Lebanese Businessman Charif Souki Hugely Interesting Story in US Oil & Gas Sector
America’s Most Unlikely Energy Project Is Rising From a Louisiana Bayou
A $20 billion project is poised to transform the natural gas market - Matthew Philips – Bloomberg Business
From a mile away, at the distant end of a flat, two-lane road, the Sabine Pass Liquefied Natural Gas terminal materializes like an alien city from the haze of the Louisiana bayou. Five white cylinders with domed tops, each 140 feet tall and 225 feet in diameter, rise from the empty horizon. Set on the Texas border 4 miles from the mouth of the Sabine River on the Gulf Coast, the terminal is one of the largest industrial energy facilities under construction in North America. The domes, made of nickel alloy and wrapped in a layer of carbon steel, are essentially giant freezers, each capable of holding 81,000 tons of liquefied natural gas (LNG) at -260F.
Cheniere Energy, based in Houston, has spent more than a decade, and upwards of $20 billion, turning 1,000 acres of swamp into the first LNG export terminal in the continental U.S. When the terminal goes live later this year, it will change the dynamics of the energy market in North America. The U.S. will be on its way to becoming a net exporter of natural gas. About 700 million cubic feet of the stuff will begin arriving each day from all over the country—from Texas, Pennsylvania, Ohio, and as far away as North Dakota—to this spot at the end of America’s natural gas pipeline network.
At the terminal, the gas will circulate through roughly a mile of steel pipes and refrigeration systems organized into metal racks spread out across the plant. The racks aren’t unlike the one on the back of a household refrigerator, except they’re 500 feet wide and a quarter of a mile long. In the heart of each rack are two “cold boxes,” the biggest of which is a 1,400-ton, seven-story steel rectangle. Those boxes are the property of ConocoPhillips. What happens inside is so secret that a Cheniere employee can’t go in without being accompanied by someone from ConocoPhillips.
Over about five minutes, the gas will cool until it becomes a super-dense liquid, weighing 3.5 pounds per gallon, after which it will get pumped into those giant storage tanks. From there it will be loaded onto foreign tankers and sold to customers worldwide, from power utilities in Spain and Britain to state-owned gas corporations in India and Korea.
To cool all that gas, Sabine Pass makes its own power. Cheniere paid General Electric $1 billion for 24 gas-fired turbines that were initially designed as jet engines. By the time the terminal is fully operational, they’ll generate about 450 megawatts of electricity, enough to power a city of almost 300,000 homes. The docks at Sabine Pass are in water deep enough to accommodate some of the largest tankers in the world. The energy each ship will be able to carry is equal to the explosive force of a 7.5-kiloton atomic bomb.
Sabine Pass isn’t a project sponsored by an energy magnate such as Bill Koch or a megacorporation like Chevron. It is, for the most part, the slightly inadvertent creation of Charif Souki, 62, who’s been the best paid, yet least known, executive in the business. He rarely speaks to trade publications and almost never does interviews with the national press—although he occasionally appears on Mad Money, as he did on Aug. 31. Twenty years ago, he ran a restaurant in Los Angeles.
In a business dominated by lifers and specialists, Souki is a sparkling anomaly. He grew up in Beirut during the 1950s and ’60s, splitting time between hanging out at the beach and skiing in the mountains an hour away. His father suggested school in the U.S., so he headed to Colgate in upstate New York. Three years later, Souki had a degree in finance, and two years after that, an MBA from Columbia Business School.
By then, civil war had broken out in Lebanon, so he took a job in New York at a small investment bank. Souki was young, eager, and fluent in French and Arabic. It didn’t take his bosses long to figure out what to do with him. “They basically told me to go to the Middle East and grab as much money as you can and bring it back,” Souki says. “That was my mission.”
He spent the next decade putting together deals, shuttling among the Middle East, New York, and Paris. He had a young wife and two kids in Paris whom he’d go weeks without seeing. By the mid-1980s his first marriage had ended. He remarried, to Rita Tellone, a New York model he’d met in Paris, and shortly after retired at age 34. “I’d been chasing dumb deals for the last couple years, and I was tired of representing other people’s money,” Souki says. “I’d made a few million dollars. It was the mid-’80s, and I didn’t see anything that really made sense.”
