CHENIERE ENERGY INC - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________

FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934

FOR THE YEAR ENDED DECEMBER 31, 2000

Commission File No. 0-9092

CHENIERE ENERGY, INC.
(Exact name of registrant as specified in its charter)

DELAWARE 95-4352386
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

333 CLAY STREET, SUITE 3400 77002-4102
HOUSTON, TEXAS (Zip code)
(Address of principal executive offices)

Registrant's telephone number, including area code: (713) 659-1361

Securities registered pursuant to Section 12(b) of the Act:
None

Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $ 0.003 PAR VALUE
(Title of Class)

INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [x] NO [ ]

INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF THE REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION
STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY
AMENDMENT TO THIS FORM 10-K. [ ]

THE AGGREGATE MARKET VALUE OF THE REGISTRANT'S COMMON STOCK HELD BY NON-
AFFILIATES OF THE REGISTRANT WAS APPROXIMATELY $25,260,770 AS OF MARCH 30, 2001
(BASED UPON THE MARCH 30, 2001 CLOSING MARKET PRICE OF SUCH COMMON STOCK AS
REPORTED ON THE AMERICAN STOCK EXCHANGE). 12,797,393 SHARES OF THE REGISTRANT'S
COMMON STOCK WERE OUTSTANDING AS OF MARCH 30, 2001.

DOCUMENTS INCORPORATED BY REFERENCE: PROXY STATEMENT FOR THE REGISTRANT'S
ANNUAL MEETING OF STOCKHOLDERS (TO BE FILED WITHIN 120 DAYS OF THE CLOSE OF THE
REGISTRANT'S FISCAL YEAR) IS INCORPORATED BY REFERENCE INTO PART III.

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CHENIERE ENERGY, INC.
Index to Form 10-K

PART I.................................................................................................... 3
Items 1 and 2. Business and Properties.................................................................... 3
Item 3. Legal Proceedings................................................................................. 18
Item 4. Submission of Matters to a Vote of Security Holders............................................... 18
PART II................................................................................................... 19
Item 5. Market Price of and Dividends on the Registrant's Common Equity and Related Stockholder Matters... 19
Item 6. Selected Financial Data.......................................................................... 19
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............ 20
Item 7A. Quantitative and Qualitative Disclosures About Market Risk...................................... 26
Item 8. Financial Statements and Supplementary Data....................................................... 27
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.............. 51
PART III.................................................................................................. 51
Items 10-13. (Incorporated by reference to Proxy Statement)............................................... 51
PART IV................................................................................................... 51
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.................................. 51
SIGNATURES................................................................................................ 56

2

PART I

ITEMS 1. AND 2. BUSINESS AND PROPERTIES

GENERAL

Cheniere Energy, Inc., a Delaware corporation, is a Houston-based company
engaged in oil and gas exploration, development and exploitation. The terms
"Cheniere" and "Company" refer to Cheniere Energy, Inc. and its subsidiaries.
The Company evaluates and generates drilling prospects using a regional and
integrated approach with a large seismic database as a platform.

Cheniere has been publicly traded since July 3, 1996 under the name
Cheniere Energy, Inc. The Company's principal executive offices are located at
333 Clay Street, Suite 3400, Houston, Texas 77002, and its telephone number is
(713) 659-1361. Cheniere's internet website is located at www.cheniere.com.

On October 16, 2000 the Company's stockholders approved a one-for-four
reverse stock split. The reverse stock split became effective on October 18,
2000 and reduced Cheniere's issued and outstanding shares from 43,989,572 shares
to approximately 10,997,393 shares. All historical share and per share data
appearing in this document have been restated to reflect the reverse stock
split.

As used in this Report, "Mcf" means thousand cubic feet, "Mmcf" means
million cubic feet, "Bcf" means billion cubic feet, "Bbl" means barrel or 42
U.S. gallons liquid volume, "Mbbl" means thousand barrels, "Mcfe" means thousand
cubic feet of natural gas equivalent using the ratio of six Mcf of natural gas
to one Bbl of crude oil, condensate and natural gas liquids, "Mmcfe" means
million cubic feet of natural gas equivalent, "Bcfe" means billion cubic feet of
natural gas equivalent, and "Mmbtu" means million British thermal units. This
Report includes various other capitalized terms that are defined when first
used.

GENERAL DEVELOPMENT OF BUSINESS

Cheniere Energy Operating Co., Inc. ("Cheniere Operating") was incorporated
in Delaware in February 1996 for the purpose of engaging in the oil and gas
exploration business, initially on the Louisiana Gulf Coast. On July 3, 1996,
Cheniere Operating underwent a reorganization whereby Bexy Communications, Inc.,
a publicly held Delaware corporation ("Bexy"), received 100% of the outstanding
shares of Cheniere Operating, and the former stockholders of Cheniere Operating
received approximately 93% of the issued and outstanding Bexy shares. As a
result of the share exchange, a change in the control of the Company occurred.
The transaction was accounted for as a recapitalization of Cheniere Operating.
Bexy spun off its existing assets and liabilities to its original stockholders
and changed its name to Cheniere Energy, Inc. Cheniere Operating became a
wholly-owned subsidiary of the Company.

Cameron Project. In 1996, Cheniere acquired a proprietary seismic database
along the transition zone in Cameron Parish, Louisiana, covering a 228-square-
mile area (the "Cameron Project"). The 228-square-mile survey was acquired
jointly by Cheniere and an industry partner, and initial processing was
completed in 1997. Interpretation of the data yielded drilling prospects
located onshore and in the state and federal waters of offshore Louisiana.
Leasing activity occurred over identified prospects throughout these areas and
five prospects were drilled during 1999. Leasing over additional prospects
began in 2000 and continues. See "--Exploration Programs".

Offshore Louisiana Area. In an effort to provide continued access to high
quality drilling prospects, the Company expanded beyond the Cameron Project and
into the shallow waters of the Gulf of Mexico. In 1999, Cheniere licensed 8,800
square miles of seismic data from Fairfield Industries (the "Offshore Louisiana
Area"). The Company also made the commitment to reprocess the entire 8,800
square-mile seismic database. On March 10, 2000, the Company entered into a
Joint Exploration Agreement with Samson Offshore Company ("Samson"), whereby
Samson acquired an option to participate at a 50% working interest level in any
prospects Cheniere generates within an area of mutual interest in the Gulf of
Mexico through September 2001.

On September 15, 2000 Cheniere reached an agreement (the "Gryphon
Transaction") with Warburg, Pincus Equity Partners, L.P. ("Warburg"), a global
private equity fund based in New York, to fund exploration and development in
the Offshore Louisiana Area through a newly formed private corporation, Gryphon
Exploration Company ("Gryphon"). The Company contributed to Gryphon: (i) the
Company's license from Fairfield Industries to seismic data covering the
Offshore Louisiana Area; (ii) the Company's interest in the Joint Exploration
Agreement with Samson, (iii) certain offshore leases, including its Shark
prospect on West Cameron Block 49, and

3

(iv) certain other assets and liabilities, all in exchange for 100% of the
common stock of the subsidiary and cash. Warburg invested $25,000,000 and
received preferred stock, with an 8% accruing dividend, convertible into 63.2%
of Gryphon's common stock. Cheniere and Warburg have also agreed, under certain
circumstances, to contribute to Gryphon their respective shares of an additional
$75,000,000 investment. The Gryphon Transaction was consummated on October 11,
2000. See "--Investment in Gryphon Exploration Company".

Offshore Texas Project Area. Between June 2000 and October 2000, Cheniere
acquired licenses to approximately 6,800 miles of seismic data primarily in the
shallow waters offshore Texas and also in the West Cameron area in the Gulf of
Mexico (the "Offshore Texas Project Area") in separate transactions with Seitel
Data Ltd., a division of Seitel Inc., and JEBCO Seismic, L.P. Cheniere has
committed to reprocess all of the data from the Offshore Texas Project Area at a
cost of approximately $8,500,000, payable in installments beginning in October
2000 and continuing through the final delivery of reprocessed data, which is
expected to occur by December 2001. See "--Exploration Programs".

Cheniere's existing data set covering the Cameron Project and the
reprocessed data set covering the Offshore Texas Project Area, as it is
delivered, provide the Company the framework with which to identify potential
drilling prospects which may then be acquired through leasing at the area-wide
federal and state lease sales, through farm-ins, and through participation in
industry prospects. Cheniere has added exploration staff and infrastructure and
plans to engage an exploration partner with the intent of commencing exploration
drilling of the Offshore Texas Project Area during 2001.

As a part of its plans to add exploration staff, in December 2000, Cheniere
entered into an agreement with Aurora Exploration, LLC ("Aurora") to assist
Cheniere in the interpretation of the Company's seismic data sets and in the
Company's prospect generation activities. The initial term of the agreement is
through March 2001, but it is anticipated that the agreement will be extended
for an additional two years. Aurora, based in Lafayette, LA, will focus its
efforts on the Mustang Island, Matagorda and West Cameron areas of the Gulf of
Mexico shelf, using a portion of Cheniere's recently licensed seismic data from
the Offshore Texas Project Area.

BUSINESS STRATEGY

The Company's objective is to expand the net value of its assets by
building an oil and gas reserve base in a cost-efficient manner. Cheniere's
exploration program combines the use of regional seismic data in shallow water
areas of the Gulf of Mexico, advanced analytical technologies, a methodology
that integrates geoscience and engineering disciplines, and a core of
experienced staff.

Seismic Data

Cheniere has acquired two significant seismic database assets: 1) a 228
square-mile proprietary seismic program covering the transition zone in Cameron
Parish (the Cameron Project described above), and 2) a 6,800 square-mile
seismic database comprising several seismic surveys in the shallow waters
offshore Texas (the Offshore Texas Project Area described above). The offshore
Texas database has been available previously to the industry and was processed
using a technique called dip move out ("DMO"). Cheniere has acquired the DMO
data and is underwriting the reprocessing of the data utilizing a more advanced
and technically accurate technology known as prestack time migration ("PSTM").
The regional PSTM data is the "technology tool" which management believes gives
Cheniere a competitive advantage and is being processed at the rate of
approximately 600-800 square-miles (70-80 blocks) per month.

Analysis

Cheniere has built a prospect generation infrastructure capable of detailed
analyses of large volumes of seismic, geological, and engineering data. At the
center of the analytical capabilities is a UNIX workstation network, which
allows large databases to be shared by the technical staff. Geological and
geophysical interpretation, modeling, and mapping software packages are
available on the network for use by each of the geoscientists to generate and
refine drilling opportunities. A thorough analysis of the various technical
factors, utilizing some of these advanced evaluation capabilities, is essential
to accurately quantify reserve potential and risks.

Methodology

Cheniere employs a rigorous methodology which includes: 1) the detailed
analyses of existing fields to identify geological and geophysical attributes
for use as analogs, 2) regional trend mapping to extend prolific plays

4

into under-explored areas, 3) the use of workstation interpretation techniques
to rapidly identify prospects with attributes similar to those identified in the
analog fields, 4) the integration of seismic interpretation, well control,
structure, stratigraphy, timing, sourcing factors, and production data to
quantify prospect potential, and 5) the integration of the above sciences with
experience and conservative economic evaluation to focus the exploration program
on highly commercial projects. By conducting a thorough analysis of the data and
strict adherence to the methodology, Cheniere believes it can reduce the risk of
dry holes and achieve significant growth, while maintaining a competitive cost
of finding and development.

