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The gap between natural gas prices in North America and elsewhere has created the potential for a new U.S. industry—liquefied natural gas (LNG) exports. But getting in the LNG game has high hurdles. Playing on this field requires going through rigorous governmental permitting while attracting investors to pay for world-scale gas liquefaction plants that cost billions. Cheniere is the first organization to accomplish those goals. Construction is under way on its first liquefaction plant—adjacent to a little-used gas import terminal—with a late 2015 start-up date. Meanwhile, Cheniere has permitting under way for a second liquefaction terminal outside Corpus Christi, Texas. Charif Souki, Cheniere’s co-founder and chief executive, visits with Midstream Business and discusses the future of Cheniere and the LNG business.
MIDSTREAMYour background is in investment banking. What attracted you to the energy industry?
SOUKI In the mid-nineties, I was looking to concentrate on one industry for my investment-banking activities, and I was looking for industries with at least two characteristics. The first was a business where raising funds was important, and I thought the energy industry qualified because it had been starved for capital for many years and prices were unsupportive.
The second was very important. I wanted an industry where technology actually changed the industry. I had become familiar with developments in seismic technology, post-stack and pre-stack depth migration, which allowed drilling to become more and more efficient.
And slowly I got involved in the industry, then very quickly I got hooked, and I started Cheniere.
MIDSTREAMUnconventional natural gas has transformed the U.S. energy business, turning the future from gas importer to gas exporter. You’ve been involved in both businesses. How has Cheniere adapted?
SOUKI Painfully! We developed the white elephant [LNG imports] of the past decade. When we finally brought the plant on in 2008, it had become questionable as to whether it would be needed as an import facility, although a year earlier, in 2007, it was still a very popular idea. Then by 2009, it became clear that it wouldn’t be needed.
So we had to adapt. We had a fragile capital structure and in 2009, toward the middle of the year, we started seriously looking at liquefaction. We had all these existing facilities, storage and docking. Would it make sense? Would the numbers support it?
We started doing our homework. By the middle of 2010, we became convinced that it was a good idea. We announced the project and the rest is history. It took a lot of work to start answering all the questions that we needed to answer before we knew whether we had a valid business plan for exports or not.
MIDSTREAMCheniere faced significant hurdles in gaining regulatory approval for the project, not only export permits, but environmental permits and many other reviews. How did you manage this complex permitting process?
SOUKI I don’t think of permitting as hurdles. It is a complex process but it’s very visible, and it’s very transparent. I’ve said this many times and I stand by it: I have not met a civil servant yet who doesn’t want to get a project permitted. So if you treat them right, and if you treat them with respect, and if you don’t fudge the truth, and if you accept that there are things, together, we don’t know—both the regulator and ourselves—you work through in good faith. It is not a big problem.
MIDSTREAMLNG pricing is moving away from traditional crude oil indexes to spot-market gas pricing. How is this changing the worldwide LNG market?
SOUKI I’ve never understood the rationale for one commodity to be priced to another commodity. I don’t think it’s sustainable on a global basis, and as soon as the market increases and you create liquidity, then you need to have gas-on-gas competition.
The pricing mechanism is a signal that a buyer sends to a seller. If I need more gas, I will pay more—so go and produce it. If I don’t need more gas then I will pay less, and you really should not spend time exploring and producing more.
Now in the U.S., this works very well because we can drill very quickly. We can put rigs to work very quickly. It is not the same in the rest of the world. We’ve had a discrepancy between oil prices and gas prices in the last three or four years so producers like the idea of making the extra profit from using oil pricing. But it’s not justified, and it wasn’t always the case. In 2006-2007, producers wanted a pricing mechanism based on [Louisiana’s] Henry Hub because at the time gas was more expensive than oil.
A lot of substitution from oil to gas has happened in the U.S. It is happening now in the rest of the world. LNG is a very large market. But if you have gas that can be delivered to markets at less than the oil equivalency, you will continue to have very significant switching. I don’t think the oil pricing is sustainable; it creates its own demise.
MIDSTREAMBuilding a liquefaction plant the size of the one you have planned in Louisiana (18 million tons per year) is a massive operation. What has been the biggest challenge? Is the project on schedule for startup in 2015?
SOUKI First, yes, the project is on schedule for startup in 2015. I don’t think there’s one big challenge. There are a lot of reasonable challenges that you have to address simultaneously. You have to address the regulatory process. You have to address the construction risk—and here we are very fortunate to have Bechtel as the general contractor. They have built the biggest portion of liquefaction facilities around the world, so they’re an extremely good partner to have in our camp.
Then you have to handle the commercial side and make sure that your customers are happy and accept your business model. And you have to handle the politics, both domestically and internationally. Given the size of the project, we have to ramp-up with a significant number of people. We need to continue to attract quality people to the company.
MIDSTREAM Financing world-scale gas liquefaction plants is something comparatively new to U.S. investors and their buy-in is crucial. How are you telling your story to Wall Street?
