Tellurian, a United States-based liquefied natural gas (LNG) startup, has landed three sale and purchase agreements (SPAs) for its Driftwood LNG liquefaction plant and export terminal, located just south of Lake Charles, Louisiana. One SPA is with Vitol, a commodity trading firm. The second is with Gunvor, the largest independent global trader of LNG by volume. Those two deals (announced in June) have similar structures and are expected to generate a combined US$24 billion in revenue over 10 years.
The third deal came on July 29 when Tellurian announced it had signed an agreement with Shell. Each of the three SPAs is for 3 MTPA of LNG over a 10-year period. The three agreements came within 10 weeks of each other. With 9 MTPA of total capacity, the agreements comprise nearly all of the capacity of Driftwood’s first two plants. “Tellurian welcomes Shell to the Driftwood project,” said Tellurian President and CEO, Octávio Simões. “Shell manages one of the largest and most diverse portfolios of LNG in the world and is leading the industry in delivering carbon dioxide (CO2)-neutral LNG cargoes. Owing to Driftwood’s integrated project, our ability to accurately measure well to loading arm emissions and reducing emissions where operationally possible, further enables Shell’s CO2-neutral LNG offering. With these SPAs, we have now completed the sales to support the launching of the first two plants. Tellurian will now focus on financing Driftwood, in order to give Bechtel notice to proceed with construction in early 2022.”
Riding High In 2019, Shot Down In 2020
Tellurian’s Driftwood LNG is arguably the single most ambitious US LNG project. Phase 1 will consist of three plants with a combined capacity of 16.5 MTPA and an expected cost of US$16.8 billion. Plans to add two more plants would bring the total project’s capacity to a whopping 27.6 MTPA for a total cost of US$30 billion. All told, the facility would have 20 LNG trains and at least 705,000 m3 of storage capacity.
The three SPAs are a big boost for Tellurian, which has had a rough go of it as of late. The company landed two big deals in 2019, one with French integrated major, Total, and the other with Petronet, one of India’s largest LNG importers. However, the COVID-19 pandemic took its toll on the LNG market, especially greenfield projects that depend on funding. In March 2020, Tellurian laid off 40% of its workforce. In November 2020, Tellurian proceeded to revamp its C-suite by replacing CEO Meg Gentle with Simões, as well as by adding two new board members. The final blow came a month later. After several extensions, Petronet failed to finalize the investment deal by the December 2020 deadline, effectively canceling its US$2.5 billion supply agreement with Tellurian.
Regaining Its Footing
After a brutal 2020, Tellurian has been hard at work drumming up renewed interest in Driftwood. The timing has worked out well. In early June 2021, West Texas Intermediate (WTI) crude oil prices crossed the US$70 per barrel mark for the first time in nearly three years. Between January and May 2021, Henry Hub natural gas prices averaged over US$2.50 per MMBtu every month and $3.25/MMBtu for the five-month period. For context, consider that the EIA’s December 2020 short-term energy outlook forecasted a 2021 average spot price of US$3.01/MMBtu. It’s worth mentioning that the Texas winter freeze contributed to higher gas prices, which will inflate full-year numbers. The Henry Hub February 2021 average price was US$5.25/MMBtu, roughly double the January 2021 average.
An Integrated Business Model
Tellurian’s high-risk/high-reward business plan hinges on the seamless integration of several moving parts, as well as high LNG prices and demand. Similar to an integrated oil and gas major that contributes to the entire integrated supply chain upstream, midstream, and downstream, Tellurian plans to operate its business from the wellhead to the export terminal. It will source upstream gas production from the Haynesville Basin in East Texas and Northwest Louisiana, which will then be transported by the Driftwood pipeline to the Driftwood LNG export terminal and liquefaction facility in southwest Louisiana. The upside of the integrated model is that it allows Tellurian to better monetize its own US domestic production; monitor emissions; and achieve ESG objectives, and gives it potentially more leverage during contract negotiations with overseas buyers. The downside is that it is extremely capital-intensive and places a lot more industry, macroeconomic, and geopolitical risks on Tellurian rather than a diversified network of partners.
Digging Into The Business Plan
Tellurian pushed back the final investment decision (FID) for Driftwood from 2021 to 2022, but now hopes to achieve commerciality in the first quarter of 2022. Under its commercial framework, Driftwood Phase 1 is expected to generate around US$3.7 billion in earnings before interest, taxes, depreciation, and amortization (EBIDA).
| Contract | Annual Revenue | Annual EBITDA | EBITDA Margin |
| 3 MPTA, 10-Year SPA | US$1.2 billion | $663 million | 55% |
| Driftwood Phase 1, If Fully Contracted Under 10-Year SPAs | US$6.7 billion | $3.7 billion | 55% |
(Data Source: Tellurian)
Driftwood is expected to have an EBITDA margin of 55%, meaning 55 cents of every dollar of revenue would be converted to profit. EBITDA tends to be a better profitability metric when comparing companies within the same industry than net income because it removes accounting factors that have to do with a company’s structure rather than its operational performance. An EBITDA of 55% would be very high for an LNG export company.
Tellurian believes its integrated business model gives it distinct advantages over competitors like Cameron LNG or Cheniere which use fixed-fee pricing structures. Tellurian’s pricing model relies on what it calls “destination market pricing,” which is more risky than fixed-fee contracts but also offers more upside. The two benchmarks it uses are Title Transfer Facility (TTF), the European benchmark, and Japan/Korea Marker (JKM), which is the Asian benchmark.
Tellurian believes destination market pricing gives it better optionality to buyers in Europe and Asia. Tellurian is forecasting the two-year average TTF price to be US$7.80/MMBtu and the JKM price to be US$9.00/MMBtu. Assuming a gas supply cost of $2.50/MMBtu, JKM pricing of $8.50/MMBtu, and TTF pricing of $7.50/MMBtu, Tellurian would be able to achieve a netback price of $1.75/MMBtu on JKM-priced LNG and $0.75/MMBtu on TTF-priced LNG.
Netback pricing is another useful profitability metric that demonstrates the total profit after production, transportation, marketing, and other costs are considered. In theory, Tellurian would be able to generate a higher netback price than its competitors because of operational efficiencies throughout the supply chain. However, like most things with Tellurian, projections are little more than theory and speculation at this point.
