This Billion Dollar Project Is Reshaping The LNG Business

Houston-based LNG player Tellurian Inc. said last Thursday that its subsidiary has entered into a memorandum of understanding (MoU) with Vitol, a British energy and commodities company, to supply 1.5 million metric tons per annum (mtpa) of liquefied natural gas (LNG) from its proposed Driftwood LNG export terminal south of Lake Charles, Louisiana. Tellurian said that the two companies have agreed in principle on the 15-year contract but are still ironing out the details of the deal.

Tellurian is trying to change the way the LNG business evolves. Instead of pricing its LNG on the Henry Hub bench-mark, it will price LNG on the Japan-Korea-Marker (JKM), a benchmark price assessment developed by commodities data provider S&P Global Platts, which includes spot physical cargoes delivered ex-ship into Japan, South Korea, China and Taiwan.

Currently, 72 percent of global LNG demand is derived from the Asia-Pacific region, while Japan and China are the world’s largest LNG importers, followed by South Korea. By pricing its LNG on the JKM, Tellurian is also forward thinking and ahead of most of its industry rivals in realizing that the super-cooled fuel is increasingly being delinked from oil-price indexations and will in time trade more like a real commodity, similar in some respects to the world’s most heavily traded commodities, crude oil and iron ore.

Tellurian President and CEO Meg Gentle said, “The LNG business is evolving into a true commodity market, which includes LNG purchases and sales based on actual LNG prices rather than indexing to other energy products. JKM has emerged as the most liquid and transparent pricing mechanism for LNG. Tellurian is proud to work with Vitol, who has long been known for its innovation and creativity in the energy commodity markets, to lead LNG market transformation with a long-term LNG sale at the market index.”

Changing LNG project funding models

Not only is Tellurian going to have the first U.S.-based LNG export project to base its fuel on JKM prices, the company is also changing the way massive capex intensive LNG projects are funded.

Historically, LNG projects were mostly funded when developers inked long term off-take agreements with buyers in order to secure capital necessary to reach the all-important final investment decision (FID) needed before a project moves forward. Tellurian, for its part, is securing investment partners to take an equity stake in its project instead for its massive 27.6 mtpa Driftwood LNG project. Tellurian is offering 60 percent to 75 percent equity interest in Driftwood Holdings, which comprises Tellurian’s upstream company, its pipeline and the upcoming terminal.

The company will charge around $1.5 bn payable over a four-year period for 1 million tonnes of LNG, or $1,500 per tonne for the equity, Martin Houston, co-founder and vice-chairman of the firm, told reporters on the sidelines of the Singapore International Energy Week late last year. Houston said that by taking a stake in the project, investors could eventually deliver LNG at even lower prices than the company claimed at a conference earlier this year since it has been able to cut costs at the Driftwood project.

The project will be one of the largest LNG export terminals in the world and help the U.S. compete for top LNG exporter status against industry heavyweights Qatar and Australia. More than 80 million metric tons of capacity are under construction in the U.S., Tellurian recently estimated. Driftwood is projected to become operational around the year 2022, a period that until recently many analysts thought would mark the possible beginning of a global LNG supply crunch. However, with rampant gas and LNG demand coming out of China as the country works to replace dirtier-burning coal used mainly for power generation with gas, LNG markets have been revolutionized. Correspondingly, global supply of the super-cooled fuel could face supply pressures a number of years ahead of earlier forecasts.