Tellurian takes flexible approach
US independent banks on cost control and optionality to fulfil its full value chain ambitions
There is no shortage of US Gulf Coast LNG export facility developers. But Tellurian stands out for a model where it not only wants to build and own a terminal, but to produce its own gas, build pipelines and sell cargoes to the global LNG market.
The firm, which was set up by former executives of pioneering US terminal developer Cheniere and UK producer BG, has already secured investment from its EPC contractor Bechtel, oil services heavyweight BHGE and Total. But it is now negotiating with interested parties for an $8bn investment for a 60pc stake in Driftwood Holdings, which will be responsible for the production, pipeline and terminal operations (see figure 1).
The new equity partners will then have rights to c.16mn t/yr of offtake from the Driftwood terminal, with Tellurian Marketing retaining c.12mn t/yr of capacity. The overall capacity of the planned Driftwood terminal, which received its final environmental impact statement from the Ferc in January, will be 27.6mn t/yr and Tellurian hopes to take a final investment decision (FID) in the first half of this year, targeting first LNG in 2023.
The project also encompasses three pipelines, the 2bn ft³/d Permian Global Access and 2bn ft³/d Haynesville Global Access, which will allow volumes from those two prolific shale basins to flow to the terminal, while the 4bn-ft³/d Driftwood pipeline will connect the project to the Eunice compressor station in Louisiana, the convergence point for two major offshore Gulf of Mexico pipelines and three different trading zones.
And Tellurian is aiming to become a growing producer in the Haynesville shale. It already has production of 3.3mn ft³/d and has identified up to 12 potential acquisition targets to achieve its goal of holding 15tn ft³ of reserves. It aims to produce Haynesville gas at a cost of $2.25/mn Btu, but when it can buy volumes at Henry Hub or other trading locations linked to its pipeline network at prices lower than $2.25/mn Btu, it will throttle back its own production and secure gas in the market.
Petroleum Economist sat down with Tarek Souki, Tellurian's senior vice-president for LNG trading and marketing, on the sidelines of BHGE's annual meeting in Florence last month.
PE: Tellurian has a unique model where it is not just a terminal operator, or even just procuring its own gas, but is becoming a producer in its own right.
TS: If you want to produce a cost model and you want to control your costs, you have to control them at every step of the chain. It does not suffice to just go and buy gas off the market. Given that we will be buying up to 4bn ft³/d, or producing up to 4bn ft³/d, it will give us a little bit of market power, and we are more comfortable competing with the larger movers of natural gas in the US.
But, for us, having the upstream assets-we have acquired about 10pc of the reserves and we will get up to about 15tn ft³ by the time we start production-that really maximises our optionality. We are not only doing that, but we are building three pipelines and it is really to get gas at the lowest possible cost all the time. Will the arbitrages that are currently available always be available, particularly when you look at the arbitrage between the places like Permian Basin and Henry Hub? Absolutely not.
I think, however, they will be available for a while. Every time you build a pipeline, it will start to close the arbitrage, but if you are producing more gas out of a basin than is currently available on the off-take, which is what we have now, those differentials will remain.
PE: So, your aim is to get yourself in a position where you can either produce or buy in the market depending on price and, with the pipelines, you are not just talking about buying at a Henry Hub price, you have different market prices at which you can buy gas?
TS: That is right. When you look at the various basins, Henry Hub is a small market in physical terms, although obviously some physical gas trades through there. It is "the" market, but it is not really when you look at the 15-20 basins just in the central southeast of the US. They are all differentials to Henry Hub, but plenty of them exist. Henry Hub is just the one that is the most visible and has become the standard for US pricing.
We can manage the differentials and that is fine. That was the thinking when we were at Cheniere and that is how we built those HH contracts.
We are building as much optionality into the system so that, when those arbitrages are not available, we just produce. And all the evidence around production in the US is that we will be able to produce and get gas to our plant at $2.25/bl, more often than not. People are making returns at $3/mn Btu, and most of these companies are leveraged. That $2.25/mn Btu figure does not include leverage.
PE: You mentioned the Cheniere experience, where you pioneered a percentage of Henry Hub plus a fixed fee SPA model. But your recent memorandum of understanding (MoU) to supply 1.5mn t/yr over 15 years to trader Vitol is on a Japan Korea Marker (JKM) basis, rather than Henry Hub?
