The Frackers: The Outrageous Inside Story of the New Billionaire Wildcatters (22 page)

By 1986, Souki had had enough of the globetrotting and dealmaking. On a visit to Paris, he had met a New York model named Rita Tellone, who had appeared in magazines including
Vogue,
Elle,
and
Sports Illustrated
’s annual swimsuit edition. He and Rita became close and soon married atop Aspen Mountain, outside the city of Aspen, in a daytime ceremony before fifty friends and family members.

Souki told his new wife that he was done with banking and traveling. He just wanted to ski, relax, and spend time with her. His frenetic pace had ruined one marriage, and he didn’t want it to crater another one. The couple decided to stay in Aspen and make it their new home.

Souki built an entirely different lifestyle. He had saved enough money to retire so that he could fully enjoy the city that singer John Denver described as a “sweet Rocky Mountain paradise.” Souki hiked, biked, and dined with locals. Racing a local ski instructor down various mountains was as close as he came to competition.

For several years, Souki led a relaxed routine. His two children spent extended vacations and all summer with him and Rita. Soon they had two children of their own, and Souki focused on them, trying to be a better parent than the first time around. “There were many years when I traveled so much I couldn’t see them grow up,” he recalls. “This was a counterweight.”

He figured he had enough money stashed away, but he still needed a hobby. The Aspen slopes seemed to lack an upscale family eatery, which got Souki thinking about starting one. He didn’t know much about the restaurant business, but he had confidence he could figure it out.

Eventually, Souki launched a restaurant called Mezzaluna in the center of town, a block from the famed Silver Queen Gondola. The restaurant, featuring pizza, pasta, and salads, was an instant hit. Movie stars who came to Aspen to ski, including Jack Nicholson, Michael Douglas, and Kevin Costner, were regulars, as was oil and movie mogul Marvin Davis. Gonzo journalist Hunter S. Thompson entertained guests at the restaurant’s bar, and lines formed around the block to get in.

The experience was fun and lucrative, so Souki and his brother decided to open a few more restaurants in Los Angeles with the goal of providing income during Aspen’s off-season. They also invested in Los Angeles bars. One of their hot spots, the Monkey Bar, attracted the brightest stars of the day, including Nick Nolte, Dolly Parton, and Penny Marshall.

In 1990, Souki and his brother opened a new Mezzaluna restaurant in the Brentwood district of Los Angeles. Souki began spending morning until nighttime at the new restaurant, trying to put it on firm footing and getting to know his staff and regular customers. Over time, he became friendly with a young waiter named Ron Goldman, as well as a regular patron, Nicole Brown Simpson. He also got to know her ex-husband, football legend O. J. Simpson.

One evening in June 1994, Nicole’s mother called the restaurant looking for Nicole’s missing eyeglasses. The manager found the glasses and placed them in a white envelope. After his evening shift was over, Goldman dropped them off at Nicole’s home around 10 p.m. Shortly thereafter, Brown was found lying facedown on the house’s walkway in a puddle of blood; nearby was Goldman’s own lifeless, bloodied body. A Jeep-like vehicle was seen racing from the scene.

O. J. Simpson was arrested and tried for double murder. His acquittal, in one of the most controversial trials in American history, divided the nation, though Simpson later lost a civil case related to the murders.

The trial placed Souki’s restaurant in the national headlines. Within days, hordes of tourists lined up to get into Mezzaluna, badgering Souki and his staff about Ron and Nicole, asking for details of her last meal, and stealing dishes embossed with the restaurant’s logo. Business soared, but Souki was sickened by the experience.

“It was disgusting, tourists got off of buses from Indiana and wanted to eat in a place connected to the crime,” Souki says. “I got to see a side of human nature that wasn’t very pretty.” He and his brother sold the restaurant and got rid of the rest of their eating and drinking establishments. What started out as a hobby had become a monumental headache for him.

Souki received a new shock when he realized he had drained most of his savings. A nest egg of several million dollars had been whittled away by years of fun in Aspen and mixed results from his Los Angeles ventures. It didn’t help that he led an expensive lifestyle with four children, a wife, and an ex-wife.

