the requirement to develop
     guidelines on siting to foreclose on the siting of LNG
     facilities in densely populated areas.   As you are well
     aware, the siting issue has emerged as one of the major
     concerns associated with LNG imports.   The growing awareness
     of the potential hazards to public safety in having these
     sizeable import facilities located in densely populated areas
     has been a significant source of delay.   Although extensive
     studies and analyses have been conducted, they have not
     alleviated public concern since they have not conclusively
     demonstrated that the potential hazards are acceptable.
     The decision of the Administration to resolve this and other
     issues is not discussed in the draft report.

 The above specific comments, while presented as constructive
 criticisms to the technical contents of the draft report, should
 not detract from my central comment which I expressed earlier,
 that the issuance of the report is premature at this time since
 the interagency task force on LNG is now conducting an extensive
 study to develop the new LNG policy.

 If you desire further assistance, please contact me or Mr. Ken
 Kincel of FEA (566-9133), the Chairman of the LNG Task Force.

                                    Sincerely,



                                    C. William Fischer
                                    Associate Administrator
                                    Policy & Program Analysis


GAO note:   Omitted comments pertain to material contained in the draft report
            but omitted from the final report or to suggestions for improving
            presentation of matters in the report which have been considered
            in preparing the final report.



                                     37
    APPENDIX VI                                                          APPENDIX VI



                       EXPORT-IMPORT BANK OF THE UNITED
                                                        STATES
                                       WASHINGTON,   D.C. 20571


FIRST VICE PRESIDENT
         AND                                                              CABLE ADDRESS "EXIMBANK"
   VICE CHAIRMAN                                                                  TELEX 9-461




                                                           September 20, 1977




                Mr. J. K. Fasick
                Director, International Division
                United States General Accounting Office
                Washington, D. C. 20548

                Dear Mr. Fasick:

                      Thank you for the opportunity to review and comment
               on the GAO's proposed review of the national LNG
                                                                policy.
               Eximbank has no comments to offer on the substance
               analysis. The Bank would, however, like to correct of GAO's
                                                                   a slight
               misconception concerning the relationship of Eximbank
                                                                     and
               the National Advisory Council (NAC). This misconception
               originates in the 1976 ERC study and appears on
                                                               pages 6 and
               33 of this document.

                     Specifically, Eximbank authorizations do not "require
              approval from" nor are "conditioned by approval
                                                               from" an
              interagency advisory committee (the NAC) with respect
                                                                     to
              national policy objectives. All Eximbank transactions
              an Eximbank authorization value of $30 million          with
                                                              or more are
              sent c the NAC for national policy guidance, but
                                                                 the NAC
              does not have the authority to "approve" or "deny"
                                                                  an Exim-
              bank transaction.

                     Although this adjustment ducs not alter the substance
              of tne specific ERC conclusion, the Bank fels
                                                             it is a mis-
              conception which could eventually lead to inapponriate
                                                                      con-
              clusions,

                     Thank you again for the opportunity to comment.
              best regards, I am                                       With


                                                  Sincerely yours,



                                                 Delio E. Gianturco




                                            38
APPENDIX V.I                                           APPENDIX VII

                         FEDERAL POWER COMMISSION
                             WASHINGTON. D. C, 20426



OFFICE OF THE CHA!RMAN
                                                       SEP 30 1//


 Mr. Monte Canfield, Jr.
 Director
 Energy and Minerals Division
 U. S. General Accounting Office
 Washington, D. C. 20548

 Dear Mr. Canfield:

      This is to acknowledge your letter of August 31
 forwarding the draft of the proposed report on "Improve-
 ments Needed in the NLiunal Liquefied Natural Gas Import
 Policy" and inviting our comments on the report.

      I note that the recommendations in the report are
 directed to the Secretary of Energy. This is appropriate
 in view of the transfer of jurisdiction over LNG imports
 from this Commission to the Secretary by the recently
 enacted Department of Energy Organization Act. One of
 the purposes of the Act is "to achieve, through the
 Department, effective management of energy functions of
 the Federal Government, including consultation with the
 heads of other Federal departments and agencies in order
 to encourage them to establish and observe policies con-
 sistent with a coordinate energy policy . . ."    Thus,
 the transfer of jurisdiction to the new Department should
 facilitate the development of a clearly defined policy
 regarding the future role of imported LNG in our national
 energy program. I am confident that the specific recommenda-
 tions in your report--particularly the recommendation to
 establish criteria for project acceptability on the basis
 of national dependency and in relation to national energy
 goals--will be given serious consideration by the Secretary.