In 1987 he bought a house in Aspen and settled down to raise a second family and enjoy the outdoors. Within a year he was restless. A decade of living in some of the world’s best cities had given Souki some elevated tastes. One of his favorite restaurants was Mezzaluna, an unpretentious Italian place on the Upper East Side of Manhattan. Souki cut a deal with the owner and opened a replica in Aspen. It was an instant hit, quickly attracting Jack Nicholson, Melanie Griffith, Don Johnson, and other ’80s A-listers. Souki eventually opened three more restaurants in L.A. “I was in my 30s and needed a hobby,” he says. “I thought I knew something about the restaurant business, which I didn’t.”
In 1993 he moved to L.A. His two oldest kids lived there, and he needed to spend more time managing the restaurants. Plus, seven years as a gentleman of leisure in Aspen had drained his bank account. “I had made a few investments on my own and thought I had enough to retire on,” Souki says. “I was wrong.” Over the next few years, he went back to raising money, this time for small businesses. They usually needed $2 million or so—nothing too big, but it got Souki putting deals together again. L.A.’s Mezzaluna had become one of the trendiest restaurants in town, a ’90s yuppie hot spot in the Brentwood neighborhood.
On June 12, 1994, Nicole Brown Simpson showed up for dinner with her family. Her mother left her glasses behind; later that night, a young waiter, Ron Goldman, stopped by Simpson’s condo to return them. Both he and Simpson were murdered, leading to the media supernova of the O.J. Simpson trial.
Mezzaluna quickly became a stop on the O.J. tour. Buses of tourists showed up, and lines formed of diners asking waiters what Simpson had ordered for her final meal (rigatoni, if you must know). “It wasn’t a very nice picture into human nature,” Souki says. “The morbid curiosity, the lack of taste and decency of people, was pretty astonishing.” He was bombarded with interview requests from talk shows, none of which he accepted. “Ron Goldman was a friend, someone we considered close to our family. People were absolutely callous to this.” He shut Mezzaluna down in 1997.
By then, Souki had begun a career in oil and gas. He’d decided he wanted to find a niche, an industry that he could learn about and specialize in and, most important, that was primed for technological disruption. At an energy conference in San Francisco, Souki heard a Chevron scientist talk about how computers were revolutionizing the maps energy companies use to hunt for oil and gas, improving the odds of drilling a successful well from 1 in 10 to better than 50 percent. Souki didn’t need to understand geology to know what a breakthrough 3D mapping was. “My brain works quantitatively, and so it clicked.”
And pretty much like that, he was a self-appointed energy executive. Armed with the technology, Souki looked into exploring for oil in the shallow waters of the Louisiana coast. Major companies had moved on to deeper waters, yet tiny pockets of oil and gas remained. Drilling for it would take tens of millions of dollars. Souki figured the best way to raise that kind of money was to sell shares to the public. Rather than start his own company, he bought a dead one. In 1996 he took over the shell of a defunct film-colorization company whose shares still traded. He changed the name to Cheniere—Cajun for “high ground looking over a swamp”—opened an office in Houston, hired a bunch of geologists and engineers, and became the founder and chief executive of a publicly traded energy company.
By 1997, Cheniere’s stock was rising in a market that loved anything involving technology, and the company was worth about $50 million. Souki’s story had all the hallmarks of the tech-bubble moment—computers were going to locate overlooked reserves!—but he was never going to find true gushers this way, and with oil and gas prices near decade lows, it was almost impossible to make money with small strikes. By late 2000 the dot-com boom was over, and Cheniere’s shares were trading for less than a dollar.
Souki started to study the economics of imports. The oil trade was dominated by enormous integrated companies that owned the whole supply chain, from refineries to gasoline stations. The natural gas side was more open—and more complicated. The U.S. imported almost all of its natural gas through pipelines from Canada and Mexico. Increasing amounts, however, had begun arriving on LNG tankers from Trinidad and Algeria, unloading at one of four aging import terminals. With forecasts predicting a rise in demand for LNG, Souki started driving around Texas and Louisiana looking for the perfect site for a terminal, quietly taking out options to buy hundreds of acres of the swampy coastline.
In June 2001, Cheniere announced plans to build four LNG import terminals, each one costing more than $300 million. Souki hit the road to raise money, but no one took him seriously. If anyone was going to build an LNG import terminal, it was going to be a major energy company, not some former restaurateur who couldn’t keep his stock above $1. The government hadn’t approved an import terminal in at least 20 years, and Sept. 11 hadn’t exactly relaxed people about the idea of a giant facility filled with explosive gas. “Nobody believed it was going to work,” Souki says. “Everyone kept saying, ‘You’ll never get funded.’ They thought I was crazy.” He went to 30 private equity firms; they all turned him down.
