Court orders FERC to explain Cove Point LNG decision

A court today ordered the US Federal Energy Regulatory Commission (FERC) to justify its 2015 decision to allow Dominion Cove Point to terminate an LNG import contract with Statoil but not with BP.

BP claims it was unfairly discriminated against, but the US Court of Appeals for the District of Columbia Circuit did not rule on the merits of the case. It said FERC most provide a more detailed explanation of its decision to help the court determine if there was discrimination.

Dominion in 2012 agreed to an early termination of Statoil's contract because it had decided to add export facilities at its existing Cove Point LNG import terminal in Lusby, Maryland. The $3.8bn export facility is under construction and is scheduled to start operating in late 2017.

Dominion likely saved hundreds of millions of dollars by using Statoil's pipeline and LNG storage capacity. Statoil likely will save hundreds of millions of dollars with the early termination of a 20-year contract scheduled to expire in 2029 for 773mn cf/d (22mn m³/d) of firm transportation capacity and LNG storage capacity equivalent to 6.8 Bcf of gas. The contract will end when Cove Point exports start.

BP has said it is paying for $25mn/yr for virtually worthless import capacity at Cove Point under a 20-year contract that expires in 2023.

Under federal law, customers of projects regulated by FERC cannot be unfairly discriminated against. BP in October 2014 asked FERC to order Dominion to allow BP to terminate its contract early. After the agency in May 2015 ruled against BP, the UK company in July 2015 filed a lawsuit in the appeals court.

FERC said BP was not discriminated against because the import contracts were significantly different.

BP, Statoil and Shell each own one-third of 1 Bcf/d (28mn m³/d) of import capacity at Cove Point under 20-year deals that started in 2003. Those contracts were signed under open-access regulated rates, meaning that the customers were protected from overpaying.

In an effort to spur development of additional LNG import terminals, the Energy Policy of Act of 2005 said FERC could not require open access and regulated rates for LNG terminals. Statoil agreed to be the sole customer for a significant expansion of import capacity at Cove Point at market rates, under a 20-year deal that started in 2009.

In 2012, after the US shale gas boom became evident, Dominion and Statoil agreed to terminate that expansion contract early. FERC said Dominion was not required to offer customers that had signed open-access contracts the ability for early termination, because those customers were differently situated and had more regulatory protection. Statoil still has the capacity it contracted for under open-access regulated rates.

The appellate court said it is unclear if Statoil's expansion contract offered the Norwegian company the same protection as BP had in its open-access contract, since FERC did not review the expansion contract.