Experience

Cheniere has built a technical and management team that is experienced in
the Gulf of Mexico and in various technical specialties required for its
exploration program. The technical staff averages 20 years of experience
exploring for oil and gas in the Gulf Coast, and each individual has a proven
track record of discoveries. The Company believes this experienced team allows
it to be very productive in the generation and acquisition of prospects and
drilling of exploratory wells.

EXPLORATION PROGRAMS

The Company's current oil and gas exploration and development activities
are focused on two areas: (i) the Cameron Project, which covers an area
extending roughly three to five miles on either side of the westernmost 28 miles
of Louisiana coastline; and (ii) the Offshore Texas Project Area, which covers
approximately 6,800 square miles in the shallow waters offshore Texas.
Substantial infrastructure along the Gulf Coast and in the shallow Gulf of
Mexico should permit Cheniere to lower its development costs compared to those
in other geographic regions and facilitate timely development of oil and gas
discoveries. The Company's officers and technical staff have extensive
experience both onshore and offshore in the Gulf Coast and believe the Company
is well-positioned to evaluate, explore and develop properties in these areas.

Proprietary Seismic Exploration Program in Cameron Project

Under the terms of an exploration agreement with an industry partner
covering the Cameron Project, Cheniere paid for certain seismic costs and earned
a 50% interest in seismic data covering the Cameron Project. Neither party to
the exploration agreement may sell or license the acquired seismic data without
the other party's approval.

In addition to ownership of the seismic data, under the exploration
agreement, Cheniere has the right to acquire a 50% working interest in prospects
generated by its partner within the Cameron Project. In addition to its right
to participate in prospects generated by its partner, Cheniere has elected to
reprocess and interpret the seismic data itself in order to generate its own
prospects. Under the exploration agreement, leases acquired by either Cheniere
or its partner within the Cameron Project may be subject to an area of mutual
interest, under which the other party would have the right to acquire a 50%
interest in acquired leases. The area of mutual interest will expire May 15,
2001.

Seismic Exploration Program in Offshore Texas Project Area

In June 2000, Cheniere acquired a license to approximately 1,900 square
miles of seismic data from Seitel Data Ltd., a division of Seitel Inc. In
October 2000, Cheniere exercised its option to expand the agreement with Seitel
Data Ltd. to cover an additional 1,900 square miles of seismic data. Together,
the licenses acquired from Seitel represent coverage over 433 Outer Continental
Shelf blocks in the shallow waters offshore Texas and Louisiana in the Gulf of
Mexico.

In October 2000, Cheniere negotiated a Master Data Users Agreement with the
Houston-based firm, JEBCO Seismic L.P., to acquire 3,000 square miles (333
blocks) of seismic data in both state and federal waters offshore Texas,
bringing Cheniere's total data set in the shallow waters offshore Texas and
Louisiana to approximately 6,800 square miles of seismic coverage. Cheniere
has added exploration staff and infrastructure and plans to engage an
exploration partner with the intent of commencing exploration drilling of the
Offshore Texas Project Area during 2001. Cheniere has committed to reprocess
all of the data from the Offshore Texas Project Area at a cost of approximately
$8,500,000, payable in installments beginning in October 2000 and continuing
through the final delivery of reprocessed data, which is expected to occur in
October 2001.

5

Drilling Activities

In 1999, the Company drilled and completed two discovery wells located in
adjacent fault blocks on West Cameron Block 49 in Louisiana state waters: the
Redfish well and the Stingray well. The wells were tied into a common platform
and began production during September 1999. During 2000, the wells produced 1.5
bcfe. Both wells are located in shallow waters of approximately 25 feet and
were drilled into the Lower Miocene formation from 9,000 to 11,000 feet.
Cheniere owns a 30% working interest in the Redfish well and a 45% working
interest in the Stingray well.

During 2000, the Company commenced drilling an additional exploration well
on West Cameron Block 49, known as the Shark well. In connection with the
Gryphon Transaction, Cheniere assigned its interest in the Shark well, which was
then being drilled, to Gryphon. Gryphon subsequently completed the well in
February 2001. Production of natural gas from the Shark well is handled through
a common platform which, since September 1999, has also handled production from
the Company's Stingray and Redfish wells. Further drilling in the Cameron
Project is scheduled for 2001 on leased prospects, and leasing on additional
prospects is ongoing.

Investment in Gryphon Exploration Company

Cheniere has a 36.8% interest in Gryphon, but does not participate in the
day-to-day management of Gryphon, does not exercise control over Gryphon, and
cannot effect a change in the management of Gryphon.

In the Gryphon Transaction, the Company contributed the license to 8,800
square miles of seismic data that it had originally licensed from Fairfield
Industries. The data covered more than 1,100 outer continental shelf blocks in
the shallow waters of the Gulf of Mexico (the "Offshore Louisiana Area").
Cheniere also assigned its rights in its Joint Exploration Agreement with
Samson. Under that agreement, Samson has the option to participate as a 50%
working interest owner in any drilling prospect generated or acquired by
Cheniere in a designated area of mutual interest coincident with the Offshore
Louisiana Area within the Gulf of Mexico.

The Company also assigned to Gryphon its rights in certain leases,
including the Shark Prospect on West Cameron Block 49. Gryphon has initiated
production from the Shark well in February 2001, and by month-end, the well was
flowing at a rate of 11 mmcf/day. Gryphon has a 29% working interest in the
Shark well.

Gryphon has developed an inventory of more than 40 leads and prospects. As
of March 26, 2001, Gryphon had two wells for which drilling was in progress.
Depending on rig availability, Gryphon anticipates drilling up to twelve
exploration wells during 2001. Gryphon is also engaged in acquiring drilling
prospects through leasing at area-wide federal and state lease sales and through
farm-ins of leased acreage.

PRODUCTION AND SALES

The following table presents certain information with respect to oil and
natural gas production attributable to the Company, average sales prices
received and average production costs during 2000 and 1999. The Company
commenced oil and gas production on September 9, 1999.

Year Ended Year Ended
December 31, 2000 December 31, 1999
--------------------------- ---------------------------

Production:
Oil (bbls) 3,703 2,975
Gas (mmcf) 1,459,897 633,432
Gas equivalents (mmcfe) 1,482,117 651,282

Average sales prices:
Oil (per barrel) $ 29.78 $ 23.18
Gas (per mcf) $ 3.79 $ 2.59

Selected data per mcfe:
Average sales price $ 3.59 $ 2.48
Production costs $ 0.26 $ 0.20
Oil and gas depreciation, depletion and amortization $ 2.04 $ 1.84

6

ACREAGE AND WELLS

The following table sets forth certain information with respect to the
Company's developed and undeveloped leased acreage as of December 31, 2000.

DEVELOPED ACRES UNDEVELOPED ACRES (1)
----------------------------------- -----------------------------------------
GROSS NET GROSS NET
-------------- ---------------- ---------------- --------------------

Louisiana 1,366 513 1,466 1,352
Texas -- -- -- --
-------------- ---------------- ---------------- --------------------
Total 1,366 513 1,466 1,352
============== ================ ================ ====================

(1) The Company has no leases which expire in 2001.

At December 31, 2000, the Company had working interests in 2 gross (0.75
net) producing gas wells.

DRILLING ACTIVITIES

All of Cheniere's drilling activities are conducted through arrangements
with independent contractors. Cheniere owns no drilling equipment. Certain
information with regard to the Company's drilling activities, during the years
ended December 31, 2000 and December 31, 1999, is set forth below:

YEAR ENDED YEAR ENDED
DECEMBER 31, 2000 DECEMBER 31, 1999
------------------------------------ ------------------------------------
NET WORKING NET WORKING
GROSS INTEREST GROSS INTEREST
--------------- --------------- --------------- ---------------

Development wells -- -- -- --
--------------- --------------- --------------- ---------------
Exploratory wells:
Oil -- -- -- --
Gas -- -- 2 0.8
Nonproductive -- -- 4 2.5
--------------- --------------- --------------- ---------------
Total -- -- 6 3.3
--------------- --------------- --------------- ---------------

Total wells -- -- 6 3.3
=============== =============== =============== ===============

Cheniere drilled no wells prior to 1999. All of the Company's wells are
located in the United States. At December 31, 2000, the Company was not
participating in the drilling of any wells, although its unconsolidated
affiliate, Gryphon, had one well in progress.

OIL AND GAS RESERVES

All information herein regarding estimates of Cheniere's proved reserves,
related future net revenues and PV-10 is taken from reports generated by the
Company's independent petroleum engineers in accordance with the rules and
regulations of the SEC. The independent engineers' estimates were based upon a
review of production histories and other geologic, economic, ownership and
engineering data provided by the Company.

DECEMBER 31, 2000
--------------------------------------------------------------------------
PROVED RESERVES
--------------------------------------------------------------------------
OIL GAS
(BBLS) (MCF) MCFE PV-10 (1)
-------------- -------------- -------------- ---------------

West Cameron Block 49 19,874 4,568,000 4,687,244 $20,618,002
-------------- -------------- -------------- ---------------
Proved Reserves - Consolidated 19,874 4,568,000 4,687,244 $20,618,002
============== ============== ============== ===============
Proved Reserves - Total (2) 22,514 6,242,000 6,377,084 $29,756,922
============== ============== ============== ===============
Proved Developed Reserves -
Consolidated 16,913 3,982,000 4,083,478 $17,080,027
============== ============== ============== ===============
Proved Developed Reserves - Total (2) 19,553 5,656,000 5,773,318 $26,218,947
============== ============== ============== ===============

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(1) The PV-10 amount (present value of estimated future net revenues discounted
at 10%) is calculated using year-end prices of $29.72 per barrel of oil and
$10.71 per mcf of gas.
(2) Includes Cheniere's proportional share, based on its 100% common stock
ownership, of the proved reserves, proved developed reserves and PV-10
value of Gryphon ( 2,640 barrels of oil, 1,674,000 mcf of gas and PV-10 of
$9,138,920). Such proportional share of Gryphon reserves and PV-10 value
is based upon Cheniere's ownership of 100% of Gryphon's common stock and
will be reduced to 36.8% upon the conversion of Gryphon's preferred shares.
See "--General Development of Business."

There are numerous uncertainties inherent in estimating quantities of
proved reserves and in projecting future rates of production and future amounts
and timing of development expenditures, including many factors beyond the
control of the Company. Reserve engineering is a subjective process of
estimating underground accumulations of crude oil and natural gas that cannot be
measured in an exact manner, and the accuracy of any reserve estimate is a
function of the quality of available data and of engineering and geological
interpretation and judgment. Estimates of proved undeveloped reserves are
inherently less certain than estimates of proved developed reserves. The
quantities of oil and gas that are ultimately recovered, production and
operating costs, the amount and timing of future development expenditures,
geologic success and future oil and gas sales prices may all differ from those
assumed in these estimates. In addition, the Company's reserves may be subject
to downward or upward revision based upon production history, purchases or sales
of properties, results of future development, prevailing oil and gas prices and
other factors. Therefore, the present value shown above should not be construed
as the current market value of the estimated oil and gas reserves attributable
to the Company's properties.

