Viewpoint: Driftwood's Challenges

Charif Souki, the former head and co-founder of US LNG behemoth Cheniere Energy has a lot to be proud of as a first mover in the US LNG export business. Cheniere holds a special place in the industry, and the war in Ukraine has now handed the company and its compatriots a major role in supplying a tight global market. But past performance is not necessarily a guarantee of future success: Souki's current company, Tellurian, keeps hitting apparent road bumps with its Driftwood LNG project.

Recent news casts doubt over Driftwood and, some say, Tellurian itself. Souki has sold most of his shares in the company in recent months, shedding his owned shares from over 26 million shares on Feb. 8 to 1.6 million shares as of Apr. 5, according to US Securities and Exchange Commission filings. The sale reflected a pledge of 25 million shares "as part of a collateral package to secure a loan for certain real estate investments," based on a loan agreement signed on Apr. 27, 2017, according to the filings. No further details were provided.

Then came Tellurian's sale and leaseback of its Louisiana properties under Driftwood, described by Souki on his YouTube series as a "very creative financial transaction with a New York-based investment management company.” The deal provided some $1 billion in financing, but Souki admitted that it will add about 15¢ to 18¢ per million Btu to Driftwood — a cost increase that the already-expensive project can ill afford.

Driftwood, which is planned to have an 11 million ton per year capacity in its Phase 1, is trying to carve a place in a highly competitive market. Rival US LNG projects have more momentum, clinching long-term offtake deals and reaching final investment decisions over the past year. The Big Three companies in the US LNG space — Cheniere, Sempra and Venture Global — all have operating projects, existing revenue, and a slew of cheaper, brownfield options for buyers. Driftwood, on the other hand, is still in its construction phase, offering offtake LNG deals tied to equity investments with a steep upfront cost compared to the relatively cheaper tolling model offered by its US competitors. Gunvor, Vitol and Shell have all ended such proposed offtake agreements in Driftwood over the last couple of years.

It's not unknown for pioneers to face problems with later projects. French engineer Ferdinand de Lesseps successfully led the construction of the Suez Canal, completed in November 1869, to world acclaim. Using the clout from this endeavor, de Lesseps embarked on the construction of the Panama Canal in 1881. But conditions in the tropics, very different from the dry Egyptian desert, mired the project in construction delays, disease and financial troubles, leading to its failure. The project was eventually bought out by the US and completed in 1914.

But Souki may yet overcome current challenges, succeed at Driftwood and score a double win for his legacy. After all, Cheniere also faced similar obstacles before proving critics wrong.