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Tellurian offers fixed-price LNG as buyers call for shorter contracts

Tellurian Inc. co-founder Charif Souki is offering Japanese buyers five-year deals through the proposed Driftwood LNG export facility at a fixed $8/MMBtu, a split from traditional 20-year contracts with Henry Hub-linked pricing, as off-takers push for shorter agreements.

Souki, who launched Tellurian after he was ousted from his role as CEO of Cheniere Energy Inc., announced the offer at the Gastech 2017 conference in Japan.

"I'd see this as one part of a portfolio for Tellurian, in much the same way gas buyers mix long-term, fixed-price, or formula contracts with shorter, market-sensitive contracts, spot activity and financial tools," said Rick Smead, managing director at RBN Energy LLC.

Industry observers have pointed out a shift toward shorter, more flexible LNG contracts as buyers try to take advantage of an oversupplied market. Tellurian CEO Meg Gentle has said the company sees LNG contracts with a short to spot basis growing from roughly 30% to near 50% by 2020.

"We firmly believe that there will be a lot more short-term contracting," Gentle said in a March interview. "However, that doesn't mean there aren't any long-term contracts ... The reality is that we are all, both buyers and sellers, going to have to form a portfolio of some long-term contracts, some medium-term, some short-term."

Many U.S. developers have said short-term contracts are not in the picture for them, since they depend on the promise of a steady stream of cash to finance massive export ventures. But Tellurian's fixed-price offer could provide a compromise to developers' need for stability and buyers' push for flexibility.

"The risk of the offer appears manageable and ... [the arrangement] would give a very important element of certainty to support financing," Smead said.

Still, banks may not be convinced that such a deal locks in cash flow. "I am skeptical whether Tellurian's proposed five-year arrangement would be enough to satisfy potential lenders," Raymond James & Associates Senior Vice President Pavel Molchanov said in an email.

Tellurian has the help of oil and gas giant Total SA. Total announced in December 2016 that it was buying a 23% stake in Tellurian for $207 million, giving the small developer a boost as it taps capital markets for financing. While Total is solely an equity partner for now, Gentle did not rule out the possibility that the supermajor could become an off-taker.

Driftwood filed a formal application with FERC for the export terminal and a related 96-mile pipeline on March 31. The terminal, which would be located on the west side of the Calcasieu River in Louisiana, would include 20 liquefaction trains, each capable of producing 1.3 million tonnes per annum for a total capacity of 26 mtpa. Construction is expected to begin in mid-2018. (FERC dockets CP17-117, CP17-118)