In accordance with SEC guidelines, the Independent Engineers' estimates of
future net revenues from the Company's proved reserves and the present value
thereof are made using oil and gas sales prices in effect as of the dates of
such estimates and are held constant throughout the life of the properties
except where such guidelines permit alternate treatment, including, in the case
of gas contracts, the use of fixed and determinable contractual price
escalations. The Company may receive amounts different than the Independent
Engineers' estimates for a number of reasons, including changes in prices. See
"Supplemental Information to Consolidated Financial Statements." Estimates of
the Company's proved oil and gas reserves were not filed with or included in
reports to any other federal authority or agency other than the SEC during the
fiscal year ended December 31, 2000.

COMPETITION AND MARKETS

Competition in the industry is intense, particularly with respect to the
acquisition of producing properties and proved undeveloped acreage. The Company
competes with the major oil companies and other independent producers of varying
sizes, all of which are engaged in the exploration, development and acquisition
of producing and non-producing properties. Many of the Company's competitors
have financial resources and exploration and development budgets that are
substantially greater than those of the Company, which may adversely affect the
Company's ability to compete.

The Company anticipates selling a portion of its interest in certain
prospects as a means of funding its participation in the development of these
properties. The Company anticipates that competition will arise from other
companies seeking drilling funds from potential working interest partners.
There can be no assurance that the Company will be successful in securing funds
in this manner.

The availability of a ready market for and the price of any hydrocarbons
produced by the Company will depend on many factors beyond the control of the
Company, including the extent of domestic production and imports of foreign oil,
the marketing of competitive fuels, the proximity and capacity of natural gas
pipelines, the availability of transportation and other market facilities, the
demand for hydrocarbons, the political conditions in international oil-producing
regions, the effect of federal and state regulation of allowable rates of
production, taxation, the conduct of drilling operations, and federal regulation
of natural gas. In the past, as a result of excess deliverability of natural
gas, many pipeline companies curtailed the amount of natural gas taken from
producing wells, shut in some producing wells, significantly reduced gas taken
under existing contracts, refused to make payments under applicable "take-or-
pay" provisions, and have not contracted for gas available from some newly
completed wells. The Company can give no assurance that such conditions will
not arise again.

8

In addition, the restructuring of the natural gas pipeline industry has
eliminated the gas purchasing activity of traditional interstate gas
transmission pipeline buyers. Producers of natural gas, therefore, have been
required to develop new markets among gas marketing companies, end-users of
natural gas, and local distribution companies. All of these factors, together
with economic factors in the marketing area, generally may affect the supply
and/or demand for oil and gas and thus the prices available for sales of oil and
gas.

GOVERNMENT REGULATION

The Company's oil and gas exploration, production, and related operations
are subject to federal and state statutes and extensive rules and regulations
promulgated by federal and state agencies. Failure to comply with such laws can
result in substantial penalties. The regulatory burden on the oil and gas
industry increases the Company's cost of doing business and affects its
profitability. Because such laws are frequently amended or reinterpreted, the
Company is unable to predict the future cost or impact of complying with them.

Production

In most, if not all, areas in which the Company conducts activities,
statutes concerning the production of oil and natural gas authorize
administrative agencies to adopt rules which, among others matters, (i) regulate
the operation of, and production from, both oil and gas wells, (ii) determine
the reasonable market demand for oil and gas, and (iii) establish allowable
rates of production. Such regulation may restrict the rate at which the
Company's wells may produce oil or gas, with the result that the amount or
timing of the Company's revenues could be adversely affected.

MMS Regulation

The Company may conduct certain activities on federal oil and gas leases
which the Minerals Management Service ("MMS") administers. The MMS grants
leases through competitive bidding. These leases contain relatively
standardized terms and require compliance with detailed MMS regulations and
orders pursuant to The Outer Continental Shelf Lands Act ("OCSLA") (which
regulations and orders are subject to change by the MMS). For offshore
operations, lessees must obtain MMS approval for exploration plans and
development and production plans prior to the commencement of such operations.
In addition to permits which may be required from other agencies (such as the
Coast Guard, the Army Corps of Engineers and the Environmental Protection
Agency), lessees must obtain a permit from the MMS prior to the commencement of
drilling. The MMS has adopted regulations requiring offshore production
facilities located on the Outer Continental Shelf ("OCS") to meet stringent
engineering and construction specifications. The MMS also has regulations
restricting the flaring or venting of natural gas, and has amended such
regulations to prohibit the flaring of liquid hydrocarbons and oil without prior
authorization except under certain limited circumstances. Also, the MMS has
promulgated other regulations governing the plugging and abandonment of wells
located offshore and the removal of all production facilities. To cover the
various obligations of lessees on the OCS, the MMS generally requires that
lessees post substantial bonds or other acceptable assurances that such
obligations will be met. The cost of such bonds or other surety can be
substantial and there is no assurance that the Company will be able to obtain
such bonds or other surety in all cases.

In March 2000, the MMS amended its regulations governing the calculation of
royalties and the valuation of crude oil produced from federal leases. This
rule modifies the valuation procedures for both arm's length and non-arm's
length crude oil transactions to decrease reliance on oil posted prices and
assign a value to crude oil that better reflects its market value. The Company
cannot predict how it will be affected by this regulation.

In April 1997, after two years of study, the MMS withdrew proposed changes
to the way it values natural gas for royalty payments and requested comment on
two alternative options for natural gas valuation. The changes as originally
proposed would have established an alternative market-based method to calculate
royalties on certain natural gas sold to affiliates or pursuant to non-arm's
length sales contracts. Informal discussions among the MMS and industry
officials are continuing, although it is uncertain whether, and what, changes
may be proposed regarding gas royalty valuation.

Bonding and Financial Responsibility Requirements

The Company is required to obtain bonding, or otherwise demonstrate
financial responsibility, at varying levels by governmental agencies in
connection with obtaining state or federal leases or acting as an owner or
operator on such leases or of exploration and production related facilities.
These bonds may cover such obligations as plugging and abandonment of
unproductive wells, removal and closure of related exploration, production
facilities, and pollution liabilities. The costs of such bonding and financial
responsibility requirements can be

9

substantial, and there can be no assurance that the Company will be able to
obtain such bonds and/or otherwise demonstrate financial responsibility in all
cases.

Natural Gas Marketing and Transportation

The Federal Energy Regulatory Commission ("FERC") regulates the
transportation and sale for resale of natural gas in interstate commerce
pursuant to the Natural Gas Act of 1938 ("NGA") and the Natural Gas Policy Act
of 1978 (the "NGPA"). In the past, the federal government has regulated the
prices at which natural gas could be sold. Deregulation of wellhead sales of
natural gas began with the enactment of the NGPA in 1978. In 1989, Congress
enacted the Natural Gas Wellhead Decontrol Act (the "Decontrol Act") which
removed all NGA and NGPA price and nonprice controls affecting wellhead sales of
natural gas effective January 1, 1993. While sales by producers of natural gas
can currently be made at uncontrolled market prices, Congress could reenact
price controls in the future.

Commencing in April 1992, the FERC issued its Order No. 636 and related
clarifying orders ("Order No. 636"), which, among other things, restructured the
interstate natural gas industry and required interstate pipelines to provide
transportation services separate, or "unbundled," from the pipelines' sales of
natural gas. Order No. 636 and certain related proceedings have been the
subject of a number of judicial appeals and orders on remand by the FERC. Order
No. 636 has largely been upheld on appeal. The Company cannot predict when
these remaining appeals will be completed or their impact on the Company. The
FERC continues to address Order 636-related issues (including capacity
brokering, alternative and negotiated ratemaking and transportation policy
matters) in a number of pending proceedings. It is unclear what impact, if any,
increased competition within the natural gas industry under Order Nos. 636, et
al., will have on the Company's activities. Although Order No. 636 could
provide the Company with additional market access and more fairly applied
transportation service rates, Order No. 636 could also subject the Company to
more restrictive pipeline imbalance tolerances and greater penalties for
violations of these tolerances.

The FERC has announced its intention to re-examine certain of its
transportation-related policies, including the appropriate manner in which
interstate pipelines release transportation capacity under Order No. 636, and
the use of market-based rates for interstate gas transmission. While any
resulting FERC action would affect the Company only indirectly, the FERC's
current rules and policy statements may have the effect of enhancing competition
in natural gas markets by, among other things, encouraging non-producer natural
gas marketers to engage in certain purchase and sale transactions. The Company
cannot predict what action the FERC will take on these matters, nor can it
accurately predict whether the FERC's actions will achieve the goal of
increasing competition in markets in which the Company's natural gas is sold.
However, the Company does not believe that it will be treated materially
differently than other natural gas producers and marketers with which it
competes.

OCSLA requires that all pipelines operating on or across the OCS provide
open-access, non-discriminatory service. Although the FERC has opted not to
impose the regulations of Order No. 509, in which the FERC implemented OCSLA, on
gatherers and other non-jurisdictional entities, the FERC has retained the
authority to exercise jurisdiction over those entities if necessary to permit
non-discriminatory access to service on OCS. In this regard, the FERC issued a
Statement of Policy ("Policy Statement") regarding the application of its
jurisdiction under the NGA and OCSLA over natural gas facilities and service on
OCS. In the Policy Statement, the FERC concluded that facilities located in
water depths of 200 meters or more shall be presumed to have a primary purpose
of gathering up to the point of interconnection with the interstate pipeline
grid. The FERC has determined that gathering facilities are outside of its
jurisdiction, and thus, it will no longer regulate the rates and services of
such OCS facilities under the NGA. While it is not possible to determine what
the actual impact of this new policy will be, it is possible that the Company
could experience an increase in transportation costs associated with its OCS
natural gas production and, possibly, reduced access to OCS transmission
capacity.

The FERC has also issued numerous orders approving the sale and abandonment
of natural gas gathering facilities previously owned by interstate pipelines and
has acknowledged that if the FERC does not have jurisdiction over services
provided thereon, then such facilities and services may be subject to regulation
by state authorities in accordance with state law. A number of states have
either enacted new laws or are considering the inadequacy of existing laws
affecting gathering rates and/or services. In addition, the FERC's approval of
transfers of previously regulated gathering systems to independent or pipeline-
affiliated gathering companies that are not subject to FERC regulation may
affect both the costs and the nature of gathering services that will be
available to interested producers or shippers in the future. The effects, if
any, of state and federal gathering policies on the Company's operations are
uncertain.

10

Oil Sales and Transportation Rates

Sales of crude oil, condensate, and gas liquids by the Company are not
currently regulated under federal or state law and are made at market prices.
The FERC regulates the transportation of oil in interstate commerce pursuant to
the Interstate Commerce Act. However, the price a Company receives from the
sale of these products is affected by the cost of transporting the products to
market. Effective as of January 1, 1995, the FERC implemented regulations
establishing an indexing system for transportation rates for oil pipelines,
which would generally index such rates to inflation, subject to certain
conditions and limitations. Over time, these regulations could increase the
cost of transporting crude oil, liquids, and condensate by pipeline. The
Company is not able to predict with certainty what effect, if any, these
regulations will have on it; but other factors being equal, these regulations
may tend to increase transportation costs or reduce wellhead prices for such
commodities.

