Low Gas Prices Squeeze Industry and Fell a C.E.O.

Source: By CLIFFORD KRAUSS, New York Times • Posted: Tuesday, December 15, 2015

The Cheniere terminal near Sabine Pass, La. The company expects oil prices to remain low and decided against expanding its operations in Texas and Louisiana. Credit Michael Stravato for The New York Times 

HOUSTON — Plummeting oil and natural gas prices have whipsawed the energy industry, forcing cancellations of billions of dollars of projects, late payments on loans, and over a quarter of a million layoffs worldwide.

On Monday, with domestic gas prices hitting their lowest level since 2001, Cubic Energy, a company that produces natural gas and oil, became the latest of several dozen producers to file for bankruptcy protection this year. Even a company the size of Chesapeake Energy, one of the nation’s biggest producers, is struggling to reduce its $11.6 billion debt load.

Over the weekend, Charif Souki, the chief executive of Cheniere Energy, was unceremoniously dismissed only weeks before the Louisiana natural gas export terminal he conceived and built would send its first shipment — the first of its kind from the lower 48 states.

At the heart of Mr. Souki’s dismissal was a divergence of views between him and Carl Icahn, the activist investor, over the future of the global natural gas markets, many of which are linked to oil prices that have crashed by nearly two-thirds since the summer of 2014.


Charif Souki, the former chief executive of Cheniere Energy. Credit Michael Stravato for The New York Times 

In Mr. Souki’s view, oil prices should rebound strongly over the next year or two, meaning that cheap American natural gas will have a big competitive advantage over producers from Australia, Qatar and elsewhere.

But the board, which includes two of Mr. Icahn’s allies, saw it differently and decided that Mr. Souki’s plan to continue expanding Cheniere terminals in Texas and Louisiana was a foolhardy crapshoot at a time when the dominant view is that oil prices will remain low for a long time.

At the same time, the market has become so glutted that, many experts say, it is time to consolidate and roll back plans to expand export capacity.

But not Mr. Souki, who has made a career as an iconoclast and remains convinced the natural gas market will expand for years to come.

“In my view this is a temporary thing, and you don’t change the strategy of the company based on a temporary thing,” Mr. Souki said on Monday in a telephone interview from Aspen, Colo., where he plans to spend the next three months skiing and mulling over his future. “Their view is that is an incorrect assessment and it’s time to move on, be a lot more conservative, fold in the sails and wait for the storm to pass.”

Mr. Souki, whose peripatetic career has included stints in investment banking, restaurants and shallow Gulf of Mexico gas drilling, is no stranger to shifting markets. In his early days at Cheniere, he built liquefied natural gas import terminals. But demand for imported gas dried up when the shale gas revolution flooded the domestic market after 2008. With $2 billion in debt, he shifted gears to build export terminals.

Cheniere’s sprawling, $20 billion terminal nearing completion in Sabine Pass, La., will eventually have the capacity to export 31.5 million tons of liquefied gas a year — more than any country with the exception of Qatar and Australia.

Mr. Souki, who has a taste for fancy double-breasted suits in Houston’s informal business world, has often defied conventional wisdom, and this time is no different. Many experts say that the fortunes for exports of liquefied natural gas, or L.N.G., have declined, and will not rebound anytime soon.

Adding to the pressure on Cheniere is a surge of new export projects, representing nearly a 50 percent increase in global capacity, that is due to come on line over the next five years at a time when Indian demand is falling and Chinese demand is far softer than most experts expected a few years ago. In Europe, gas demand is squeezed by renewable energy like solar and wind that receive big public subsidies and cheap coal imported from the United States.

“There is a lot of supply coming to market in a very short time from Australia and the U.S.,” said Faisel Khan, a Citigroup managing director and energy expert, “and that is causing an oversupply over the next three to five years that could extend further than that depending upon demand from China, which may or may not show up.”

Mr. Souki and other executives finance their projects by first lining up long-term supply commitments that guarantee revenue to pay off debts. But Mr. Souki was planning on making 20 percent of his terminal sales on the spot market, where arbitrage profits can be huge when world oil and gas prices are high and American gas prices are low. Other companies have similar approaches.

But the arbitrage has shrunk sharply over the last year and a half as world gas prices, which differ by region, have declined with oil. Spot gas prices in Japan, for instance, have averaged about $8 per million British thermal units in recent months, half the price in early 2014. Around Western Europe, where there have been similar drops, United States liquefied natural gas will probably be bought early next year at nearly the same price as local gas once transportation and processing expenses are added to the lower American gas price.

“This was always an arbitrage game,” said Nikos Tsafos, president and chief analyst at the consultancy Enalytica. “Three or four years ago you didn’t have to explain the numbers too much to show a slam dunk. Now, no one thinks U.S. gas is expensive gas but broadly speaking it’s not as attractive as people were hoping for.”

It is that kind of thinking that made investors think twice about Cheniere over the last year, as the stock price — which has gyrated for more than a decade — dropped in half from its high, along with many other energy companies. (It dropped again by nearly 3 percent on Monday.)

As Mr. Icahn increased his stake in the company in recent months he made no secret of his concerns about Mr. Souki’s high-flying ways, including his abundant pay package. This year, Mr. Souki sold $116 million in stock, reducing his holdings by a third, as he slashed his pay under pressure from the board.

“The board wished to move the company in a direction that differed greatly from the path Mr. Souki wanted,” Mr. Icahn said in a statement that he also posted on Twitter on Monday. “It is also telling that Mr. Souki sold a great deal of his stock, which made it somewhat easier for him to ‘swing for the fences,’ making it a win-win for Mr. Souki but not necessarily for the shareholders.”

Neal Shear, an independent member of the board, will run the company on an interim basis. Mr. Souki expressed no bitterness about his downfall, and acknowledged that Mr. Icahn and his allies had a plausible point of view.

“I understand it’s time to consolidate and look at what we have,” he said. “If I were an independent board member I would ask myself: ‘Is Charif the right person to run a quasi-utility?’ And the answer is no. I am constitutionally not well suited to run a utility.”