Souki eventually enlisted the help of Mike Bock, a Denver investment banker who specializes in raising money for oil and gas deals. “I told Charif we needed to find someone whose greed overwhelms his fear,” Bock says. That led them to Michael Smith.
A big, burly guy from Long Island, N.Y., Smith built his own oil company, Basin Exploration, out of a few Colorado leases he’d bought in 1980 when he was 25. In February 2001 he sold Basin for $410 million. After several months on the golf course, Smith was ready to get back to work and scheduled a breakfast meeting in Denver with Bock. Bock turned up with Souki. The two had met years earlier, when Souki had tried to get Smith to invest in his seismic data idea. Smith had passed, considering Souki overly aggressive.
Souki laid out a plan for the four terminals. While Smith still thought Souki was pushy, overall he agreed with Souki’s view that natural gas prices would rise. But four terminals for more than $1 billion? “Not a chance,” Smith said.
Several months later, in August 2002, Souki and Smith agreed on a smaller project. They would build one terminal in Freeport, Texas. But Smith wasn’t just going to give Cheniere money—he insisted on forming a brand-new company, Freeport LNG. He would run it, he would fund it, and he would own 60 percent of it.
Souki, however, wanted to run his own terminal, and used part of the cash Smith put into the Freeport deal to begin developing an import facility at Sabine Pass. The partners soon became rivals. In 2010, Souki sold back Cheniere’s stake in Freeport LNG. “We stayed friendly, but we were definitely hard-core competitors,” Smith says.
Souki maintained control of his terminal—and the potential for reward that came with it. By the end of 2004, Souki had raised $300 million by selling common shares of stock in Cheniere to banks and investors. He’d also signed two oil majors, Total and Chevron, to 20-year agreements that required them to pay Cheniere a total of $250 million a year for natural gas from Sabine Pass, whether they took delivery of the stuff or not. (Such binding agreements are common in the capital-intensive energy business.) By late 2005, Cheniere was worth more than $2 billion. “We could do no wrong,” Souki says. “Everything was coming along perfectly. But then, of course, 2008 hit, and all of a sudden the genius became the idiot.”
In 2007, after years of trying, energy companies had finally started getting natural gas out of shale rock formations. One of the early evangelists of horizontal fracking was an oil and gas analyst named Vello Kuuskraa. Souki invited him to make a presentation at Cheniere in Houston, during which Kuuskraa predicted that natural gas production in the U.S. was on the threshold of an historic rise and that prices would crash, destroying the market for imported LNG—and Cheniere’s entire business plan. Souki challenged his conclusions, but he kept inviting him back. Each time Kuuskraa returned, he brought more evidence that the shale boom was real. “I was like Dr. Doom,” Kuuskraa says. “And each time I showed up, the doom got darker and darker.” He was, of course, right, and by the end of 2007, Cheniere’s stock price was starting to crash again.
On April 21, 2008, Cheniere held the inauguration ceremony for Sabine Pass. Busloads of executives and politicians, including Samuel Bodman, the U.S. secretary of energy, showed up. As Souki gave his speech in the marshlands that day, he could tell bad news was circulating through the crowd. That morning, Moody’s put the Sabine Pass project under review for a possible debt downgrade. “Everybody had the good grace to wait to the finish to tell me what had actually happened,” he says. On the ride back to Houston, Souki contemplated the fate of Cheniere, now teetering toward bankruptcy. “We’d built a world-class facility on time and on budget, and on that day the market had turned and decided that bringing LNG into this country was no longer necessary,” he recalls. “It was like four years of work down the drain.”
Perhaps the best way to understand Souki is through his favorite hobby: downhill skiing. An exercise in real-time risk management, it’s most exhilarating when the skier is nearly, but not quite, out of control. Souki’s stocky frame suits the sport, as does his temperament. “Charif has that innate ability to look down from the top of whatever situation he’s facing and read it in a way that is extremely skillful,” says Geoff Tasker, a former ski instructor and one of Souki’s closest friends. The two met in Aspen in the mid-’80s. They now go backcountry heli-skiing together in Canada.
In the summer of 2008, Souki retreated to Aspen. Almost every day, he and Tasker would get on road bikes and ride through the mountains. “Charif isn’t one to wallow, but that summer he was pretty down,” Tasker says. Mostly, Souki was upset with himself. “He kept saying, ‘S---, man, I can’t believe I didn’t see it coming,’ ” Tasker says.