Operating Hazards and Environmental Matters

The oil and gas business involves a variety of operating risks, including
the risk of fire, explosions, blow-outs, pipe failure, casing collapse,
abnormally pressured formations and environmental hazards such as oil spills,
natural gas leaks, ruptures and discharge of toxic gases, the occurrence of any
of which could result in substantial losses to the Company due to injury or loss
of life, severe damage to or destruction of property, natural resources and
equipment, pollution or other environmental damage, clean-up responsibilities,
regulatory investigation and penalties and suspension of operations. Such
hazards may hinder or delay drilling, development and on-line production
operations.

Extensive federal, state and local laws and regulations applicable to oil
and gas operations regulate the discharge of substances into the environment or
otherwise relate to the protection of the environment. These laws and
regulations may require the acquisition of a permit before drilling commences,
restrict or prohibit the types, quantities and concentration of substances that
can be released into the environment or wastes that can be disposed of in
connection with drilling and production activities, prohibit drilling activities
on certain lands lying within wetlands or other protected areas and impose
substantial liabilities for pollution or releases of hazardous substances
resulting from drilling and production operations. Failure to comply with these
laws and regulations may also result in civil and criminal fines and penalties.
Moreover, state and federal environmental laws and regulations may become more
stringent.

The Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"), also known as the "Superfund" law, imposes liability, without regard
to fault or the original conduct, on certain classes of persons who are
considered to be responsible for the release of a "hazardous substance" into the
environment. These persons include the owner or operator of the disposal site
or sites where the release occurred and companies that disposed or arranged for
the disposal of the hazardous substances. Under CERCLA, such persons may be
subject to joint and several liability for the costs of cleaning up the
hazardous substances that have been released into the environment, for damages
to natural resources and for the costs of certain health studies, and it is not
uncommon for neighboring landowners and other third parties to file claims for
personal injury and property damage allegedly caused by the release of hazardous
substances.

The Company's operations may be subject to the Clean Air Act ("CAA") and
comparable state and local requirements. Amendments to the CAA were adopted in
1990 and contain provisions that may result in the gradual imposition of certain
pollution control requirements with respect to air emissions from the operations
of the Company. The EPA and states have been developing regulations to
implement these requirements. The Company may be required to incur certain
capital expenditures in the next several years for air pollution control
equipment in connection with maintaining or obtaining permits and approvals
addressing other air emission-related issues. The Company does not believe,
however, that its operations will be materially adversely affected by any such
requirements.

In addition, the U.S. Oil Pollution Act ("OPA") requires owners and
operators of facilities that could be the source of an oil spill into "waters of
the United States" (a term defined to include rivers, creeks, wetlands, and
coastal waters) to adopt and implement plans and procedures to prevent any spill
of oil into any waters of the United States. OPA also requires affected
facility owners and operators to demonstrate that they have at least $35 million
in financial resources to pay for the costs of cleaning up an oil spill and
compensating any parties damaged by an oil spill. Such financial assurances may
be increased to as much as $150 million if a formal assessment indicates such an
increase is warranted.

11

Operations of the Company are also subject to the federal Clean Water Act
("CWA") and analogous state laws. In accordance with the CWA, the state of
Louisiana has issued regulations prohibiting discharges of produced water in
state coastal waters, effective July 1, 1997. Producers may be required to
incur certain capital expenditures in the next several years in order to comply
with the prohibition against the discharge of produced waters into Louisiana
coastal waters or increase operating expenses in connection with offshore
operations in Louisiana coastal waters. Pursuant to other requirements of the
CWA, the EPA has adopted regulations concerning discharges of storm water
runoff. This program requires covered facilities to obtain individual permits,
participate in a group permit or seek coverage under an EPA general permit. The
Company believes that it will be able to obtain, or be included under, such
storm water discharge permits, where necessary.

In addition, the disposal of wastes containing naturally occurring
radioactive material, which are commonly generated during oil and gas
production, is regulated under state law. Typically, wastes containing
naturally occurring radioactive material can be managed on-site or disposed of
at facilities licensed to receive such waste at costs that are not expected to
be material.

OPERATIONAL RISKS AND INSURANCE

The Company anticipates that any wells established by it will be drilled by
proven industry contractors. Based on financial considerations, the Company may
choose to utilize turnkey contracts that limit its financial and legal exposure.
However, circumstances may arise where the Company is unable to secure a turnkey
contract on satisfactory terms. In this case, the Company may decide to drill,
or cause to be drilled, the applicable test well(s) on either a footage or day-
rate basis, and the drilling thereof will be subject to the usual drilling
hazards such as cratering, explosions, uncontrollable flows of oil, gas or well
fluids, fires, pollution, and other environmental risks. The Company's
activities are also subject to perils specific to marine operations, such as
capsizing, collision, and damage or loss from severe weather. These hazards can
cause personal injury and loss of life, severe damage to and destruction of
property and equipment, pollution or environmental damage, and suspension of
operations. In accordance with customary industry practices, the Company
intends to maintain insurance against some, but not all, of such risks, and
some, but not all, of such losses. The occurrence of a significant event not
fully insured or indemnified against could materially and adversely affect the
Company's financial condition and operations. Moreover, no assurance can be
given that the Company will be able to maintain adequate insurance in the future
at rates considered reasonable by the Company.

EMPLOYEES

The Company had 12 full-time employees as of March 30, 2001.

FORWARD-LOOKING STATEMENTS AND RISK FACTORS

This annual report contains certain statements that may be deemed "forward-
looking statements" within the meaning of Section 27A of the Securities Act of
1933, as amended ("Securities Act"), and Section 21E of the United Stated
Securities Exchange Act of 1934, as amended ("Exchange Act"). Readers of this
annual report are cautioned that such forward-looking statements are not
guarantees of future performance and that actual results, developments and
business decisions may differ from those envisaged by such forward-looking
statements.

All statements, other than statements of historical facts so included in
this annual report that address activities, events or developments that the
Company intends, expects, projects, believes, or anticipates will or may occur
in the future, including, without limitation: statements regarding the Company's
business strategy, plans and objectives; statements expressing beliefs and
expectations regarding the ability of the Company to successfully raise the
additional capital necessary to meet its obligations, the ability of the Company
to secure the leases necessary to facilitate anticipated drilling activities and
the ability of the Company to attract additional working interest owners to
participate in the exploration and development of oil and gas reserves, and
statements about non-historical Year 2000 information, are forward-looking
statements within the meaning of the Act. These forward-looking statements are,
and will be, based on management's then-current views and assumptions regarding
future events.

The following are some of the important factors that could affect the
Company's financial performance or could cause actual results to differ
materially from estimates contained in the Company's forward-looking statements.
The important factors are not exclusive.

12

THE COMPANY HAS A LIMITED OPERATING HISTORY DURING WHICH IT HAS INCURRED LOSSES,
AND IT MAY CONTINUE TO INCUR LOSSES.

The Company has a limited operating history with respect to its oil and gas
exploration activities, which were commenced in April 1996. From the Company's
inception until the quarter ended June 30, 2000 and subsequently, it has
incurred losses and may continue to incur losses, depending on whether it
generates sufficient revenue from producing reserves acquired either through
acquisitions or drilling activities.

THE COMPANY HAS LIMITED CURRENT OIL AND GAS PRODUCTION AND LIMITED PROVED
RESERVES, WHICH MEANS THAT ITS SUCCESS IS HIGHLY DEPENDENT ON THE SUCCESS OF ITS
EXPLORATION PROGRAM.

Cheniere established its initial oil and gas production in September 1999.
Through its drilling in 1999, the Company established "proved reserves," which
means that it has identified oil and gas reserves that geological and
engineering data demonstrate with reasonable certainty to be recoverable in
future years from known reservoirs under existing economic and operating
conditions. The focus of Cheniere's business is exploratory drilling. Because
almost all of the Company's assets are represented by investments to date in its
exploration program, and the Company anticipates investing additional amounts in
the program, the Company is highly dependent on the success of its exploration
program.

THE COMPANY MAY NEED ADDITIONAL FINANCING AND MAY NOT BE ABLE TO OBTAIN IT ON
TERMS THAT ARE ACCEPTABLE TO THE COMPANY, WHICH COULD HARM ITS ABILITY TO
CONDUCT BUSINESS.

Cheniere presently has limited operating revenues. As of December 31,
2000, Cheniere had $2,838,800 of current assets and working capital of
$1,234,390. Because of its low level of current assets, the Company may need
additional capital for a number of purposes, and if the Company were unable to
obtain additional financing it could significantly harm Cheniere's ability to
conduct its business, including its ability to take advantage of opportunities
that come from its exploration program. Cheniere's needs for additional
financing include the following:

. Additional capital will be required to pay for Cheniere's share of costs
relating to the drilling of prospects and development of those that are
successful, to exercise lease options, and to acquire additional oil and
gas leases. The total amount of the Company's capital needs will be
determined in part by the number of prospects generated within its
exploration program and by the working interest that the Company retains
in those prospects.

. The Company will need funds for the payment of approximately $8,000,000
related to future deliveries of reprocessed seismic data through December
2001.

. The Company may need capital to fund its pro-rata share of the capital
calls by Gryphon that are approved by Gryphon's Board of Directors. The
Company's share of such future capital calls could total up to
$27,600,000. If the Company elects not to fund its pro-rata portion of
such capital calls, and Warburg funds its portion, as they would be
entitled, the Company will suffer dilution of its holdings in Gryphon. If
the Company subscribes to its pro-rata portion of such capital calls but
fails to fund, it would lose its ability to subscribe to any future
capital calls and would suffer dilution of its holdings in Gryphon. It is
anticipated that Gryphon will make cash calls for additional funds during
2001.

. The Company will need funds for the payment of a transfer fee related to
the assignment to Gryphon of its seismic license over the Offshore
Louisiana Project Area. Cheniere is obligated to pay a transfer fee of up
to $2,500,000, in ten installments of $250,000, which would become
payable after one month of production from each of ten separate
successful wells completed by Gryphon within the data set.

. Should the Company choose to make an acquisition of producing oil and gas
properties, it is likely that such an acquisition would require that some
portion of the purchase price be paid in cash, and thus would create the
need for additional capital.

Additional capital could be obtained from a combination of funding sources.
These potential funding sources include:

. cash flow from operating activities,

. borrowings from financial institutions,

13

. debt offerings, which would increase the Company's leverage and add to
its need for cash to service such debt,

. additional offerings of the Company's equity securities, which would
cause dilution of its common stock,

. sales of portions of its working interest in the prospects within its
exploration program, which would reduce future revenues from its
exploration program,

. sale to an industry partner of a participation in the Company's
exploration program, including sale of a license to the approximate 6,800
square miles of seismic data in the Offshore Texas Project Area, which
would reduce future revenues from its exploration program, and

. sale of all or a portion of the Company's producing oil and gas
properties, which would reduce future revenues.

Cheniere's ability to raise additional capital will depend on the results
of its operations and the status of various capital and industry markets at the
time such additional capital is sought. Accordingly, there can be no assurances
that capital will be available to the Company from any source or that, if
available, it will be on terms acceptable to the Company.

