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Tellurian evolved with global LNG market, CEO says

➤ Tellurian Inc. opened its Driftwood LNG project to a broad pool of investors after listening to requests for equity.

➤ Liquidity in the global LNG market has increased quickly.

➤ A legal dispute with Cheniere Energy Inc. has not affected investors' interest in Driftwood, the Tellurian CEO said.

Tellurian President and CEO Meg Gentle oversees a different kind of U.S. LNG export project. The Driftwood LNG project mainly relies on equity partners that would buy stakes in the terminal and get LNG that they could use or resell, instead of relying on long-term LNG contracts and banks. The project would produce 27.6 million tonnes per annum of LNG. At CERAWeek by IHS Markit, S&P Global Market Intelligence sat down with Gentle to talk about Tellurian's financial structure, its potential business partners, and trade tensions. The following is an edited transcript of that conversation.

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Tellurian and Chinese LNG buyers are "ready to transact," President and CEO Meg Gentle said.
Source: Tellurian Inc.

S&P Global Market Intelligence: With what seems to be the end of an impasse over LNG project authorizations at the Federal Energy Regulatory Commission, does Tellurian feel the need to speed up equity and supply deals to underpin the project?

Meg Gentle: We are still driving everyone for our first half of 2019 [final investment decision], so the FERC schedule is as we've always expected it to come out.

We've been working with the equity customers and partners to get the partnership documents finalized, and our real urgency is that we want to start producing LNG from the plant as early in 2023 as we can. The expectation is that the LNG market will be pretty tight and prices should be pretty high.

In February you announced a memorandum of understanding with India's Petronet LNG Ltd. for a possible equity investment, but Tellurian has not disclosed the size of the potential investment or how much LNG capacity the deal could cover. Can you offer some more insight?

We're continuing to finalize the details. Overall, we expect that we'll have between four and eight customers, so that will mean that they [account] for on average 2 million tonnes each.

The first big deal we saw Tellurian announce was a memorandum of understanding with Vitol Inc. for a long-term sales and purchase agreement, and the potential deal is linked to the Japan/Korea LNG price marker. Why is that significant?

LNG as a commodity is growing up and will be tied to LNG price, and less and less tied to oil price or other natural gas prices. That's an important evolution that the industry is really just at the precipice of.

Tellurian revised its equity financing model by cutting down potential partners' buy-in to $500 per tonne from $1,500 per tonne. Why did Tellurian change the structure and choose to keep the equity model?

We came with the mindset that we needed to deliver LNG as cheaply as possible to the customers. In order to do that, we needed to know our cost of supply and remove their exposure to Henry Hub. The only way really to do that is integrate the model and produce gas in the field at a cost that is pretty dependable, deliver it to the plant, and then produce it on an integrated basis. When we went to the LNG community to propose that ... the overwhelming request [from them was] to be partners with us in the project. Our decision to pursue an equity model was really in response to customers' requests.

Some of the companies we are talking to have access to cheap capital, cheaper actually than what we can do with bank financing initially. We began with a 100% equity model, but we — together with those partners — decided it would be more efficient in the long run to put some substantial piece of the capital right at the assets where lenders like to be, so they can have the assets as their collateral. Then we put 70% debt on the structure, which is typical for project finance ... and that enabled us to lower the equity investment to $500 per tonne from $1,500 per tonne. It widened the universe of companies that could participate.

How many equity partners will you need to line up in order to make a final investment decision?

The lowest amount that we could go forward with would be the first 11 million tonnes. We have a group that actually looks like we would be finalized for 16 million tonnes ... and we have an absolute urgency to get that finished.

Saudi Arabia is reportedly one of the parties considering a deal for an equity stake. Is Tellurian still considering that partnership?

What I will say is I love the Middle East because the region consumes a lot of energy, has huge population growth and the companies there are knowledgeable on the upstream [side]. They have really great potential partner attributes. We are talking to everyone in the Middle East.

China is a key market for U.S. LNG exports. Has the trade conflict between the two countries impacted Tellurian's business?

We're in a position now where we and the Chinese buyers are sort of standing ready to transact on things when the two governments have concluded some of their trade negotiations.

Is Tellurian confident that it has a clean title to the Driftwood property? Is the legal dispute with Cheniere creating difficulty in lining up investors and or buyers?

It has not soured anything with investors or buyers. The land is a combination of some pieces that we own, some pieces that we have an option with a landowner to lease it and then some pieces that we've actually leased already. But in all cases we are very comfortable on clear title. In fact, that is a very important component of a FERC permit, and that requirement has already been satisfied.

Between your tenures at Cheniere and Tellurian, what is the biggest change in the LNG market that you have seen?

Definitely the increase in liquidity. We didn't even imagine it would happen this fast, but cargoes are really getting reoptimized around the world. The Japan/Korea Marker is now also traded on the Intercontinental Exchange Inc. financially and has been increasing exponentially in volume, so now it's like a real index and the price clearing mechanism for the industry. It's been a pleasant surprise.

Second, [there are] projects going to this equity model for starting their construction where they don't have any long-term contracts. They just have big LNG companies that are comfortable selling the LNG into the market in five years. That has kind of supported our theory of needing to go to that model.