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Driftwood LNG nears FID, backed by 10-year contracts in break from norm

Highlights

Tellurian expects to reach FID by end of April

US developers report increased buyer interest

  • Author
  • Corey Paul    Harry Weber
  • Editor
  • Adithya Ram
  • Commodity
  • LNG Natural Gas

The rising demand for US LNG and high natural gas prices abroad will allow a developer to finance a Gulf Coast export terminal without the traditional 20-year customer contracts that used to back US projects, according to Charif Souki, the executive chairman and founder of Driftwood LNG terminal developer Tellurian.

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Souki said Tellurian is on the verge of proving the approach by commercially sanctioning the Driftwood LNG project in Louisiana in the coming weeks, nearly seven years after Souki was ousted as CEO of Cheniere Energy following disagreements with activist investor Carl Icahn.

"It got me fired at Cheniere, but I was right," Souki, who pioneered US LNG exports, said in a recent interview at the CERAWeek by S&P Global energy conference in Houston. "I want to be long [on] American molecules, with the ability to sell it on the global markets because I always anticipated that we were going to continue to be able to develop our resource somewhere in the $2 to $3 range but that the world was going to be shorter and shorter on natural gas."

Tellurian was in financing talks over Driftwood during a massive run-up in European LNG prices. Supply uncertainty has driven the increase after Russia's invasion of Ukraine, which exacerbated an existing gas crisis in Europe. The market dynamics represented a remarkable change from two years ago when delivered prices in Europe and spot prices in Asia fell below $2/MMBtu. Recent prices have been assessed at 30 to 40 times that level.

For months Tellurian has said 10-year agreements -- deals with Gunvor Group, Vitol and Royal Dutch Shell that total 9 million mt/year -- more than cover the first phase of the Driftwood project, which could produce about 11 million mt/year before expanding to 27.6 million mt/year.

"I am sold out," Souki said. "I don't need or want to do any more commercial agreements. Because with current prices and what I envisage happening, once my first phase is built, the rest will be built from cash flow."

Tellurian is also one of several US LNG developers reporting increased buyer interest during the crisis in Europe. Souki said the company would still consider entering further offtake agreements with European counterparties to provide security of supply.

"It is the human thing to do," Souki said. "Do we have conversations with people in Europe? Yes, of course, because they are scrambling, trying to figure out how they are going to bail themselves out."

'Seismic shift' in financing

Tellurian expected to reach a final investment decision, or FID, on the project by the end of April. Souki said Tellurian plans to produce enough gas to supply the export facility in five years but does not need to secure more upstream assets before commercially sanctioning the project.

Banks historically have been warm to loaning money to LNG projects, which have proven to be good business for lenders without any examples of major export facilities that were built and then failed, Jason Feer, head of business intelligence at Poten & Partners, said in an interview. Tellurian's challenge is convincing banks that its business model works and that the contracts it is using to underpin the project provide sufficient collateral, given that the repayment period for LNG projects has typically exceeded 10 years, Feer said.

"If they are able to go to FID and get financing, it would be a seismic shift in how LNG projects are financed," Feer said. "We have never seen a project backstopped by 10-year contracts."

Tellurian has said it expects leverage levels for the first phase of between 60% and 70%. The anticipated payback period would be much quicker than previous projects, enabling Tellurian to meet buyer demand for short, flexible contracts, according to the company.

'The stomach for' 10-year deals

Tellurian's 10-year deals are indexed to a combination of the S&P Global Commodity Insights' Platts JKM -- the benchmark for spot-traded LNG delivered to Northeast Asia -- and the Dutch Title Transfer Facility benchmark price in Europe, netted back for transportation charges. The LNG would be delivered free on board from Driftwood.

The developer's exposure to prices under its model could leave the company vulnerable if US cargoes are suddenly uneconomic to ship for an extended period, a scenario Souki described as unlikely but one Tellurian could demonstrate to banks that it can weather.

"Of course, they have the stomach for it," Souki said. "It's a different debt-to-equity ratio, that's all."

Tellurian had estimated in 2021, when gas prices were lower, that annual cash flows from operations of the first phase could be enough for a payback period of less than three years for the development cost, based on a margin of $9/MMBtu. The estimate included an LNG sales price of $12/MMBtu after transportation costs, using the Platts JKM. The company estimated liquefaction and transport costs of about $1/MMBtu and a gas sourcing cost of $2/MMBtu.

Souki said the company was close to signing the deals it needed to support advancing Driftwood in 2020, but "then COVID-19 blew everything up."

"We are in fine shape now," Souki said. "The question now is, you have a business model that says you get your money back from an investment in a year and a half: Do you think it's hard to finance?"