TS: It is cif linked, but it is a fob contract. We account for a shipping differential, it is JKM minus a formula we have agreed. They backed-to-back with Tellurian Marketing on that, not with Driftwood directly. I do not think the banks are ready yet to go and finance a whole project on what the Asian price is going to be over the long term. I know one day it will get there, or the Gulf Coast marker will reflect what the best destination price is-it does already but with greater liquidity will reflect even better what the rest of the market is doing-and the banks will get comfortable with that, but we are still some ways off that.
We do not want to be trapped into any one thing, there are a lot of things about 115pc Henry Hub plus, whatever your adder is, that even the companies offering it today do not really think about. If you are selling LNG, where are you procuring your gas? And if you are procuring your gas, what are your price points? What is your strategy for that? Are you going to fit that in the 115pc of Henry Hub or not? These are all things that people have to think about if they really want to get gas onto a ship and make a return to shareholders and not be exposed to the differentials in various basins and various prices bases. That is something I do not think people have really thought enough about yet.
PE: In terms of formula for selling the gas going forward, is it another case of being flexible?
TS: It is. When we build Driftwood, we are going to have a fairly large stake in the capacity of that plant, so agreements like the Vitol MoU, that helps to manage that. I do not fancy having 11mn t/yr+ of des volume, that means we would have to take 50 ships, that is a huge undertaking. Maybe someday, but I think it is better to aim for the 20-30 ship range-built into that we do have seven years to get up to that speed-and just be thoughtful about how we execute that.
PE: So, for Tellurian Marketing going forward, we might expect to see a mix of Vitol-style deals and the firm also being an active player in the global LNG market?
TS: That is right. Part of it is a logistics optimisation game, you take 10-15pc of your portfolio, maybe 20pc-you have got to work out what your risk tolerance is-and you play around with that, and the other 80pc you want to be a little bit more secure on how that gets prosecuted. We are still figuring out what that mix is, what the pricing points are, when we go into different things, but, over time, you do not want to let too much float in the prompt. You can look at one-to-two-year strip deals, three-to-five-year strip deals, and I think that if you are a prudent operator, you are going to have a lot of things in your portfolio.
PE: And the Vitol MoU could be the start of a deeper relationship?
TS: Vitol have been out in the market securing long-term volumes, as a lot of the traders have been. They are one of the many counterparties looking at our equity offering, but who knows where that will go.
PE: What is the driver of having 20 smaller 1.38mn-t/yr trains rather than a smaller number of larger trains? Is that a cost decision, or to increase flexibility?
TS: We set out to reduce cost, that was our primary driver at the time. When you look at when we started this company, in 2016, we saw pretty much the bottom of the current LNG market in that summer and the following winter, which was dismal, everyone was negative and depressed. In pursuing those lower costs, you come to realise that flexibility helps to drive down costs because it reduces your redundancy in the system. That was really the big driver.
PE: In an oversupplied market could you choose to run at 100pc, 95pc, 90pc etc., if you had concerns over getting a return from producing?
TS: Operators of larger trains certainly have less flexibility on that. But, if you look at a supposedly "oversupplied" market, such as in 2016, nothing got produced which did not find a home. Every supplier operated as much as they possibly could. We in the LNG space have had the good fortune that we have not had to experience shutdowns yet, maybe it will come in time.
PE: And you may be better future-proofed for that?
TS: That is certainly a possibility. But I am hoping that, in my career, I will not have to see that!
PE: What is the timing on phases?
TS: The EPC contract is in four phases. It is a 27.6mn-t/yr facility, 11mn t/yr for the first phase and 5.5mn t/yr for each of the three subsequent phases. Each plant has four turbines and four liquefaction units and every six-to-nine months a new one will come on.
PE: What are the requirements for taking FID in the first half of 2019?
TS: We have to get our Ferc order, that is first and foremost. That is usually within 90 days of our final environmental impact statement, so the clock is on for that. And obviously we have to finish the commercialisation of the project, which is ongoing and going pretty well. Narrowing the field has been a process. It is not like signing a set of almost identical SPAs, barring a slight discrepancy in price or a first-mover discount.
This is a group of people investing together, bringing everyone along has been a complex yet fulfilling process. But it is coming towards the end, we are circling a good group. We are very pleased at how it is now coming together.