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Looking past the glut

Charif Souki and Martin Houston think now is the time to start building more US liquefaction capacity

Sometime early next decade the glut in liquefied natural gas will be gone and customers will be scrounging for fresh supply. Charif Souki and Martin Houston, two men with a long history in the business, will be ready. Cargoes of LNG will arrive in Europe from their plant in Louisiana, landing for a price of just $7 per 1,000 cubic feet (cf). Today’s supply surfeit doesn’t matter. The market will need their gas, and they will produce it more cheaply than anyone else on the planet.

That’s the plan anyway. In today’s market it looks bold, to say the least. The world isn’t short of LNG or proposals to build more liquefaction capacity (see p16-35). The crash in seaborne-gas prices has brought a rash of postponements and project cancellations. On 23 March, Woodside Petroleum shelved its Browse LNG project in Australia, just the latest deferral in a sector that, for now, looks somewhat overdeveloped.

Souki and Houston aren’t put off. Browse would have used a floating platform to produce 3.9m tonnes a year (t/y) and could have cost its developers more than $30bn to develop. Souki and Houston, who formed a new company, Tellurian Investments, earlier this year, say they will build their plant in Calcasieu, Louisiana for $8bn to produce 12m t/y of LNG by 2021. Then they’ll keep building, expanding that plant and adding another, ending up with 30m-40m t/y.

The partners certainly aren’t novices. Houston spent decades at BG Group and when he retired as chief operating officer in 2013 was credited with having overseen the firm’s LNG expansion. It would be hard to find an executive in the sector with more trading and operational experience.

His enthusiasm for the sector comes with a certain wonkishness. “Gas will be the destination fuel and not the transition fuel that many people talk about as they misplace gas in the seriatim of hydrocarbon goodness, if you like,” he says in a Tellurian promotional video.

Corporate survivor

While Houston was leading BG’s LNG business, Souki was helping reinvent the American gas landscape. As the US headed inexorably – or so people thought – towards gas deficiency Cheniere Energy, the company he founded in the 1990s, started building LNG import terminals. The shale boom ruined the plan. Cheniere began converting the plants into export facilities. Souki and Houston sat across from the negotiating table in 2011 as Cheniere signed up BG as a buyer, helping to underpin the turnaround. The inaugural cargo from Sabine Pass LNG, the first of several new export plants due on line in the Lower 48, set sail for Brazil in February.

Souki, one of American energy’s most famous entrepreneurs, was no longer at Cheniere to celebrate.

Carl Icahn, an activist investor who had been building up a stake in Cheniere, didn’t agree with the plans to keep building more liquefaction capacity. He staged a boardroom coup in December 2015. Souki was out.

Now the former restaurateur is using some of the fortune he amassed at Cheniere to double down on liquefaction nearby. He and Houston are funding the initial investment needed to get their project at Calcasieu moving. To secure the $8bn Tellurian will also offer some equity and raise debt. Souki says the funding for construction will be in place sometime in 2018.

The partnership of visionary, entrepreneurial leadership and nuts-and-bolts operational experience will make Tellurian a compelling case study for the LNG sector. The firm’s corporate website boasts of the company “Reinventing the gas industry. Again.” Construction will be based around smaller trains – “bricks” – of about 0.7m t/y, making the projects “more flexible than megaprojects”. A repeatable design will use off-the-shelf equipment.

But it’s not just modularity and better engineering that Houston says will make their plants more viable. It’s also about creating a lean LNG producer that doesn’t waste time or money duplicating processes that the contractor – Bechtel is already aboard, and front-end-engineering and design is underway – can handle on its own.

“BG had a whole bunch of its own standards which it deemed necessary for its own governance,” he says, with a hint of disdain. Tellurian will do what the laws of the land demand, period. Large companies tend to deploy many people to oversee the engineering, procurement and contracting (EPC), he says. “It attracts a lot more change orders.” Tellurian will have far fewer people “sitting on top of the EPC”. “Our philosophy is Bechtel is a first-class contractor and if they want to build something, let them get on with it.” The process of approvals, land acquisition, sales contracts – as at Cheniere, says Souki, long-term deals will underpin 80% of the construction cost – and project execution is fraught. “The good news is both Martin and I have done it in the past so this time the script has already been written,” says Souki. Tellurian has just 15 employees now but will be 700 or 800 strong by 2021.

The face of danger

As for today’s glut, Houston and Souki aren’t fazed. “There will be a little bit of oversupply for the next two or three years,” says Souki. By 2021-22 a “very significant imbalance” will appear on the other side, because decisions to create new capacity by then aren’t being taken now. “We expect to come to the market by the time the gap will have been developed.” Global demand is now 300bn cf a day and growing by 2% a year, or 6bn cf/d, he says. “If we put the maximum amount of liquefaction we think we can, that means 30m-40m t/y, we end up with six to eight months of growth.”

Nor do rival developers’ plans pose a threat. “If you want to go to Tanzania, knock yourself out, go to Tanzania.” The US, says Souki, remains the “most propitious place to put a liquefaction facility.” Houston points to the wealth of feedstock on offer. Fully 1,400 trillion cf of reserves are economic below $4/’000 cf and 800 trillion cf below $3/’000, he says – the latter figure equivalent to Qatar’s North Field. It’s the oil price, not US Henry Hub, that will see volatility, he says. “Everyone’s celebrating low oil-indexed prices in Asia with oil at $35-40 a barrel – well, whoopy do! How long do you think oil is going to be at $35-40/b when the technical cost of global replacement is probably more than $60/b?

“What we want to do is produce the cheapest LNG on the planet – that’s the only thing that matters,” says Houston. Souki puts it another way. The market by 2020 will be much more flexible. Each day, customers will be able to bid on 11 cargoes; meaning 35bn cf/d of physical volumes, controlled by 30 or 40 different players. Oil indexation will be “out of the window” because this physical market will be “completely correlated by transportation costs”. In that context, he says, “it becomes critical to be the low-cost producer”.

Not everyone has such a bullish outlook for America LNG. Energy consultancy Wood Mackenzie says half of the US’ export capacity could be idled between 2017-20 if coal prices in Europe – the primary destination for the LNG – remained low or Russia’s Gazprom cuts prices to defend market share.

European gas prices could fall to under $4/’000 cf, says the consultancy.

Souki isn’t worried. Rival suppliers aren’t keeping up. Algeria is getting out of the gas-export business, he says. “All of southern Europe is a potential customer – we have no competition from Gazprom for this.” Declining output from the North Sea, falling exports from the Netherlands, and growing demand in eastern Europe all mean that, unless Europe is happy to buy even more gas from Russia, a “very significant market” will open for the US in Europe – a “combination of geopolitical concerns and commercial concerns”.

So Houston and Souki are pressing on. A final investment decision on their first plant at Calcasieu will be made in 2018. The 12m-t/y capacity will eventually double. For a second plant, at a different site, the decision will come 12 months later. “Design it once, build it many times” is the mantra.

It rests on the partners’ fundamental faith in the market’s revival and an absolute conviction in the exceptionalism of American LNG.

“Given we have a long-term sustainable expectation of a low Henry Hub price and a long-term unsustainable expectation of a low oil price,” says Houston, “if I were betting for the benefit of my consumers, long term, where the cheapest LNG was going to come from over the next 20 years it would be: one, the US, two, the US, three, the US and on with that seriatim until you get to about 15.”

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