The United States Department of Transportation (“DOT”), Office of the Inspector General (“OIG”) recently issued its audit findings of the Pipeline and Hazardous Materials Safety Administration’s (“PHMSA’s”) procedures and standards for reviewing whether liquified natural gas (“LNG”) facilities meet federal safety standards. The audit was designed to assess PHMSA’s (1) review of proposed LNG facilities, (2) inspection of existing LNG facilities, and (3) evaluation of state gas programs that are tasked with inspecting LNG facilities. While the OIG found that PHMSA’s inspection of existing interstate LNG facilities met agency standards, the audit identified several deficiencies with PHMSA’s siting of proposed LNG facilities and its review processes of state programs. This report comes as PHMSA’s proposed overhaul of its Part 193 LNG safety regulations moves toward publication.

First, the audit found that PHMSA’s procedures for reviewing the siting of proposed LNG facilities failed to include a second-level verification review process. According to a 2018 Memorandum of Understanding between PHMSA and the Federal Energy Regulatory Commission (“FERC”), PHMSA reviews all applications for proposed LNG facilities to ensure that the facility complies with all federal siting requirements. In September 2019, PHMSA implemented a set of procedures and a checklist to guide its review of these applications. Although the OIG found that the procedures were compliant with 49 CFR Part 193 (which is currently under review and revision), the OIG found that the procedures lacked a necessary second-level verification of initial reviews. The OIG found that the failure to include a second level of review “increased risk that initial PHMSA and subcontractor analyses of LNG facility applications may be incomplete, contain errors, or lack consistency.”

Additionally, the OIG report concluded that PHMSA’s evaluations of state gas programs failed to identify deficiencies related to the frequency of LNG inspections and inspector training requirements. PHMSA can authorize states to inspect interstate LNG facilities within their jurisdiction. PHMSA evaluates these state gas programs for compliance with the agency’s Guidelines for States Participating in the Pipeline Safety Program. According to the OIG, PHMSA’s review of state programs failed to detect whether the programs complied with either (1) inspection frequency requirements or (2) the requirement that at least one inspection team member complete all required LNG safety training courses. The OIG found that PHMSA evaluators likely failed to identify these deficiencies because the evaluators may not have reviewed all of the necessary records. According to the OIG report, there is currently no guidance or requirement in PHMSA’s review procedures that mandates evaluators to keep a log of records they reviewed or details a sampling method for what records should be reviewed during an evaluation. Additionally, the OIG identified that PHMSA’s guidance does not clearly state its requirements for inspector training.

Given its findings, the OIG made several recommendations to PHMSA, which the agency apparently has already implemented:

(1) update and implement procedures to add steps to verify the accuracy and completeness of initial LNG application reviews;

(2) update and implement agency procedures to require the use of random sampling in the selection of operators and facilities used for testing, and the review of certain records during an evaluation; and

(3) update guidelines to clearly require one inspection team member to have completed all required training.

Meanwhile, PHMSA’s long-awaited proposal to update its Part 193 LNG regulations is currently with the Office of Management and Budget pending publication in the federal register. These regulations have not been substantively updated since they were issued in 1980, despite the vast changes in the U.S. energy landscape since that time. Congress mandated updates to the Part 193 rules in 2016, in particular to address small scale LNG facilities. In addition, an April 2019 Executive Order on energy and infrastructure directed DOT to finalize updated LNG regulations, using “risk-based standards to the maximum extent practicable,” by May 2020, a deadline which PHMSA is certain not to meet.

In light of PHMSA’s increased role in the siting review of LNG facilities and forthcoming proposal to update its Part 193 regulations, the agency’s oversight and interest in these facilities is increasing. Large LNG export facilities often present unique design, construction, operation, and jurisdictional issues, and the new proposed regulations should be reviewed carefully in that context.