Tellurian Inc. first tried the traditional long-term off-take model to fund construction of its Driftwood LNG export terminal, and then it offered fixed-price LNG to Asia. When those efforts did not work, the company turned to an equity buy-in approach, requiring a substantial upfront payment in exchange for the right to lift LNG for the life of the Louisiana facility.
This last option appears to be a winning number in a crowded field of U.S. LNG export developers as Tellurian signed a memorandum of understanding Sept. 21 with Petronet LNG Ltd. The agreement calls for the Indian company to negotiate an up-to-$2.5 billion stake in the holding company that includes Driftwood and four pipelines proposed by Tellurian.
"The requirements for India are so large, they can't afford to do small things," Tellurian co-founder Charif Souki said in an interview with S&P Global Platts.
If finalized at the top end — finalization is currently expected in the first quarter of 2020, subject to further due diligence and approval of directors — Petronet would get the rights to 5 million tonnes per annum of LNG of supply from Driftwood. One of the single largest potential volume commitments for any U.S. liquefaction project puts Tellurian on a path toward full commercialization of Driftwood's first phase by the end of this year, with construction targeted to begin soon after and first exports planned for 2023. Based on 5 mtpa, Petronet would be responsible for underwriting $5 billion of Driftwood's total project debt.
A founder and former CEO of Cheniere Energy Inc., Souki knows about big ideas. He guided Cheniere past its original plans to be a major importer of LNG to becoming a major exporter after the U.S. shale revolution unlocked vast reserves of cheap natural gas that could be used to feed liquefaction facilities along the Gulf Coast.
After he was fired from Cheniere in late 2015 in a dispute with the board over the direction of the company, just as Cheniere's Sabine Pass terminal was on the cusp of exporting its first cargo, Souki joined former BG Group PLC executive Martin Houston to start Tellurian, with designs of being a competitor to Cheniere one day. Along the way, he brought along a number of Cheniere officials, including former marketing chief Meg Gentle, now the CEO at Tellurian.
"Buyers are always looking to manage their portfolios on a one-, five-, 10-, 20-year time horizon," Gentle said in an interview about the Petronet preliminary agreement. "The challenge for them, as they are thinking about their portfolio, is what is the future contracting in a context that LNG is becoming commoditized and price indexes are changing?"
Partner talks
Petronet was among the companies said to be exploring the possibility of making an equity investment in Driftwood. Tellurian has been talking to other potential partners as well, in an effort to add to the $500 million investment France's Total SA agreed to earlier this year.
At full development of the 27.6-mtpa Driftwood facility, about half of the capacity is expected to be used by equity investment partners that have talked with Tellurian. Tellurian would retain the remaining capacity to market on its own.
Besides the equity commitment, Total also has agreed to buy 1.5 mtpa of off-take from Tellurian's marketing volumes, indexed to the Platts Japan Korea Marker, or JKM, the benchmark price for spot-traded LNG in Northeast Asia. Commodity trader Vitol Inc. has a preliminary 15-year deal, also to be linked to JKM, to off-take 1.5 mtpa of Tellurian marketing volumes.
Under the Petronet preliminary agreement, there is no separate off-take component tied to Driftwood's marketing volumes. The Sept. 21 signing coincided with a visit by Indian Prime Minister Narendra Modi to Houston. Modi was at the signing, and he was scheduled to participate in a cultural gathering Sunday that was expected to draw tens of thousands of people to NRG Stadium.
Robust demand
India presents one of the biggest demand opportunities for U.S. LNG developers. S&P Global Platts Analytics forecast the country's consumption to exceed 40 mtpa by 2024, nearly double 2018 imports on the back of economic expansion, declining domestic reserves and the government's determination to expand the share of natural gas in the country's energy mix to 15% by 2030 from 6% currently. But India's LNG importers, including Petronet, face significant challenges, including infrastructure deficits and operational inefficiencies across the downstream markets.
In the Platts interview, Souki acknowledged the infrastructure challenges in India as well as in the U.S., where more pipelines are being developed to move shale gas to the Gulf Coast to support proposed liquefaction facilities.
"They have five years to solve that, and they are already working on it," Souki said. "I don't think it is going to be a concern."
Harry Weber is a reporter with S&P Global Platts. S&P Global Market Intelligence and S&P Global Platts are owned by S&P Global Inc.