SOUKI It’s not really very different from financing a pipeline, just a little bigger. This is a piece of infrastructure that is required at the moment. There’s a very strong fundamental reason to build it. We will provide a service, and we will be paid for that service. We’re not planning to take a commercial risk or a commodity risk. The service we provide is paid for by very strong financial players— be it on the production side, if they own gas in the U.S. and want to sell it—or the utilities around the world that buy gas based on (oil) indexation, which is becoming more and more painful for them. They need to diversify their sources, both geographically and from a financial standpoint.
We have counterparties that are very bankable. They’re paying us a fee, whether they use the service or not. And based on that fee, we’re able to finance the project, and those contracts are for 20 years. So the cash flow is very predictable and very stable.
But if you have a good plan, I’ve never found that money is a problem. If the business model works and the idea is good, money comes.
MIDSTREAMHow would you reply to critics of LNG exports?
SOUKI Let me take it on two levels. First, the most significant critics haven’t expressed an opinion, all they say is we ought to go more slowly. Well, everybody’s been looking at LNG exports for years now, and all they have come up with are different studies. No one has been able to demonstrate that LNG exports would not be beneficial for the U.S. and other countries.
So, we’ve done a lot of studying. Senator (Ron) Wyden (Democrat-Oregon) and Congressman (Ed) Markey (Democrat- Massachusetts) are not satisfied. They want to do more studies. Fine, go do more studies.
Second, let’s take the criticism—directed at the facility— from environmental groups who think fracing is abominable and should not be permitted. That’s an opinion. It’s fine, if you want to ban fracing, go ban fracing. And by the way, if you want to ban fracing, that’s OK, but get ready to pay $20 to $25 per million Btu for gas. If you’re willing to live with the consequences and you can convince a majority of the American people that this is the right thing to do, then I’ll abide by the laws. I have another plant that is not very useful now, but we’ll start importing gas again.
We don’t try to figure out what the economy is going to do five years from today. We believe in markets, free markets. You cannot predict all the different consequences. For example, U.S. CO2 emissions are down 13% in the last few years because of gas. If we had been a subscriber to the Kyoto Protocol, we would have met our 2020 objective this year.
MIDSTREAMSome analysts have recently said there can be a sweet spot for LNG exports in the 5 billion cubic feet (Bcf) to 8 Bcf per day range, roughly 10% current production. What’s your opinion?
SOUKIMy opinion is unreliable, as is the opinion of these analysts. The markets will create the sweet spot. I have no idea whether it’s 5 Bcf, 1 Bcf, or 15 Bcf. When we build our facility it will have the capacity to export 2 Bcf per day, but we won’t export 2 Bcf a day if the market is not there.
MIDSTREAMLong term, do you expect the U.S. to become a major player in LNG exports, or do you see Australia and the Middle East remaining in the forefront as LNG suppliers?
SOUKI Given what I see in the rig count, the fact that people continue to drill, and that we’re moving from gas plays to oil plays where gas is a byproduct, it’s my sense at the moment that we have so much production capacity that we’re going to become a very significant player—but it’s not going to happen overnight.
These LNG export projects take two to three years to plan and three to five years to build. So the fact that you can do one, if everything goes really well, in seven years, will take us to 2020.
We started Sabine Pass in 2009. We’re going to deliver our first gas in 2015. We were very determined and worked very, very quickly. Our Corpus Christi LNG will be brought on at the end of 2017. For us, to get to 2 Bcf per day will have taken eight years.
We had no competition, and we were able to work very quickly through the process. I suspect others are going to have to count somewhere between eight and 10 years from the time that they decide, seriously, to pursue a project until the time they finish. So in that context, you’re going to see LNG become a significant export product in the late part of this decade and the early part of next decade. But I don’t see other projects moving fast enough and aggressively enough to stay on that kind of timetable.
MIDSTREAMWhat impact does the administration’s position requiring permits for non-free trade agreements have on LNG exports?
SOUKI I think what they’re saying is taking your time and do everything right. The rules say you need three things: First, you need to demonstrate that your project is not against the public interest. The burden of proof is not on you, it’s on whoever intervenes. Since the U.S. Department of Energy just finished a study and said there is no case under which exports to non-free trade countries would be against the public interest, you have a very strong presumption that projects will be approved.
Second, you need to demonstrate that you’re doing everything right from an environmental and safety standpoint. And for this, you can substitute your application with the Department of Energy (DOE) with your application for the Federal Energy Regulatory Commission (FERC). You can give DOE your FERC docket number and that will suffice.
The third thing you need is to submit your sales contracts to the DOE. When you have all three done, then the process ought to move forward. There is no project except ours that has done this so far.
MIDSTREAMWhere do we go from here? What does the future hold for U.S. LNG exports?
SOUKI I think there’s an enormous appetite for American gas on a global basis because there are a lot of countries that are using oil for home heating, electricity generation or petrochemical production, which can be easily substituted by gas. And the only countries at the moment that are willing to contemplate this market are the U.S. and Canada.
We’re receiving a gift from traditional LNG producers, who continue to insist on oil-price indexation. And as long as you think that gas prices in the U.S. are going to remain at the $3 to $4 level and oil prices are going to be north of $70 a barrel, the market is huge.
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