Feature: A gambit or a new way to finance US LNG projects? Tellurian is about to find out

With the latest tinkering of its strategy for commercializing Driftwood LNG, US developer Tellurian is betting on the carbon price in Europe creating a floor for the international gas hubs to which it has linked its LNG supply contracts.

It is also hoping to satisfy banks it is seeking to loan it the money it needs to build the Louisiana facility that the shorter length of its deals with Gunvor, Vitol and Shell -- compared with traditional long-term contracts -- provide sufficient collateral.

Before the end of the year, Tellurian expects to have an answer to market questions about whether it can make the financing happen, in the face of uncertainty caused by extremely volatile end-user prices.

"If they do it, it will change the financing model globally for LNG projects," Poten & Partners' head of business intelligence, Jason Feer, said during a session at the World LNG & Gas Series Americas Summit & Exhibition conference in Lake Charles, which ended Nov. 5.

The 10-year deals that Tellurian signed to support the first phase of Driftwood LNG are indexed to a combination of the Platts JKM, the benchmark for spot-traded LNG delivered to Northeast Asia, and Dutch TTF, netted back for transportation charges. The LNG would be delivered free on board from Driftwood. Tellurian plans to produce its own feedgas for the first phase of the terminal.

"Does it work better with JKM and TTF high? Of course. It's a much higher margin," Tellurian CEO Octavio Simoes said in an interview with S&P Global Platts on the sidelines of the conference. "But we're not worried about how low does it get because there is a natural floor."

Based on a current carbon price in Europe of around Eur 65, that would translate to $6-$7 TTF, or European index, Simoes said.

"That's our model," he said.

By eliminating the US Henry Hub gas price from the equation, Tellurian hoped to alleviate one measure of volatility that was preventing more North American LNG projects from getting off the ground. The run-up in global gas prices over the last year has added a new layer of volatility, one that some LNG producers believe could eventually weaken global demand.

The shipping component in Tellurian's model also has raised some uncertainty in the market, given how expensive LNG freight is currently. On Nov. 5, day rates stood at $250,000/day for the Pacific basin and at $195,000/day in the Atlantic.

Those rates translate to around $6-$7/MMBtu for the Pacific and $2-$3/MMBtu in the Atlantic. Tellurian, on the other hand, expects the shipping costs it will be netting back to its counterparties to be $2/MMBtu from US-Asia and $1/MMBtu from the US to Europe.

The difference for Tellurian is the ships that Simoes said the counterparties the developer signed with will bring to the table.

"Somebody who signs a contract for 10 years isn't going to pay $6 or $7," Simoes said. "See this is the thing that people missed. Guvnor, Vitol and Shell, when they signed the deals for 3 million tons each and people said, 'Of course you sold them, there's no risk for them in those contracts.' They don't know what they're talking about. They are going to have to invest multibillions into the ships to lift those volumes over 10 years. They are not going to rely on the volatility of the charter, spot chartering, which may reach $200,000 a day."

Risk tolerance

Other US LNG developers with perhaps a more conservative view on tolerance for risk, including Sempra Energy, have so far stuck to the traditional business model that helped finance the first wave of major liquefaction facilities on the Gulf and Atlantic coasts.

Asked whether Sempra has missed the boat after recent long-term supply deals were announced by Cheniere Energy and Venture Global LNG with Chinese end-users, Dan Brouillette, head of Sempra's LNG infrastructure unit, said he believes there is plenty of demand to go around.

"There is plenty of opportunity for Sempra and other players in the marketplace," he told Platts in an interview during the conference.

He acknowledged that his US competition was undercutting other developers with liquefaction fees at around or below $2/MMBtu.

"We're going to look at everything we do," Brouillette said. "While there are going to be deals in the marketplace, short-term in duration, that's fine. That's not where we see our strengths."