The oil and natural gas sectors have been reeling from the COVID-19 pandemic and its devastating impact on demand for fuels, and that includes liquefied natural gas. U.S. LNG exports fell from a record high of 8 billion cubic feet a day in January to 3.1 BCF a day in July, prompting some new projects to postpone final investment decisions.
Among them was Tellurian, a Houston-based company co-founded in 2016 by a U.S. LNG pioneer, Charif Souki.
In this episode of Columbia Energy Exchange, host Bill Loveless is joined by Charif to get his take on this latest challenge for the U.S. LNG sector. After all, he’s seen this business grow from the start, having founded Cheniere Energy, the largest U.S. LNG exporter, back in 1996, before moving on to Tellurian.
Bill and Charif talked about the circumstances leading to the decline in LNG trade this year and the outlook for a recovery. Interestingly, Charif acknowledged that he’s been surprised by some developments.
They also touched on the fundamental changes in LNG trade, especially involving how the commodity is priced now, as well as on the implications for LNG of the closer scrutiny that natural gas is getting because of its greenhouse gas emissions.
Tellurian’s proposed Driftwood LNG project near Lake Charles, Louisiana, would cost more than $27 billion, including pipelines to deliver natural gas to the export facility. The project has all the required permitting to begin construction, but Tellurian has put off a final investment decision until 2021 in light of the market turmoil this year.
Charif is the executive chairman of Tellurian’s board. He also serves on the advisory board of the Center on Global Energy Policy. He received a B.A. from Colgate University and an MBA from Columbia.
Bill Loveless: Hello and welcome to the Columbia Energy Exchange, a podcast from the Center on Global Energy Policy at Columbia University. I’m Bill Loveless. The oil and natural gas sectors have been reeling from the Covid-19 pandemic and its devastating impact on demand for fuels, but that includes liquefied natural gas. US L&G exports fell from a record high of 8 billion cubic feet a day in January to 3.1 Bcf at the end of the day in July, prompting some projects to postpone final investment decisions. Among them was Tellurian, a Houston based company, cofounded in 2016 by a Houston L&G pioneer, Charif Souki.
I reached out to Charif to get his take on this latest challenge for the US, L&G sector. After all he’s seen this business grow from the start. Having founded Cheniere Energy, the largest US L&G exporter back in 1996, before moving on to Tellurian. We talked about the circumstances leading to the decline in L&G trade this year and the outlook for a recovery and interestingly Charif acknowledged that he’s been surprised by some developments. We also touched on the fundamental changes in L&G trade, especially involving how the commodity is priced now as well as on the implications of L&G and the closest scrutiny that natural gas is getting because of its Greenhouse gas emissions.
Tellurian’s proposed driftwood L&G project, near Lake Charles Louisiana would cost more than 27 billion dollars, including pipelines to deliver natural gas to the export facility. The project has all the required permitting to begin construction, but Tellurian has put off a final investment decision until 2021 in light of the market turmoil this year. Charif is the executive chairman of Tellurian’s boar. He also serves on the advisory board of the center on global energy policy. Well, here’s our conversation, I hope you enjoy it. Charif Souki, welcome to Columbia Energy Exchange.
Charif Souki: Thank you very much Bill.
Bill Loveless: Charif, before we get to L&G and the business that you are so involved in, it is important to note that we are talking just a day after hurricane Laura struck the US Gulf Coast area, including Calcasieu, the parish in Louisiana where Tellurian was proposing to build its L&G export plan. Did Tellurian have any personnel in the area at that time? And if so are they safe?
Charif Souki: We had one person on the ground. The project is very preliminary yet but that person I understand is safe, her house has been damaged but we will make sure that she’s taken care of and that she is okay and Bella will note that in my 20 year career in Louisiana, it is the third 100 year storm that I go through. Rita, Ike, and now Laura and the people in Louisiana know how to deal with these catastrophes that have seemed to become more and more frequent and are very resilient and recover always very well from this. So, my heart is sensitive to them and they have my prayers, but I’m sure they will come out fine.
Bill Loveless: Yeah, the severity and the frequency of these storms --these major storms in the Gulf Coast regions poses risks to the many energy facilities located in the area including oil, finance, petrochemical plants, L&G facilities. How durable are they? And is there more that the government or the private sector can do to protect them from Mother Nature given their importance to the US economy?
