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How Powerful Friends and Cozy Relationships Helped Cheniere Energy Cash in on Natural Gas Exports

The company went from economic disaster to dominating the industry -- here's how they pulled it off.
 
 
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Photo Credit: Oleksandr Kalinichenko/ Shutterstock.com

 
 
 
 

Five years ago, Cheniere Energy Inc. was losing tens of millions of dollars a quarter and slashing its workforce in half, as crippling debt threatened to force it into bankruptcy. Today it’s the undisputed leader in the nation’s promising new energy sector: exporting liquefied natural gas, or LNG. That remarkable turnaround followed its industry-leading decision in 2010 to reverse course and export, rather than import, natural gas.

Cheniere’s success in executing that costly and risky switch is a direct result of its ability to obtain a unique regulatory status. Federal energy regulators have awarded the company a combination of federal permits — so far withheld from all 20 competitors seeking similar treatment — that have worked like sprinkled pixie dust, attracting major customers and investors to Cheniere and giving wing to its stock.

Among the power brokers who’ve hitched a ride:

  • Spencer Abraham, a former secretary of the Department of Energy (2001-2005), who formed a consulting firm in late 2005 that landed Cheniere as its first major client. That prompted one television stock touter to rate Cheniere stock a “triple buy” as a “pure play on cronyism.”
  • John Deutch, a former director of the CIA (1995-1996) and recent chairman of a DOE advisory committee on natural gas, who serves as a Cheniere director and holds company stock and options worth $1.7 million.
  • Vicky Bailey, a former commissioner of the Federal Energy Regulatory Commission (1993-2000), a former senior deputy to Abraham at the DOE and current Cheniere director with stock and options worth $1.6 million.
  • Neil Bush, the younger brother of former President George W. Bush, who served as co-chairman of a company that partnered with Cheniere in 2001 and collected at least $22 million in royalty payments over a decade.

There’s no evidence any of the four acted illegally or improperly for the Houston-based energy company. But each has benefitted financially, and each has been in position to wield influence on its behalf with government officials. And Cheniere’s bumpy 15-year journey from relative obscurity has been marked by remarkably favorable government treatment.

From 2000 to 2008, Cheniere was committed to building several multi-billion-dollar LNG import terminals in Texas and Louisiana to serve the nation’s anticipated need for natural gas. The facilities were in various stages of completion when the import market simply dried up, knocking the company’s stock from $40 in October 2007 to $1.12 a year later. The culprit: major new domestic gas supplies obtained from hydraulic fracturing, or fracking, of shale formations.

With his back to the wall, Cheniere’s energetic chief executive, Charif Souki, opted to switch from importing LNG to exporting it. It was a brassy idea, given Cheniere’s debt load and its need for fresh money (many billions of dollars) and time (four or five years) to build the necessary export facilities. How could Souki possibly beat less-encumbered competitors? He’s managed.

The pivot point in the company’s turnaround came in May 2011 when the DOE granted Cheniere authority to export LNG to countries without a free trade agreement with the United States. That includes Japan, India, China, Korea and most of Europe — the LNG markets that really matter. Permits to export to free-trade countries like Canada and Mexico are automatically granted and therefore far less valuable.

Cheniere was the first to apply for the prized non-FTA export permit, but when other companies quickly followed suit, the DOE slapped a moratorium on approvals. Then on May 17, the DOE ended its moratorium by granting Freeport LNG a provisional non-FTA export permit.

The DOE had processed Cheniere’s application in nine months. Freeport’s, filed in December 2010, took 30 months. And Freeport still can’t begin construction on its export terminal until it clears another challenging regulatory hurdle with FERC.