Insight Conversation: Charif Souki, Tellurian

US-based LNG project developer Tellurian's proposed Driftwood export facility in Louisiana would have a capacity of up to 27.6 million mt/year. Charif Souki, co-founder and executive chairman of the company, spoke to Harry Weber in late December 2020 about current market dynamics and future prospects for LNG trade.

Harry Weber: We started 2020 with a pandemic, cratering of demand for LNG globally, a historic drop in the Platts JKM benchmark price, and we're finishing 2020 with historic run-up in the Platts JKM, a rebound of demand, we've seen some supply constraints around the world, Malaysia, Australia. What do you see as the biggest challenge and the biggest positive for the market heading into 2021?

Charif Souki: Harry, first, let me correct you. There was never a drop in LNG demand on a global basis in spite of the pandemic. I think it's not unusual for everybody to wonder what was happening in March because there was pandemic, the impact on oil was absolutely devastating. However, there was no impact on natural gas or LNG on a global basis. And if you think about it, when people stay at home, they need more heating, they need more electricity. So it is logical, but nobody saw it in March.

I think by June, you were tending to recognize that LNG demand was not affected. LNG supply was affected simply because a lot of projects that were late finally started arriving, including in the United States, Cameron and Freeport, and that added a lot of unexpected supply or expected, but not quite in that timing. And at the same time, the psychology was very, very nervous about whether there would be an impact on gas demand or not. By June, we at Tellurian started warning people, be careful, there are things that are changing and it could happen very, very rapidly. I started warning people very early, this is going to happen.

I think what we saw is that in June, everybody went on vacation, very comfortable with the $2/MMBtu gas environment on a global basis, came back in September to a totally different situation. And it only started getting worse—or better, for us—through the end of the year. The initial push was coming from the United States because we're not producing enough gas. At the same time, we've now become 20% of the global LNG market, we have an impact on global prices. And you started seeing Henry Hub go up from $1.70/MMBtu to almost $3/MMBtu. And correlated, JKM and Asia and TTF in Europe going up by the same amount. Then in October, November, EMEA provided a flow for the rest of the world, but demand matters started getting worse in Europe and in Asia, and prices have taken off in both Europe and Asia. So we're in a totally different situation at the end of 2020 than at the beginning of the year.

Charif Souki, founder and executive chairman, Tellurian

HW: At the end of 2019, things seemed to be going very well for Driftwood LNG. You had, you still have, a firm equity investment from Total, you had a memorandum of understanding for a potential investment from Petronet. And now it appears the MOU with Petronet has effectively expired without a firm agreement. I imagine you'll still continue to talk to them, but could you go over where that stands and any talks you have ongoing with Saudi Aramco or any other potential partners?

CS: Well, first, we were at the center of the negotiations with India at the beginning of the year in 2020, and with China. And our CEO was invited to the White House to participate in the restarting of trade with China, and it was expected that natural gas would be a percentage of everything. This, of course, with the pandemic, did not materialize. So it was more than just Petronet in India. You remember that we were at the center of the visit of Prime Minister Modi to the United States, and then after that, we were expected to go to India to finalize agreements with President Trump. All of this did not materialize. So you're right, the end of 2019 looked very, very bright and the pandemic slowed everything down to a very significant level.

Fast forward to the end of 2020, and the fundamentals are stronger than ever. What Prime Minister Modi and Minister Pradhan [minister for petroleum, natural gas and steel] in India foresaw is the tightening of the global gas market, and they were trying to do something about it proactively. You know that India has now increased the potential gas participation within the next 10 years from 6% to 25%. That is a very, very significant change. I think China is doing the same thing. You're starting to see changes in Korea and in Japan and in other Asian countries in terms of favoring gas and reducing coal and doing as much renewables as they can, but that's not sufficient to justify their growth.

Even in Europe, you now have two phenomena. The first one is for the next two years—there's not a single month that gas prices around the $5/MMBtu. In fact, the Valendar '21 and the Calendar ‘22 prices in Europe are flirting with $6/MMBtu.

At the same time, the price of carbon in Europe has gone up dramatically. It is now very close to $40/tonne, which means that gas prices would have to be significantly over $5/MMBtu in order to justify switching to coal. So if Germany gets serious about carbon emissions and stops using lignite in generation, you could have an added 4 Bcf of demand in Europe. The notion that Europe is a destination of last resort is wrong. Europe is a real buyer of LNG on a long-term basis, and they need it in order to balance their markets.

So you're seeing all these different price signals from everywhere, basically saying we are now short on a global basis, very much the same as we were in 2014, 2015. The difference is in 2015, there was 150 million tons of LNG under construction that would come over the next five years. We are now at one third of that number. In the next five years, there will only be 50 million tons of LNG [production capacity] being built. So we're in a totally different situation, we're in the same crisis that we were in 2015, but we don't have the infrastructure build that is necessary to meet the demand that is going to continue to come.