Charif Souki: I think it is incumbent on the private sector to make sure that the people who work there is always safe in an environment that is safe. Generally speaking, these facilities are very doable. They are made to list decades and in general they have survived the test of time. Governments can set rules and regulations and I think really it is incumbent on the people who are on the ground and are providing the work and the facilities to ensure that everything is safe.
Bill Loveless: Well, you have been a pioneer in the L&G industry, having been a founder of two companies, now Tellurian and Cheniere . Before that you were an investment banker and a wildcatter. Tell us a little bit about what you have learned over the years and how it prepares you for the opportunities and challenges that L&G faces today?
Charif Souki: I think there’s no more truism than be always prepared for the unexpected, because we are active in an industry that changes all the time. We build facilities that are supposed to last decades, 30 or 40 years. In an industry that changes every 5 years pretty dramatically, so I think the most important lesson is how to plan for what you don’t expect to happen, which is not very easy and be prepared to see how the market is turning and changing and adapt to it in function of what is happening. The good news is we are in an industry that is extremely important to the rest of the world. We are always going to need to turn the lights on. We are always going to want to drive our cars. We are always going to want to heat our homes. This is not going to change, but how the industry moves from one situation to another every few years, every five years maybe and we have to make investments that last for forty years is always a challenge.
Bill Loveless: Yeah and the industry is facing a challenge this year. I mean, the international energy agency expects global gas demand to fall four percent in 2020, largely because of the Covid -19 pandemic that would be the biggest demand shock for gas on record. What are the implications for the liquefied natural gas industry?
Charif Souki: So this is a very unusual situation. We had a global reaction to a pandemic that was maybe over emphasized, maybe d certainly the world is going to have to learn to live with it and come back from it, and I think the early indications are that the world is coming back. So, demand for energy, particularly from Asia particularly in China is starting to come back very quickly. Economic activity is back to almost normal. The same thing is happening in India at a slow pace. The rest of Asia is also reacting, so I think we have a sharp V-shaped correction because of the pandemic and now as the different countries are learning to live with the pandemic; things are getting back to normal on the demand side.
Bill Loveless: Yeah.
Charif Souki: So you may have a significant correction by 2020, but I think by 2021 the correction will be finished. The early signs are there. We are starting to see a demand for L&G from a variety of different places around the world come back very quickly. I think the other side of the equation is that supply was also affected and what we are seeing now is that we are starting to get on the other side of the curve. We are starting to see a slowdown in supply on a dramatic basis, while the demand is recovering and we may very quickly get on the other side of the equation. So the L&G industry in general has to continue to react very, very quickly to what is happening and adapt to all the changes that have happened in the industry over the last few years.
Bill Loveless: Right and the downside of the V as you describe it are certainly significant after establishing a record high of 8 billion cubic feet a day in January. US average of L&G fell to an average of 3.1 Bcf a day in July that’s according to the energy information administration and that July figure is less than one third of the US L&G export capacity as I understand it. So it was a short drop through half the year.
Charif Souki: Bill, you are absolutely right but I think you have to take it into context with everything else that is happening. So, yes there was a reaction on the L&G piece, where the demand came down from 8 or 9 Bcf, which is the capacity that we have in the United States down to 3.5 over the summer. It’s already starting to bounce back and if you look at the cancelation of cargoes from the US for the September/October timeframe, they continue to get better. In other words, there is less cancellations so we are getting back towards that 9 Bcf number. This is happening in the context where you can’t really isolate L&G from the rest of the natural gas demand and supply pictures.
So, I think the major change for the last 5 years has been the arrival of the United States as a significant L&G exporter. The first cargo left four and a half years ago from Sabine Pass and over the last four and a half years, we now have the capacity to export 70 million tons. It puts us as one of the top three exporters of L&G potentially in the world. We also currently have 35 million tons under construction, which will come over the next five years. Unquestionably, in the next five years, the United States will become the larger L&G exporter in the world.