                                        39
APPENDIX VII                                        APPENDIX VII

Mr. Monte Canfield, Jr.              - 2


     This draft report will make a valuable contribution
to the further development of the Administration's position
on LNG import policy in the months ahead. Should you desire
it, members of our staff will be available to assist you
in the preparation of a final report on this matter.

                                Sincerely,




                                Charles B. Curtis
                                Chairman




                           40
APPENDIX VIII
                                                       APPENDIX VIII


                    DEPARTMENT OF STATE
                        Washington. D.C   20520




                                          October 7, 1977


 Mr. J. K. Fasick
 Director
 International Division
 U.S. General Accounting Office
 Washington, D. C.
 Dear Mr. Fasick:
 I am replying to your letter of September 7, 1977,
 which forwarded copies of the draft report: "Improvements
 Needed in The National Liquefied Natural Gas
                                              Import
 Policy."
The enclosed comments were prepared by the Acting
Assistant Secretary for Economic and Business
                                               Affairs.
We appreciate having had the opportunity to review
comment on the draft report. If I may be of         and
                                              further
assistance, I trust you will let me know.

                               Si c ely,



                                  ane L. Williamson, Jr.
                              Deputy Assistant Secretary
                                for Budget and Finance
Enclosure:
  As stated




                                41
APPENDIX VIII                                      APPENDIX VIII

    GAO DRAFT REPORT:   "IMPROVEMENTS NEEDED IN THE

    NATIONAL LIQUEFIED NATURAL GAS IMPORT POLICY"



      I am responding on behalf of the Secretary to
 your letter of September 7, 1977 concerning the draft
 report on LNG import policy.

      The National Energy Plan   (NEP) was never   intended
 to provide a detailed exposition of LNG policy. It
 states that LNG can be an important supply option
 through the mid-1980's and beyond, until additional
 gas supplies may become available. The ned for LNG
 will depend on a number of factors including the
 cost of competitive energy sources, conservation, the
 success of the prograrm o convert low priority users
 to coal, and the degree to which new domestic produc-
 tion is stimulated by higher prices.
       Those portions of the NEP requiring legislative
 action are currently under consideration by Congress.
 Many of these proposals, particularly those dealing
 with natural gas prices, will have a signficiant impact
 on the supply and demand for gas. It would be more
 approl -iate to develop some of the specific aspects of
 LNG policy once they are enacted and the market for
 natural gas can be projected more accurately.

      The lengthy regulatory process was not addressed
 in the NEP but is being examined elsewhere. Some LNG
 import applications are currently being handled on an
 expedited basis by the FPC and the organization and
 procedures of the new Department of Energy will be
 established with this problem in mind.



                    [See GAO note, p. 43.]




                            42
APPENDIX VIII                                  APPENDIX VIII


                     [See GAO note below.]


       Contractual modifications would no doubt have to
  be approved by the FPC or its successor before the
  gas could be imported. Since the producing countries
  have significant debt service and other expenses
  arising from their ownership of the LNG facilities,
  they would seek to avoid any interruption in revenue.
  These factors would provide significant disincentives
  for a producing country to attempt unilateral contract
  modifications.




                    [See GAO note below.]




                             Sincerely,



                                  Robert Hormats
                            Acting Assistant Secretary
                       for Economic and Business Affairs




GAO note:   Omitted comments pertain to material contained
            in the draft report but omitted from the final
            report or to suggestions for improving presen-
            tation of matters in the report which have been
            considered in preparing the final report.



                             43
APPENDIX IX                                                 APPENDIX IX




                      -   UNITED STATES DEPARTMENT OF COMMERCE
                          The Assistant Secretary for Administration
                   ~-,    Washington, DC 20230




     17 OCT 1977


 Mr. Monte Canfield, Jr.
 Director, Energy and
   Minerals Division
 U.S. General Accounting Office
 Washington, D. C.   20548

 Dear Mr. Canfield:

This is in reply to Mr. Eschwege's letter of
September 1, 1977, requesting comments on the
draft report entitled "Improvements Needed In
The National Liquefied Natural Gas Import Policy."

We have reviewed the enclosed comments of the
Assistant Secretary for Maritime Affairs and
believe they are responsive o the matters
discussed in the report.

