Tellurian says talks with banks underway for $12 billion Driftwood LNG project

Tellurian is in talks with bank groups about financing its proposed Driftwood LNG export terminal in Louisiana after signing a series of supply deals with buyers that cover the project's first phase, the company said Aug. 9.

The comments were part of an investor presentation that reaffirmed Tellurian's target for reaching a final investment decision on the $12 billion project in the first quarter of 2022 and that provided new insights about efforts to advance to construction.

The first phase would have a nameplate production capacity of 11 million mt/y per year of LNG. Tellurian in recent months chose to pursue the smaller of two options for the first phase of the natural gas liquefaction and export facility, which at full construction would be capable of producing up to 27.6 million mt/y. As recently as May, Tellurian had estimated a capacity of about 16.6 million mt/y for the first phase.

The decision to pursue the smaller option coincided with the developer lining up three similar medium-term supply contracts with commodity traders Gunvor Group, Vitol and the portfolio player Shell. That marked significant commercial progress for Tellurian, after a two-year lull in the LNG industry that saw only a few long-term contracts signed for supplies linked to US terminals. The company said the 10-year offtake commitments, which total 9 million mt/y, more than cover the first phase of the project.

Questions remained about whether the company's strategy of using 10-year supply contracts to finance an LNG export project will ultimately be successful. LNG project developers have traditionally relied on longer-term sale and purchase agreements that cover periods of 15 or 20 years. But an answer may materialize in the months ahead.

International financing

Tellurian estimated that $5 billion in annual cash flows from operations of the first phase could be enough for a payback period of less than three years for the development cost, based on a margin of $9/MMBtu. The estimate, which factored in Tellurian's upstream production plans, included an LNG sales price of $12/MMBtu after transportation costs, using the S&P Global Platts Japan Korea Marker, or JKM, the benchmark price in Northeast Asia. The company estimated liquefaction and transport costs of about $1/MMBtu and gas sourcing cost of $2/MMBtu.

Tellurian said it expects to secure financing from a group of between eight and 10 international banks and that it expects leverage levels for the first phase of between 60% and 70%. The developer said it also planned to fund future phases from retained cash flow.

Tellurian did not immediately respond to a request for comment on Aug. 9. But Executive Chairman Charif Souki said during a July podcast that Tellurian expects to be able to announce the bank group that will finance the project by the end of 2021. Souki also described banks as bullish about the Driftwood LNG project because of the strength of market fundamentals in recent months.

Haynesville Shale

Tellurian has said it wants to produce all the gas it will need to feed the Driftwood terminal, and it will not sanction the project until it has secured sufficient upstream reserves for the first phase.

Based on its current drilling program in the Haynesville Shale province, Tellurian expected to have almost 100 MMcf/d in production by the end of the year, three times the volume it was producing at the end of 2020. Tellurian said the feedgas requirement for the first phase of the project would be about 550 Bcf/y, or about 1.5 Bcf/d, and that there was a "process underway with several upstream counterparties" to acquire an "estimated total 5-10 Tcf of resource" funded by a mix of cash, debt and equity.

Tellurian's cash position, with no debt on its balance sheet, sets the stage for the developer to proceed with the purchase of gas production assets, which may prove an important catalyst for the company, B. Riley Securities analyst Liam Burke said in an Aug. 9 note to clients.

"There are other benefits to internally produced natural gas other than supporting stable gross margins and the company's strategy of providing low-cost LNG to global markets," Burke wrote. "The cash flows derived from Haynesville natural gas production also provide underlying cash flows that would support the company's internal operation during the liquefaction project development period and could make it easier for the company to secure the larger project financing debt required for the build-out of Driftwood LNG on better terms."