Now other countries may accelerate programs in the future, they are not there yet, so there could be a race but for the time being the US is becoming the largest exporter and this will happen over the next 2 or 3 years. It’s something completely different because the US brings something different to the table. For the first time, a major country has started exporting natural gas without destination clauses. So the 70 million tons that the US is capable of exporting today, representing about 15% of the total L&G capacity of the world. There’s 420 million tons of capacity today and 70 million is from the US, that part is extremely flexible and has operated to ensure that the L&G business has accelerated its path to becoming a true commodity where the commodity can move freely to the highest bidder to where it’s needed the most as opposed to before the US arrived, most of the industry was still point to point.
On top of that, for the first time in the first—the last four weeks, we’re starting to see the impact of the US production profile to the—on the rest of the world. If you’ll pardon me, an easy sentences “America sneezes, the rest of the world catches a cold.” Let me explain what I mean. We are now drilling in the United States with seventy rigs. We have 35 Tcf of production. We were at 95 Bcf a day six months ago; we are down to 85 Bcf a day. We are consuming 85 Bcf a day, domestically. We are very close to being in balance. We are also exporting potentially up to 15 Bcf a day. We don’t have the gas to do that.
Bill Loveless: Right.
Charif Souki: So as you are starting to see in the last three weeks, Henry Hub how prices go up, because we are getting close to the winter season. We don’t have much in storage as we thought we would have and Henry Hub is starting to climb up. It’s up 30% in the last 4 weeks.
Bill Loveless: Right.
Charif Souki: The rest of the world is doing the same thing. Europe has gone from less than 2 dollars for calendar 21 to 4.75 for calendar 21. In three or four weeks, JKM has gone from less than 3 dollars to over 5 dollars, and if we don’t correct the problem in the United States, we would need to take our rate count from 70 to 170 to ban markets. The rest of the world is paying the price as well as we are.
Bill Loveless: Right, one thing though Charif is, I mean –the downturn has had some impact on decisions on final investments. This happened in your company, Tellurian laid off 40% of its workforce in March. The company delayed a final investment decision for the driftwood L&G project from this year to 2021. Shell pulled out of the Lake Charles export project in March, Sempra delayed a final investment decision on Port Arthur L&G terminal. When do you think we’ll see final investment activity in the US L&G industry picking up again or do these recent developments that you just laid out mean you will in fact –
Charif Souki: In the next six months Bill, because I think that the situation is going to get tighter and tighter. I don’t know how you are going to put a hundred rigs to work in a hurry in the United States, so that process will be slower than it needs to be, and therefore; American gas prices will increase. When that happens, the early evidence—it’s only been four weeks, but the early evidence indicates that both Europe and Asia are reacting to the same fundamental dynamics. So, if you have Henry Hub climbing and you have TTF climbing and you have JKM climbing, there’s going to be some pressure on people who need gas on a global basis to come back and say “we need to make decisions now, not in a year from now” Because if you make a decision today, you get an answer in five years.
Bill Loveless: Right.
Charif Souki: So I think the pricing pressures that you are going to see on the global gas business everywhere is going to put some pressure on people to make decisions quickly, and as you mentioned a lot of the ______ [00:15:35] of people who could have built these facilities is being impaired, so there’s going to need to be a new business model, there’s going to need to be an access to capital that is different so that we can build this infrastructure as fast as we can, and this is where the US and the Gulf Coast in particular are so competitive. We also are going to need to take Henry Hub out of the equation, because you cannot suffer the volatility, so we have to apply the same rules in the US that we’ve applied everywhere else in the world in the L&G business. It needs to be an integrated project.
You need to be able to determine the pace at which you want to drill your wells, so that you don’t run into an issue of other people not drilling enough wells and then you have climbing and coming down and climbing and coming down all the time. So I think having an integrated – which is what you do everywhere else in the world, you have to apply the same thing in the US.
The good news in the US is that several basins that are capable of producing gas at very cheap prices for a long time. You need to build the infrastructure to bring it to the coastline and the liquefaction capacity to be able to process and put it on the water. If we are truly going towards a commodity business, you want to be in the 25th percentile, in terms of competitiveness to be able to survive in a commodity world. So, if you can produce gas in the US at 2 dollars, which you can, transport it to your facility for a few cents, not for dollars, build your liquefaction capacity at an attractive price, which you can in the US because of the _____ [00:17:26] of the labor pool, because of the experience, because of what we had done at Cheniere the past with Sabine Pass in Corpus Christi and having the best contractors willing to work there. You can have the gas on the water at 350, no matter what prices are doing at Henry Hub or any other place; you have to control the whole chain. You have to drill the wells you need for your business.