Sincerely,




Assistant Secretary
  for Administration


Enclosure




                                44
APPENDIX IX                                                        APPENDIX IX



                                  UNITED TATL, DEPARTMENT OF COMMERCE
                       .~"fiW .   The Alssistant Sec itary for Maritime Affaire
                                  Washington, D.C. 20230




  OCT   3 1977


  Mr. Monte Canfield, Jr.
  Director, Energy and Minerals D vision
  General Accounting Office, Room 5120
  441 G Street, N.W.
  Washington, D.C. 20548

  Dear Mr. Canfield:

  Secretary Kreps has asked me to respond to the September 1, 1977,
  letter she received from Mr. Henry Eschwege, Director of the
  U.S. General Accounting Office. Comments have been solicited
  on the GAO's draft repcrt entitled "Improvements Needed in
  the National Liquefied Natural Gas Import Policy."

  General Comments

  The GAO draft report is well written and provides a concise,
  yet comprehensive review of past and present LNG import
  policy issues. However, we think the GAO criticism of the
  President's revision of LNG import policy represents something
  of an overreaction.

  A major review or revision of the President's policy statement
  on LNG imports, contained in the National Energy Plan (NEP),
  is considered both undesirable and unnecessary at this time.
  Many of the GAO concerns reflect the same ground which was
  explored in detail during the deliberations of the Energy
  Resources Couicil (ERC) Task Force last year.
  The draft report gives the impression that the NEP has
  essentially "repealed" the existing ERC policy on LNG
  imports. This is not the case. We believe the ?lEP has not
  changed the thrust of that policy, bt has ailow d greater
  flexibility by removing arbitrary limits on the quantities
  of LNG to be imported. This new approach was adopted to:
  (1) acquire some flexibility in dealing with the alternate
  sources of gas supply; (2) improve prospects for such supply
  in the critical 1980's   id
                           1 1990's; and (3) reduce the
  dampening effect on LNG project development that past policy
  (with its arbitrary ceiling) may have imposed. The "case-by-case"




                                     45
APPENDIX IX                                                APPENDIX IX


      approach adopted in the NEP still preserves flexibility
      considering various options should it prove necessary.  in
      opportunity to reappraise gas consumption and import    The
      and to review the policy issues cited in the draft   trends
      as time goes on also remains.                      report

     However, by not discouraging future LNG project development,
     the new policy enhances prospects for significant
                                                        improvement
     in future U.S. gas supplies. While
     overseas sources for this vital fuel possible dependency on
                                           is a serious issue to
     be continuously addressed, any final determination
                                                         should
     await an assessment of domestic supply trends and
     evolving pattern of LNG import projects. The lead  the
     these projects is such that major dependency dangerstime on
                                                            can be
     fairly easily avoided.

     Hence, we cannot agree wit} the recommendations reached
                                                              in
     the report, i.e., it is necessary to immediately reconsider
     and revise the policy statement contained in the Presidtit's
     National Energy Plan. There will be time enough
     build on and amplify the present statement       later
                                                of policy.
     In addition, continuing work in this area is being
                                                         carried
     out by the President's Inter-Agency Task Force in
                                                        LNG.    It
     is our understanding that a complete LNG policy evaluation
     is underway and a policy statement is scheduled
     by December 1, 1977. Areas to be covered includeto be issued
     dependence on foreign LNG, reliability of sources, U.S.
     and siting of facilities, and regional dependence. safety
     statement may well cover the primary areas of concernThis
     the GAO.                                                to

     Finally, we would expect that the new Department of
                                                           Energy
     and the Federal Energy Regulatory Commission, carrying
     the former Federal Power Commission (FPC)' functions,    out
                                                            would
     clarify and expand o the NEP LNG policies, as
                                                     well as
     propose new or revised policies as time and circumstances
     demand.

     Specific Comments
     1.   On the conclusion:  there is a need to relate import
          policy to the overall energy program.
    This is, of course, desirable when articulating any
                                                        aspect of
    overall energy policy. The implication, however,
                                                      seems to




                                 46
APPENDIX IX                                               APPENDIX IX


    be that LNG import goals must be quantified and related
    to overall energy and gas consumption obiectives in order
    to render the policy effective.

    Quantification is not necessarily a prerequisite for
    effective policy. The importance of natural as to the over-
    all energy picture, its environmentally preferable character,
    the statistics on declining domestic gas production, etc.
    are, in fact, discussed elsewhere in the National Energy Plan.
    The role of LNG imports as an important supplemental source
    of natural gas during the possible shortage years ahead is
    also made clear. To establish a specific goal at this
    point (e.g., LNG imports should constitute 10 percent of U.S.
    gas supply in 1990, etc.) is neither desirable nor necessary.
    Clearly the President is saying that as long as we keep
    producing less gas domestically each year, and as long as
    we continue to suffer curtailments, we should not discourage
    the exploitation of this source of supply -- to the extent,
    of course, that undue dependency on foreign sources and
    safety or.environmental hazards are not created.