“I had literally lost all my money,” Souki recalls. It was a “big miscalculation.”

It was a bit of an exaggeration—Souki still had about $300,000 left in savings. But he was close enough to broke to turn quite nervous and search for a new career. Restaurants and bars hadn’t worked out very well. He had some experience working on deals in fashion and retail, but those businesses held even less appeal.

“You’re dealing with large egos and difficult people, it’s not a lot of fun when you get to know them,” says Souki, who acknowledges that he wasn’t a perfect fit for the retail or fashion business. “When you have to re-create yourself every six months it’s a lot of pressure.”

By 1996, American businesses were beginning to embrace technology, the Internet was coming into vogue, and Souki was convinced something big was afoot. He decided to try to find an industry that hadn’t been fully impacted by technological change. He thought he might have an advantage if he could be the first to embrace some new advance.

By then, he and his family had moved to Los Angeles, where his two older children lived, so he looked into the entertainment industry, learning about digitization of music and movies. He couldn’t figure out how to make money from it, though, which frustrated him.

His interest began to shift to energy, a sector few cared about. Oil and gas prices had been limp for nearly two decades, making it hard to score profits, even as sexy Silicon Valley technology companies were raking in investor money and attracting the best and brightest young minds. It was hard to persuade top students to join sleepy oil companies when tech start-ups were handing out stock options, installing foosball tables, and feting employees with catered lunches.

Because the energy industry was so unloved, Souki thought there might be opportunity, if only because it likely was starved for new capital. He knew a bit about the business from his trips to the Middle East and from a few early deals, but that was about it. At that point in his life, he knew more about fajitas than fracking.

So he went to an industry conference to meet geoscientists and learn. There, a Chevron geologist discussed how his team was doing more with desktop and even laptop computers than they had a decade earlier with a huge supercomputer. Not only that, but three-dimensional seismic imaging and other advances were improving the odds of finding energy deposits. Just as MRIs are better at scanning than mere X-ray machines, the pros were using the latest advances to do a better job detecting oil and gas.

Technology was a great equalizer, Souki concluded, one that might even allow someone who had been skiing and pouring drinks for seven years to discover oil or gas. All he had to do was find smart geophysicists, raise enough capital—something he always had been good at—and invest in the right exploration technology.

“It was a numbers game now,” he says. “I was never going to be an expert in putting geology together, but I understand probability and statistics.”

Souki searched for energy exploration and production pros employing the latest technology and in need of cash. Then he tapped friends and previous investors to raise the necessary financing. He received a commission for bringing money to the exploration executives, cash that gave him and his family some breathing room after his financial scare. Soon he was kicking his own money into the deals.

These were small-fry deals, each less than $20 million. One early investment was in a California company that saw a well burst into flames, sparking a fire that took ninety days to put out. After two years, Souki’s group realized that gas just couldn’t be produced economically from the company’s wells.

Souki managed to have more winning investments than failures, however, and by early 1996 he was worth several million dollars. At that point, he decided to try to do some exploration himself, figuring there was more upside to that approach.

Souki’s entrance into the wildcatter game had small-time written all over it. He took over an inactive Hollywood film-colorization company that happened to still have publicly traded shares. Assuming control over a “shell” company, or one without any assets or operations, is a decidedly backdoor means of accessing public markets and one that often raises eyebrows among experienced investors.

Souki and his geologists decided to focus on drilling in the Louisiana Gulf Coast area after their mapping data suggested the region held promise. Souki renamed his company Cheniere Energy after the Cajun word for the elevated land above a swamp. The name seemed sturdy and safe, and had some local flavor.

In 1998, Souki and his family moved to Houston so he could run Cheniere. He began raising money for his new company, telling investors that his team would use the latest and most expensive seismic data to find oil and gas in the Gulf of Mexico. Tapping old connections, he managed to raise cash from a former Lehman Brothers energy banker, a Cayman affiliate of a company headed by Lebanese financier Michel el-Khoury, and several high-profile executives.

