Corporate repositioning and an activist investor led to LNG pioneer Charif Souki becoming a free agent in 2016, but he didn’t waste any time getting back in the game.

“Martin [Houston] and I became free agents in February of last year and decided to start Tellurian,” said Charif Souki obliquely, referring to his ouster as CEO of Cheniere, the LNG export company he founded, and Cheniere’s subsequent disillusionment with its contract with Martin Houston’s company, Parallax Energy LLC. “We had a blank sheet of paper and decided to be the best in the business in an industry that we love and in which we’ve invested for many years.”

Souki is best known as the entrepreneur who first boldly built a multibillion-dollar LNG import facility on the Gulf Coast at Sabine Pass when it looked as if the U.S. would be dependent on international gas supplies. He famously flipped the concept to liquefaction when shale gas flooded the U.S market. As a result, Cheniere was the first to export waterborne LNG in February of last year.

“We created a model that provided for flexibility of destination, the ability not to have a take-or-pay contract but an option premium to merely have access to American gas reserves—which increasingly became some of the cheapest reserves in the world. Now the question is, can we expand on it?”

Egyptian-born, Lebanon-raised Souki began his career as an investment banker before starting Cheniere as an E&P in 1996. The same company would launch his idea of importing, then exporting, LNG before being wrested from him by activist shareholder Carl Icahn in early 2016. Now, Tellurian Inc.—which means “of the earth” and launched days after his exit from Cheniere—is the extrapolation of his vision to seize the opportunity of growing LNG demand. Souki, chairman and founder, took Tellurian public via a reverse merger in February.

Houston, executive vice chairman and co-founder of Tellurian, spent more than three decades with London-based BG Group where he led its LNG business, rising to COO. There he developed three separate greenfield LNG projects around the globe. He formed Parallax after retiring from BG, and partnered with Souki in various projects while at both companies.

Meg Gentle joined Tellurian in August as president and CEO. She worked alongside Souki for 13 years at Cheniere, first as manager of strategic planning, and later taking the CFO title. She was responsible for the financial group from the beginning of development and funding of Cheniere’s Sabine Pass facility.

Now, the team is allied for a venture that could one day surpass that of their former employers.

Tellurian’s first project is Driftwood LNG, a 1,000-acre liquefaction plant on the Calcasieu River near Lake Charles, La. The 26-million tonnes per annum (mtpa) export facility is expected to begin construction in 2018, with first LNG production in 2022. The construction cost is expected to be $13- to $16 billion. French IOC Total has invested $207 million into the project for a 24% stake.

“We created Tellurian to build an LNG business with the Driftwood LNG plant being the first asset, and to build a company around that,” said Gentle.

Souki, Houston and Gentle recently chatted with Oil and Gas Investor about their new LNG business.

Investor The global LNG market is currently experiencing an oversupply glut. What is your strategy for launching a massive and expensive project now?

Souki Since the liquefied natural gas business is becoming a commodity business, being the low-cost provider is very important. It has become evident that wellhead costs in the United States are as competitive as anywhere in the rest of the world, if not more. You have a multiplicity of basins that can produce gas in the $1 to $1.50 range at full cycle cost. That’s a tremendous advantage.

Gentle The LNG business model is changing. A lot of liquidity is coming into the market over the next four years as U.S. LNG enters the market, which is fully destination-flexible.

To meet the 2% growth in the worldwide natural gas market, as an industry we need to start construction on another 100 million tonnes over and above what is under construction today for the next five-year construction period. The winners are going to be those pursuing a strategy of low cost. That cost is going to matter more than ever as LNG trades more like a true commodity on a global basis.

Investor So as a group, the U.S. projects will be cost-advantaged compared to other international projects?

Souki Yes, because they can source the gas cheaply and build along the Gulf Coast cheaply. Having said this, trying to guess the exact right timing on something that takes two years to plan and five years to build, my crystal ball is not that good. We get ready and go as fast as we can. It takes seven years. It’s not a sprint; it’s a marathon. If we’re early, we’ll wait another year. If we’re late, the world will be in pain.

Investor Are you expecting the demand equation to change by the time you go live?

Souki The global market is 350 Bcf [billion cubic feet] a day, which is our internal number. Growth of 1.8% means every year you have to come up with 7 Bcf per day more, or three times Driftwood. So you have to come up with three Driftwoods every year between now and 2025.

I don’t think that’s going to happen, so I’m not too concerned about whether we are exactly right on timing or a little bit early or a little bit late, because I’m pretty sure demand is going to continue to grow. People seem to mysteriously forget that high prices discourage demand, and low prices encourage demand. Demand will be there in a low-price environment.