    The question of quantitative goals can be better addressed
    later as domestic production trends and the impact of the
    changed price structure become clear.




                     [See GAO note, p.    52.]




     2.   On the conclusion: there is a need to establish criteria
          on what constitutes national dependency.
    This is, of course, the main bone of contention in the report.
    No one has satisfactorily resolved this question yet. The
    ERC Task Force wrest-ed with this and ended up begging the
    question somewhat (though one can infer from the ERC report
    that more than 1 Tcf of LNG from a single country and more
    than 2 Tcf overall would seem to constitute undue dependency).
    In fact, the Task Force realized that more than 2 Tcf of LNG
    imports by 198a was very unlikely given the realities of LNG
    import projects then under serious consideration. What the Task




                                   4?
APPENDIX IX                                              APPENDIX IX


     Force report did do was put a damper on further projects
     involving LNG impcrts from Algeria since only that country
     has the poteltial for exceeding 1 Tcf of LNG exports to the
     U.S. by l. c.
    The President's satement, moreover, is quite explicit that
    project review, in each case, will take into account "undue
    risks of dependency on foreign supplies" and that import
    projects that are approved will provide for "distribution of
    imports throughout the nation so that no region would be
    seriously affected by a supply interruption." The GAO draft
    report does not seem to recognize this will be done during
    the "wait and see" period before declaring any arbitrary
    LNG ceiling.

    The degree of national dependency on LNG importation is
    related to the percentage of such imports in U.S. energy
    supplies. The acceptability of such dependence is related
    to a number offactors. Among these are the reliability of
    exporting countries and the level of regional dependency in
    the U.S.
     The discussion of the issue of dependence appears to us to
     represent a somewhat limited viewpoint.  LNG imports, even
     at two to three trillion cubic feet per year, would amount
     to about 10 percent of U.S. gas consumption at current
     levels. The only realistic alternative to foreign gas supplies
    during the next decade is foreign oil. Present dependence
    on imported oil is now approaching 50 percent. While a goal
    of increased domestic production combined with conservation
     is the most desirable goal, energy demand will almost certainly
    continue to grow, and in the near future will not be met by
    purely domestic enr:6y supplies.   LNG imports at least diffuse
    the sources of energy supplies. The GAO draft paper makes the
    point th:at there is a question about the reliability of LNG
    producer.    This may be, but the relevant comparison is
    between the reliability of OPEC oil producers versus LNG
    producers, because realistically these are the competitive
    energy suppliers.
    This section of the report dwells heavily on the often
    repeated contention that an LNG embargo is likely to cccur.
    It further includes the idea that an LNG embargo is "easier
    to target than an oil embargo." however, it is our opinion
    that the exact reverse is the correct situation.




                                 48
APPENDIX IX                                              APPENDIX IX


     There are two very strong reasons why an LNG embargo is
     significantly less likely to occur than an oil embargo.
     First, LNG projects are essentially composed of mutually
     dependent and supporting facilities. In this highly capital
     intensive industry there is little, if any, excess liquefaction,
     shipping, or regasification capacity. The foreign plant,
     the ships, and the receiving facilities are built for one
     another and are tied together by common economic incentive.
     Unlike oil, opportunities to sell to alternative purchasers
     do not, as a practical matcer, exist. A politically motivated
     interruption of commerce would result in severe economic and
     social repercussions in the selling country, almost as fast
     as in the purchasing country.
    Second, the primary LNG exporting and potential exporting
    countries, with the exception of ran, are not those which
    are "oil rich." They are developing their LNG capacity as
    an economic base from which they can improve the standard
    of living for generally large populations. They are forced
    to call upon worldwide capital markets to finance facilities.
    Unlike many of the large oil exporting nations, the price
    paid by them as a result of an embargo would be swift and
    dear, particularly from the world financial community hich
    they have assiduously couirted over the years. Finally,
    countries which by necessity are currently flaring gas are
    not apt to embargo its exportation after going to the expense
    of building liquefaction plants.
     3. On the conclusion:   the lengthy regulatory process is
        not addressed.
    The lengthy regulatory process involved in FPC decisions
    about LNG projects is in many respects mandated by law,
    especially where safety and environmental factors are
    concerned.
    The President has already noted the need to improve the
    approval process for major energy projects and one can
    assume that this will be addressed by the new Department
    of Energy and the Federal Energy Regulatory Commission,
    which will be a part of the Department.
    Further, the Federal Power Commission recently has made
    substantial progress in expediting these cases, and the
    companies involved generally anticipate that the process
    in the future will be shortened considerably, perhaps
    reducing the present average time of two and one-half (2-1/2)
    years to less than a year.