Cheniere spent about $20 million for three-dimensional seismic data and leases along the Louisiana coast and began drilling. By the summer of 1999, however, Cheniere had no booked reserves, no revenues, and no production.
¹

Souki was a forty-five-year-old ex-banker who seemed stuck in the energy industry’s ugly underbelly. Cheniere was worth a measly $40 million, and energy seemed mired in a never-ending bear market, making life hard for the puny company. Cheniere had drilled four exploration wells along the swampy Louisiana coastline, but just two were modest successes, and most experts viewed their shallow-water Gulf of Mexico locations as having been fully picked over and played out. The region also had environmental risks that added to the company’s obstacles.

Souki found ways to attract blue-chip investors, like he usually did, by focusing on Cheniere’s technology-heavy approach to squeezing gas out of old wells. In 2000, private equity giant Warburg Pincus and industry heavyweight Samson Investment Co. both agreed to kick in cash and partner with Cheniere to drill some prospects.

These investors viewed Souki as supersmart, and more ambitious and creative than executives at even the largest oil companies. His new investors had deep reservations about him, though, even as they wrote their checks. Souki was brilliant and hard-charging, but what did he really know about energy?

“Reservations” might actually be an understatement. Jack Schanck, co-CEO of Samson at the time, doubted Souki understood “an iota” about the drilling Cheniere said it would do, and he was turned off by Souki’s smooth pitch. Samson only agreed to invest money in the project because one of Souki’s lieutenants was a respected energy veteran, Schanck now says.

“Charif was forceful and charismatic, you really had to calm him down,” Schanck recalls. “He was a little too slick for me.”

Souki stood out in the energy patch, which may have added to the concerns. He had olive skin, wore his hair a bit long, favored custom-made double-breasted suits, and came off as almost too self-assured. He oozed confidence but hadn’t accomplished very much.

Some assumed Souki was out to sell his company for a quick score and then would move on to his next business, maybe in an entirely different sector. Even this plan seemed a long shot, however. Throughout most of 1999 and the start of 2000, natural gas traded for less than three dollars per thousand cubic feet. But it cost Cheniere about three dollars per thousand cubic feet to get gas out of the ground. In other words, it cost more to produce gas than the company could get for it.

Souki racked his brain to understand what was happening.
I’m using the latest technology, I have great guys, and we’re in a promising area, but I still can’t get my costs low enough to make any money,
he thought.

All the cheap natural gas in the Gulf, and perhaps the country, had been sucked up, it seemed, and Souki didn’t know how his company was going to make any money at those prices. He also couldn’t figure out how other producers could be profitable if it cost more to find and produce natural gas than they could get selling it. The math just didn’t add up.

He came to a simple and yet unconventional conclusion: Natural gas prices were bound to climb—the same conclusion Aubrey McClendon and Tom Ward were coming to around the same time. If prices didn’t rise, the entire energy industry would go out of business, he decided. And there was no way that was going to happen, since the country still depended on natural gas. In fact, Souki saw indications of rising demand.

If natural gas prices were set to skyrocket, Souki figured he’d strike it rich if he could just find a lot of gas, somewhere. It was getting harder for him and others to produce natural gas in the Gulf of Mexico, but maybe Cheniere could locate it somewhere else.

McClendon and Ward had decided to search for gas in the United States, but Souki couldn’t imagine the country held enough natural gas to get very excited about. This was America, after all. He and his team did some research and decided the nation didn’t hold enough new energy supplies.

“I knew about the shale reserves,” he recalls, “but it wasn’t relevant, nobody believed they could be produced.”

He had another, more unorthodox idea. Maybe he could get his hands on cheap natural gas being produced elsewhere in the world and ship it to the United States? He continued to travel to the Middle East and other countries to visit family and investors. He knew that a number of countries, including Qatar, Algeria, Australia, and Russia, had massive gas reserves and needed new customers. Perhaps the way to locate huge amounts of gas wasn’t to dig it up in America, but to turn foreign supplies into a liquefied form of gas that could be shipped to the United States.