How Cheniere Energy Decided to Take a Gamble on Liquified Natural Gas - The New York Times

Oil and Money

Every few days, a 900-foot long tanker sails from Cheniere Energy’s mammoth new Sabine Pass terminal on Louisiana’s Gulf Coast, loaded with natural gas for destinations around the world.

Everything about the operation is oversized. The terminal straddles 1,000 acres on the Texas-Louisiana border and cost about $18 billion to build. Each shipment contains enough liquefied natural gas, or L.N.G., to heat 45,000 homes for a year.

“This is a generational opportunity for us,” said Michael Wortley, Cheniere’s chief financial officer. “We’re not talking about the next couple of years, we’re talking about the next 50 years.”

Much as hydraulic fracturing, or fracking, helped drillers extract vast quantities of oil from once-inaccessible shale formations in states like Texas and North Dakota in the last decade, natural gas production has quietly traced a similar trajectory. Soaring L.N.G. exports are changing how natural gas is priced around the globe and opening new markets overseas for American drillers.

While Cheniere is the only exporter of L.N.G. from the continental United States, by 2020, new domestic L.N.G. export terminals are expected to open, “transforming the global energy market and making the United States a global gas superpower,” said Jason Bordoff, director of Columbia University’s Center on Global Energy Policy.

But before Sabine Pass delivered its first cargo in February 2016, it wasn’t clear where all of the natural gas would go. “We have a huge amount of cheap gas as a result of the shale revolution, and we are going through a real transition since it can now be exported as L.N.G.,” said Mr. Bordoff.

For Cheniere, and for the broader global L.N.G. market, it’s a remarkable turnaround. Sabine Pass had originally been designed as an L.N.G. import terminal, but with domestic prices falling and overseas demand rising a decade ago, executives realized the natural gas needed to go out, not come in.

“We thought that if we’re going to make this thing work, we’re going to have to go all in and literally turn the plant around,” said Mr. Wortley.

At the time, Cheniere’s stock was trading at less than $3 a share, and the company had $2 billion in debt and only $50 million in cash on hand.

However, the company’s former chief executive, Charif Souki, was able to convince foreign companies like Britain’s BG Group (acquired by Shell last year) to sign long-term contracts for future deliveries, reassuring lenders and bond investors that his vision would eventually pay off.

“People thought they were crazy, but domestic gas production kept growing, and Cheniere reinvented themselves,” said Faisel Khan, an analyst at Citigroup who follows the company.

Tens of billions of dollars in investment later, the infrastructure to make that happen is coming on line. In addition to Sabine Pass, Cheniere plans to open a second facility in Corpus Christi in 2019. Before the two plants are completed, Cheniere expects to spend about $30 billion.

Cheniere’s bet has paid off for patient investors. Its stock now trades at about $47 a share.

Companies like Sempra, Dominion Energy and Kinder Morgan are working on several additional plants, which will help lift total L.N.G. export capacity to about nine billion cubic feet per day by late 2019 from a little under two billion today, Mr. Bordoff said.

“We’re at a breakthrough point for America’s L.N.G. exports and its influence in global energy markets,” said Agnia Grigas, author of “The New Geopolitics of Natural Gas.”

Unlike oil, which has been moved around the world for decades in supertankers, natural gas, as a vapor, is much more complicated — and expensive — to transport.

While pipelines carry natural gas over long distances, the only way to move it across oceans is through the L.N.G. process.

Natural gas vapor is chilled to 260 degrees Fahrenheit below zero, turning it into a liquid that can be pumped aboard specially designed ships that keep it under pressure with minimal change in temperature. Upon arrival, the liquid is slowly warmed and converted back into conventional natural gas that can be delivered to customers.

“It’s much harder to take energy out of something and cool it down than to put energy in and warm it up,” said James Carreker, an equity research analyst at U.S. Capital Advisors in Houston. “A refrigerator is more complicated than an oven.”

The Trump administration backs opening new areas to oil exploration and reducing regulations on coal to help miners, but the president has also emerged as a strong supporter of L.N.G. exports. In July, he praised the exports during a visit to Poland, a few weeks after the country took delivery of its first L.N.G. shipment from Cheniere.

The Obama administration backed L.N.G. exports as well, but the Trump administration has linked this development more closely to trade policy, especially as a way of countering Russia’s influence in Europe. “The Trump administration has tried to create L.N.G. diplomacy,” said Ms. Grigas.

Even if the administration lives up to its promise to reduce regulations, cheap natural gas means utilities will likely be reluctant to move back to coal.

“The rising L.N.G. supply has put consumers of natural gas in the driver’s seat, minimized the oil link and maximized competition,” Edward L. Morse, global head of commodities research at Citigroup, said. “This is a really revolutionary change.”