                                  49
APPENDIX IX                                              APPENDIX IX


    4. On the conclusion: the need to address the problems
       of curtailments to low priority incrementally pricd
       LNG users.
    This is a good point, but one that we can expect will be
    addressed as the issue of incremental pricing is dealt with
    in future deliberations by the Federal Energy Regulatory
    Commission regarding proposed LNG import projects. In fact,
    this may be a moot issue. The recent FPC decision in the
    Trunkline case calls for rolled-in pricing. Should this be
    precedent-setting there will not be any problem of curtailments
    to either high priority or low priority customers for their
    LNG supplies.




                  [See GAO note, p. 52.]




   The NEP statem, nt on page 25 refers to a new policy where the
   Federal Government would review each application to import
   LNG so as to provide for LNG availability at a reasonable
   price without undue risks of dependence on foreign supplies.
   It then states that "This action could add as much as 500
   billion to 1 trillion cubic feet annually to U.S. gas supply
   through the 1980's, without making an open-ended commitment
   for large volumes of this expensive resource." GAO also
   makes the point on page 21 that contracts are for 20 years
   or more and are for definite periods, and are therefore not
   "open-ended commitments." However, our own interpretation of
   the NEP statement is that it refers to a U.S. energy policy
   commitment on LNG imports, not to the term of any individual
   projects.




                                  50
APPENDIX IX                                              APPENDIX IX


    6. Proposed Policy Additions
    qot mentioned in the GAO draft report, but a policy
    recommendation that we consider to be highly important,
    is the need for a substantial portion of participation by
    U.S. flag vessels in each LNG import project.
     In all U.S. baseload LNG import projects under active
    consideration to date (i.e., El Paso I, Trunkline, Eascogas,
    Pacific Indonesia, El Paso II and Tenneco) the need for
    U.S. flag participation has been recognized. In the above
    projects the U.S. flag participation varies from 40 percent
    in the Trunkline Project to 66 percent in both the El Paso I
    and Pacific Indonesia Projects. By maintaining a portion
    of the "pipeline" under U.S. flag an added degree of control
    over the delivery of this prime product is ensured. Future
    projects may not contemplate U.S. flag participation. Therefore,
    to ensure this result, U.S. Government policy should recognize
    the value and benefits to the nation as a whole and endorse
    a policy that U.S. fg    vessels carry a substantial portion
    of U.S. LNG imports.
   In addition to the security and control benefits that accrue
   to a U.S. LNG import project through U.S. flag participation,
   there are obvious economic impacts of awarding work to a U.S.
   shipyard which would otherwise be performed in a foreign
   country. Where vessel construction is carried out in a foreign
   shipyard the negative results are:   (1) the outflow of U.S.
   dollars thereby aggravating our balance of payments deficits;
   (2) elimination of millions of dollars worth of material and
   labor purchases many of which would be small business concerns
   in a labor surplus area; (3) the elimination of potential
   tax bases available to Federal, State and local Governments;
   and (4) the continuing need cr   the 25-year economic life
   of the vessel to secure parts from foreign sources provided
   the source is still available and on friendly terms.
   Summary
   In sum, we d not feel that a major review or revision of
   the President's policy statement regarding LNG imports is
   called for at this time. The present actions within the
   Executive Branch to analyze and revise, if necessary, LNG
   importation policies are more than adequate and the points
   raised in the GAO draft report are being given full consideration.




                                   51
APPENDIX    X                                             APPENDIX IX


     The Department of Commerce feels that the present policy
     is both proper and prudent -- i.e., one that does not
     discourage the development of LNG import projects, and yP
     recognizes the dangers of dependency and the need for
     appropriate controls in the environmental and safety areas,
     coupled with the recognition of the need for U.S. flag
     vessel participation.
     Sincerely,


    ROBERT    RLACKWELL
    Assistant Secretary
    for Maritime Affairs




GAO note:       Omitted comments pertain to material contained
                in the draft report but omitted from the final
                report or to suggestions for improving presen-
                tation of matters in the report which have been
                considered in preparing the final report.

(30828)


                                  52