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How Carl Icahn Got In A Legal Spat With This Natural Gas Tycoon Over A $30 Billion LNG Export Terminal

This article is more than 4 years old.

When billionaire investor Carl Icahn took over LNG exporter Cheniere Energy, he fired its CEO Charif Souki and canceled his expensive pet projects. Souki decided to build anyway, and launched his new company, Tellurian Energy, to construct the $30 billion megaterminal Driftwood LNG. Naturally, Cheniere is suing.  

Trial is set to begin early February in Harris County District Court in Houston in a case that pits billionaire corporate raider Carl Icahn, 83, against Charif Souki, the trailblazing tycoon of liquefied natural gas. 

Icahn and Souki, 66, had tangled back in 2015 when the investor acquired a 15% stake in Cheniere Energy, where Souki was CEO. Icahn got two seats on the board and soon had Souki fired. “In 24 hours they decided to stop all the projects, fire me and discontinue assets that would have been extremely valuable today,” Souki recalled in a late 2019 conversation with Forbes.

Cheniere (market cap $17 billion) has alleged (among many things) that on his way out, Souki stole early plans for a giant new LNG plant, and used them as the foundation of his new company, Tellurian Energy (Nasdaq: TELL). Cheniere claims Souki and Tellurian owes $47 million loaned to fund early development work.

The project in question, called Driftwood LNG, is a megaplant, to be built by Bechtel on 1,000 currently bare acres in Lake Charles, Louisiana, at a cost of $30 billion. It will chill 4 billion cubic feet of natural gas per day into a -260 degree liquid, then pump it into insulated supertankers for export to ports like Tokyo or Seoul. Tellurian’s partners in Driftwood include Total, Vitol and India’s Petronet. Tellurian (market cap $2 billion) has been burning about $150 million a year; it exists to engineer, finance and build Driftwood. Souki, 66, owns 25% of the equity now, but intends to raise billions more, and some $20 billion in debt. It's a make-or-break undertaking. By building America’s biggest LNG project, on his own terms, Souki aims to make Cheniere regret firing him. 

It’s ironic Cheniere sees any value in Driftwood at all; when Icahn first got involved, he was so turned off by the idea of Cheniere backing another expensive LNG project, that he orchestrated Souki’s ouster. Icahn’s POV: Cheniere was already nearing completion of its first LNG export terminal at Sabine Pass, Louisiana. Why risk messing it up? Icahn and Souki were at loggerheads. They each saw the same thing in Cheniere’s future — billions of dollars of cash profits once Sabine Pass became operational. Where they differed was on what Cheniere should do with that money. Souki wanted to build more. Icahn wanted to rein in spending, and make sure Souki didn’t mess up a company that was set to pay hefty dividends. 

Cheniere was Souki’s baby. He had built it from nothing, initially to import LNG (a business plan made obsolete by the shale fracking revolution). Out of near bankruptcy, in 2010, Souki turned Cheniere around and raised $25 billion to construct America’s first big LNG export plant, at Sabine Pass, where the Sabine River empties into the Gulf of Mexico, on the border of Louisiana and Texas. Sabine Pass was just two months from its inaugural export cargo when Souki was fired. He says he was shellshocked, but he understood. “The day I start proposing that you need to pay dividends, fire me. My job is to reinvest capital. I’m a builder, not a manager of a utility company,” he says.

According to the deposition of Samuel Merksamer, one of Icahn’s appointed boardmembers, Souki “showed no interest in reducing spending, including spending that I think we thought was excessive and unnecessary.” Merksamer added that “Mr. Icahn agreed with my assessment that Mr. Souki was not well-suited to run the company…” Merksamer, 35 at the time, and new to LNG, felt Souki had received “egregious compensation” in prior years, including a $142 million payday in 2014, and that he spent too much time at his ski retreat in Aspen. Icahn didn’t bother hiding his disdain for Souki, writing in a letter at the time that because Souki has sold a lot of stock, that “made it somewhat easier for him to ‘swing for the fences.’” 

Icahn in mid-December 2015 asked Cheniere board member Neal Shear if he would go along with the new strategy and serve six months as interim CEO. Shear agreed. His price: $4 million in cash and stock. Souki, with 3% of Cheniere shares, was powerless against Icahn’s new hold over the board and chose to be fired rather than resign. 

At the same time, Cheniere also broke off the joint venture Souki had made with Parallax Energy, a consultancy owned by Souki’s friend Martin Houston, the former LNG chief of BG Group. Because Cheniere’s in-house development team was all tied up with Sabine Pass, Souki had enlisted Parallax to pursue new ideas and loaned it $47 million to work on plans, including one called Live Oak LNG — which was to be located on the some of the same land in Lake Charles that now makes up Driftwood. 

So what if Icahn didn’t like it? Souki and Houston still thought Live Oak was a good idea. Houston declared Parallax defunct and teamed with Souki to pursue similar concepts at Tellurian. Some 50 former Cheniere execs have jumped ship, including former COO Meg Gentle, now Tellurian CEO (who received a shout-out from President Trump during the mid-January China trade pact signing ceremony).  Working together they have secured all the required permits for Driftwood, and have signed up Bechtel to a $15 billion turnkey contract for the liquefaction plants, which they intend to build in an innovative modular fashion in order to keep costs and execution risk low. The objective is to provide the cheapest gas liquefaction in America, at a delivered price of $4.50 per mmBTU of LNG. 

Cheniere claims that Houston (and by extension Souki) stole Parallax’s nascent LNG projects when they launched Tellurian. Cheniere also wants to be repaid the $47 million loan that it made to Parallax.

Souki’s side counters that the two projects, despite sharing some land, aren’t the same at all, that Driftwood is much bigger. Besides, according to deposition testimony, the loan is void.

That’s because Houston and Souki already had agreed on terms of a JV between Cheniere and Parallax – one that would have recharacterized that loan into an equity investment, and also would have paid out to Parallax as much as $400 million in success fees on two LNG projects. Final workings of the JV hadn’t been finalized by the time he was fired, but the Cheniere board had agreed to it, and Houston’s attorneys believe he has a solid breach-of-contract claim against Cheniere for abruptly discontinuing funding without notice after Icahn barged in. Houston put that aside so they could focus on building Tellurian. 

It’s complicated. And it’s become personal; the parties failed earlier in an attempted mediation. A settlement is possible before trial, and would likely involve Houston agreeing to set aside his claim against Cheniere (and its boardmembers) in return for Cheniere walking away from its $45 million loan. 

It would be hard for Cheniere shareholders to say they’ve been hurt by Souki’s firing – shares are up 60% in the post-Charif era, though still down from when Icahn first got involved. Icahn’s 9% stake is worth $1.5 billion (out of estimated net worth of $17.3 billion). And Cheniere is not without growth — it does have another LNG project underway, in Corpus Christi (planned by Souki years ago). But as record low gas prices squeeze margins, America’s LNG game is getting more competitive. In defenestrating Souki, Cheniere squandered an opportunity to maintain market share in the growing LNG export market. Cheniere shareholders can measure the opportunity cost of abdicating to Icahn by keeping an eye on Tellurian.

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