To date, no cube.

UP, UP AND AWAY: Pure fuel manufacturing may skyrocket as Houston’s LNG trade grows

Investing within the $13.6 billion Driftwood undertaking — constructed on a riskier enterprise mannequin that might additionally enable the corporate to reap extra income — is a chance no main investor has been prepared to take, regardless of hovering abroad demand for pure fuel after Russia’s February invasion of Ukraine squeezed provides. The undertaking’s precarious state raises questions on whether or not Souki, who’s credited with constructing the LNG trade, has taken his aggressive dealmaking too far.

Souki is reaching for a brand new enterprise mannequin that will enable Tellurian to profit totally from swings in fuel costs, however undertaking that will imply exposing the corporate to dangers that different LNG firms are sheltered from. 

“He’s attempting to persuade the world he can construct a greater mousetrap when the one which’s there may be working simply advantageous,” stated Clark Williams-Derry, vitality finance analyst with the Institute of Vitality Economics and Monetary Evaluation. 

That “mousetrap” is of a common design within the U.S., the place all working LNG amenities, based on the Institute of Vitality Economics and Monetary Evaluation, depend on 15- or 20-year contracts with consumers who pay a hard and fast worth for turning pure fuel right into a liquid by cooling it to 260 levels under zero. The assured earnings offers monetary stability to repay debt, keep on operations and switch a revenue. 

Souki, nonetheless, is pitching a plan that will have Tellurian function like an built-in oil firm — akin to Exxon or Chevron — producing, transporting and liquefying pure fuel and taking costs set by world markets.

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The fee-based mannequin, Souki says, is dying as rising costs, together with that of pure fuel, slash revenue margins constructed into long-term contracts. Tellurian’s plan permits it to revenue totally from fuel costs, that are notoriously unstable. For instance, the benchmark U.S. worth for pure fuel, which Souki calls “the molecule,” has bounced from about $2.60 per million British thermal items two years in the past to greater than $5. Souki believes costs will stay excessive, and as they’re, he stated, the undertaking would pay for itself in a yr and a half.

“With the molecule at the moment, you make a $15 or $20 margin. With the idea of (fee-for-service) you make 50 cents,” Souki stated. “And folks say, however not less than my 50 cents is assured. No it isn’t. Your 50 cents can blow up in a second. So I might somewhat take a danger on $10 than a danger on 50 cents.”

For Souki, the high-risk maneuverings are a continuation of a theme that dates to his time on the helm of Cheniere Vitality. Souki’s push to construct extra liquefaction capability and his expertise for elevating billions from traders took Cheniere from the sting of chapter in 2008 to the biggest participant in a fast-growing U.S. LNG trade. 

However Souki’s drive for extra export capability as fuel markets weakened and the corporate hadn’t but turned a revenue — mixed with controversy over the dimensions of his compensation package deal — put him at odds together with his board and activist investor Carl Icahn, who known as Souki’s concepts “harebrained.” Souki was ousted as CEO in December 2015 and started constructing Tellurian the next yr.

At Tellurian, he got down to do what he hadn’t been capable of persuade his colleagues at Cheniere to do — expose extra of the corporate to the spot market as a substitute of locking it up in fastened contracts, and open the corporate as much as extra income. At Cheniere, Souki had aimed to depart not less than 20 p.c of the corporate’s capability open to the spot market, which might internet enormous income when costs are excessive, whereas Icahn was extra conservative.

“Are you able to think about if that they had 9 million tons at the moment within the free market?” Souki requested.

However the 20-year fixed-fee contracts Souki presided over at Cheniere locked in income that lined the price of building whereas shielding the corporate from downturns just like the one which slammed the trade through the pandemic, Williams-Derry stated. It protected Cheniere in opposition to price overruns, regulatory modifications and worth swings.

“The early Cheniere enterprise mannequin was targeted on de-risking the enterprise mannequin within the U.S.,” Williams-Derry stated. “Souki’s later plans have been all about re-risking it.”

To hedge that danger, Tellurian owns Haynesville fuel acreage, but it surely makes up solely a fraction of what can be wanted for the LNG undertaking, analysts stated. 

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As Souki struggles to make his case to potential traders, inflation is rising and the price to construct Driftwood’s 11 million-metric-ton first part has ballooned to $13.6 billion from $11.9 billion. 

Tellurian’s enterprise mannequin has benefit, however it should take greater than philosophy to make Driftwood a actuality, stated Dan Pickering, chief funding officer for Pickering Vitality Companions. He stated Tellurian will seemingly must make concessions to get funding.

“Imaginative and prescient isn’t sufficient,” he stated. “You’ve acquired to have cash.”

Ben Nolan, an vitality analyst with Stifel, stated in a analysis observe that his agency expects Driftwood will want an funding of not less than $5 billion to get funding. What’s extra, home and worldwide fuel costs are anticipated to converge within the latter half of this decade, jeopardizing Tellurian’s margin on the identical time building inflation is rising.

“We do not imagine the present administration crew goes to have the ability to transfer forward with the undertaking,” Nolan wrote. “In the end, we predict the corporate ought to promote itself for elements.”

Skepticism round Driftwood hasn’t scared off Souki, who stated the corporate has already spent $1 billion of its personal cash on the undertaking. He stated Tellurian will maintain slowly constructing the ability, tapping the roughly $600 million a yr it makes as a fuel producer within the Haynesville basin till the best associate comes alongside.

To make certain, the undertaking may nonetheless transfer ahead as Souki envisions it if a like-minded investor sees worth within the gamble.

“All it takes is one particular person with deep pockets who sees the world the identical approach they do,” Nolan stated.

amanda.drane@chron.com