LNG:

Cheniere CEO Souki says U.S. could see $2 natural gas

Can the United States' natural gas supply support a robust LNG export market while maintaining steady gas prices for consumers here at home? During today's OnPoint, Charif Souki, CEO of Cheniere Energy Partners, explains why he believes natural gas prices could drop to $2 per million British thermal units. He discusses his company's pending permit with the Federal Energy Regulatory Commission for an LNG export terminal in Louisiana and talks about the existing international market for exports.

Transcript

Monica Trauzzi: Hello and welcome to OnPoint. I'm Monica Trauzzi. Joining me today is Charif Souki, CEO of Cheniere Energy Partners. Charif, thanks for coming on the show.

Charif Souki: Thank you for having me.

Monica Trauzzi: Charif, LNG exports have become a hot topic here in DC and around the country and your company already has one permit from the Obama administration for LNG exports. It's the only one that's been granted. Why do you think this issue has heated up in the way that it has?

Charif Souki: The flip answer is because it's political season, elections, everybody is posturing. I think at the end of the day the fundamentals are going to prevail anyhow. And we are very fortunate to be sitting on an enormous resource, but abundance comes with some drawbacks. We need to find new demand for the natural gas that we can now produce. We are, in fact, producing it with drilling a lot of wells and there's more gas than we know what to do with. We're in March, inventories are almost full. There's a number of wells that have not been connected because there's no place to send the gas, so sometimes too much of a good thing is too much.

Monica Trauzzi: Right and your industry essentially threatens that if they're not able to export, that they'll cut back on production and putting money towards production.

Charif Souki: I don't think the industry threatens. I don't think all 4000 producers in the country stand up together and start saying things. There's a reality of life. You have to pay for your next rig and your next well and if you can't generate enough cash from the gas you sell from the previous well, then you don't have any cash to drill the next well. So it's a reality of life that once you don't have anything to do with the product you stop drilling.

Monica Trauzzi: You're waiting on FERC to issue a permit to build an LNG facility in Louisiana and I know that you were hoping to be on their schedule this week. There are concerns from environmental groups though that you have not addressed the emissions and pollutant issues associated with this construction. How big of a hurdle are these last-minute petitions that have been filed?

Charif Souki: Well, we've been through the process for two years now, OK? We're going close to two years since we started the application process with FERC. So everybody had ample opportunity to get involved through the process, during the process in order to see if we were doing anything right or wrong. We spent a lot of time and a lot of money and we pride ourselves on trying to do things the right way. And we're talking strictly about the facility itself where we are. This is the only thing that we can control, what is within the boundaries of the facility that we control and we own. There is always going to be some subjective standards in terms of whether you're using the best available technology or not for everything. We have gone out of our way to try to figure out what it is that will reduce the emissions as much as possible as an impact of what we do. We are convinced and we have convinced the Louisiana Department of Environmental Control that we're doing things the right way. They've given us the permits and the EPA has had an opportunity to review the NTEQ's findings and did not comment on them. So, coming now and telling us that we could have done things differently is a little bit after the game is finished.

Monica Trauzzi: All right, let's talk about the DOE process. Does DOE's permitting process work? What's your assessment of how it's working?

Charif Souki: This is something that is brand new. The DOE was never expecting to have to regulate oil and gas activities. They're doing a very good job of dealing with a brand-new situation. And, in my opinion, they ought to let the market determine whether exports are a good thing or a bad thing. And in terms of policy, but this is my opinion, I can read the Natural Gas Act as well as they can. We all have our different views on what it says. It is counterintuitive that I would support everybody who would be viewed as my competition, but I do support their right to also do what is right. It is a very, very expensive investment. It's not going to happen. People are not going to make stupid decisions about this, because they won't find the money. You have to convince your shareholders, you have to make a very significant investment and the market ought to take care of those things. We are not in a centrally planned economy. We're in an economy that the market helps us determine where you sell your product and how you proceed about doing your commercial implications.

Monica Trauzzi: Let's talk about who might be buying these exports. The Japanese have been aggressively stating their interest in U.S. LNG exports. What's the potential for the Japanese market and what kind of conversations have you been having with the Japanese about selling your exports?

Charif Souki: You know, unfortunately, because I sympathize with the Japanese situation enormously, unfortunately they were not quick enough and, therefore, we have sold the first project to a company in England, a second one in Spain, a third one in Korea and a fourth one in India. They all need the gas desperately, so do the Japanese. We were in negotiations with them, they were a little bit slower than they needed to be and, therefore, we cannot respond to them with the first project. So, I'm disappointed that we weren't able to do something with Japan, because they're a very large buyer of LNG.

Monica Trauzzi: But if you get the OK for a second project, then the Japanese will be in the running for that LNG?

Charif Souki: Yes, if I get a permit for the second project, the Japanese will definitely be in the running.

Monica Trauzzi: Are there any concerns that we might see a revocation of licenses by DOE and is that something that you've heard from the international community as a concern?

