CAMERON PARISH, Louisiana – The oil patch is a world of risk takers, but few are as daring as Charif Souki, the chairman and chief executive of Cheniere Energy.
A decade ago, Souki warned of an impending natural gas shortage, and set out to build a network of gas import terminals after none had been built in a generation.
He lured Chevron and the French oil giant Total into signing long-term use agreements, and Cheniere’s stock price rocketed from less than $1 a share in 2002 to more than $40 in three years.
But the sudden boom in gas drilling that took off around 2005 created a glut, ruining Souki’s dream. Cheniere’s stock price collapsed to $2.
And he managed to complete only one terminal, at a cost of $1.4 billion, that stands idle much of the time.
Now he is trying to recoup his investment by making the opposite bet: that he can profitably export cheap American natural gas to Europe and Asia, where prices are roughly twice as high.
Souki intends to sink at least another $3 billion into Cheniere’s terminal of docks and storage tanks, located in an alligator-infested marsh here near the Texas border.
Cheniere plans to install two, maybe four, giant refrigeration units capable of cooling methane gas into liquid for shipment on giant cargo ships.
Currently, only one U.S. terminal, built in Alaska 30 years ago, can do that.
“If you keep digging, digging, digging, you find something,” said Souki, 58, who in a varied career has invested in real estate in Paris, hotels in Hawaii and natural gas wells in the Gulf of Mexico.
A Lebanese immigrant and former investment banker with a taste for double-breasted suits in a world of cowboy boots, Souki thrives on the sheer excitement of speculation.
Citing a quote that he once heard, attributed to a race car driver, Souki said, “If I’m not making mistakes, I’m not driving fast enough.”
If Cheniere can obtain the necessary regulatory approval and financing, Souki says he can start exporting gas as early as 2015.
He predicts he will eventually be able to export 57 billion cubic litres of liquefied natural gas a day from his facility, or about 3 per cent of current domestic gas production.
As other companies like Freeport LNG join Cheniere in exporting liquefied natural gas, Souki says the U.S. has the potential to become a premier global provider, capable of exporting 283 billion cubic litres a day, roughly the amount that Britain consumes.
When Souki set out to build at least three liquefied natural gas import terminals, bankers were so sceptical initially that he was forced to borrow $30,000 from Cheniere’s president to meet payroll.
The company persevered, but Souki had to settle for one terminal.
Over time, Sempra Energy and Exxon Mobil also bought into the idea of building terminals on the gulf, and Chevron and Total signed 20-year agreements guaranteeing Cheniere payments of more than $250 million a year for use of half the Louisiana terminal capacity.
The other half was intended to give Cheniere the opportunity to trade gas on the spot market.
New drilling techniques have opened up vast shale rock fields to gas prospecting over the last few years, bolstering domestic production and adding a century or more of reserves.
That has made the import terminal a disappointment. Meant to receive 30 tankers a month, it only received a dozen all of last year. Much of that business was simply temporarily storing gas for re-export.
Souki has plenty of excess capacity to provide similar long-term contracts to other companies interested in export. As long as he can complete definitive long-term agreements, he says, finding the financing to build out the terminal should be easy.
The central assumption behind the export strategy is simple: U.S. gas prices are destined to be cheaper than European and Asian prices for years to come.
At today’s prices, companies would be able to buy U.S. gas at $4.35 per million British thermal units, and then sell the same gas in Europe or Asia for roughly double that price, since long-term contracts globally are still largely tied to high benchmark oil prices.
With those spreads in mind, Morgan Stanley, ENN Energy of China, Gas Natural Fenosa of Spain, Sumitomo of Japan and EDF Trading of France have entered into memorandums of understanding with Cheniere to reserve processing capacity for export.
Sceptics predict the current gas glut in the U.S. will spread around the world as shale is drilled in Europe and Asia, major producers like Russia increase exports and more LNG export terminals are built in the U.S.
“For heaven’s sake, Israel just discovered 16 trillion feet of gas,” said Gheit. “Indonesia, Qatar, Algeria, Nigeria and now Israel can all sell cheaper than the U.S.”
Still, Souki has made believers of some influential investors, like the Blackstone Group, which invested $250 million in the form of a convertible debt security in the company in 2008 and remains one of its largest share owners.
“You’ve got to give Charif credit,” said Dwight Scott, a Blackstone senior managing director. “He has built a very good asset there, and he has not let the changes in the market stop him.”
But even Souki admitted that the economics and global politics that underpin the spread between oil and gas prices were too unpredictable for him to pronounce complete confidence in his new plan.
The other day, as he stood in the terminal control room here watching operators working on a bank of computer monitors, he recalled that “I was convinced we would use this facility at full capacity.”
“History has demonstrated that, with all the facts in, in two years I could be totally wrong,” he said.