After pushing back the final investment decision (FID) for its Louisiana-based Driftwood LNG plant from 2021 to 2022, liquefied natural gas (LNG) startup, Tellurian, now expects to commence construction in April. The company had previously announced it hoped 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 (EBITDA) per year.
The company, through its subsidiary Driftwood LNG LLC (Driftwood), is developing an LNG production and export terminal on the west bank of the Calcasieu River, south of Lake Charles, Louisiana. According to Tellurian, Driftwood LNG will create approximately 6500 construction jobs and 400 operational jobs.
Contracts And Financing
Tellurian has yet to secure financing for the entirety of the Driftwood LNG project. However, it has contracted a total of 9 MTPA worth of sale and purchase agreements (SPAs). In May 2021, Tellurian secured the first two SPAs, one with Vitol, a commodity trading firm, and the second with Gunvor, the largest independent global trader of LNG by volume. Tellurian then secured a third SPA with Shell in July 2021. Each SPA is for 3 MTPA of LNG over a 10-year period. Combined, the three SPAs are expected to generate annual revenue of US$1.8 billion and annual EBITDA of just under US$1 billion.
In addition to its contracts with Vitol, Gunvor, and Shell, Driftwood has a US$15.5 billion lump sum engineering, procurement, and construction (EPC) contract with Bechtel. Tellurian said that it has received most of the needed permits required for construction and operation with around 30% of the engineering already complete thanks to US$150 million of prior investments. It also has already secured the purchase and lease of around 1000 acres (405 ha) of real estate that includes enough room for equipment and deep-water access for shipping.
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 24.9 million scf (705,000 m3) of storage capacity.
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 of 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 be 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; 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. 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.
