Tellurian to build out upstream gas reserves before sanctioning Driftwood LNG: CEO

Houston — Tellurian plans to produce all the natural gas it will need to feed the proposed Driftwood LNG export terminal in Louisiana, CEO Octavio Simoes told S&P Global Platts in an interview March 25.

The developer will not sanction the liquefaction project until it has secured sufficient upstream reserves for the 16 million mt/year first phase of the up to 27.6 million mt/year facility, he said. With only a small acreage position in Louisiana's Haynesville Shale, Tellurian has a lot of drilling rights to acquire before it can meet its goal. Asked about the timing of a final investment decision, Simoes said, "stay tuned."

The upstream move is necessary to make feasible another update to its strategy that Simoes disclosed: Tellurian is offering 10 million mt/year of Driftwood supply for a 10-year term for the price of the monthly Platts JKM assessment or Dutch TTF index, minus the cost of shipping. By eliminating the US Henry Hub gas price from the equation, Tellurian hopes to alleviate one measure of volatility that has so far prevented it and many of its North American competitors from building.

"We adapt to the circumstances and are not afraid to move to what works," said Simoes, a veteran Sempra Energy executive who took the helm at Tellurian after Meg Gentle stepped down in November 2020.

At full development, about half of Driftwood's capacity was expected to be used by equity investment partners that Tellurian has been soliciting for the last few years. The remaining capacity was to be retained by Tellurian to market on its own.

To date, however, only France's Total has made a firm commitment to an equity partnership in Driftwood -- a $500 million deal signed in 2019. Total, which has reduced its stake in Tellurian from 20% when the partnership deal was announced to about 8% currently, can walk away from the project investment if Tellurian does not declare a final investment decision by June.

The equity investment feature is still part of Tellurian's business model, Simoes said. He said the new features were an "evolution" of its model. The company is in talks with Total about the future of its Driftwood investment, though Simoes would not speculate on whether the deal will continue past summer.

"We're in conversations with everybody," Simoes said. "My Zoom screen is very busy these days."

Market outlook

In a December 2017 interview with Platts, then-CEO Gentle said if the developer got into 2019 and did not have commercial momentum toward FID, it might consider other options, including a potential sale of Driftwood. Some two years later, Tellurian has not seen much commercial momentum beyond the Total deal, at least based on its public comments.

Simoes said the market was in a different place when Gentle made those comments. It was before the coronavirus pandemic and before new midstream infrastructure was built to allow Permian Basin producers to deliver more gas to US Gulf Coast demand centers.

"We're not entertaining any conversations about the project with others in terms of ownership," Simoes said.

But he added, "Obviously, we encourage every single discussion on every commercial topic with everyone."

The focus now, Simoes said, is on the new price offering and building out Tellurian's upstream gas drilling portfolio.

"In order for the Driftwood model to work, we would be looking at a significant amount of reserves under Tellurian to support all of the gas to produce eventually the 27 million tons," he said. "We currently don't have the reserves needed. But, obviously, we would not launch the project unless we would."