What the TPP Means for LNG

This post was co-written with Cole Wheeler, CFR’s research associate for energy and the environment. 

Unfettered access to U.S. liquefied natural gas (LNG) was reportedly a prime motivation behind Japan’s decision to join the Trans-Pacific Partnership (TPP) trade talks. The United States already gives automatic approval of exports to 18 other countries with which it has special free trade agreements (FTAs), but requires distinct permits for exports to others, including Japan. Yet there has been scant (if any) reporting on this issue since the release of the final TPP text two weeks ago, and there appears to be considerable confusion about what the deal actually does. A look at the text of the agreement in the context of U.S. law confirms that it grants automatic approval of exports to Japan and the other TPP member nations.

The confusion seems to stem from the fact that the TPP text doesn’t mention natural gas at all. Rather, the critical element of the agreement is its language on “national treatment,” a trade law status which the TPP member nations commit to granting to each other’s goods, with no enumerated exception for natural gas.

While national treatment doesn’t in itself provide the green light for all LNG exports to Japan, it triggers existing U.S. law in a way that does. Under the Natural Gas Act, any company wishing to export natural gas first needs authorization from the Department of Energy, which determines whether exports are “in the public interest.” For countries with which the U.S. has established an FTA including national treatment for natural gas, however, the law effectively waives this process, and requires DOE to grant authorization “without modification or delay.” A quick comparison of the TPP to the 2012 U.S.-Korea Free Trade Agreement, which is widely agreed to provide blanket approval for LNG exports, provides further confirmation of the TPP’s impact: like the TPP, the U.S. Korea agreement does not mention natural gas exports, but the language on national treatment is virtually identical to that of the TPP.

The TPP’s approach to approving LNG exports shouldn’t come as a surprise. A January 2015 paper from the National Bureau on Asian Research, for example, described the “national treatment” recipe for automatic LNG export approval, and predicted that it was likely to be part of the deal. Other observers, from the Congressional Research Service to the International Business Times, also foresaw this outcome.

All this said, it’s important to remember that the biggest barriers to LNG exports have always been commercial rather than legal. Several LNG exporters in the U.S. have already received authorization to export to non-FTA countries, and Japanese companies have signed contracts for the purchase of at least 100 billion cubic feet per year of U.S. LNG by 2020. But building LNG export terminals is expensive, and export capacity has lagged behind the massive increase in North American supply. Indeed, U.S. companies have had blanket FTA approval to export LNG to South Korea, the world’s second largest LNG importer, since 2012, but the first deliveries of U.S. LNG to South Korea are not expected until 2017. Moreover, even if export permits for Japan become easier to acquire, companies will still apply for permission to export freely, giving them the valuable option to sell to growing markets in China, India, and beyond.

So why does this aspect of TPP even matter? Because of the confidence it provides. What Japan would gain from the TPP isn’t a sudden, massive increase in imports. It’s confidence in U.S. LNG as a reliable source of energy, insulated at least somewhat from the vicissitudes of U.S. energy politics. That matters not only for commercial dynamics and market flows, but for the broader U.S.-Japan relationship too.