INTERVIEW: Tellurian sees market support for higher liquefaction fees bolstering Driftwood LNG prospects

US LNG developer Tellurian sees market support for liquefaction fees in the mid-$2.40/MMBtu area as a tailwind for the company as it looks to advance its Driftwood LNG project to a final investment decision by the end of 2024, a senior executive said in an interview.

Tellurian, after shifting its commercial strategy multiple times in recent years in an effort to progress Driftwood, now describes itself as a company focused on delivering LNG free-on-board under long-term contracts, following a traditional pricing playbook that includes a fixed liquefaction fee plus a feedgas cost of around 115% Henry Hub.

"The market is north of $2.40/MMBtu but south of $2.50/MMBtu, in my view," Mark Evans, executive vice president of US LNG marketing and gas supply at Tellurian, told S&P Global Commodity Insights in a recent interview. "We feel very good about our prospects and the market is there. Our cost structure is in line with market opportunities."

The executive's comments offered further evidence of LNG developers needing to command higher liquefaction fees to underpin financing for their projects in recent years because of rising material and financing costs.

Liquefaction fees

Pricing for a 20-year sale and purchase agreement for 1.9 million mt/year signed in May between the UAE's ADNOC and Rio Grande LNG developer NextDecade was said to include a fixed liquefaction fee of $2.40-$2.55/MMBtu and a feedgas cost around 115% of Henry Hub, market sources told Commodity Insights.

In 2022, by comparison, some US developers reported liquefaction fees tied to long-term capacity were being agreed to at around $2.00-$2.25/MMBtu. The increased fees also represent a departure from prior years, when some developers were offering long-term supplies at or below $2.00/MMBtu.

Tellurian does not have any firm long-term LNG contracts tied to Driftwood, after previous offtake deals were terminated. But the company struck a preliminary deal in late May with privately-held natural gas producer Aethon Energy Management that could provide a new lifeline for the company.

The deal included a heads of agreement for the companies to negotiate a 20-year offtake deal for 2 million mt/year from Driftwood with a price linked to Henry Hub plus a liquefaction fee.

Aethon also agreed to acquire Tellurian's upstream assets in the Haynesville Shale for $260 million.

Commercial talks

Tellurian said the deal improved its financial position, while supporting further long-term supply deals in a year when long-term contracting announcements tied to US projects have slowed significantly compared with 2023. To commercially sanction the first 11 million mt/year phase, Tellurian has a target of securing long-term deals covering 9 million mt/year of supply. A second proposed phase would expand Driftwood's production capacity up to 27.6 million mt/year.

"We are in various stages of discussions with a broad spectrum of industry participants for over 25 million mt/year of LNG," Evans said. "We finally have some commercial momentum, and we would hope that we have incremental announcements later this summer and fall."

There have also been management shake-ups, including the late 2023 ouster of co-founder and executive chairman Charif Souki and the March 2024 resignation of CEO Octavio Simoes.

Souki's replacement, co-founder and executive Chairman Martin Houston, pledged to cut costs, and in early June reported cutting first-quarter 2024 overhead expenses by more than half compared with the same period of the prior year. The developer in March said it was exploring a sale of the company among other options to improve its finances.

Moving forward

At the same time, the company reported a surge in customer interest since the White House hit "pause" on issuing key LNG export permits for new projects in January. The license from the US Department of Energy allows Tellurian to export LNG from Driftwood to countries that lack free trade agreements with the US, although the approval is set to expire in May 2026, meaning Tellurian will need to get an extension from the agency.

The company has also touted its engineering, procurement and construction contractor, Bechtel, as a competitive advantage at a time when the May bankruptcy of another EPC contractor, Zachry Holdings, cast a new spotlight on risks of unforeseen delays and cost inflation in the US LNG industry.

The developer began early construction of the project in March 2022 but gave Bechtel only a limited notice to proceed as it worked to raise the commercial and financial support to complete the project.

"It's in everybody's best interest that we move this project forward now," Evans said.

"The time is now," the Tellurian executive continued. "We're under construction -- That's important. Our regulatory house is in good order. Bechtel is in good order. Our EPC is in good order. The markets are in good order. We're finally being rewarded for all the things that we had done ... And now the management team has to deliver on this."