And I don't comment on specifics, but what I would say in terms of MOUs, is the time for MOUs is finished. We have $12/MMBtu gas prices in Asia. You have $2.50/MMBtu prices in the United States. It's time for people to make deals, not promises. So we have no interest in renewing an MOU with anybody. It doesn't mean that we don't want to work with everybody. Of course, we want to work with people. We're talking to more than two dozen different counterparties, and we'll end up making deals with the right people.

HW: That answers part of my next question. But just to clarify here, the MOU with Petronet, that's no longer in force?

CS: I'm unequivocally saying that I have no interest in signing or renewing an MOU with anybody.

HW: Well, that puts that to rest. You're talking to others, who do you see as your biggest opportunities? I mean, you talked a little bit about Europe... who are some of the big players that you're interested in, looking ahead to 2021?

CS: I have no prejudice. I'm happy to talk to anybody who sees an opportunity. If you look at the gas that crosses borders on a global basis, it's about 100 Bcf a day. Half of it is LNG, half of it is pipeline. In order to cross borders, the infrastructure costs are very extensive. And if you look at where that 100 Bcf a day comes from, it comes from four places: Russia in first position, the US and second position, Australia and Qatar, very close to third and fourth.

Now Australia is the only one that has not shown any ambition to continue that trend. Russia, Qatar and the US, are the places where the rest of the world is going to get its gas in the future. And in that context, because [the US] built infrastructure cheaper and better than anybody, we have an advantage. Our gas is very competitive with both Qatari and Russian gas.

Go deeper: Factbox and infographic - Asian LNG spot prices hit record high

And since LNG has now become a true commodity, we're trading about 15-20 cargos a day—there are about 300-400 cargoes on the water all the time. As a true commodity, you don't really need to have a long-term contract. And if you want to be competitive in this business, you need to be in the top quartile in terms of your costs. And the US meets that bar very easily.

HW: Speaking of commercial opportunities, Total is to date the only firm equity partnership commitment you have at Driftwood. As I understand it, in June of next year, they would have the ability to walk away from that commitment if you haven't reached a final investment decision. Can you say if you are in talks with them about extending that firm commitment? Do you expect to get to FID publicly by June of next year, making that issue moot?

CS: Total are an investor in Tellurian and they're committed to take a participation... so we talk to them all the time. Like everybody else, Total had other things to worry, I don't expect that we were in the top 100 issues that they were thinking about for the last year. I think the world is slowly coming back to normal now.

[...]

I think we'll have a dialogue with Total next year, and we'll see what they want to do. But the project will sell itself on its merits to Total or to anybody else. If it's an attractive project, that we'll continue to participate. I have no doubt to budget. I know them very well, and they're looking for value.

HW: As far as FID, is June a realistic time frame, given the flux that the market is in?

CS: Gas prices in America are $2.50/MMBtu and in Asia $12/MMBtu. The likelihood of getting to FID is very high—the circumstances dictate it. People are starting to know that there is a problem and there's only 50 million tonnes of LNG being built over the next 5 years. It is an issue that people have to address.

And the alternative, what you normally do when you can no longer get gas at a reasonable price, you switch to coal—this is becoming less and less appealing on a global basis. People are very reluctant today to switch to coal. So we're sitting in a situation with no solution, if you want to continue to be able to power the economies of all the developing countries. So there's never been a better time from a fundamental basis to finalize deals.

HW: At Tellurian, you have made some changes over the last year and a half to get yourself in a better position financially to withstand some of the shocks that the market has seen, and that developers have seen. You've cut staff. You've extended a loan obligation, a pretty significant one. What is your liquidity position going into 2021? How much of a cushion do you have?

CS: Extremely comfortable. It is not a concern. We have enough liquidity, and we have access to capital markets on a daily basis. So we really have no concerns. The only concern at the end of the day is what will be the impact of COVID on the company? Obviously, we have dilution we didn't expect. But that's what happens when you do a development company. Sometimes you access markets better and sometimes worse. But we have no issue accessing markets. We'll end up with dilution that was not expected before COVID, but nothing really drastic. The fundamentals, if anything, are better than they were a year ago.

HW: Lastly, at the end of November your CEO, Meg Gentle, departed. Why did she leave? What happened there?

CS: You would have to ask her. So if you're asking me was she forced out, absolutely not. I've been working with Meg for 18 years, I'm very fond of her, she was an integral part of the team for 18 years. Her absence will be felt but we will compensate. I think we need to bring additional experience and additional involvement from the two founders, Martin [Houston, Tellurian vice chairman] and myself.

We had the good fortune of having Octavio [Simoes, appointed president and CEO in November 2020] available because he liked our business model, and he wanted to be involved with us. So between the three of us, we have the ability to access people around the world very quickly. And in a COVID world where you can no longer visit people and build relationships, the fact that the three of us have relationships that we've built, over the next 20 or 25 years is very valuable. So we're just helping the team, making them all feel comfortable in that context, and I'm sorry she's gone.