How Michael S. Smith salvaged a wrong-way guess on fracking by constructing a $14 billion plant in Texas to ship gasoline across the globe.
Quintana Island is a seven-mile speck of land off Freeport, Texas, tucked in the place the Brazos River empties into the Gulf of Mexico. Over the previous 200 years the island has been residence to a Mexican fort, then a busy seaport for early Texas farmers, who shipped out cotton. Union ships later bombarded Accomplice troops stationed there. In 1900 got here the Nice Galveston Hurricane, which killed 11,000 within the fast neighborhood and wiped Quintana clear. By the point Michael S. Smith set foot on the island in 2002, it was languishing: a number of dozen dilapidated houses, a migratory hen sanctuary and seashore, and a brownfield of storage tanks constructed on fill dredged from navigation channels. “We’d be sinking within the mud if we have been standing right here then,” Smith says.
Smith has made his personal historic mark on the island. Having spent $14 billion, he now owns a controlling curiosity in Freeport LNG, which chills and exports 2 billion cubic toes of pure gasoline per day, most of it so-called shale gasoline, horizontally drilled, hydraulically fracked. At present market costs that day by day output is price some $14 million, on which Freeport collects about $5 million a day in tolling income. “We’re taking clear American pure gasoline, including large worth and exporting it to international locations that wouldn’t have sufficient power and would in any other case be burning soiled coal,” he says.
Since turning into operational in September 2019, Freeport LNG has loaded 200 cargoes destined for Japan, South Korea and Croatia, the place a single cargo can meet the annual power wants of tens of 1000’s. Freeport will export about 15 million tons of LNG this yr—the power equal of 130 million barrels of oil—and is on monitor to ebook almost $2.5 billion in income. Smith’s 63% possession within the restricted partnership is price in extra of $1 billion.
Liquefying gasoline entails chilling methane down right into a minus-260-degree liquid that may be pumped into thermos-bottle tankers after which shipped world wide. To take action economically, Freeport LNG has erected a number of the world’s largest LNG machines, referred to as “trains.” It began by hammering 36,000 pilings 100 toes into mushy Quintana floor. Atop that now stands sufficient metal to construct six Eiffel Towers and 192 miles of gleaming pipe, all anchored in 496,000 tons of concrete. What’s actually extraordinary is that every one this was constructed not by some multinational power large however by one particular person: the cussed, Bronx-born Smith.
He admits he initially acquired his guess mistaken. Again in 2002, when he acquired his begin on Quintana Island, Smith’s technique was to not export LNG in any respect, however to import it. He believed on the time that the U.S. would quickly run in need of inexpensive provides of home gasoline. Certainly, he first raised $800 million to construct an import terminal that by 2008 was out of date earlier than it was even accomplished.
Having been the primary mover in a failed technique, although, put Smith in prime place to reverse course and export, relatively than import, LNG. All he needed to do was handle a number of dangers: elevating $14 billion, leaping by way of regulatory hoops and finishing one of many world’s largest building tasks. “Our capital prices have been off by greater than 2x,” he says. “We simply didn’t know.” A decade later, due to the fracking revolution, the U.S. now exports a report 10 billion cubic toes of gasoline per day, about one-tenth of home manufacturing.
Smith is a big man who at age 66 continues to be snowboarding and scuba diving regardless of some alternative joints. He has a lopsided nostril and loads of “da Bronx” nonetheless in his voice. His father ran a enterprise concerned in turning rubbish into gasoline. Smith studied premed at Colorado State College, however his senior yr he “realized I used to be going to be a physician for all of the mistaken causes. I didn’t know what I needed to do.” So he dropped out and have become a Vail ski bum.
To earn a residing, Smith acquired his actual property license in Colorado in 1978, promoting business properties out of Fort Collins. Important to his later success was studying all of the paperwork—offers, contracts, plans, permits. Actual property offered a pure pivot into oil and gasoline; within the late Nineteen Seventies, when oil costs spiked, he acquired into leasing land for drilling close to the place extra skilled operators had simply hit huge wells. “Once I began drilling wells, I might sit the wells myself,” he says, which means he’d keep on web site alongside the roughnecks. “I discovered that I had the basics to know the technical aspect of the enterprise.” Fairly than pay engineers, Smith used a calculator: “I did it on my HP 12c.”
“I had everlasting optimism,” he continues, “however I used to be at all times afraid there was a lot I didn’t know.” Akin to oil costs’ tendency towards volatility. When oil plunged within the late Eighties, Smith purchased out his accomplice for little greater than the belief of liabilities. To save lots of money, he paid service suppliers Halliburton and Maverick Tube with pursuits in new wells. Smith took Basin Exploration public in 1992. Huge finds grew elusive, so in 1995 he reworked Basin, offered the Rockies belongings, lower workers and shifted operations to Houston to drill within the Gulf of Mexico. That acquired irritating too, leaving Smith satisfied that home provides of pure gasoline have been drying up. In 2000 he offered Basin for $410 million to Stone Power, pocketing about $60 million.