In the spring of 2009, Souki started getting strange phone calls. The first came from Aubrey McClendon, the billionaire co-founder of Chesapeake Energy and a fracking pioneer. McClendon wanted to know if Souki could reverse direction and turn Sabine Pass into an export terminal. Not long after, an executive at Shell called asking the same thing. Souki started going to conferences where fracking executives were speaking. “They all seemed to have a problem they couldn’t really discuss outright,” he says.
Their problem was that frackers had unlocked so much gas that prices would soon fall below what it cost to extract it. Oil prices, on the other hand, were going up. Global LNG prices are linked to oil, which meant that while natural gas was cheap in the U.S., it was still expensive abroad. One thousand cubic feet of natural gas cost less than $4 in the U.S. and more than $10 in parts of Asia, Europe, and South America.
In September 2010, Cheniere became the first company to apply to the Department of Energy for a permit to export liquefied gas to countries without free-trade agreements with the U.S., which account for about 90 percent of the global economy. It was followed three months later by Smith’s project in Freeport. The department approved Cheniere’s application in May 2011. By then other companies had applied for licenses. Rather than continuing to approve applications, the DOE commissioned a yearlong study to determine whether exporting natural gas was in the public interest of the U.S. While Souki was sprinting ahead, raising money, and signing contracts, Smith, along with everyone else, was stuck at the starting line. Souki’s three-month head start turned into two years.
By October 2011, he had a deal to sell $8 billion of gas over 20 years to BG Group, the world's largest natural gas trading company. A few months later, Blackstone, the giant private equity group, agreed to invest $2 billion toward the construction of the terminal. By August, Souki had an additional $1 billion committed from the governments of China and Singapore. Souki even got the Teachers Retirement System of Louisiana to kick in $17 million. Martin Houston, the former chief operating officer of BG Group, had been watching Souki from afar, marveling at his ability to stay afloat amid the chaos. “I learned never to bet against him, that’s for sure,” Houston says. “Everything he’s done in his life, he’s done with gusto and passion, and I consider him one of the great entrepreneurs of our time.”
By next year, the Sabine Pass terminal should provide enough revenue to finally make Cheniere profitable, which it’s never been. For engineering the turnaround, Souki has paid himself fantastically well. In 2013 his total compensation was $142 million, good enough to make him the highest-paid CEO of a U.S. public company. About $130 million of that came in the form of company stock.
In 2011 and 2013, Cheniere shareholders approved incentive packages granting a total of 27 million shares to be distributed among all company employees. In 2014 shareholders revolted and sued over what they claimed had been an improper vote count over the bonus pool. In a settlement reached last year, Cheniere won’t be able to ask shareholders for additional stock grants before 2017. The defendants didn’t admit wrongdoing.
Souki has decided to forgo his salary and bonus. Since Sept. 2, 2014, he’s sold $157.6 million of his shares in Cheniere, according to data compiled by Bloomberg. “Charif’s arrogance has made him a rich man, but it’s almost bankrupted him, too,” Smith says.
David Foley, who runs Blackstone’s energy group, now sits on Cheniere’s board. He’d passed on Souki’s import idea in the mid-2000s but couldn’t help but be impressed by his grit after almost going bankrupt. “Some guys would be happy just to be alive after that,” Foley says. “I think Charif wanted to not leave the battlefield limping. He wanted to go out a winner.”
Souki hasn’t won quite yet. The recent crash in oil prices has lowered the price of LNG in most of the countries he hopes to be selling into. The arbitrage isn’t what it was; with oil below $60 a barrel, it’s not clear it exists at all. But 80 percent of Sabine Pass’s capacity is contracted to buyers who have to pay whether they take the gas or not. Cheniere executives insist that’s enough to lock in a double-digit annual return. The remaining 20 percent of Sabine Pass’s capacity Cheniere will keep for itself and sell around the world to the highest bidder, if it can.
On Aug. 6, activist investor Carl Icahn disclosed that he’d built an 8.2 percent stake in Cheniere. Souki agreed to give Icahn two seats on the Cheniere board in return for Icahn signing agreements that limit his ability to wage a proxy fight or publicly agitate about the company.
In 2013, Souki started buying real estate in downtown Aspen and paid $27 million for a ranch outside the town. When he’s in Houston, he lives at a Four Seasons hotel just a few blocks from his new office. This year, Cheniere moved into Shell’s old space in a high rise downtown. Souki cautions against reading too much into that. Shell moved to the outskirts of the city, and Cheniere needed more room, simple as that. Asked if he worries about getting too big and losing his ability to maneuver, Souki says, “That’s the only way I see of running things. If I lose that, I will have lost my relevance.”