Liquid Assets: A Billionaire Takes a Gamble To Fix Natural-Gas Shortage --- Mr. Kaiser Plans to Shift Processing Onto Tankers, Avoiding Terrorism Fears --- A Deal Sealed With Sweets
Wall Street Journal // 23 July 2004
TULSA, Okla. -- In 2002, Kathleen Eisbrenner, then an executive at El Paso Corp., spent months trying in vain to find a buyer for the company's novel technology for importing natural gas.
In February 2003, she left for a vacation in Cancun, convinced that El Paso would be forced to abandon the project. As she sat on the beach one afternoon, she got a call on her cellphone. A colleague had a message from an intermediary, who said he had an "interested buyer," identified only as a "Midwest billionaire."
"It's Warren Buffett calling," she recalls telling her husband as they clinked pina colada glasses together in celebration. "I was absolutely sure."
But it wasn't Mr. Buffett. It was another billionaire named George B. Kaiser.
A relative unknown even in his home state of Oklahoma, Mr. Kaiser is a publicity-shy businessman with a fortune built on oil and banks. Like Mr. Buffett, who has been acquiring natural-gas pipelines, Mr. Kaiser is making a huge bet that demand for natural gas will continue to surge because it's a clean-burning fuel for power generation.
Right now, most of North America's natural-gas supply comes from North American wells. The gas goes from the wells through a network of underground pipelines to final users, without ever changing its gaseous form. That's the most efficient way -- but America is running out of its local supply.
Imports are an obvious answer. But to travel over the seas, the gas first has to be changed into a super-cooled liquid, loaded onto tankers and then changed back into gaseous form.
Currently, tankers unload their cargoes at one of four onshore terminals in the U.S., where the liquid is heated up. The capacity is limited, and with demand for natural-gas imports rising, more terminals are needed. But they face opposition by many communities worried that the fuel-filled structures or tankers could explode or be targeted by terrorists.
Mr. Kaiser's new way of handling imports is called Energy Bridge. He's invested $660 million in the project since he took it over from El Paso in December 2003. Energy Bridge is scheduled to go into operation next January in the Gulf of Mexico, about 100 miles off the Louisiana shoreline.
The technology works like this: Special tankers carrying liquefied natural gas from places like Egypt and Trinidad would idle in the gulf. The liquid would be heated while still on the tankers, returned to gaseous form and sent via an underwater pipeline into the U.S. pipeline network.
The Energy Bridge, with its tankers far beyond the horizon, eliminates the risk of explosions on land and thus sidesteps not-in-my-backyard controversies. If everything works as planned, backers say, the gulf project could increase the U.S.'s import capacity by up to 20%.
When El Paso put Energy Bridge up for sale, several of the world's biggest oil companies took a look but decided against buying it, partly because of its untested technology. Liquefied natural gas, or LNG, has never been turned into a gaseous form aboard a floating ship, and there were concerns about the impact of the rocking motion. While the process worked in a simulator built by El Paso in Alabama to mimic the motion of 12-foot swells, the technology still hasn't been tested under real-life conditions.
Some people are also skeptical Mr. Kaiser will be able to buy enough liquefied natural gas, in part because most of the supply is already under contract. "You can't just sail up and say fill 'er up," says Ira Joseph, managing director for global LNG at PIRA Energy. "The LNG business doesn't work that way."
But if Energy Bridge succeeds, Mr. Kaiser, who is 61 years old, could become one of the top 10 providers of natural gas in the U.S., just behind ConocoPhillips.
Kaiser-Francis Oil Co. was created in the 1940s by Mr. Kaiser's uncle and parents, Jewish refugees from Nazi Germany who settled in Oklahoma. Mr. Kaiser graduated from Harvard and took over the family company in 1969. At the time, it had fewer than 10 employees and operations in a single state, Kansas. He expanded the business and his fortune dramatically, in part by buying up properties during the oil industry's inevitable busts. Today, Kaiser-Francis fills a five-story headquarters building in Tulsa, and is producing oil and natural gas in at least eight states. Production is up about 100-fold from 1969.
Last year, the privately held company generated more than $600 million in revenues from oil and natural gas production, according to estimates by IHS Energy, a Houston energy consulting firm. That puts it in the same league as Tom Brown Inc., an energy company bought in April by EnCana Corp., based in Calgary, Alberta, for $2.3 billion.
Forbes magazine estimates Mr. Kaiser's wealth at $3 billion, placing him at No. 56 on its list of richest Americans. Much of his fortune came from high-risk bets in the banking and venture-capital areas, as well as the energy business. When bad loans to the oil industry left the Oklahoma energy and banking industries in tatters in the 1980s, he snapped up the Bank of Oklahoma from the Federal Deposit Insurance Corp. for $95 million.
Mr. Kaiser now owns a 70% stake, valued at $1.9 billion, in BOK Financial Corp., a publicly traded company that owns banks in Oklahoma, Texas, Colorado, Arkansas and New Mexico. Mr. Kaiser is so intense about his work that he once outfitted the back of a delivery van with a makeshift desk so that he could spread out his papers and work during the two-hour trips between Tulsa and Oklahoma City to visit banking clients.
With his wealth, Mr. Kaiser has endowed two foundations that have combined assets of more than $800 million. The foundations have given generously to nonprofit groups such as Oklahoma chapters of pro-choice groups and legal services for the poor. A major benefactor to the Jewish community in Oklahoma, which numbers about 5,000 people, Mr. Kaiser has told associates he plans to leave the bulk of his estate to charity. For every $1,000 he has given to Republican politicians, he has given $10,000 to Democrats, according to campaign contribution records.