Bill Loveless: Yeah, and in order – you mentioned that price of 350, the loaded price that’s what Tellurian says it will—it intends to load gas at that price. What is the price in the market that will be competitive? I mean, what do you need to sell that gas for to someone – to sell that gas for in Asia or in Europe in order to be competitive?
Charif Souki: Well, if your gas is 350 in the water in the Gulf of Mexico and your transportation cost to Asia is about a dollar 75, it’s not very difficult. If you get 5.50, you are doing very well. If you get 7 or 8 dollars, you are doing great.
Bill Loveless: Yeah, and you mentioned a minute ago, the JKM, the Japan Korea marker for the curve going out is in that 5 dollar range, I guess what -- early next year?
Charif Souki: Yeah and only three weeks ago, four weeks ago it was under three.
Bill Loveless: Right, right.
Charif Souki: This is how fast things move.
Bill Loveless: Yeah, you’re not surprised by this?
Charif Souki: Yeah, I think I am surprised by the timing and also in earnestness; I also did not look at the catalysts properly. I thought the demand in Asia is going to continue to increase, which is not a surprise. They absolutely need the gas and they need to get away from coal for a lot of different reasons. Whether you believe in climate change or not, there isn’t material. Everybody believes in pollution and your population getting sick, so that is not controversial. You don’t want your people to get sick, so when you start looking at the pollution in Beijing or the pollution in New Delhi, you understand that you need to do something. So, I thought the catalyst would come from that. What I missed completely until about two weeks ago, is that the impact of Henry Hub and our lack of drilling would have on the rest of the world, and having the US drill with only seventy rigs effects the rest of the world and I’m dumbfounded at how fast it happened. It only took three or four weeks and then I started focusing on the numbers and I realized that with seventy rigs, we are losing approximately 1 Bcf per day of production every month, it’s not sustainable.
Bill Loveless: Right, so the impact is going to be, not so much on demand but on supply and I’m thinking back Erin Blanton, who is a senior research scholar at the center on global energy policy wrote in May that the Covid-19’s impact on the L&G supply will last significantly longer than its impact on global L&G demand. She wrote that, and while the L&G market will remain over supply this year and possibly longer, construction delays and the decline in final investment decisions could bring it back into balance sooner than buyers anticipate.
Charif Souki: Three weeks ago I would have agreed with her. I am now in the camp that says because we are not drilling enough in the United States, the whole world is going to suffer and this happened so quickly that I guess confinement has its own benefits, because I am sitting around doing nothing and reading a lot, so it shocked me and when I saw particularly in Europe, which I still don’t understand, why we went from sub 2 to almost 5, in the course of three weeks. I still don’t understand what happened on a fundamental basis to cause this difference but the European markets are sending us a signal, which I still don’t understand but I think the cause root of everything is that we are not drilling in the United States fast enough to be able to supply ourselves and the rest of the world, and that for me is a big surprise.
Bill Loveless: Yeah – you know, you talked before about how investments in L&G projects have changed over the years and I’m recalling a report from the international energy agency noted that L&G investment and L&G liquefaction facilities in 2019, were nearly 65 billion dollars and much of the investment IEA said was supported by developers and partners taking equity stakes in future projects and that enabled them to reach project milestones at a faster pace than typical L&G project based on long term supply agreements with third parties. What’s your take on project financing in the L&G industry in the past, present and future?
Charif Souki: Okay, so of all the projects that happened in 2019, I noted that three of them were without off takers. Golden Pass, L&G Canada and Arctic L&G, so this is the first time that you have this much capacity that is brought on to the market without having the capacity underwritten by the potential customers. And it was done mostly by large corporations that could afford to put up the equity for projects like this. This is the quantity that we have today. If you really have a 420 million ton market that continues to increase, which means that you have 60 to 70 Bcf a day of L&G markets, about two-thirds the size of the American market, and it’s extremely liquid and you have 350 ships on the water at any given time, and if you’re a small customer anywhere in the world, threes likely to be a ship full of L&G not too far from you. When you pick up the phone and you say “I’ll pay you a dollar more, will you redirect your ship?” what’s the incentive for you to enter into a long term contract?
