LNG Academy Episode 9: Commonwealth LNG with Paul Varello

Mehdy Touil
Hello everyone and welcome back to the LNG Academy.

 

I’m your host Mehdy Touil and for any new listeners, I want to reiterate the vision of the LNG Academy podcast, which is simply to spread LNG education to the world.

 

Today, we are excited to have a very special guest on the show, Paul Varello, Founder and Executive Chairman of the very promising Commonwealth LNG here in Houston, TX from the Commonwealth LNG studio.

 

Paul, thank you very much for joining us and it’s a pleasure to have you here today.

 

Paul Varello
Thanks, Mehdy. It’s, it’s good to be with you. Thank you.

 

Mehdy Touil
You’re welcome.

 

So Paul, you have had a long career in construction. What’s brought you to the LNG world?

 

Paul Varello
Yes, I have had a long career in construction. I’ve been in the design and construction business for more than 50 years. I started as a contractor. I was with Fluor for 20 years, was president of their process group, which was building process plants essentially all over the world. Later I worked as an owner and developer of energy projects, both project financed and owner finance projects. So my experience is pretty wide, but always around process plants and later I started my own engineering and construction company and we were focused on processing again gas. We got involved in the shale play and ultimately into LNG. So my background has really been about being an EPC contractor and being an owner and understanding the good, the bad, the ugly of both sides of that, of that equation.

 

Mehdy Touil
Thank you. I have a very technical question.

 

So, Commonwealth LNG recently announced the selection of the Baker Hughes LM 9000 as gas turbine for refrigeration. Why go with the new type and how it will impact the project capacity after the Trent 60?

 

Paul Varello

First of all, the trend 60 was our originally the gas turbine we were going to use. You may recall the manufacturer announced that they were no longer going to make that gas turbine. So we were left with having to find another choice. Baker Hughes came to us with their idea about the LM9000. It’s an Arrow derivative gas turbine, which is a little different. It has hundreds of thousands of hours of operation, but not in an LNG capacity driving a compressor. However, they were using it on the Arctic LNG 2 project and so it already been string tested. It already showed great promise and we were very pleased, our engineers were very pleased to see the kind of performance it had. It frankly was substantially better than the prior machine we were going to use and its environmental emissions were far lower on a per ton basis. So it was clearly the right decision for us and we’re really happy we’ve gone that way. So we all know the advantages of modular construction.

 

Mehdy Touil
Are there any downsides of this approach?

 

Paul Varello
Well, certainly everything has both positives and negatives. But if we consider what we’re seeing here in the LNG business, we recognized early that CapEx drove debt service and debt service is the largest line item in a project’s cost. And so if you can control CapEx by efficient design, by efficient manufacturing of the items, then you have a very good chance of being very competitive.

We knew that from day one.

Our organization is primarily focused on engineering and construction. I’m an engineer. I’ve been at it for a very long time. Our team is very much focused in that area and we have this diligent focus on making sure that we don’t let CapEx get away from us. So modular became a consideration both in cost and schedule and safety. On top of that, we also had seen some substantial challenges with other projects, LNG projects where they were using large numbers of Craftsman and having a very difficult time.

 

We knew that was going to persist. We knew that having 8 to 10,000 people on the job site would be a challenge for any contractor and so we wanted to move more man hours off the site and put them into really well organized manufacturing type of environments rather than a field construction site. So the modular decision was an easy one. We made it day one. We built our permits around it with FERC and we knew exactly the way we were going to go and we’ve been very thankful for having made that decision.

 

On the challenge side of it though, these modules are huge. Our modules, we have 6 trains. There are only two modules per train and each module is the footprint of a football field almost and weighs more than 9000 tons. So these are monsters and we have 12 of them to move from yards primarily in Asia through the Panama Canal and into our site, pick them up off the the ship and bring them on to their foundations. Logistics will be the biggest challenge for us. Luckily our EPC contractor Technique Energies is perhaps the world’s best at LNG modular design and construction. They certainly have a great track record in doing that and I have every confidence that they along with our team and some of our specialty logistics contractors will pull that off and do a very good job.

 

Mehdy Touil
Thank you, Paul.

 

Offtake agreements are the foundation of any successful LNG project in this highly competitive landscape. What are the main challenges in securing them?

 

Paul Varello
Well, I think LNG first of all, these are long term contracts in order to project finance jobs like ours which are in the billions of dollars. Lenders and and investors want to see underlying contracts. They want to see those contracts be of a term sufficient to to to cover the debt service. They want to see creditworthy off taking customers and they want to have a price that’s competitive and gives them the return they need. Those are the challenges.

 

Price, term and creditworthiness are the three big items in talking with customers. I think there’s a fourth item that to us means all the difference in the world, and I’ve often likened it to a marriage contract in that this is a long term relationship. It’s not a one off transaction. You’re not buying a pair of shoes that will or will not fit, you’re you’re entering into a relationship like a marriage that is long lasting and it’s so doing.

 

Lawyers often try to imagine all the things that could possibly go wrong, and they miss him because other things go wrong. And the answer is not to make contracts thicker and wider and deeper, to anticipate every possible situation, but rather to keep it simple, to say whether it’s good or bad. Think again about the marriage analogy. For good or for bad, for better or for worse, in good times and bad.

 

That’s the reality, how long term contracts work and we have to have that relationship with our customers where they understand and trust us and where we understand and trust them.

 

So when those inevitable challenges happen, we don’t sit there pointing fingers at one another. We find a way to work around it for the better good, the longer term good of the relationship. To me that is the heart and soul of what we’re doing and the relationships we’re building now with these customers are all about that. They’re about trust.

 

Yes, we talked about price. Yes, we talked about term.

 

The term is a particularly important one because they’re trying to figure out particularly the European customers, when will they be able to move to other sources of energy that are non fossil fuels and nobody really knows that answer, but I can tell you it’s not for several decades. It’s not going to be overnight and it will take time. And so entering into a 15 or 20 year contract is something they know they they have to do. And so term, again, 15 to 20 years, however, is a fairly long time to anticipate issues.

 

I remember if five or six years ago somebody had said, oh, we need to write down a global pandemic is one of the things that could happen, we would have been laughed off the the, the table away from everybody because nobody anticipates that. That’s just one example. There are other things like global strife and invasions and you name it, that will happen in these relationships. Term is important and finally creditworthiness, while you may take that for granted, we have to remember that these contracts are worth billions of dollars and cover a long period of time. Having customers who are creditworthy, you can live within those credit restraints are critically important for our lenders and our investors and frankly for the the betterment of the whole business model. So those are the three challenges we have, but I will tell you that we are very fortunate to be talking with some very good customers who understand all of those dynamics.

 

Mehdy Touil
Thank you, Paul. Fascinating insights. Is there something you would like to add just that we’re excited about where we are in the business?

 

Paul Varello
I think as an entrepreneur, I started this business 10 years ago. I didn’t think it would take that long or cost that much, but it did. And pandemic of course added a few years to that as well. But we’re excited about where we are and excited about the industry and and the need for LNG for several decades to go. I know ultimately there will be other forms of energy, but they have to be reliable, they have to be dependable, they have to be affordable and that will take time and the infrastructure to do that will take time. We have to be pragmatic about those kind of things. I think we are and I I have very strong feelings that LNG will play a critically important role going forward, particularly USLNG in the world. So we’re excited and thank you again for inviting me to be part of this podcast.

 

Mehdy Touil
You’re welcome, Paul. It was really an honor to have you here as a guest.

 

So thank you everyone for tuning in and we’ll catch you on the next one.