BECAUSE OF THE COMPANY'S LACK OF DIVERSIFICATION, FACTORS HARMING THE OIL AND
GAS INDUSTRY IN GENERAL, INCLUDING DOWNTURNS IN PRICES FOR OIL AND GAS, WOULD BE
ESPECIALLY HARMFUL TO IT.

As an independent energy company, Cheniere's revenues and profits will be
substantially dependent on the oil and gas industry in general and the
prevailing prices for oil and gas in particular. Circumstances that harm the
oil and gas industry in general will have an especially harmful effect on
Cheniere. Oil and gas prices have been and are likely to continue to be
volatile and subject to wide fluctuations in response to any of the following
factors:

. relatively minor changes in the supply of and demand for oil and gas;

. political conditions in international oil producing regions;

. the extent of domestic production and importation of oil in relevant
markets;

. the level of consumer demand;

. weather conditions;

. the competitive position of oil or gas as a source of energy as compared
with other energy sources;

. the refining capacity of oil purchasers; and

. the effect of federal and state regulation on the production,
transportation and sale of oil and gas.

It is likely that adverse changes in the oil market or the regulatory
environment would have an adverse effect on the Company's ability to obtain
capital from lending institutions, industry participants, private or public
investors or other sources.

THE COMPANY EXPERIENCES COMPETITION IN THE OIL AND GAS INDUSTRY, WHICH MAY MAKE
IT DIFFICULT FOR THE COMPANY TO SUCCEED.

The oil and gas industry is highly competitive. If Cheniere is unable to
compete effectively, it will not succeed. A number of factors may give the
Company's competitors advantages over Cheniere. For example, most of the
Company's current and potential competitors have significantly greater financial
resources and a significantly greater number of experienced and trained
managerial and technical personnel than the Company does. There can be no
assurance that Cheniere will be able to compete effectively with such companies.
Moreover, the oil and gas industry competes with other industries in supplying
the energy and fuel needs of industrial, commercial and other consumers.
Increased competition causing over supply and depressed prices could greatly
affect Cheniere's operating revenues.

14

THE COMPANY IS SUBJECT TO SIGNIFICANT OPERATING HAZARDS AND UNINSURED RISKS, ONE
OR MORE OF WHICH MAY CREATE SIGNIFICANT LIABILITIES FOR IT.

The Company's oil and gas operations are subject to all of the risks and
hazards typically associated with the exploration for, and the development and
production of, oil and gas. In accordance with customary industry practices,
the Company intends to maintain insurance against some, but not all, of these
risks and losses. The occurrence of a significant event not fully insured or
indemnified against could seriously harm the Company. Moreover, no assurance
can be given that the Company will be able to maintain adequate insurance in the
future at rates it considers reasonable. Risks in drilling operations include
cratering, explosions, uncontrollable flows of oil, gas or well fluids, fires,
pollution and other environmental risks. The Company's activities are also
subject to perils specific to marine operations, such as capsizing, collision
and damage or loss from severe weather. These hazards can cause personal injury
and loss of life, severe damage to and destruction of property and equipment,
pollution or environmental damage and suspension of operations.

THE COMPANY IS SUBJECT TO SIGNIFICANT EXPLORATION RISKS, INCLUDING THE RISK THAT
IT MAY NOT BE ABLE TO FIND OR PRODUCE ENOUGH OIL AND GAS TO GENERATE ANY
PROFITS.

The Company's exploration activities involve significant risks, including
the risk that it may not be able to find or produce enough oil and gas to
generate any profits. There can be no assurance that the use of technical
expertise as applied to geophysical or geological data will ensure that any well
the Company drills will discover oil or gas. Further, there is no way to know
in advance of drilling and testing whether any prospect will yield oil or gas in
sufficient quantities to make money for the Company. In addition, the Company
is highly dependent on seismic activity and the related application of new
technology as a primary exploration methodology. This methodology, however,
requires greater pre-drilling expenditures than traditional drilling strategies.
Even when fully used and properly interpreted, seismic data can only assist the
Company in identifying subsurface reservoirs and hydrocarbon indicators, and
will not allow the Company to determine conclusively if hydrocarbons will in
fact be present and recoverable. There can be no assurance that the Company's
exploration efforts will be successful.

THE COMPANY MAY NOT BE ABLE TO ACQUIRE THE OIL AND GAS LEASES IT NEEDS TO
SUSTAIN PROFITABLE OPERATIONS.

There can be no assurance that Cheniere will be successful in acquiring
farmouts, seismic permits, lease options, leases or other rights to explore for
or recover oil and gas. Consequently, the area covered by Cheniere's seismic
data that could be explored through drilling could be reduced if these leases,
permits, options and the like are not acquired. The United States department of
the interior and the states of Texas and Louisiana award oil and gas leases on a
competitive bidding basis. Further, non-governmental owners of the onshore
mineral interests within the area covered by the Company's exploration program
are not obligated to lease their mineral rights to the Company except where the
Company has already obtained lease options. Other major and independent oil and
gas companies with financial resources significantly greater than Cheniere's may
bid against Cheniere for the purchase of oil and gas leases.

IF THE COMPANY IS UNABLE TO OBTAIN SATISFACTORY TURNKEY CONTRACTS, IT MAY HAVE
TO ASSUME ADDITIONAL RISKS AND EXPENSES WHEN DRILLING WELLS.

Cheniere anticipates that any wells drilled in which it has an interest
will be drilled by established industry contractors under turnkey contracts that
limit its financial and legal exposure. Circumstances may arise, however, where
a turnkey contract is not economically beneficial to the Company or is otherwise
unobtainable from proven industry contractors. In such instances, the Company
may decide to drill wells on a day-rate basis, subjecting it to the usual
drilling hazards such as cratering, explosions, uncontrollable flows of oil, gas
or well fluids, fires, pollution and other environmental risks. The Company
would also be liable for any cost overruns attributable to drilling problems
that otherwise would have been covered by a turnkey contract.

Under a turnkey drilling contract, a negotiated price is agreed upon and
the money is placed in escrow. The contractor then assumes all of the risk and
expense, including any cost overruns, of drilling a well to contract depth and
completing any agreed upon evaluation of the wellbore. Upon performance of all
these items, the escrowed money is released to the contractor. On a non-turnkey
basis, all risk and expense, including cost overruns, of drilling a well to
total depths lies with the operator.

15

EXISTING AND FUTURE UNITED STATES GOVERNMENTAL REGULATION, TAXATION AND PRICE
CONTROLS COULD SERIOUSLY HARM THE COMPANY.

Oil and gas production and exploration are subject to comprehensive
federal, state and local laws and regulations controlling the exploration for
and production and sale of oil and gas and the possible effects of such
activities on the environment. Failure to comply with such rules and
regulations can result in substantial penalties and may harm the Company.
Present as well as future legislation and regulations could cause additional
expenditures, restrictions and delays in the Company's business, the extent of
which cannot be predicted and which may require the Company to limit
substantially, delay or cease operations in some circumstances. In most areas
where the Company plans to conduct activities, there are statutory provisions
regulating the production of oil and natural gas which may restrict the rate of
production and adversely affect revenues. The Company plans to acquire oil and
gas leases in the Gulf of Mexico, which will be granted by the federal
government and administered by the U.S. Department of Interior minerals
management service. The department strictly regulates the exploration,
development and production of oil and gas reserves in the Gulf of Mexico. Such
regulations could seriously harm the Company's operations in the Gulf of Mexico.
The federal government regulates the interstate transportation of oil and
natural gas, through the Federal Energy and Regulatory Commission ("FERC"). The
FERC has in the past regulated the prices at which oil and gas could be sold.
Federal reenactment of price controls or increased regulation of the transport
of oil and natural gas could seriously harm the Company. In addition, the
Company's operations are subject to numerous laws and regulations governing the
discharge of oil and hazardous materials into the environment or otherwise
relating to environmental protection, including the Oil Pollution Act of 1990.
These laws and regulations have continually imposed increasingly strict
requirements for water and air pollution control, solid waste management, and
strict financial responsibility and remedial response obligations relating to
oil spill protection. The cost of complying with such environmental legislation
could have a general harmful effect on the Company's operations.

THERE IS ONLY LIMITED TRADING IN THE COMPANY'S COMMON STOCK, WHICH MAKES ITS
STOCK MORE DIFFICULT TO SELL THAN THE STOCK OF COMPANIES WITH MORE ACTIVE
MARKETS.

Historically, there has been only limited trading in Cheniere's common
stock, which makes its stock more difficult to sell than the stock of companies
with more active markets. For the year 2000, the average trading volume of
Cheniere's common stock was approximately 72,000 shares per day.

THE COMPANY HAS NOT PAID DIVIDENDS AND DOES NOT EXPECT TO DO SO IN THE
FORESEEABLE FUTURE, SO ITS STOCKHOLDERS WILL NOT BE ABLE TO RECEIVE A RETURN ON
THEIR INVESTMENT WITHOUT SELLING THEIR SHARES.

The Company has not paid dividends since its inception and does not expect
to in the foreseeable future, so Cheniere's stockholders will not be able to
receive a return on their investments without selling their shares. The Company
presently anticipates that all earnings, if any, will be retained for
development of its business. Any future dividends will be subject to the
discretion of the Company's board of directors and will depend on, among other
things, future earnings, the Company's operating and financial condition, its
capital requirements and general business conditions.

THE COMPANY'S STOCKHOLDERS COULD EXPERIENCE DILUTION IN THE VALUE OF THEIR
SHARES BECAUSE OF ADDITIONAL ISSUANCES OF SHARES.

Any issuance of common stock by the Company may result in a reduction in
the book value per share or market price per share of its outstanding shares of
common stock and will reduce the proportionate ownership and voting power of
such shares. The Company has 125,000,000 authorized shares of stock, consisting
of 120,000,000 shares of common stock, and 5,000,000 shares of preferred stock.
As of December 31, 2000, approximately 90% of the shares of the common stock
remained unissued. The board of directors has the power to issue any and all of
such shares without shareholder approval. It is likely that the Company will
issue shares of common stock in order to raise capital to sustain operations,
and/or to finance future oil and gas exploration projects. In addition, the
Company has reserved 2,758,621 shares of the common stock for issuance upon the
exercise of outstanding warrants and 1,500,000 shares of the common stock for
issuance upon the exercise of stock options. As of December 31, 2000, there are
884,236 issued and outstanding options to purchase common stock. To the extent
that outstanding warrants and options are exercised, the percentage ownership of
common stock of the Company's stockholders will be diluted. Moreover, the terms
upon which the Company will be able to obtain additional equity capital may be
adversely affected because the holders of outstanding warrants and options can
be expected to exercise them at a time when the Company would, in all
likelihood, be able to obtain any needed capital on terms more favorable than

16

the exercise terms provided by such outstanding securities. In the event of the
exercise of a substantial number of warrants and options, within a reasonably
short period of time after the right to exercise commences, the resulting
increase in the amount of the Company's common stock in the trading market could
substantially adversely affect the market price of the common stock or the
Company's ability to raise money through the sale of equity securities.