Charif Souki: Clearly, since we have been commercially successful with four customers from four different areas of the world, they don't seem to be too concerned about it. Also, we have heard what the DOE has said about this, that they consider that sanctity of contract is very important and would factor heavily into a public interest determination. When they issued the order to us, they were very careful about explaining their rationale and saying that price did not count. It was simply availability of gas for the American consumer that would force them to reopen a case. And they were very clear to say it was by procedure with hearings and with them having to demonstrate what their case was and us having the ability to explain our point of view. I have absolutely no doubt that if any country in the world, in particularly in the United States, if you're an American consumer or your a national consumer if it's another country, does not have a commodity, that the rules will change and the laws will change regardless of what the books say. So, if we ever find ourselves in the United States where we can't access natural gas, Congress will act and will change the laws and will say, Mr. Souki, you can no longer export. We need the gas. But if that's the case, the price would be so high that we would revert to being an import facility in bringing gas in. So, under normal sets of circumstances, where the president is talking about 130 years' worth of supply, I don't think I will live long enough to see a change of circumstances.

Monica Trauzzi: All right, so some industries, like the chemical industry, say that if you begin exporting LNG, prices are going to skyrocket and they're going to be forced to export jobs out of the United States. Do you think that what your company and other LNG companies are doing could have a negative impact on the economy?

Charif Souki: OK, so let me give you some very quick numbers from last year, because it's easy to make projections for the future, but they're always wrong. So, let's just talk about what happened last year. We invested $250 billion upstream. We drilled 47,000 wells at an average of about $5 million per well. We are talking now about building an infrastructure at the rate of maybe $10 billion a year for the next 20 years. And we're talking about some of the manufacturing companies and the chemical companies spending $30 billion over the next five years. So, here are the numbers, 250, 10, 5. I venture ...

Monica Trauzzi: So are you saying it doesn't matter if the ...

Charif Souki: I venture to say that we've got too much gas and what they intend to spend on midstream to deliver the gas and downstream to use the gas is not going to be sufficient.

Monica Trauzzi: So, even if they have to send jobs overseas ...

Charif Souki: They are not going to send jobs overseas.

Monica Trauzzi: Not a big deal.

Charif Souki: It would take a manufacturing facility that produces some kind of chemical that uses either ethane or methane in this country. The prices are very simple, three dollars maybe to you in the market today. It's a little bit lower than this, but let's call it three dollars. A company in India would have to do exactly the same thing, pay three dollars here. For the American company it would be over. For the Indian company they would also have to pay me three dollars for liquefying the gas and find a ship for three dollars to get it to take it to India. So the poor Indian company is going to pay nine dollars for what the American company would pay three dollars. If that is not enough, I suggest to the manufacturing company find a new line of business.

Monica Trauzzi: OK, so we're working with three dollars million BTU right now.

Charif Souki: Yeah.

Monica Trauzzi: As the price. How high do you see the price going if we start exporting on a large scale?

Charif Souki: Two dollars.

Monica Trauzzi: Two dollars more than it is now?

Charif Souki: No, it's going to go to two dollars.

Monica Trauzzi: You think it's going to go down to two dollars?

Charif Souki: Yes.

Monica Trauzzi: What's the rationale for that thinking?

Charif Souki: The rationale is this is no longer an exploration play. We know where the resource is. This is now a technology play. Technology plays become better, not worse. We are learning how to image better, so we know where we have to drill. Our drill bits are getting better, so we know how to manage them and get them to the right place faster and better with less intrusion. John Berge was talking last week about being able to reduce the amount of water used in the fracking process by 80 percent over the next few years. So, this is going to become a better and better process. We're very early in the learning curve and we're going to be able to find this resource more easily, faster and cheaper over a long period of time. Whatever we can do to export is not going to be sufficient to make any impact at all. Most of the studies talk about 20 cents, I would propose that 20 cents statistically is insignificant, because gas prices can go up or down 20 cents every week. So, over a 20 year period, if our impact by modeling is 20 cents, that's fine.

Monica Trauzzi: You're the first person I've spoken to that predicted a drop in prices from exports, so this will be interesting to watch.

Charif Souki: Well, it's not going to be from export. We're not significant enough to talk about what we are going to do to the price. We're talking about us, Cheniere Energy, being ready by 2018, six years from today with 2 bcf a day out of a 65 bcf market. We are currently in storage situation where we have the record number of gas in storage and we have 5,000 wells that are sitting with no place to send their gas. They're just waiting for a hook up. So, we are going to be insignificant. We're not going to make a difference. Our competitors haven't even started the FERC profile, the FERC process. It's going to take them two years to get a permit and then five or six years to build the facility. Nothing is going to happen from export for six, seven, eight, nine years. So, you're going to see the other impact from the production way before you see anything from us.

Monica Trauzzi: I want to ask you one final question about China. How big of a factor are they and their LNG supplies?

Charif Souki: They could be a very, very large factor. If China could buy gas at a price that is based on handling hub as opposed to oil prices, they could be a very, very large factor. But at the moment they're mad at me, so ... they're mad at me because we didn't sell them from the first four trains, as they were too slow. They're absolutely convinced that we did it on purpose. It's not true, but since they're mad at me, I prefer not to go there for the time being.

Monica Trauzzi: All right, we'll end it right there. Fair enough. Thanks for coming on the show.

Charif Souki: Thank you very much, Monica.

Monica Trauzzi: And thanks for watching. We'll see you back here tomorrow.

[End of Audio]

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