INTERVIEW: Tellurian to draw in equity partners for Driftwood Phase 1 by year-end

US LNG developer Tellurian aims to draw in equity partners for Phase 1 of its proposed Driftwood LNG project by end of 2023 and has targeted to deliver LNG in the second half of 2027, the company's President and CEO Octavio Simoes told S&P Global Commodity Insights in an interview.

"We will own 45% and our equity partners will own 55% [in Phase 1]," Simoes said on the sidelines of the Energy Asia conference in Kuala Lumpur last week.

"We are in full construction [phase] right now... We have prepared the site, installed the piles, are doing the dredging, work related to the tanks, and we've spent over a billion dollars on the site," Simoes said.

In May, a company presentation noted that it had executed a binding letter of intent for $1 billion in financing and has to date invested or received commitments for $2 billion of project costs.

Various parties -- oil majors, "mini majors", end-users such as utilities, trading houses, and businesses that have significant portion of their costs related to LNG such as large steel manufacturers and shipping companies -- are interested in the project Simoes said, adding that by investing in a project like Driftwood LNG, they can sell the LNG at cost or use it for themselves, helping hedge expenses.

Although there was a significant interest in the model, the process of finalizing equity partners was taking longer than initially expected, as it is a complex process, which goes beyond merely signing a contract, Simoes explained.

"You have a suite of documents that you must evaluate on governance, operations, equity contributions, joint venture. So, to build the project on an equity basis is a much more complex process than signing an SPA that you take to the bank for financing," he said.

Meanwhile, the company is also taking steps to curb Scope 1 and Scope 2 emissions, Simoes said.

"We have identified initiatives in planting of trees, committing about $25 million or about 13 million trees with the National Forest Foundation," Simoes said.

"We are also looking into the viability of projects in carbon sequestration, and in other forms of reducing carbon like using carbon capture on the inlets of our liquefaction facility," he said, adding that the company was also carrying out emissions monitoring for methane and eyeing green completions while curbing flaring for its activities.

Europe's winter needs

Europe secured its LNG supplies last year by paying a premium over what Asians were willing to give, and invested significantly in regasification facilities, Simoes said.

"However, I think they [Europe] don't realize that just having regasification facilities doesn't assure that they are going to get supply. The world has more than twice the amount of regasification capacity than the supply, and building regasification does not guarantee any supply," Simoes said.

To avert energy shortages, the continent also spent close to a trillion dollars in subsidies for keeping the cost of energy low for its population, Simoes said.

"I am not sure they can do it every year and the fact are that nothing is getting less problematic in the next three years," Simoes said.

"So, if they don't have a warm winter like last year, they could be in significant trouble in trying to attract LNG to their shores and the only way they can do that is by paying a higher price," Simoes added.

Simoes believes that instead of providing subsidies, Europe should have invested in LNG projects and made sure those were built so that in about four years they had assured availability.

But the narrative in Europe is such that they are very reticent in investing capital in producing LNG, when doing so makes complete sense, Simoes said.

Simoes also highlighted that if in future for some reason Europe did not require any gas, which is very unlikely, they could still supply to Asia and Africa, allowing those countries to burn a cleaner fuel compared to what they have available presently.

LNG would not only help Asian countries such as Bangladesh, Pakistan, Vietnam, Philippines meet their energy needs but also help them in lowering carbon emissions, Simoes said.

Coping with energy shortages

The world is fundamentally short of energy supply and the situation is not merely because of Russia's invasion of Ukraine but due to under investments for many years in the oil and gas sector, Simoes said.

"People don't realize how fundamental the oil and gas sector are to economies and they confuse energy with electricity although electricity is only about 25%-30% of the total energy demand," Simoes said.

According to the company's presentation, global gas market volatility has demonstrated the impact of under-investment in LNG. Nearly all the global capacity under construction, about 135 million mt/year, is required to backfill Russian piped gas to Europe, it said.

The recent Wagner coup in Russia did not make much difference to Europe from the supply point of view even though some LNG from Russia still finds its way to Europe, Simoes said.

However, if the situation in Russia becomes unstable to the point that oil supply would be somehow curtailed or the gas that they supply via pipeline to some parts of the world would be cut further, supply risks would get exacerbated, aggravating the problem that the world already faces of being fundamentally short of energy supply, Simoes said.

In future, most of the LNG supply will come either from the US or Qatar, Simoes said, noting that US can "very easily" compete with Qatar. "Russia was the other option but they have taken themselves out of the picture."

"One of the things we [industry] can do is to invest in producing vast amounts of energy so that we at least lower some of the costs that are related with energy supply. As a result, we will also lower the spectrum of inflation and interest rates will also likely come down," with the objectives of energy security and affordability being achievable, Simoes said.