Tellurian Strikes Lucky With New Pitch

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US-based Tellurian has used a radically different commercial proposition to snag two major offtake deals for its long-stalled Driftwood LNG project. The 3 million ton per year contracts with commodity trading giants Gunvor and Vitol represent a further evolution of the US LNG business, where developers are struggling as buyers shy away from taking on price risk, and last year's oil price collapse made Qatar's oil-linked pricing look even more attractive (WGI Apr.7'21). Tellurian is working toward a final investment decision on Driftwood's 16.6 million ton/yr first phase, and continues to talk to other potential offtakers. Chairman Charif Souki reaffirmed last week that site preparation in Louisiana will start this summer and that contractor Bechtel will be issued with a notice-to-proceed in the first quarter of 2022. What’s So Different? The two f.o.b. deals are over 10 years, rather than the 15-20 years normally sought by lenders -- the shortest ever signed by a new US project. And rather than being priced off the US Henry Hub, Tellurian is indexing the supply to an unspecified combination of S&P Platts’ Japan-Korea Marker (JKM) and the Dutch TTF benchmark. The formula is the greater of a coefficient to each index (likely with a few percentage points discount), minus a fixed fee that allows offtakers to recover shipping costs and a floor price that reflects break-even costs. Removing Henry Hub eliminates a major price risk for buyers, industry sources say. For Tellurian, the formula protects it from from downside price risks but allows it to benefit from JKM/TTF price upside. Tellurian puts Driftwood's variable costs at $2.50 per million Btu. Sources reckon the floor price could range from $4/MMBtu-$4.50/MMBtu, based on upstream costs of $1.50/MMBtu, pipeline costs of $0.25/MMBtu and liquefaction costs of $2.50/MMBtu. Liquefaction costs could shrink as capacity rises to the proposed 27.6 million ton/yr maximum. According to one source, what really concerns lenders is whether Tellurian can repay its debt at the floor price. Sources agree that now is a good time to price US LNG off the two indexes. TTF prices have been supported by a dramatic rise in European carbon prices, while JKM is becoming increasingly liquid as Asia's de facto LNG benchmark. How Can Tellurian Do It? Tellurian’s ownership of upstream resources is key to its ability to offer non-Henry Hub-priced LNG. Rather than buy from the grid, it wants to source gas from its own assets. After buying into the Haynesville Shale in 2017, it is on the prowl for more acreage. CEO Octavio Simoes has reportedly said Driftwood won't be sanctioned until there are enough reserves for the first phase. Tellurian is offering 10 million tons/yr of supply, according to Simoes. That leaves 4 million tons/yr to sell, although it will likely reserve some for its own marketing. Before the Gunvor/Vitol contracts, Tellurian's only other firm commercial deal was with TotalEnergies, which bought a 23% stake in 2016 and signed a heads of agreement in 2019 to invest $500 million in return for 1 million tons/yr of partner supply and 1.5 million tons/yr from Tellurian Marketing (WGI May1'19). But Total's interest may be waning, and it recently cut its stake to less than 10%. The expected start of construction this summer will likely influence its decision whether to stay or go. Tellurian's business model has undergone various changes as it failed to attract investors. In 2017, it offered a fixed price of $8/MMBtu. A strategy in which buyers would invest heavily upfront, with their strong credit ratings used to secure funding, also flopped. The lack of new investors means Tellurian will have to raise more debt to finance the liquefaction plant as well as upstream assets. Despite a stellar team at Tellurian's helm, many investors were wary of its free-spending ways. In a bid to restore confidence, management has been repaying debt voluntarily. It declared the company debt free as of the second quarter with $58 million of cash on hand. The new contracts have also bolstered its share price. From $1.28 per share in early January, the price now is around $5. Can Others Replicate? It might be difficult for fellow developers without their own upstream assets to persuade US producers to sell gas on a different index (WGI Jul.3'19). “We tried to get gas producers to sell us gas on JKM or TTF but were never successful,” a source says. “They could be put in a position of being forced to produce gas below production cost. Their boards would never agree to take that kind of risk even with the upside opportunity it provided.” Another challenge is the time it takes to build LNG infrastructure. When export pioneer Cheniere signed two 15-year JKM-indexed gas supply deals with US producers EOG Resources and Apache in 2019, it already had trains in operation at Sabine Pass and Corpus Christi. According to another source, "it's hard for a producer to agree on a formula when the gas would be sold only five years later.” Clara Tan, Singapore

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