Meg Gentle sees herself as a disrupter.
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Previously it was as a marketing executive who helped Cheniere Energy become the first US exporter of LNG produced from shale gas. And now it is as the CEO of Tellurian, pitching a new business model to finance construction of a rival terminal.
Related factbox: No regrets for Tellurian CEO after move
In effect, it is the global market that is forcing the change in strategy, Gentle said in an interview December 8 with S&P Global Platts reporters and editors in Houston.
No longer are buyers eager to sign 20-year take-or-pay contracts like the ones that helped Cheniere launch its Sabine Pass terminal in Louisiana.
With so much supply becoming available in the market through the end of the decade, Asian utilities and European traders have more options to get LNG anytime they want, she said.
"If we want to sit and be patient until mid-2020 when the market is tight, people will probably sign anything to get supply," Gentle said. "But we would rather stay on the timeline and be producing into the tight market. And so in order to do that, we have got to recognize the reality the market is demanding more flexible terms. And frankly, we can land on a business model that represents that."
The shift came in September when Tellurian announced that it would offer equity interest in a holding company that will include its production operations, the 3.4 Bcf/d Driftwood LNG export terminal it is developing in Calcasieu Parish Louisiana, and Driftwood Pipeline, which will transport feedgas to the terminal.
Under the pitch, offtakers would pay $1.5 billion to Tellurian in exchange for the right to lift 1 million mt/year of capacity from Driftwood for the life of the terminal.
They would pay the lifting cost and use the regasified LNG themselves. Or they would pocket the difference between the lifting cost and what the cargo will fetch in the market.
With a Henry Hub price of $3/MMBtu and a shipping cost of $1.50/MMBtu, the margin could be about $3.50/MMBtu or more based on realized prices of $8/MMBtu for delivery to Asia.
"If we translated that back into 115% of Henry Hub plus something, and we assumed Henry Hub was about $3, then our structure translates back into 115% of Henry Hub plus $1, assuming that you're amortizing the $1.5 billion over the 20-year period. But, in fact, the customer has the right to lift the LNG for the entire life of the plant, so they can amortize the capital over however long they want to think about it."
By comparison, some of Cheniere's 20-year take-or-pay contracts with foundation shippers at Sabine Pass ranged from 115% of Henry Hub plus $2.25/MMBtu to $2.49/MMBtu, she said.
Other shippers paid as much as $3/MMBtu on top of the markup to Henry Hub, she said.
Potential buyers are considering new model
Under Tellurian's business model, the company will retain 7 to 11 mt/year of LNG that it will use to market under spot, medium-term and long-term arrangements, similar to how Cheniere's marketing unit manages its excess capacity at Sabine Pass. So far, Tellurian hasn't secured any firm takers to speak of.
While a previous plan to offer fixed-price LNG to Asia for a five-year period fell flat, Tellurian has been talking to about two-dozen potential buyers about its equity interest plan, including Asian and European utilities, major integrated oil and gas companies, and LNG traders, Gentle said.
Tellurian has opened a data room for the parties to get more information about its plan for operations, and a number of players are currently working on their due diligence.
"We will be in a position to be distributing documents by the end of January, early February," she said. "We will spend the first half of 2018 really negotiating the partnership agreements and sale and purchase agreements."
Tellurian is looking to prove commercial viability for Driftwood by the first half of 2018, with construction to begin soon after and the startup of at least the first phase of the project, or about 1.5 Bcf/d of gas output, in 2022.
Company is adding staff, working on permits
To get there, Tellurian has been beefing up staff, aggressively pursuing regulatory permits and working on narrowing operational costs.
It recently signed a $15.2 billion lump-sum turnkey agreement with Bechtel to be the construction contractor for Driftwood, equating to a cost of about $550/mt of LNG. Bechtel also was hired as the contractor for Cheniere's Sabine Pass.
The price per ton puts the facility's expected engineering, procurement and construction costs among the lowest compared with the current generation of LNG terminals, data from Platts' PIRA Energy Group show.
Tellurian also bought drilling assets in Louisiana's Haynesville Shale to help control costs of feedgas to Driftwood, and it is talking to producers in South Texas' Eagle Ford and the Permian, which spans West Texas and southeastern New Mexico, about possibly expanding its production base.
Despite the progress, there are plenty of risks that remain, mostly centered around the market.
Second wave of projects have faced challenges
Since Sabine Pass shipped its first cargo in February 2016, none of the second wave of US LNG export projects that are being proposed has taken a final investment decision amid fears of a global supply glut and uncertainty about future demand.
Few firm long-term contracts have been reached for the dozen or so projects, and several of the developers have not provided updates on their progress on the commercial front in over a year.
Gentle — who joined Tellurian in August 2016 after being brought over by co-founder Charif Souki, the former Cheniere CEO who helped launch that company — hears the chatter, and she understands the concerns.
"As I look around the world at what can reach FID, I believe the call on the US will be roughly 60 million tons. That's like a doubling of what's under construction today," she said. "Driftwood, at 27 million tons, can't support all that. So we'll have some friends who make it to the finish line."
And if that doesn't happen for Tellurian, the 43-year-old Gentle said the company has a Plan B that could mean a buyout.
"If we get into 2019 and still no customers are signing for anything, then we'll have to make some decisions about what we do," the CEO said. "We'll have a fully permitted plant with an EPC contract that's intact, and that will be attractive to a company that wants to buy the whole thing."
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