THE COMPANY DEPENDS ON KEY PERSONNEL AND COULD BE SERIOUSLY HARMED IF IT LOST
THEIR SERVICES.

Cheniere depends on its executive officers for various activities. The
Company does not maintain "key person" life insurance policies on any of its
personnel. The loss of the services of any of these individuals could seriously
harm the Company. In addition, the Company's future success will depend in part
on its ability to attract and retain additional qualified personnel. Cheniere
currently has 12 full-time employees.

THE COMPANY DEPENDS ON INDUSTRY PARTNERS AND COULD BE SERIOUSLY HARMED IF THEY
DO NOT PERFORM SATISFACTORILY, WHICH IS USUALLY NOT WITHIN THE COMPANY'S
CONTROL.

Because the Company has limited financial resources, it will be largely
dependent on industry partners for the success of its oil and gas exploration
projects for the foreseeable future. Cheniere could be seriously harmed if its
industry partners do not perform satisfactorily on projects that affect it. The
Company often has no control over factors that influence the performance of its
partners.

THE COMPANY IS CONTROLLED BY A SMALL NUMBER OF PRINCIPAL STOCKHOLDERS WHO MAY
EXERCISE A PROPORTIONATELY LARGER INFLUENCE ON CHENIERE THAN ITS STOCKHOLDERS
WITH SMALLER HOLDINGS.

Cheniere is controlled by a small number of principal stockholders who may
do things that are not in the interests of the Company's stockholders with
smaller holdings. BSR Investments, Ltd. ("BSR") owns approximately 11% of the
outstanding common stock. BSR is controlled by the mother of Charif Souki,
chairman of Cheniere's board of directors. Accordingly, it is likely that BSR
will have significant influence on the election of Cheniere's directors and on
its management, operations and affairs, including the ability to prevent or
cause a change in control of the Company.

ANTI-TAKEOVER PROVISIONS OF THE CERTIFICATE OF INCORPORATION, BYLAWS AND
DELAWARE LAW COULD ADVERSELY IMPACT A POTENTIAL ACQUISITION BY THIRD PARTIES
THAT MAY ULTIMATELY BE IN THE FINANCIAL INTERESTS OF THE COMPANY'S SHAREHOLDERS.

Cheniere's certificate of incorporation, bylaws and the Delaware general
corporation law contain provisions that may discourage unsolicited takeover
proposals. These provisions could have the effect of inhibiting fluctuations in
the market price of the Company's shares that could result from actual or
rumored takeover attempts, preventing changes in its management or limiting the
price that investors may be willing to pay for shares of common stock. These
provisions, among other things, authorize the board of directors to designate
the terms of and to issue new series of preferred stock, to limit the personal
liability of directors, to require the Company to indemnify directors and
officers to the fullest extent permitted by applicable law and to impose
restrictions on business combinations with some interested parties.

A SIGNIFICANT PORTION OF THE VALUE OF THE COMPANY IS DERIVED FROM ITS OWNERSHIP
INTEREST IN GRYPHON, OVER WHICH THE COMPANY EXERCISES NO DAY-TO-DAY CONTROL.

Cheniere owns 100% of the common stock of Gryphon (36.8% effective
ownership after conversion of Gryphon's preferred stock), and a significant
portion of the Company's value is derived from this investment. However,
Cheniere is a passive investor; it does not participate in the day-to-day
management of Gryphon and has no ability to effect a change of control of
Gryphon. Accordingly, Gryphon's management team could make business decisions
without Cheniere's consent that could impair the value of Cheniere's investment
in Gryphon.

17

ITEM 3. LEGAL PROCEEDINGS

There are no material legal proceedings currently pending against the
Company.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The Company held a special meeting of its stockholders on October 16, 2000.
The purpose of the meeting was to take a vote of the stockholders concerning a
proposed one-for-four reverse stock split. Information concerning the proposal
was distributed to all stockholders of record as of September 11, 2000 in a
proxy statement dated September 18, 2000. There were 43,989,572 pre-stock split
shares of common stock outstanding and eligible to vote as of the record date of
September 11, 2000. The results of voting on the reverse stock split is
summarized as follows:

Votes for the reverse split 29,161,146
Votes against the reverse stock split 431,671
Abstentions 25,707

18

PART II

ITEM 5. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS

Beginning on March 5, 2001, the common stock of the Company has traded on
The American Stock Exchange under the symbol "CXY". Between December 14, 2000
and March 2, 2001, Cheniere's common stock traded on the OTC Bulletin Board
under the symbol "CHEX".

Between April 11, 1997 and December 13, 2000, the common stock of the
Company traded on The Nasdaq SmallCap Market under the symbol "CHEX". From the
time the Company first traded publicly until April 11, 1997, the Company's
common stock traded on the OTC Bulletin Board. The table below presents the
high and low daily closing sales prices of the common stock, as reported by the
Nasdaq SmallCap Market and the OTC Bulletin Board, for each quarter during 1999
and 2000, and for a portion of the Company's current quarter, as reported by the
OTC Bulletin Board and The American Stock Exchange.

High Low
------ -----

Three Months Ended
March 31, 1999 $8.00 $3.50
June 30, 1999 $7.00 $3.50
September 30, 1999 $8.50 $4.75
December 31, 1999 $5.63 $1.63

Three Months Ended
March 31, 2000 $4.57 $3.91
June 30, 2000 $4.00 $2.13
September 30, 2000 $3.30 $2.91
December 31, 2000 $2.27 $1.98

Three Months Ended
March 31, 2001 $3.38 $2.09

As of March 30, 2001, there were 12,797,393 shares of the Company's common
stock outstanding held by approximately 2,800 beneficial owners.

The Company has never paid a cash dividend on its common stock. The
Company currently intends to retain earnings to finance the growth and
development of its business and does not anticipate paying any cash dividends on
the common stock in the foreseeable future. Any future change in the Company's
dividend policy will be made at the discretion of the Company's board of
directors in light of the financial condition, capital requirements, earnings
and prospects of the Company, and any restrictions under any credit agreements,
as well as other factors the board of directors deems relevant.

With respect to equity securities sold by the Company during the fourth
quarter of 2000 that were not registered under the Securities Act of 1933, as
amended ("Securities Act"), see "Liquidity and Capital Resources - Private
Placements of Equity" under Item 7 of this report.

ITEM 6. SELECTED FINANCIAL DATA

Selected financial data set forth below are derived from the Company's
audited Consolidated Financial Statements for the periods indicated, except for
the data as of December 31, 1996 and for the four months ended December 31,
1996, which is derived from the Company's unaudited financial data. The
financial data should be read in conjunction with the "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the Company's
Consolidated Financial Statements and Notes thereto included elsewhere in this
report.

19

FOR THE YEAR ENDED FOR THE FOUR MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------------------------------- ----------------------------
2000 1999 1998 1997 1996(1)
------------ ------------ ------------ ----------- -------------

Revenues $ 5,320,432 $ 1,614,055 $ -- $ -- $ --
Production Costs 388,637 128,859 -- -- --
Depreciation, depletion and amortization 3,371,383 1,361,644 39,171 2,936 2,695
General and administrative expenses 1,938,659 1,908,805 1,619,307 444,087 189,635
Loss from operations (378,247) (1,785,253) (1,658,478) (447,023) (192,330)
Interest income (expense) 23,916 31,530 20,634 58,662 (1,223)
Equity in net loss of affiliate (3) (426,649) -- -- -- --
Net loss (780,980) (1,753,723) (1,637,844) (388,361) (193,553)
Net loss per share (basic and diluted) (3) (0.07) (0.27) (0.41) (0.11) (0.07)
Cash dividends per share $ -- $ -- $ -- $ -- $ --
Weighted average shares outstanding (3) 10,732,678 6,449,104 4,003,864 3,587,032 2,650,342

FOR THE PERIOD ENDED
AUGUST 31,
-----------------------------
1997 1996
------------- -------------
Revenues $ -- $ --
Production Costs -- --
Depreciation, depletion and amortization 8,268 3,603
General and administrative expenses 1,705,193 100,211
Loss from operations (1,713,461) (103,814)
Interest income (expense) 36,993 (18,033)
Equity in net loss of affiliate (3) -- --
Net loss (1,676,468) (121,847)
Net loss per share (basic and diluted) (3) (0.55) (0.06)
Cash dividends per share $ -- $ --
Weighted average shares outstanding (3) 3,035,980 2,152,735

DECEMBER 31,
---------------------------------------------------------------------------------
2000 1999 1998 1997 1996 (1)
-------------- ------------- ------------- ------------- -------------

Cash $ 1,888,562 $ 1,175,950 $ 143,868 $ 787,523 $ 2,419,264
Oil and gas properties, proved, net 6,727,613 9,459,041 -- -- --
Oil and gas properties, unproved 18,253,731 20,648,923 20,000,425 16,534,054 6,000,000
Total assets 34,665,618 34,481,275 20,840,474 17,705,627 8,476,710
Long-term notes payable -- -- 2,025,020 2,025,000 --
Total liabilities 1,604,410 6,735,537 4,523,144 4,285,599 262,798
Total stockholders' equity 33,061,208 27,745,738 16,317,330 13,420,028 8,213,912

AUGUST 31,
----------------------------------
1997 1996
------------- ------------------

Cash $ 234,764 $ 1,093,180
Oil and gas properties, proved, net -- --
Oil and gas properties, unproved 13,500,000 4,000,000
Total assets 13,841,712 5,145,310
Long-term notes payable -- --
Total liabilities 888,291 718,855
Total stockholders' equity 12,953,421 4,426,455

(1) On April 7,1998, the Company's board of directors approved a change in
fiscal year-end. The change in year-end resulted in a transition period
from September 1, 1997 to December 31, 1997.
(2) Represents the Company's equity in the net loss of Gryphon. See Note 6 to
the Company's Consolidated Financial Statements.
(3) Net loss per share and weighted average shares outstanding have been
restated to give effect to the one-for-four reverse stock split which was
effective in October 2000. See Note 2 to Consolidated Financial
Statements.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

GENERAL

Cheniere Operating was incorporated in Delaware in February 1996 for the
purpose of engaging in the oil and gas exploration business, initially on the
Louisiana Gulf Coast. On July 3, 1996, Cheniere Operating underwent a
reorganization whereby Bexy Communications, Inc., a publicly held Delaware
corporation ("Bexy"), received 100% of the outstanding shares of Cheniere
Operating, and the former stockholders of Cheniere Operating received
approximately 93% of the issued and outstanding Bexy shares. As a result of the
share exchange, a change in the control of the Company occurred. The
transaction was accounted for as a recapitalization of Cheniere Operating. Bexy
spun off its existing assets and liabilities to its original stockholders and
changed its name to Cheniere Energy, Inc.

On April 7, 1998, the Company's board of directors approved a change in
fiscal year-end. The change in year-end resulted in a transition period from
September 1, 1997 to December 31, 1997.

20

PRODUCTION AND PRODUCT PRICES

Information concerning the Company's production and average prices received
for the years ended December 31, 2000 and 1999 is presented in the following
table. Cheniere commenced its production of oil and gas on September 9, 1999.