Simply 45, Smith had a fortune, however he wasn’t able to hit the slopes full-time. In 2001, on the Brown Palace Lodge in Denver, he met Charif Souki, a former funding banker and restaurateur with a small gasoline firm referred to as Cheniere Power. They each believed the USA would quickly must import gasoline. Souki had scoured the Gulf Coast for prime LNG areas and had choices on three websites, together with Freeport. Smith may have thrown in his lot with Souki, however he needed to run his personal present. He put up $14 million for 60% of the Freeport web site.
The undertaking united his actual property and power expertise. Smith recouped his preliminary funding by getting huge potential clients like Dow Chemical and ConocoPhillips to place down deposits and ultimately signal 20-year contracts securing the best (however not the duty) to show LNG again into usable gasoline at Freeport. With these anchor tenants in place, ConocoPhillips put up greater than $500 million to construct the import terminal, together with insulated tanks sufficiently big to stack Boeing 747s in. “If I had identified the prices would turn out to be so excessive, I might’ve simply checked out Charif’s proposal, shut it and stored on going,” Smith says.
By 2008 it was clear the growth in shale gasoline had made their import terminal lifeless on arrival. However due to these 20-year contracts, Freeport LNG was nonetheless making $25 million a yr . . . for doing nothing. Says Smith: “We had constructed this facility, and it actually by no means acquired used.”
He subsequently made a guess that it was extra profitable to reverse the movement and export America’s natural-gas bonanza (up 74% in 20 years, due to fracking some 33 trillion cubic toes per yr). As Jason Feer, of the consultancy Poten & Companions, says, “These guys have been fast to know the worth of those stranded belongings simply ready for repurpose.” Smith once more raised cash by promoting 20-year contracts for providers to liquefy pure gasoline to BP and Japanese giants comparable to Osaka Fuel and Jera. He additionally offered fairness stakes in particular features of the undertaking: The 2 Japanese firms put up
‘He constructed it. It’s completed. He has completed one thing outstanding and achieved an outstanding job.’
$1.25 billion to personal 50% of prepare 1. Australian non-public fairness agency IFM Traders injected $1.3 billion for 56% of prepare 2. In 2014, non-public fairness large GIP purchased 25% of the restricted partnership for $850 million. With strong backing, Smith’s workforce borrowed large quantities.
Most NIMBY conflicts have been resolved when Freeport LNG purchased and demolished some 60 houses on the island. The most important frustration was Hurricane Harvey, which dumped two toes of rain in 2017 and ruined tools. Lastly, in late 2019, Freeport LNG was operational. “He constructed it. It’s completed. He has completed one thing outstanding and achieved an outstanding job,” says Souki, a pleasant rival, who in 2015 left Cheniere to start out LNG developer Tellurian Power. “Any type of building threat is out of the best way. It’s the most secure enterprise mannequin doable—only a tolling enterprise inconceivable to copy right now.”
Right this moment Freeport LNG carries $13 billion in debt. That’s manageable. With clients locked in to paying $2.5 billion a yr for the subsequent 20 years, there can be sufficient to repay debt, hold the machines operating and make distributions to Smith and companions.
There are nonetheless complications. No sooner had Freeport LNG gotten all three trains operational in early 2020 than Covid-19 lockdowns dashed international demand for gasoline. Amid canceled cargoes, summer time LNG costs slumped to $3.40 per million BTU (British Thermal Items). This January, although, LNG shot as much as a report $18.50 per million BTU in Asia, earlier than falling once more to $7. Such volatility may spur dealmaking. “That’s the impetus to signing 20-year provide offers—utilities in Japan have to verify they’ve the gasoline they want,” says analyst Alex Munton, of power consultancy Wooden Mackenzie. As for Freeport, “they should know there’s a purchaser for the gasoline.”
Smith already has approvals so as to add a fourth prepare and may use it to market premium, lower-carbon-footprint LNG. Sounds gimmicky, however clients need it. And since Freeport LNG will get all its electrical energy off the Texas energy grid—which has benefited from a decade-long growth in wind energy—he can promote his product as greener than LNG generated with gas-fired generators.
The gasoline is greener, too. In line with Lawrence Berkeley Nationwide Lab, we will credit score the shale fracking growth for almost half of the discount in U.S. emissions since 2005, as utilities change from higher-carbon coal. With loads of coal left to displace, “our transition to renewables, regardless of how briskly we do it, goes to take a very long time,” Smith says. “There’s nonetheless going to be a big function for pure gasoline.” He’s assured that the LNG market can develop 50% by 2030—and hold these ships docking at Quintana Island for many years to return.