Tellurian's Souki Defends Current Business Model for Driftwood

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Tellurian Executive Chairman Charif Souki this week insisted his company has arrived at the right business model for its Driftwood LNG even as the long-stalled project is still facing major headwinds following a failed financing attempt and the loss of two offtakers.

Attracting the necessary capital has been difficult, he acknowledged at Tuesday's opening session of the Energy Intelligence Forum in London. Just a year ago global energy companies lacked capital and were cutting back on dividends, but most of these firms are now reaping record profits, opening the opportunity to make investments in projects like the 27 million ton/year (3.7 billion cubic feet per day) Driftwood project on the US Gulf Coast.

But several industry analysts last week gave Driftwood little chance of succeeding at this point. Driftwood spent over a year saddled by three problematic offtake contracts while the rest of the US LNG industry moved forward with almost 40 million tons/yr worth of deals.

Two of those troublesome deals for Tellurian expired or were terminated in late September, a pair of 10-year, 3 million tons/yr deals with Shell and Vitol. “Driftwood's biggest problems were with the structure of the contracts it signed with Shell, Vitol and Gunvor — and the risks that those contracts posed to lenders. If they were strong contracts, lenders might be willing to overlook the drama. But they weren't strong contracts," Clark Williams-Derry with the Institute for Energy Economics and Financial Analysis told Energy Intelligence last week.

Financing Woes

Meanwhile, Tellurian recently pulled the plug on plans to sell $1 billion of five-year bonds for 11.25%. Even the unusually high interest rate couldn’t overcome bankers’ perceived risk. The bonds were supposed to jump-start $13 billion in financing.

Tellurian is also now facing rising interest rates and increasing construction costs that make it a more difficult environment in which to secure financing. The company also faces mounting competition along the US Gulf Coast from cheaper LNG expansions being pursued by well-financed established players, like Souki's former outfit Cheniere, as well as Sempra and more nimble newcomers like Venture Global.

Holding Court

Despite his predicament, Souki held court at the EI Forum this week, defending his company's strategy and chiding Europe to get involved in projects like his.

When it comes to US LNG export projects, it is not about the duration of supply deals but more about investment in the upstream and infrastructure side as Tellurian has done, Souki said. If Europe wants to control the LNG resource, more investments are needed in projects, which are most likely to happen in the US and Qatar, he added.

“Europe is spending next winter $5 [billion] to $6 billion in subsidies to their consumers. For a fraction of that price, we could secure long-term gas reserves from the United States at cost,” said Souki, adding that there must be political will to do this, which he has not seen so far. Many European companies are “in fact are under pressure by their respective governments to make these investments.”

With governments now imposing windfall taxes on energy firms, the situation has turned into “you either make investment or we take the money away from you,” he maintained.

However, he admitted "dreaming about the days when you could get [US] gas on the water for $4-$5/MMBtu is something of the past,” adding that in order to justify an investment in natural gas plus liquefaction, “we have to think in terms of $10-$12."

LNG Projects, LNG Supply, Liquefaction, ENERGY INTELLIGENCE FORUM 2022
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