Tellurian bets the ranch on LNG demand
The Driftwood facility is edging towards FID on a bullish outlook for global demand
US LNG project developer Tellurian passed another major milestone on the road to FID for its $30bn Driftwood LNG liquefaction and export facility in Louisiana, when it signed a memorandum of understanding (MoU) with India's largest LNG importer Petronet on 23 September. The $2.5bn equity and $5bn offtake investment was deemed important enough for US President Donald Trump to speak about it publicly and Indian Prime Minister Narendra Modi to mention it at the leaders' joint press conference.
French major Total is already committed to investing $907mn, with the documentation completed in July but pending FID, and negotiations are well advanced with other potential partners. Tellurian plans to retain roughly 49pc of equity.
"We are sticking to our plan of completing with our partners by the beginning of next year," the firm's CEO Meg Gentle tells Petroleum Economist. "It is really just a matter of time to get final documentation finished. Unfortunately, I do not have control over their approval schedules."
The US firm is offering equity in its Driftwood LNG project and plans to build it on a joint-venture basis. The project is unusual in offering the opportunity to invest in the full spectrum of services from production to pipelines and liquefaction.
“I believe the market will expand to take whatever LNG is supplied. We really tested that this year”
"It is innovative—but actually very similar to other international LNG projects," says Gentle. "[Other] US plants are a little bit different as they do not have to own the gas all the way back to the field in order to have security of supply, as you can just buy off the market."
As operator, Tellurian is incentivised to procure gas at the lowest possible cost; if gas is cheaper at US trading hubs to which it has access, it will not produce from own fields. "Henry Hub is set by the highest marginal '000ft³ cost of gas. We are investing back into the field so we can save roughly a dollar off that price," says Gentle, adding this would result in $3/mn Btu LNG for the partners.
Gentle says all permits are in place and Driftwood's EDC contract—a guaranteed fixed-price, lump-sum turnkey agreement—is fully executed with US engineering heavyweight Bechtel.
Full steam ahead
Gentle is bullish about LNG demand exceeding supply over the next decade. "If we had the supply, we could continue double digit growth, putting us at 370mn t by the end of 2019 and easily 600mn t sometime around 2025," she says. "But we are not going to have the supply to meet that."
Over the next four years the industry will only bring 60mn t of new LNG to the market, she predicts. On the supply side, "we are all going as furiously fast as possible to bring on LNG—but we are now talking end—2023 to 2025 as the fastest that we can get it done."
The Driftwood LNG facility is hardly the only one that is planned for launch in this timeframe. Demand growth can reasonably be expected to exceed supply in the next few years, once all the project in the current supply wave arrive and reach plateau. But the number of facilities targeted at the mid-2020s—from Qatar to Russia to Mozambique and even possibly Timor-Leste—could once again force down prices. However, Gentle is unperturbed.
"I am really comfortable. Firstly, some of that capacity will take longer to build than people expect—there will be delays," she says, noting that around 20mn t of expected 2018 liquefaction capacity arrived during 2019. "The ramping up volumes will spread out over more years than people expect."
"Secondly, I believe the market will expand to take whatever LNG is supplied. We really tested that this year. The market took 14pc year-on-year growth and the price went to $4.50/mn Btu. Demand was there to soak up the volume."
This is the second time the LNG market has grown by 50pc in the matter of a couple of years and proven itself to be "absolutely resilient", she says. "That will happen again for the next round in 2025-26."
“The infrastructure is so desperately needed that I am confident it will survive the [presidential election]”
While demand fluctuates between the regions, Asia consumes roughly three-quarters of LNG supply. "Most people are now including the Middle East in Asia and we have seen increasing volumes going into the Middle East," she says. "It is fantastic for them to have some supply diversification—just like everybody else."
Europe is widely predicted to take an increasing share. However, while it is true that more regasification plants are planned it remains to be seen how much demand will result. The real value from relatively modest investments in terminals could instead be in contract negotiations with pipeline gas suppliers such as Russia and Norway.
"I support more infrastructure everywhere so that the market can operate as efficiently as possible," says Gentle. "It provides the strongest market for all of us as energy suppliers and definitely for the energy consumer."
The overall cost of the US LNG export infrastructure boom—largely to facilitate shale oil extraction—was estimated to be up to $300bn by Tellurian chairman Charif Souki at the Gastech conference in Houston.
And the infrastructure is badly needed, says Gentle. "We are flaring over 1bn ft³/d of natural gas from the Permian because it does not have access to pipeline capacity."
There is 8bn ft³/d of pipeline capacity to bring gas from the Permian to south Texas and 6bn ft³/d of capacity under construction. Gentle expects the Permian to "easily get to 19bn ft³/d of production", dependent on oil prices. "So we are [still] 5bn ft³/d short of pipeline capacity."
$7.5bn Petronet’s total commitment to Driftwood LNG
It may well be needed, but that does not mean the financial markets are willing to fund it—especially given the poor return to investors from Permian producers. Again, Gentle remains supremely confident.
"If we provide the right regulatory environment, the capital will follow," she says. "Big capital is obviously [needed] on the liquefaction side. Banks are oversupplied with capital and I have been very pleased with the resiliency of the financial markets and their appetite for funding LNG plants. And private equity infrastructure funds in the US are flush with capital—they have just raised billions of dollars. In our case, equity is coming from LNG buyers."
If pipelines are built, the question shifts to whether south Texas can provide enough LNG export terminal capacity—if not, the effort would succeed simply in moving the problem further south.
Another potential obstacle is the 2020 presidential race. Plausible Democratic candidates include Bernie Saunders and Elizabeth Warren, who have both suggested they would ban fracking. While associated natural gas may be seen positively, the underlying oil production process is out of favour.
"The good news is that the heart of the Permian is in Texas," says Gentle. "It is better insulated than if it sat in the middle of California. The infrastructure is so desperately needed that I am confident it will survive the election. From a fundamental standpoint, it needs to happen."
Gentle says her biggest short-term concern is "overall global economic growth" while in the long-term competition from renewables poses the greatest threat.
However, renewables also bring opportunity. "I understand the importance of renewables but, actually, gas is its partner," says Gentle. "I am perfectly happy with all the renewables capacity as it has to go hand-in-hand with gas. Gas is obviously part of the solution for reducing carbon emissions."
Adding 200mn t of gas in place of coal for power generation would reduce carbon emissions by one gigaton, says Gentle. "On a long-term basis, we are always watching the proliferation of battery storage, competitiveness of renewables and how we, the gas industry, can serve the transition."