If you really need it, you pay the price and you can have it and the rest of the time when you don’t need it, you’re not stuck with the contract. In other words, it’s a commodity world.
Bill Loveless: Right, right.
Charif Souki: So you don’t have long term contracts for gold or contracts or silver or anything else, just L&G but L&G is becoming a real commodity. So, there’s business models that are designed on 20 year contracts to support your _____ [00:25:00] is no longer relevant. You have to find a new way to finance them.
Bill Loveless: Right and that’s going to leave some projects, some companies that have been working on plants for development, it might leave some behind – well behind the curve, in terms of how this market has developed.
Charif Souki: The good news is fundamentals don’t change. If you have cheap gas and you know how to build cheap liquefaction and your pipelines are not going to cost you too much money, the rest of the world will need the gas, and therefore; you will find a way. It may take you a year or two more, but you will find a way to finance it. Our solution is extremely simple, we are inviting partners. You’re not my customer, you’re my partner, I benefit, you benefit. What I bring you is my knowledge in the United States. I know how to find the cheap gas, transport it to the faculty at a reasonable cost and build cheap liquefaction that’s what I bring to the table, but you’re my partner. If I do my job well, you benefit with me.
Bill Loveless: Right.
Charif Souki: I think that business model will work; so far we found one customer and one potential customer. We need to keep working.
Bill Loveless: Yeah, yeah. Well, you mentioned in Tellurian its Total and Petro net of India.
Charif Souki: Yeah, so we have Total and Petro net. Total is a firm customer and Petro net is a willing negotiator.
Bill Loveless: And it shows the difficulty of the times. I mean, Total did reduce its investment in Tellurian somewhat and Petro net it’s been an ongoing –on again, off again, now on again discussions with that Indian company.
Charif Souki: So Bill, timing is everything. As you get 7 dollar JKM prices, you are going to see the level of anxiety increasing and the speed at which people come to us increase as well. So I expect now we have gone from less than 3 dollars to more than 5 dollars in 3 weeks, if it continues this way for the rest of the fall, I expect that by the end of the year, there will be a lot more into this than there is today.
I will give you a simple example. The CEO of Petro net, three weeks ago said “I can buy gas at 2 dollars, why should I enter into a long term contract?” “Well, try buying gas at 2 dollars now” it’s only 3 weeks later.
Bill Loveless: Right, yeah—let’s talk a little bit about China. You know, there’s a lot of discussion over the prospects of L&G trade between the United States and some, and I will mention my colleague Erin Blanton at the center have said that even if China begins to increase purposes of US spot cargoes this year to help meet the phase 1 trade deal with the United States it signed earlier this year, it’s not up to make itself dependent on US gas imports for a 15 to 25 year period, because of uncertainty over the US trade policy now and in the future. I mean, what’s your read on China?
Charif Souki: They need a tremendous amount of additional, natural gas. They’re not going to have the choice or the luxury of saying “I’m only dealing with this country or that country” they’re going to have to build a portfolio that is probably going to fall into the major producers and the rest of the world. So, I would expect that most of the Jap—Chinese buyers are only thinking “I need X percent from America and Y percent from Qatar and Z percent from Russia and some percentage from the rest of the world and that’s how I am going to build my portfolio” because I agree with you. When you are at that scale, you can’t afford to have all your eggs in one basket but you cannot ignore the American basket either.
So, they’re going to have to look at everything as a portfolio, and my best estimate of China is over the next 5 years they’re going to need 50 million tons more, where are they going to find it? They have to take a little bit of everything.
Bill Loveless: You know, we are in an election year, we are not going to ask you to prognosticate on politics or election, but nevertheless if former vice president Biden were to win, what might be the impact of a Biden administration on the US L&G industry. Many projects have been approved already and those that are operating are going to get their export licenses extended, so it doesn’t seem as though a Biden administration would really impact export terminals themselves, but could his administration have an impact on US gas supply?
Charif Souki: When I was at _____ [00:29:50] I got two permits for Sabine pass and Corpus Christi in an Osama administration, where vice president Biden was vice president. So, I don’t have any issue of dealing with an administration managed by the vice president, because I know what his record is, I know what his views are. We’ve worked with the Obama administration very successfully. We have found them to be very reasonable and very pragmatic in terms of what needs to happen and the results in hindsight are excellent.