YEAR ENDED DECEMBER 31,
------------------------------------
2000 1999
--------------- ---------------

Production
Oil (Bbls) 3,703 2,975
Gas(Mcf) 1,459,897 633,432
Gas equivalents (Mcfe) 1,482,117 651,282

Average sales prices:
Oil (per Bbl) $ 29.78 $ 23.18
Gas (per Mcf) $ 3.79 $ 2.59

RESULTS OF OPERATIONS - COMPARISON OF THE FISCAL YEARS ENDED DECEMBER 31, 2000
AND 1999

The Company's financial results for the year ended December 31, 2000,
reflect a loss of $780,980 or $0.07 per share (both basic and diluted), as
compared to a loss of $1,753,723, or $0.27 per share (both basic and diluted),
for the fiscal year ended December 31, 1999.

Cheniere commenced production of oil and gas on September 9, 1999.
Accordingly, oil and gas revenues and related costs and expenses include a full
year of production in 2000, compared to approximately four months of production
in 1999. As a result, revenues totaled $5,320,432 for the year ended December
31, 2000, compared to $1,614,055 in 1999; production costs were $388,637 in 2000
compared to $128,859 in 1999; and depreciation, depletion and amortization
("DD&A") increased to $3,371,383 in 2000 from $1,361,644 in 1999.

Gross general and administrative ("G&A") expenses totaled $4,366,207 in
2000, compared to $2,868,805 in 1999. In mid-1999, Cheniere licensed 8,800
square miles of seismic data (the "Fairfield Database") and doubled the number
of its employees, adding management and exploration professionals to exploit its
expanded database. In October 2000, Cheniere transferred to Gryphon the
Fairfield Database, other assets and liabilities and substantially all of the
management and technical team assembled in mid-1999 to exploit the Fairfield
Database. As a result, salaries, benefits and consulting expenses increased to
$2,735,337 for 2000, compared to $1,674,200 for 1999. In connection with the
October 2000 Gryphon Transaction, Cheniere issued its financial advisers
warrants to purchase 125,000 shares of common stock, valued at $165,000. Also in
2000, Cheniere received management fees totaling $1,684,193, of which $988,548
was recorded as a recovery of G&A expenses. The management fees were received
from the Company's industry partner, Samson, beginning in March 2000 and running
through October 11, 2000, at which time the related exploration agreement was
assigned to Gryphon. G&A expenses, net of recoveries, were $3,377,659 in 2000
compared with $2,868,805 in 1999. Cheniere capitalizes as oil and gas property
costs that portion of G&A expenses directly related to its exploration and
development activities. Cheniere capitalized $1,439,000 in 2000 compared to
$960,000 in 1999, the change being a direct result of the increased level of
exploration activity. G&A expenses, net of recoveries and amounts capitalized,
were $1,938,659 and $1,908,805 in 2000 and 1999, respectively.

Cheniere accounts for its investment in Gryphon using the equity method of
accounting. Cheniere does not participate in the day-to-day management of
Gryphon, does not exercise control over Gryphon and cannot effect a change in
the management of Gryphon. Cheniere's equity share of Gryphon's earnings
(losses) for the period from October 11, 2000 through December 31, 2000 was
$426,649, calculated by applying Cheniere's 100% common stock ownership interest
to Gryphon's net income of $19,003 and reducing such result for Gryphon's
preferred dividend arrearages ($445,652). At such time as Warburg converts its
preferred shares to common shares, Cheniere's equity share of Gryphon's earnings
will be calculated at 36.8%.

RESULTS OF OPERATIONS - COMPARISON OF THE FISCAL YEARS ENDED DECEMBER 31, 1999
AND 1998

The Company's financial results for the year ended December 31, 1999,
reflect a loss of $1,753,723 or $0.27 per share (both basic and diluted), as
compared to a loss of $1,637,844, or $0.41 per share (both basic and diluted),
for the fiscal year ended December 31, 1998. The Company began its initial
production of oil and gas in September 1999. Oil and gas revenues totaled
$1,614,055 for 1999, and related production costs were $128,859.

21

DD&A increased to $1,361,644 in 1999 from $39,171 in 1998 principally due to the
inclusion in 1999 of $1,200,186 related to proved oil and gas properties.

G&A expenses increased to $1,908,805 in 1999 compared to $1,619,307 in
1998. During 1999, Cheniere licensed 8,800 additional square miles of seismic
data and doubled the number of its employees, adding management and exploration
professionals to exploit its expanded database. As a result, salaries,
benefits and consulting expenses increased to $1,674,200 for 1999 compared with
$773,485 in 1998. Additionally, the related expansion of office facilities
increased office rent and occupancy expenses to $264,971 in 1999 from $52,558 in
1998. Legal and professional fees decreased to $286,716 in 1999 from $938,766
in 1998, largely due to the inclusion in 1998 of $817,870 of nonrecurring
expenses related to arbitration proceedings. Investor relations and travel
expenses increased to $293,623 in 1999 from $49,691 in 1998 as Cheniere engaged
outside consultants to assist in broadening investor interest in the Company;
approximately $100,000 of the 1999 expenses relate to the non-cash issuance of
warrants to the Company's outside consultants. Cheniere capitalizes as oil and
gas property costs that portion of G&A related to its exploration and
development activities. Cheniere capitalized $960,000 of such G&A expenses in
1999 and $444,000 in 1998.

At December 31, 1999, the cost of Cheniere's oil and gas properties
exceeded its ceiling test limitation by $1,888,912. Increases in the prices of
oil and gas subsequent to year-end were significant enough to fully eliminate
the need for a write-down of the Company's oil and gas properties. For further
discussion, see Note 2 - Summary of Significant Accounting Policies.

LIQUIDITY AND CAPITAL RESOURCES

The Company anticipates that future liquidity requirements will be met by
cash balances, cash flows from operating activities, borrowings from financial
institutions, debt offerings, additional offerings of the Company's equity
securities, sales of portions of its working interest in the prospects within
its exploration program, sale to an industry partner of a participation in the
Company's exploration program, including sale of a license to the approximate
6,800 square miles of seismic data in the Offshore Texas Project Area, and/or
sale of all or a portion of the Company's producing oil and gas properties.

Cash Flow from Operating Activities

Cheniere commenced production of oil and gas in September 1999. Cash flow
from operations (before changes in operating assets and liabilities) for the
year ended December 31, 2000 totaled $3,151,302. In October 2000, Cheniere paid
in full the $1,047,514 balance outstanding under its platform financing
facility. Cash flows from Cheniere's producing oil and gas properties, which
were previously dedicated to the repayment of this obligation, are now available
to the Company for the funding of its operations.

Private Placements of Equity

Since its inception, Cheniere's primary source of financing for operating
expenses and investments in its exploration program has been the sale of its
equity securities. Through December 31, 2000, the Company has issued 12,547,393
shares of its common stock, generating net proceeds of $38,597,631. During
2000, the Company raised $5,373,650, net of offering costs, from the sale of
units (common stock and warrants) to accredited investors pursuant to Regulation
D, through the exercise of warrants, and through the issuance of common stock in
exchange for a short-term note payable. Proceeds of the offerings were used for
the acquisition of leases and other exploration costs, for the repayment of
short-term notes payable and for general corporate purposes.

In February and March 2000, the Company issued to three investors 373,000
units at a price of $3.00 per unit, each unit representing one share of common
stock and one warrant to purchase a share of common stock. Warrants issued in
connection with these sales of units are exercisable at a price of $4.00 per
share on or before the second anniversary of the date the units were sold. These
issuances were made in reliance on the exemption from registration provided by
Section 506 of Regulation D. Net proceeds were $1,020,000 after payment of
$99,000 in selling commissions.

In March 2000, the Company issued to nine investors 234,375 shares pursuant
to the exercise of warrants at an exercise price of $4.00 per share. These
issuances were made in reliance on the exemption from registration provided by
Section 506 of Regulation D. Net proceeds were $937,500.

Also in March 2000, Cheniere issued 16,667 shares of common stock to one
Company in exchange for $50,000 of geophysical consulting services. In April
2000, Cheniere issued 50,000 shares to a drilling Company in

22

connection with an adjustment to the price of shares previously issued for
drilling services rendered. These issuances were made in reliance on the
exemption from registration provided by Section 4(2) of the Securities Act of
1933.

In April 2000, Cheniere issued 20,233 units to ten existing stockholders
pursuant to price adjustment provisions of their subscription agreements. These
units represented 20,233 shares of common stock and warrants to purchase 10,117
shares of common stock at an exercise price of $6.00 per share on or before
April 13, 2003. These issuances were made in reliance on the exemption from
registration provided by Section 506 of Regulation D.

As a selling commission related to a 1999 private placement of securities,
Cheniere issued to an individual in April 2000 warrants to purchase 25,000
shares of common stock at an exercise price of $6.00 per share on or before June
30, 2002.

In September 2000, the Company issued to the holder of its bridge notes
warrants to purchase 250,000 shares of common stock at an exercise price of
$4.00 per share on or before September 6, 2003. Cheniere also issued 250,000
shares to the note holder in September 2000, at a price of $2.00 per share, in
satisfaction of $500,000 of the bridge notes.

In December 2000, the Company consummated a private placement of 1,550,000
units consisting of one share of common stock, $.003 par value per share, and
one warrant to purchase one-sixth of a share of common stock at an exercise
price of $3.00 per share. The units were sold pursuant to Regulation D to
approximately twenty-six accredited investors, including members of the
Company's management and affiliates who purchased an aggregate of $475,000. The
total purchase price of the units sold was $3,100,000. Proceeds of the
offering, net of offering costs, were approximately $2,866,150 and will be used
to fund exploration activities and for other general corporate purposes. Petrie
Parkman & Co. acted as financial advisor to the Company in connection with the
private placement, and principals of Petrie Parkman & Co. purchased an aggregate
of $500,000 in the offering. The holders of the shares of common stock issued
in this offering were granted certain registration rights.

Short-Term Promissory Notes

At December 31, 2000, Cheniere had no outstanding debt obligations. At
December 31, 1999, Cheniere had outstanding short-term notes payable of
$4,963,213. Three financing facilities comprised the balance: platform
financing of $3,090,643, well services financing of $1,117,570 and December 1997
bridge financing notes of $755,000. The terms of each of these facilities and
of others that were utilized within the three years ended December 31, 2000, are
described in the following paragraphs.

April 2000 - $2,000,000 Bridge Financing - In April 2000, the Company
established a bridge financing facility which provided for: borrowings of up to
$2,000,000 bearing interest at a rate equal to LIBOR plus 2%, a placement fee
equal to 2% of the commitment amount, the issuance of warrants to purchase
250,000 shares of common stock at an exercise price of $4.00 per share on or
before September 6, 2003, and conversion of the notes payable into common stock,
at Cheniere's election, at a price per share equal to $2.00 per share. Cheniere
borrowed an aggregate of $2,000,000 under the facility during 2000. In
September 2000, the Company repaid $500,000 in cash and issued 250,000 shares to
satisfy an additional $500,000. In December 2000, Cheniere repaid the remaining
balance of $1,000,000 plus accrued interest.

