Tellurian Inc. is in no hurry to sell all of the 27 million metric tons/year (mmty) of liquefied natural gas (LNG) capacity from the proposed Driftwood export project in Louisiana even though there’s an opportunity to do so, according to CEO Octávio Simões.

driftwood

The company has agreed to supply 9 mmty of LNG from the unsanctioned terminal at prices linked to the Japan-Korea Marker (JKM) and Title Transfer Facility (TTF). The pricing model is a departure from other U.S. export projects that largely buy gas or sell LNG at prices linked to the more stable Henry Hub.

“We could have sold all of it, all 27 mmty on JKM and TTF,” Simões said during an interview with NGI on the sidelines of the recent North American Gas Forum in Washington, DC. “We had all kinds of people that wanted to be part of it. We sold it to the first three that stepped up, but right now, we’re basically telling people we’re in no rush to sell anymore, but people are knocking on our door.”

Global gas prices have skyrocketed this year, hitting records amid a rebound in demand following the pandemic. The supply crunch that has followed, as Simões and other energy executives have said recently, is largely attributed to underinvestment in the oil and gas sector in recent years amid a push toward decarbonization. Volatility on the spot market has driven LNG buyers back to the table to negotiate for longer-term supplies.

Simões said the company remains confident it will secure financing for Driftwood and provide Bechtel Corp. with a notice to proceed before the end of March for the 11 mmty first phase of the project. He said there were “different pathways” and “different timelines” to bring the rest of the facility online.

“That’s an evaluation, an analysis that we’re looking into,” Simões told NGI.

How is Tellurian’s Contracting Approach Different?

U.S. LNG projects have typically lined up bank financing with long-term sales and purchase agreements (SPA). The SPAs often carry costly fixed-fee components and provide cash flow assurances to underpin the steep costs of building an export project. 

Tellurian plans to sell LNG from the first phase at overseas prices netted back to the Gulf Coast to exclude shipping costs. The 10-year contracts have no fixed fees, which has cast doubt over the project’s ability to gain financing, along with Tellurian’s exposure to the spread between the price of U.S. gas, TTF and JKM. 

Simões argued the risk is easily managed under Tellurian’s integrated structure. The Houston-based company produces natural gas in the Haynesville Shale, which it plans to sell to offset the costs of feed gas for Driftwood. 

“What is our exposure to commodities if we own and produce our own gas?,” he asked. “The only financial or market risk, if you will, is the basis differential between the different places we’re going to sell the gas that we own and produce, and the different places where we buy the gas that we’re going to transport to the facility.”

Simões stressed that Tellurian can “manage the basis risk.” He said the company’s cost of LNG production would essentially start with cheaper gas from the Haynesville versus costlier gas purchased at Henry Hub prices.

Ultimately, the first phase of Driftwood would need 550 Bcf/year of feed gas. Tellurian expects to exit 2021 producing 70 MMcf/d from the Haynesville. It expects to exit 2022 producing 220 MMcf/d. The company is actively working to expand its upstream assets in the Haynesville as well. 

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Beyond the first phase, Simões said Tellurian plans to reserve 12 mmty of LNG to deliver with its vessels once it has the capital to secure them. That supply could sell into the spot or term markets on a delivered ex-ship basis. 

He noted that the company’s current offtakers have also taken a huge risk by committing billions in investments to ensure they have the ships needed to satisfy the lifting obligations included in their free-on-board contracts with Tellurian. The company has signed contracts with Gunvor Group Ltd, Royal Dutch Shell plc and Vitol Inc.

Tellurian’s management team is also wrestling with how best to limit the environmental footprint of Driftwood when it comes online. At a time when other export facilities operating and under development have committed to carbon capture, net zero or ambitious plans to track the emissions associated with their cargoes, Simões said many options appear to be uneconomic or unviable. 

There is no framework in place to ensure that nature-based credits adequately offset carbon emissions. Simões also noted that a company is unlikely to be credited for purchasing offsets if carbon pricing is implemented in the United States. He said the investment isn’t worth it if policymakers are unwilling to give credits for any offsets against a carbon price. 

He said carbon capture does not exist at “the level and scale we want” to capture emissions throughout the liquefaction process. For example, it could take between four to six years to get permits for carbon injection wells, he said. Very few have been permitted in the United States. The typical permit application time was about six years for those that have been permitted, according to Clear Path, a nonprofit focused on advancing policies that help cut emissions in the energy and industrial sectors. 

“I’m not going to invest in carbon sequestration unless I know I have a place to put it.”

Even if the company could eventually utilize larger carbon sequestration projects under development along the Gulf Coast, it would be problematic to redesign the facility. 

“We can do carbon sequestration in pretreatment, taking the carbon out that comes with the gas,” before it is liquefied,  Simões said. To capture the carbon dioxide associated with the rest of the liquefaction process would require additional authorizations from the Federal Energy Regulatory Commission.

According to Simões, Tellurian would essentially have to repermit the plant.  “You’d sacrifice two years. My shareholders aren’t going to like that, and there’s no guarantee if you reopen the FERC process that they’d look only at that. As a matter of fact, every indication is that if you reopen your process, we have to look at everything all over again.”

However, Tellurian is actively working to curb its environmental footprint. The company’s upstream segment doesn’t flare gas and has “zero tolerance for methane leaks,” Simões said. Tellurian also has said its integrated operations would make it easier to track and certify greenhouse gas emissions along the LNG value chain if its customers were interested. Its production has not yet been certified by a third party. 

Simões said implementing a carbon price in the United States that could be integrated into a global carbon market would be one of the best prescriptions to curb the oil and gas sector’s emissions. Under such a policy, Tellurian could then make better decisions “on how to create as much carbon neutrality” as possible.