The industry generated millions of jobs in the United States and improved our status on a global basis by being able to avert a catastrophe for the rest of the world, because the reason the world did not go into recession with 115 dollar oil and 15 dollar gas, is because the US all of a sudden reversed the situation and started producing oil, where it became the largest producer of oil in the oil, and gas where it became the largest producer of gas in the world. And gas in particular was able to convert from an importer to an exporter. It had an impact both in the United States and around the rest of the world, and I think that vice president Byden understands this very well. People around them understand this very well and he was a part of an administration that went along and I would say cautiously in the beginning, but the results were excellent for everybody.
Bill Loveless: Yeah but there is – since then there’s an increasing demand certainly on the left for restrictions on oil and gas production in the United States. The Biden administration hasn’t gone so far as to – or the vice president and his campaign hasn’t gone so far as to endorse some of those most far reaching proposals that have been made along those lines, but others raise questions about whether or not he could have some concerns about tracking and the supply of gas in the US and that sort of thing.
Charif Souki: Well, I mean when people want to get too much into the details of a business, they are not involved in on a day-to-day basis, it’s very difficult to understand all the implications, but I would say this. I am a hundred percent on board with the goals. I’m not onboard with the methods, okay. At the end of the day it’s extremely simple. We need to reduce our reliance on commodities that create an issue for the environment. We need to do something about climate change, and for me the first thing that you can do is start putting a price on carbon and I think that’s essential and the second thing you can do is to do is start encouraging carbon ______ [00:33:00].
Now there are a lot of new technologies that are tried and you have to do a sort of a cost benefit on each one of them, it starts becoming very, very, complicated. So if you want to ban fracking great, suit yourself, but you’re going to have 15 dollar gas prices and 115 dollar oil prices, and you’re going to have to live with the consequences. If you want to have an intelligent program to start working on the things that matter, and not sacrifice the lifestyle of people, both in our countries and around the world—I mean, it’s easy for us to say, but we only represent 5% of the world population. There are people in Africa, in Asia; different places of the world that actually need to have home cooking and electricity in their homes. What are we going to tell them? “You sacrifice forever” that doesn’t work. So, for me put a price on carbon and encourage sequestration. Sequestration could be very, very simple, plant trees but you have got to come up with the programs that actually have a chance of working without hurting people. So I’m on board with the goals, I’m not on board with the methods.
Bill Loveless: You know, one there’s been some discussion lately of carbon neutral L&G including in Europe, where the European Union is expected to publish a methane strategy in September. I should note that L&G sold as carbon neutral, still causes GHG emissions, however; parties involved in trade of the cargo agreed to buy carbon credits equivalent to the emissions associated with the cargo. Some say it’s a first step towards a carbon neutral L&G sector, what’s your take on it Charif?
Charif Souki: I’m not sure what it means. For me, it’s very simple, if you tax me on my emissions, I know what it’s going to cost, okay? And then if I want to use that money to do some deferment or some mitigation, I will try to figure out the best way to do that, but then when you ask me if I am carbon muted if you mean, have I mitigated all my emissions, that’s fine. If you mean, am I capable of doing L&G without carbon emissions at all? No, I am not, but I can mitigate and if you put a system in place that forces me to mitigate, I am happy to do it. It’s not the end of the world. I mean, a decent carbon tax is going to cost us about 20 cents a MMBTU to you, so we can live with that. The world can live with that. When you’re paying 6 or 7 dollars for the commodity, 20 cents is not going to make a huge difference and if you can eliminate emissions by doing that I’m all for it.
Bill Loveless: Well, there certainly is a lot going on in this market right now and with the recovery that we hope to see from Covid sometime soon, we will probably see that much more in developments that are going to make a big difference in this sector. As always it’s very interesting to talk with you Charif. Thanks for joining us on Columbia Energy Exchange.
Charif Souki: Bill, thank you very much for having me, it’s been a pleasure.
Bill Loveless: For more on Columbia Energy Exchange and the Center on Global Energy policy, find us on the web at energypolicy.columbia.edu and on social media at Columbia’s Energy. For Columbia Energy Exchange, I’m Bill Loveless, we’ll be back next week with another conversation.