September 1999 - $3,100,000 Platform Financing - On September 1, 1999,
Cheniere established a $3,100,000 financing facility to fund a production
platform and other exploration and development costs in the West Cameron Block
49 area. Borrowings under the facility were repaid from Cheniere's share of net
cash flow from production through the West Cameron Block 49 platform. The note
was secured by Cheniere's oil and gas properties and had a maturity date of June
30, 2000. Financing costs included interest at 10% per annum and a 5% net
profit interest in the initial two wells producing through the platform. At
December 31, 1999, the outstanding balance under the facility was $3,090,643.
During 2000, the Company borrowed an additional $605,000 under the same facility
and repaid all principal and interest due under the facility.

December 1999 - $1,117,570 Well Services Financing - In December 1999,
Cheniere entered into a financing agreement with a supplier of well services to
consolidate and convert trade accounts payable balances into

23

a short-term secured note payable. Interest was payable at 10% per annum. The
note was secured by Cheniere's oil and gas properties and matured on July 5,
2000. At December 31, 1999, the outstanding balance was $1,117,570, which
balance and all related interest were repaid during 2000.

December 1997 - $4,000,000 Bridge Financing - In December 1997, Cheniere
completed the private placement of a $4,000,000 bridge financing. The notes
payable issued by Cheniere had an initial maturity date of March 15, 1998, which
was extended ultimately to March 15, 2000, when the then-remaining balance was
paid. In connection with the issuance of the notes payable and with various
extensions in the maturity dates, the Company has issued 70,273 shares of common
stock and warrants to purchase 925,809 shares of common stock at prices ranging
from $4.00 to $7.00 per share. The notes bore interest at rates ranging from
LIBOR plus 4% to LIBOR plus 6% (approximately 12.14% at December 31, 1999).

Exploration Agreement

On March 10, 2000, Cheniere entered into an exploration agreement with an
industry partner. Under the terms of the agreement, Cheniere's exploration
partner acquired an option to participate at a 50% working interest level in any
drilling prospects generated by Cheniere over the subsequent eighteen-month
period within a defined area of mutual interest in the Gulf of Mexico. Pursuant
to the exploration agreement, Cheniere receives a management fee of $230,000 per
month over the eighteen-month term of the agreement. In addition, Cheniere's
partner pays a disproportionate share of the cost of leasing and of the initial
test well on each prospect. In October 2000, Cheniere assigned its rights and
obligations under this agreement to Gryphon in connection with the Gryphon
Transaction.

Exploration Funding

On October 11, 2000, Cheniere completed a transaction with Warburg to fund
its exploration program on approximately 8,800 square miles of seismic data in
the Gulf of Mexico (the "Louisiana Data Set") through a newly formed affiliated
company, Gryphon. Cheniere contributed selected assets and liabilities in
exchange for 100% of the common stock of Gryphon and $2,000,000 in cash, (36.8%
effective interest after conversion of preferred stock). Such assets include:
the Louisiana Data Set, certain offshore leases, a prospect then being drilled,
its exploration agreement with an industry partner and certain other assets and
liabilities. The net book value of the assets and liabilities contributed was
$7,065,919, which consisted of assets of $9,115,963, which primarily consisted
of unproved oil and gas properties and liabilities of $2,050,044, which
primarily consisted of account payable. Warburg contributed $25,000,000 and
received preferred stock, with an 8% cumulative dividend, convertible into 63.2%
of Gryphon's common stock. Cheniere and Warburg also agreed, under certain
circumstances, to contribute an additional $75,000,000 to Gryphon, proportionate
to their respective ownership interests. Cheniere accounted for the
contribution of net assets at its historical cost, whereby the net amount of
such assets and liabilities less the $2,000,000 in cash was reclassified to
investment in affiliate. No gain or loss was recognized at the time of
contribution, primarily due to Cheniere's commitment to provide additional
funding described above.

Cheniere accounts for its investment in Gryphon using the equity method of
accounting. Cheniere does not participate in the day-to-day management of
Gryphon, does not exercise control over Gryphon and cannot effect a change in
the management of Gryphon. Cheniere's equity share of Gryphon's earnings
(losses) for the period from October 11, 2000 through December 31, 2000 was
$426,649, calculated by applying Cheniere's 100% common stock ownership interest
to Gryphon's net income of $19,003 and reducing such result for Gryphon's
preferred dividend arrearages ($445,652). At such time as Warburg converts its
preferred shares to common shares, Cheniere's equity share of Gryphon's earnings
will be calculated at 36.8%.

24

Seismic Reprocessing

Between June 2000 and October 2000, Cheniere acquired licenses to
approximately 6,800 miles of seismic data primarily in the shallow waters
offshore Texas and also in the West Cameron area in the Gulf of Mexico (the
"Offshore Texas Project Area") in separate transactions with Seitel Data Ltd., a
division of Seitel Inc., and JEBCO Seismic, L.P. Cheniere has committed to
reprocess all of the data from the Offshore Texas Project Area at a cost of
approximately $8,500,000, payable in installments beginning in October 2000 and
continuing through the final delivery of reprocessed data, which is expected to
occur by December 2001.

Recoverability of Investment in Oil and Gas Properties

The recoverability of the Company's unevaluated oil and gas properties is
dependent on future events, including obtaining adequate financing for its
exploration and development program, the successful reprocessing of the 3D
seismic data in the Offshore Texas Project Area, the successful completion of
its planned drilling program, and the achievement of a level of operating
revenues that is sufficient to support the Company's cost structure. At various
times during the life of the Company to date, it has been necessary for the
Company to raise additional capital through private placements of debt or equity
financing. When such a need has arisen, the Company has met it successfully.
It is management's belief that it will continue to be able to meet its needs for
additional capital as such needs arise in the future.

Cheniere's needs for additional financing include the following:

. Additional capital will be required to pay for Cheniere's share of costs
relating to the drilling of prospects and development of those that are
successful, to exercise lease options, and to acquire additional oil and
gas leases. The total amount of the Company's capital needs will be
determined in part by the number of prospects generated within its
exploration program and by the working interest that the Company retains
in those prospects.

. The Company will need funds for the payment of approximately $8,000,000
related to future deliveries of reprocessed seismic data through December
2001.

. The Company may need capital to fund its pro-rata share of the capital
calls by Gryphon that are approved by Gryphon's Board of Directors. The
Company's share of such future capital calls could total up to
$27,600,000. If the Company elects not to fund its pro-rata portion of
such capital calls, and Warburg funds its portion, as they would be
entitled, the Company will suffer dilution of its holdings in Gryphon. If
the Company subscribes to its pro-rata portion of such capital calls but
fails to fund, it would lose its ability to subscribe to any future
capital calls and would suffer dilution of its holdings in Gryphon. It is
anticipated that Gryphon will make cash calls for additional funds during
2001.

. The Company will need funds for the payment of a transfer fee related to
the assignment to Gryphon of its seismic license over the Offshore
Louisiana Project Area. Cheniere is obligated to pay a transfer fee of up
to $2,500,000, in ten installments of $250,000, which would become
payable after one month of production from each of ten separate
successful wells completed by Gryphon within the data set.

. Should the Company choose to make an acquisition of producing oil and gas
properties, it is likely that such an acquisition would require that some
portion of the purchase price be paid in cash, and thus would create the
need for additional capital.

Additional capital could be obtained from a combination of funding sources.
These potential funding sources include:

. cash flow from operating activities,

. borrowings from financial institutions,

. debt offerings, which would increase the Company's leverage and add to
its need for cash to service such debt,

. additional offerings of the Company's equity securities, which would
cause dilution of its common stock,

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. sales of portions of its working interest in the prospects within its
exploration program, which would reduce future revenues from its
exploration program,

. sale to an industry partner of a participation in the Company's
exploration program, including sale of a license to the approximate 6,800
square miles of seismic data in the Offshore Texas Project Area, which
would reduce future revenues from its exploration program, and

. sale of all or a portion of the Company's producing oil and gas
properties, which would reduce future revenues.

Cheniere's ability to raise additional capital will depend on the results
of its operations and the status of various capital and industry markets at the
time such additional capital is sought. Accordingly, there can be no assurances
that capital will be available to the Company from any source or that, if
available, it will be on terms acceptable to the Company.

New Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." In June 1999, the FASB extended
the adoption date of SFAS 133 until January 1, 2001, through the issuance of
SFAS No. 137, "Deferral of the Effective Date of SFAS 133." In June 2000, the
FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities," which also amended SFAS 133. SFAS 133, as amended
requires that companies recognize all derivative instruments as either assets or
liabilities on the balance sheet and measure those instruments at fair value.
Changes in the fair value of derivatives are recorded each period in current
earnings or other comprehensive income depending on their designation, their
intended use, or their ability to qualify as hedges. The Company adopted SFAS
133 in the first quarter of 2001; such adoption did not have a material impact
on its financial statements.

In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." SAB No. 101 was implemented in 2000 and did not have a material
effect on the Company's financial statements.

OTHER DEVELOPMENTS

Cheniere received notice on May 15, 2000 from The Nasdaq Stock Market
stating that the Company was not in compliance with certain requirements related
to the listing of its shares on The Nasdaq SmallCap Market. Specifically, the
market price of the Company's common stock had fallen below $1.00 per share. On
September 21, 2000, Cheniere appeared before a Nasdaq Listing Panel and
requested an exception to the requirement. Nasdaq granted such an exception,
specifying that Cheniere must achieve a minimum bid price of $1.00 per share by
October 23, 2000 and maintain such a bid price for at least 10 consecutive
trading days thereafter. At a special meeting of the Company's stockholders
held on October 16, 2000, the stockholders approved a one-for-four reverse stock
split. The reverse stock split became effective on October 18, 2000 and reduced
Cheniere's issued and outstanding shares from 43,989,572 shares to approximately
10,997,393 shares. The closing bid price exceeded $1.00 per share every day
following the reverse split.

Nevertheless, on December 13, 2000, Nasdaq notified the Company that its
common stock would be delisted from the Nasdaq SmallCap Market effective at the
open of business on December 14, 2000. Effective December 14, 2000, the
Company's common stock began trading on the OTC Bulletin Board under the symbol
"CHEX". The Company appealed Nasdaq's ruling, and contemporaneously with the
appeal, applied for listing on The American Stock Exchange. When the Company's
listing application was accepted by The American Stock Exchange, it discontinued
the appeals process with Nasdaq. Cheniere's common stock began trading on The
American Stock Exchange on March 5, 2001 under the symbol "CXY".

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company produces and sells natural gas, crude oil and condensate. As a
result, the Company's financial results can be significantly affected as these
commodity prices fluctuate widely in response to changing market forces. The
Company has not entered into any derivative transactions.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO FINANCIAL STATEMENTS

CHENIERE ENERGY, INC. AND SUBSIDIARIES

Report of Independent Accountants............................... 28

Consolidated Balance Sheet...................................... 29

Consolidated Statement of Operations............................ 30

Consolidated Statement of Stockholders' Equity.................. 31

Consolidated Statement of Cash Flows............................ 32

Notes to Consolidated Financial Statements...................... 33

Supplemental Information to Consolidated Financial Statements... 46

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REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and
Stockholders of Cheniere Energy, Inc:

In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page 51 present fairly, in all material
respects, the financial position of Cheniere Energy, Inc. and its subsidiaries
at December 31, 2000 and 1999, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2000 in
conformity with accounting principles generally accepted in the United States of