Shell, Vitol offtake agreements tied to Driftwood LNG terminated: SEC filing

Two of the three offtake agreements tied to Tellurian's proposed Driftwood LNG export terminal in Louisiana -- one with Shell and the other with Vitol -- were terminated Sept. 23, the developer said in a US regulatory filing.

The developer already had been struggling to secure financing before the terminations of the sale and purchase agreements.

In the filing, Tellurian said it received a notice of termination from Shell with respect to the LNG SPA the companies signed in 2021. Also on Sept. 23, the company delivered a notice of termination to Vitol regarding their LNG SPA dated in 2021.

The company did not fully explain the decisions, though the moves were presaged in August when Tellurian amended the offtake agreements with Vitol and Shell to revise language about notice of termination after a deadline for the developer of the export project to meet certain conditions passed. In the interim, the parties continued to talk. In a statement, Tellurian said it would now prioritize securing equity partners to support construction of Driftwood and that it believes the termination of the two offtake deals would provide it flexibility in its efforts.

Shell confirmed the termination of its agreement and wished Tellurian "success in progressing the Driftwood LNG project." In a terse statement, it did not offer an explanation, though it suggested it was open to "exploring future opportunities." A Vitol official declined to comment.

Initial construction

While Tellurian has begun initial construction at the site, it has only given contractor Bechtel a limited notice to proceed with work. It also has yet to arrange for necessary financing to complete the terminal and an affiliated feedgas pipeline, though those efforts are said to be active and ongoing.

Tellurian continues to push ahead on the financing and upstream fronts. In July, it paid $125 million to purchase natural gas assets in the Haynesville shale in Louisiana. The assets cover about 45 MMcf/d of natural gas production from 44 producing wells and five wells in progress across 5,000 net acres.

Tellurian's 10-year deals with Vitol and Shell, and a third one that still remains with Gunvor, each covered supply from Driftwood of 3 million mt/year. They were to be indexed to a combination of the Platts JKM, the benchmark for spot-traded LNG delivered to Northeast Asia, and Dutch TTF, netted back for transportation charges. The LNG would be delivered free on board from Driftwood. A 2019 partner and supply agreement with France's TotalEnergies that covered 2.5 million mt/year of Driftwood volumes was terminated in 2021.

Tellurian has said it plans to produce sufficient feedgas to support the LNG terminal. The deadline for Tellurian to satisfy conditions under the Gunvor deal is Dec. 31.

Alleviating volatility

By eliminating the US Henry Hub gas price from the equation, Tellurian hoped to alleviate one measure of volatility that was preventing more North American LNG projects from getting off the ground. The run-up in global gas prices over the last year has added a new layer of volatility, one that some LNG producers believe could eventually weaken global demand. The shorter length of Tellurian's commercial deals than the traditional 20-year agreements that were used to finance the first wave of US liquefaction terminals and the pricing mechanisms underlying Tellurian's agreements have raised questions in the market about the company's ability to obtain financing.

Tellurian shares sank Sept. 20 after the developer scrapped a public debt and stock offering, citing "uncertain conditions in the high-yield market." The proceeds from the offering were to be used to support the construction of Driftwood. After the latest disclosures, its shares sank further, down 16% in highly volatile afternoon trading Sept. 23 in New York.