Driftwood LNG in Louisiana will begin construction in 18 months if FERC approval and financing go as planned, with production from 20 trains, each with 1.3 mpta capacity.

Investor A lot of global supply is coming on—any concern supply growth will overwhelm demand growth?

Houston My personal assessment is that demand is growing much faster than any of us are acknowledging. Everybody is understating demand because it suits them to do so. Pundits like to be wrong to the downside. That’s why they’re all marching to the same tune.

In the summer of 2016, analysts were crying into their coffee that gas was going to be $4 forever [on international indices] and we were heading for an Armageddon for gas. Then gas traded for $10 for a long period this winter on a spot basis.

The reality is what is happening in trade, not a set of artificial numbers that define supply and demand. What matters is the number of transactions that constitute a trade between a series of bilateral parties that add up to the global business—not necessarily global capacity, because those two numbers are irrelevant if the transactions are not taking place.

All of us are committed to the view that demand is growing faster than believed.

Investor So you’re expecting there to be a market for your gas when you come online?

Gentle Oh, for sure. We view the longer-term market as short. I think as an industry we will struggle to bring on enough new supply for that time period. Once the liquefaction capacity under construction now gets absorbed into the market, we as an industry will have to respond to the call of additional LNG.

Houston The deployment of floating storage and regas units into markets that heretofore have not had access to natural gas is transforming demand. If transportation were to take off in anything other than a small way, it will transform LNG demand even further.

Investor What’s the status of Driftwood now?

Souki It’s on schedule. When Martin and I started in February last year, we laid out the plan of what we wanted to do and how we wanted to do it. First and foremost we wanted to spend time preparing and planning the project correctly. The first step was to identify the right piece of land. The engineering and the industrial process doesn’t apply the same to every location, so finding the right piece of land is critical to keeping your cost down.

We’re now a year into the process. Engineering is 75% to 80% done. We’re fairly well advanced in having identified all of our costs.

And it’s site-specific—until you’re sure what the site is, it’s pointless to analyze what the costs are going to end up being. The manufacturing of the pieces of equipment are the same. That’s easy. But how they fit on the site is totally different. That’s what’s critical and makes a major difference between the projects. If you have the right site and if you engineer it properly, you have a good chance of being the low-cost provider.

Investor Are you concerned about being in the back of the line as a host of other U.S.-based LNG facilities come to market?

Souki I don’t see a line; I see our project. We’ve done exhaustive work in the pre-filing process. We expect that process to take 12 to 18 months, and then we’ll be ready to start construction. So we’re right on schedule with what Martin and I thought would be the case when we started in February of last year.

Investor What sets Driftwood apart in the competitive arena?

Souki The most important difference is the combined experiences of the management team. Between Martin, Meg and myself we’ve done a lot of projects around the world. Among the newcomers, we are probably the only people that actually have experience in terms of building facilities. Martin has done it in Trinidad, Egypt and Australia, and Meg and I have done it here in the U.S.

Sabine was the only project [while at Cheniere] in the last decade that has been on time and on budget, so we will take credit for the first two trains that [Cheniere] delivered in February and April.

We are also in a situation, especially with our experience at Cheniere, to deliver liquefaction facilities for around $600 per tonne. We have done this. When we talk about $600 a tonne, it’s demonstrated.

Gentle To put that in perspective, a lot of the recent Australian projects were between $2,000 and $3,000 per tonne. The range for everything that is under construction on the Gulf Coast today is between $600 and $800 per tonne. We’re trying to get the next level cheaper from there. We challenged Bechtel, GE and Chart Industries to arrive with a low-cost design, and they’re almost finished. We expect that will be between $500 and $600 per tonne.

Investor Driftwood, however, has a different construction model than Sabine Pass?

Souki It’s just engineering. It’s a question of whether you want one big train or four smaller trains.

Martin wants to use a smaller engineered unit because it gives us more flexibility and more modularity and uses more off-the-shelf equipment, as opposed to the very, very massive trains that require special everything. It’s a lot of little things that we do a little bit more efficiently.

Houston I don’t want to overspend, overbuild, over-specify, over-resource. I want to take the things out that don’t belong in. This venture is about taking our learning and doing something better. There are no silver bullets here. There are ten thousand things that are different. It’s a combination of so many things.

Souki The important part is that we bring in Bechtel and GE from the beginning and make them our partners and we work on the engineering together. We’ve been doing this for 15 months. Some in the industry do not want to do this. Some stubbornly leave out the construction company [in the planning], then hand them the bid book and say to accommodate it. They’re going to find out all the nasty surprises when they start construction. That’s not the way to get the most efficient engineering and to optimize the system.