Mr. Kaiser invested in Energy Bridge after years of research into energy markets. In the early 1990s, he built a detailed database of North American natural-gas production, comparing drilling rig and production trends with projected use. His conclusion: An "insoluble, long term shortfall" in natural gas was inevitable because demand would soon outstrip supply. He made a series of iconoclastic and hugely profitable bets in futures markets that natural-gas prices would rise. He also became increasingly interested in the emerging market for liquefied natural gas from overseas.
"He eats data for breakfast, lunch and dinner," says David S. Fleischaker, the Oklahoma energy secretary and a longtime acquaintance.
Mr. Kaiser began predicting a long-term shortage of natural gas at a time when abundant supplies had kept prices relatively low for many years. Now, however, domestic production is declining, and most industry experts agree that there isn't enough available natural gas in North America to match growing demand. In the last three years, natural-gas prices have doubled. Imports of liquefied natural gas could help ease the pinch, but the global LNG trade is still in its infancy.
At El Paso, a Houston energy company, Ms. Eisbrenner led a small team that developed Energy Bridge as an answer to the capacity bottleneck. Under the plan, a new type of tanker would pick up liquefied gas overseas, travel to the Gulf of Mexico and use an onboard facility to convert the liquid back to gaseous form. Then the gas would be sent through an undersea pipeline onto the North American continent. It would take up to six days to disgorge the cargo. Then the tankers would disconnect and go back to get more liquefied gas.
In the summer of 2002, El Paso believed LNG would be a primary vehicle for its future revenue growth. A disastrous move into energy trading, however, left the company saddled with a $25 billion debt load and forced to sell assets to stay afloat. To reduce its debt, El Paso had to sell the Energy Bridge project.
El Paso set up a data room in Houston where potential buyers could examine the project's financial and technical details. Most of the major energy companies, including the Royal Dutch/Shell Group and BP PLC, visited the data room but didn't make offers.
In early February 2003, El Paso said it would exit the LNG business. Dispirited, Ms. Eisbrenner, who had shepherded the project, decided to take a vacation. Mr. Kaiser, meantime, had read that the Energy Bridge technology was up for sale and decided to make a move. After Mr. Kaiser's representative contacted her, Ms. Eisbrenner flew to Tulsa for the first of two meetings with Mr. Kaiser.
Around the same time, Ms. Eisbrenner called Nicolas Saverys, the chief executive of Belgium-based Exmar NV. Exmar was building two of the new-style LNG vessels. Ms. Eisbrenner gushed that there was a wealthy buyer. Mr. Saverys was initially skeptical. He changed his mind in late February 2003 after meeting Mr. Kaiser in New York. "At last, I was talking to someone who was putting his own money at stake," he says.
Mr. Saverys sealed the relationship by presenting Mr. Kaiser with a box of pralines from Belgian chocolatier Pierre Marcolini at their second meeting. Mr. Kaiser, an avowed chocoholic, returned the favor a couple of weeks later in Tulsa, giving Mr. Saverys a box of candy made by Christine Joseph, a Tulsa chocolatier who also was born in Belgium.
Convinced that Energy Bridge could work, Mr. Kaiser agreed to take over the business, closing the deal last December. El Paso paid him $75 million; in return, he assumed a $120 million obligation to Exmar. El Paso also agreed to pay to install the underwater pipeline connection that carries the gas from the ship to existing pipelines in the Gulf of Mexico.
The bulk of the $660 million Mr. Kaiser invested went to modify three specially equipped tankers and to charter them for 20 years. If Energy Bridge opens on time in January, it will be at least two and a half years ahead of any new terminals being developed by other energy companies. In addition, civic leaders in Massachusetts and Rhode Island, eager to keep LNG terminals and tankers far from the mainland, are encouraging Mr. Kaiser to build an offshore tanker-based project along the Atlantic coast of the U.S.
Mr. Kaiser, who declined requests for an interview but answered some questions by e-mail, concedes he doesn't like "taking a risk on an undemonstrated technology." But he says that the chance to import natural gas quickly was "such an obvious and alluring business opportunity" that he felt compelled to get Energy Bridge into operation. He's betting that new LNG-export facilities expected to come online next year in Egypt, Trinidad and Nigeria will create enough extra supply to provide him with ample LNG.
Some companies are looking to develop offshore platforms to accept and process LNG. Those platforms would have a bigger capacity than Energy Bridge, but would cost much more and take longer to build.
ChevronTexaco Corp., for example, plans to build an offshore platform terminal to handle LNG, but it has yet to begin the multiyear construction project. Exxon Mobil has flirted with onshore terminals but now isn't ruling out the offshore route.
Assuming Mr. Kaiser gets both the Gulf of Mexico and Atlantic projects open, he would be supplying about 1% of the natural gas consumed by the U.S. He also hired Ms. Eisbrenner to run the Energy Bridge projects.
As Energy Bridge nears its planned starting date in January, Mr. Kaiser is turning his attention back to his philanthropy projects. He's creating an early-childhood education center in Tulsa that's designed to provide high-quality childcare to low-income children. It's expected to open in 2006.
He says he acquired Energy Bridge as a challenge. "I don't gain much pleasure from personal expenditure or recognition," he wrote in an e-mail. "And any gains I make from the enterprise will accrue to charity. But I enjoy problem solving and I want to keep my brain active to forestall (or at least diminish) atrophy."