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Tellurian took a step Thursday toward building commercial support for its proposed Driftwood LNG export terminal in Louisiana by disclosing that it had reached a preliminary supply deal with commodity trader Vitol.
The first offtake agreement announced to date by the developer is also believed to be the first long-term LNG contract inked by a US supplier that will be linked to Platts JKM, the benchmark price for spot LNG in Northeast Asia. While spot cargoes from the US are often sold basis JKM, long-term contracts have been mostly linked to the US Henry Hub price.
Because of the potential for substantial volatility on the price and cost sides, the contract poses a risk for the developer. But that could be mitigated by setting a floor price that would cover, at minimum, its feedstock cost, which it hopes to keep low by investing in upstream shale production and building pipelines to serve the facility.
For Vitol, the move can been seen as considering that in recent weeks, softer JKM prices have narrowed the margin on US cargoes shipped to the region. An offtake contract linked to the Asian import price could effectively hedge against that kind of risk in the future.
In a telephone interview, Tellurian CEO Meg Gentle said the move is an acknowledgment of how the global LNG market has changed since Cheniere Energy, where she used to serve as marketing chief, began selling offtake a decade ago for its Sabine Pass terminal in Louisiana, which shipped its first cargo in 2016. She cited the amount of liquidity that has emerged at JKM. Intercontinental Exchange said Thursday there was record trading in November in JKM futures contracts.
"When we started working on commercializing the Cheniere facilities in 2008 or 2009, we recognized the LNG market needed a transformative agent," Gentle said. "So, we sold the first contracts indexed to Henry Hub with full destination flexibility. That revolutionized the market. We sit here again today in late 2018 with the same realization that the market is ready for the next transformation. And, so, this we believe is the index for the next evolution of the market to becoming a real commodity."
Details of how the formula for the transaction will work were still being worked out, Gentle said, though she indicated that the shipping costs that would be incurred by Vitol under the free-on-board arrangement would be subtracted from the JKM price. If feedgas and shipping costs were low, and a liquefaction fee were included, Tellurian would benefit from an attractive spread, even with JKM falling. If such costs were high, like they have been in spot markets in recent weeks, the spread could narrow.
"On the risk side, it is then incumbent on all of us as producers to get our gas at the lowest possible cost," Gentle said.
The about 27.6 million mt/year Driftwood facility is part of the second wave of US liquefaction project, all targeted for startup in the early to mid-2020s, after the current crop of terminals that are under construction are set to go online.
Most of the second wave projects are relying on long-term contracts with offtakers to support the cost of construction. Some have had trouble reaching agreements as buyers seek shorter, more flexible terms.
In 2017, Tellurian tried something different. It pitched offtakers to pay an up-front fee for an equity interest in Driftwood Holdings, which will consist of entities including the terminal, that will give them the right to lift 1 million mt/year of LNG from Driftwood for the life of the terminal.
The original minimum buy-in of $1,500/mt was recently lowered to $500/mt.
Tellurian will retain as much as 11.6 million mt/year of capacity from Driftwood to market on its own, and that is where the memorandum of understanding with Vitol comes in.
The agreement calls for a Tellurian trading affiliate to supply 1.5 million mt/year of LNG from the facility. Tellurian and Vitol have agreed to negotiate a formal LNG sale and purchase agreement, which will include the condition that Tellurian receives regulatory approvals for the project and makes a positive final investment decision to build it.
Tellurian said Vitol is evaluating a potential equity investment in the Driftwood Holdings partnership. Startup is targeted for 2023.
-- Harry Weber and J. Robinson, firstname.lastname@example.org
-- Edited by Keiron Greenhalgh, email@example.com