Investor What’s it going to take to build Driftwood, and how are you going to get the financing for that?

Souki Sixteen billion to $18 billion, and we’re going to write a check.

Investor From?

Souki The banks are used to us. We’re going to announce the lead bank soon. [Tellurian has since announced Société Générale as financial advisor and lead bank for Driftwood LNG.]

I expect the equity to be significantly cheaper than last time. The first time [at Cheniere] we had to prove ourselves, and the first group of money that we raised turned out to be very expensive. Now, private equity firms are used to us, they know what we’ve done. We’re in constant conversation with them and we know them all. It’s just a matter of finding a way to achieve a return that satisfies them, then they will invest.

Investor Will your fundraising involve public debt or equity raises?

Souki Public equity only to the extent that it is accretive. The last deal we did at Cheniere was for an equity fund for 11% IRR. That’s our benchmark. If we can raise equity at 11%, and we can raise debt somewhere around 5% to 6%, then our blended cost will be somewhere around 8%. It’s not very hard.

Investor Was that the strategy behind the reverse merger with Magellan?

Souki Yes, to have access to public equity just in case.

Investor Are investors receptive to your message in today’s environment?

Souki On paper they are always receptive, until you actually tell them to write the check. But yes, because we’ve been exposed to a lot of private equity investors in the past, and have done very well for those that have invested with us. So there is at least good will accumulated, and the three of us have the reputation to support our business model.

Investor Is U.S. gas advantaged from a cost perspective compared to world supplies?

Souki Incredibly. It’s one of the two cheapest choices of gas. Interestingly enough, the other one is Russia. The producers have done such an incredible job of reducing their finding and development costs and improving their productivity. We could have saved a significant amount of money by sourcing the gas cheaper at Cheniere, if we had known how productive and successful from a technical standpoint the producers would be.

Investor How will you do it differently this time around?

Souki Clearly, you want to go to basins with low F&D costs and make sure transportation is acceptable. Our target at Cheniere was to be able to deliver gas at Henry Hub plus a small premium, say 8 cents. I think today in the current environment we can do a lot better than that.

Investor What is a lot better?

Souki Maybe Henry Hub minus 30 cents. When you look at the landscape today and see all the cheap, attractive gas that is available everywhere, it’s an area of improvement for us.

Investor What’s your projection for domestic natural gas prices?

Souki There’s absolutely no reason for domestic natural gas prices to go to $4 anytime soon, and I mean in the next 20 years. We have 800 Tcf [trillion cubic feet] that is producible at less than $3. If you look at the Haynesville, and the Marcellus and Utica, and look at associated gas that’s coming from the Permian Basin, the Scoop- Stack and the Eagle Ford, it is enormous amounts of low-cost gas.

What we’re doing is making it possible for American producers to sell their gas on the global market. If you think the market in the United States is not going to grow, the only alternative is to export. So for an American producer, you’re either exposed to $3 Henry Hub forever or you have the opportunity to sell on the global market.

Investor Is Tellurian a continuation of an incomplete vision from your Cheniere days?

Souki To some extent, yes. There were things left undone at Cheniere which would have been fun to continue doing. I can’t say I don’t miss the fact that they are already in production and getting volumes.

But the most important part is future growth, which they decided they didn’t want to do. That was a large part of the reason they fired me. This was soon after the arrangement we had done with Martin to develop the next generation. That one they dropped, so we picked it up. It’s a continuation.

We’re doing the same thing we did seven years ago. That part I think should have been a continuation of the model at Cheniere, but clearly the board and some of the shareholders disagreed with me, so that makes sense to move in separate ways.

Investor Do you think the Cheniere board has “short-term-ism”—or shortsightedness?

Souki I think mostly they had fatigue. We had gone through ups and downs for a long period of time, and at one point they said enough. Maybe it was possible to keep growing, but if I wanted to grow something new, why didn’t I go somewhere else?

Investor So what is your long-term vision for Tellurian?

Souki There is obviously an opportunity in the market to continue to grow. It really is basic: there is growth in demand for natural gas on a global basis. There is very, very cheap gas in the United States. You’ve got two of the components of a business strategy—a low-cost product and a growing demand with no reason to be abated. The impediment is building the infrastructure.

It is not just in the United States. If you want to develop cheap Russian gas, you have to build very long, very expensive pipelines. So on a global basis the impediment is to build the infrastructure that connects the consumption to the production. And that’s what we’re good at.
Investor Do you plan to expand beyond Driftwood with other facilities?

Souki Absolutely. There’s a huge niche for the skill set that we have developed. Why would we stop?

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