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LNG World Shipping

‘The second wave of US LNG exports will be as big as the first’

Fri 13 Oct 2017 by Karen Thomas

‘The second wave of US LNG exports will be as big as the first’
Meg Gentle: we are at the start of a second wave of export projects

Few LNG-export proposals have reached a final investment decision this year, yet Tellurian president and chief executive Meg Gentle is pressing ahead with the 26 million tonnes a year Driftwood LNG project in the US. Speaking exclusively to LNG World Shipping, Ms Gentle explains why

What stage have you reached with your export plans for Driftwood LNG?

Driftwood LNG is on Louisiana’s Calcasieu River, with liquefaction capacity for 26 million tonnes a year (mta). We are working on the project designs with technology providers Bechtel, GE and Chart Industries. We have almost completed the EPC contract and we completed the front-end engineering and design (FEED) in June.

We have calculated the cost of the plant at US$500-600/tonne, although we won’t know the final EPC costs until that contract is signed. We will execute the EPC agreement within the next month.

We have been working with the Federal Energy Regulatory Commission (FERC) and expect to complete the application process in H1 2018. That will allow us to start construction mid-year 2018. We are still on schedule – and it’s very important to maintain that schedule and to stay on-budget.

Will Driftwood LNG lead a so-called second wave of US LNG-export projects?

I believe we are at the start of a second wave of export projects. The first wave has almost 70 mta of liquefaction capacity under construction. We foresee the LNG market, based on moderate growth, requiring more than 100 mta of new construction to meet demand by 2025.

Between 60% and 70% of that will come from the US. The second wave will be very important – and we see it being as big as the first.

How many cargoes will Total buy from Driftwood LNG?

Total holds 23% of our equity, as a common shareholder. We took Tellurian public in February, trading on Nasdaq. We’ve almost tripled Total’s investment. However, Total did not sign any agreements as a customer; it signed up as a partner.

How many Driftwood LNG cargoes have you contracted?

Most of our enquiries are from big buyers of LNG, wanting to become partners in the project. This is the traditional structure for developing LNG plants. The customers are the partners in the project itself.

We will take the first half of next year to firm up our commercial model, to take a final investment decision and start construction in mid-2018. We do not have any LNG sold to date.

The market is becoming much more liquid. The LNG market is the second-largest gas market in the world after the North American pipeline gas market.  People are trading LNG on various indices. Every day, some 300 LNG cargoes are moving around the world.

Any buyer can call the sellers or the trading houses to divert a cargo from its original route. Not so many contracts are needed now.

Analysts expected most Sabine Pass cargoes to go to Europe. So far, that prediction has been incorrect. Where will Driftwood LNG cargoes end up?

Sabine Pass cargoes were fixed against long-term contracts but the buyers have retraded that LNG, optimising it to send to different markets. That’s a really good example of the increased liquidity in the market.

Driftwood’s LNG will go everywhere – to Europe, which has a transportation advantage for US gas, and to Asia, which is 75% of the LNG market and is often willing to pay a premium. But the Middle East is also a rapidly growing market that was not buying LNG five years ago. And some cargoes will go to South and Central America, for switching power generation to gas.

Is it also hard to predict what lies ahead because the markets are so volatile?

This is why we are working to ensure our business model offers the lowest costs. We know we will deliver competitive LNG to all these markets. We have expertise building liquefaction capacity at low cost.

To construct a plant at US$550/tonne, we will deliver next-generation liquefaction capacity. We’ve also secured our own low-cost gas supply, buying natural gas-producing assets and land at Haynesville in Louisiana for US$85.1M. There’s a little production there now, of some 4 mcf/d but it has an expected resource of some 1.3 tcf at 140 drilling locations.

We can produce that gas and deliver it to market for US$2.25 per mBtu. Before return on capital, we will have about US$0.75/mBtu of operating expense and fuel usage at the liquefaction plant. So we can deliver gas to the US Gulf for US$3/mBtu.

Was it the plan, all along, to invest upstream?

We were working with that possibility – we had to have low-cost supply. We had to, as far as possible, know the cost of our own supply and not be subject to volatility in the US market.

We planned a couple of things to build the supply portfolio. First, we designed the Driftwood pipeline to connect with around 35 bcf/d of flowing gas. We will buy around 4 bcf/d when the plant is at full capacity. We’ve also been talking to producers in the US about buying gas directly from them in the field.

The third point was purchasing the reserves and developing the gas ourselves. We’ve spent most of the last year working out whether we have the capability to buy and to operate. In May, we hired a reservoir exploration team. This acquisition is the first step in building a portfolio of gas supply. We are looking for reserves of 15 tcf. That’s our goal.

Tellurian announced at Gastech this year that it would offer buyers cargoes priced at US$8/mBtu for 7 mta under eight-year contract. Does that offer still stand?

The US$8 offering is from 2023-2028 for cargoes fixed to Tokyo. That offering still stands, based on expectations that we know our costs of production. That’s still a model for those who want to buy on a fixed-cost basis. Purchasing the reserves makes that possible.

How important now is it to sign that all-important first supply contract?

If LNG buyers want contracts, we are very well positioned to be flexible, to meet their needs. But our model means that contracts aren’t necessary for us to move forward. That puts us in position to start construction once the permitting process is completed and the EPC contracts are ready.

How many ships will Driftwood LNG need to bring its cargoes to market?

If it takes two ships per million tonnes and we export 26 mta, that’s roughly 50 vessels. But if we’re saying that global demand will require an additional 100 mt of liquefaction capacity, that’s 200 LNG-carrier newbuildings!

Do shipowners have the appetite to order that tonnage on spec?

We believe that a few shipowners will continue to maintain a few vessels on spec. But we don’t expect large numbers of newbuilding vessel orders until new liquefaction projects reach FID. It takes two years to deliver a new ship, four or five years to deliver a new liquefaction plant.

How far is Tellurian planning to venture downstream, perhaps as an investor in new LNG-import markets?

We have expertise in project development – we are enthusiastic about supporting new regasification capacity, particularly where that helps to expand demand. The floating storage and regasification unit (FSRU) market has been incredible in opening new markets and supporting low-cost, 600 MW power plants that can come online within two years.

We would be open to investing in regas projects that help us to grow our markets and support US LNG growth.

How far down that road have you come?

We are looking at projects. We don’t have any active investments. Around 150 mt of FSRU projects are being proposed around the world. The fact that it’s tied to demand – that’s really interesting.

Things seem to have moved quickly this year for Tellurian and for Driftwood LNG; are you on the home stretch?

I’d like to think we’re on the home stretch, yes. As we say in the States, we’re on the 10-yard line!


Driftwood LNG, the background

Cheniere founder Charif Souki formed Tellurian Investments early last year, having resigned from the board of the company that launched Sabine Pass and Corpus Christi LNG, having fallen out with activist investor Carl Icahn over how quickly to expand.

Mr Souki and ex-BG director Martin Houston announced immediately that Tellurian would develop a US$6-8Bn LNG-export project on Louisiana’s Calcasieu River, to meet mid- to long-term gas demand. Former Cheniere executive vice-president Meg Gentle jumped ship to join Tellurian in August.

In November, GE Oil and Gas invested US$25M in Tellurian. In December, French energy firm Total took a US$207M position.

Driftwood LNG has permits to export to countries that have a free-trade agreement with the US. It is waiting for approval from FERC.

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