Houston-based LNG player Tellurian Inc.
said last Thursday that its subsidiary has entered into a memorandum of
understanding (MoU) with Vitol, a British energy and commodities company, to
supply 1.5 million metric tons per annum (mtpa) of liquefied natural gas
(LNG) from its proposed Driftwood LNG export terminal south of Lake Charles,
Louisiana. Tellurian said that the two companies have agreed in principle on
the 15-year contract but are still ironing out the details of the deal.
Tellurian is trying to change the way the LNG business evolves. Instead of
pricing its LNG on the Henry Hub bench-mark, it will price LNG on the
Japan-Korea-Marker (JKM), a benchmark price assessment developed by
commodities data provider S&P Global Platts, which includes spot physical
cargoes delivered ex-ship into Japan, South Korea, China and Taiwan.
Currently, 72 percent of global LNG demand is derived from the
Asia-Pacific region, while Japan and China are the world’s largest LNG importers,
followed by South Korea. By pricing its LNG on the JKM, Tellurian is also
forward thinking and ahead of most of its industry rivals in realizing that
the super-cooled fuel is increasingly being delinked from oil-price
indexations and will in time trade more like a real commodity, similar in
some respects to the world’s most heavily traded commodities, crude oil and
iron ore.
Tellurian President and CEO Meg Gentle said, “The LNG business is evolving
into a true commodity market, which includes LNG purchases and sales based on
actual LNG prices rather than indexing to other energy products. JKM has
emerged as the most liquid and transparent pricing mechanism for LNG.
Tellurian is proud to work with Vitol, who has long been known for its
innovation and creativity in the energy commodity markets, to lead LNG market
transformation with a long-term LNG sale at the market index.”
Changing LNG project funding models
Not only is Tellurian going to have the first U.S.-based LNG export
project to base its fuel on JKM prices, the company is also changing the way
massive capex intensive LNG projects are funded.
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Historically, LNG projects were mostly funded when developers inked long
term off-take agreements with buyers in order to secure capital necessary to
reach the all-important final investment decision (FID) needed before a
project moves forward. Tellurian, for its part, is securing investment
partners to take an equity stake in its project instead for its massive 27.6
mtpa Driftwood LNG project. Tellurian is offering 60 percent to 75 percent
equity interest in Driftwood Holdings, which comprises Tellurian’s upstream
company, its pipeline and the upcoming terminal.
The company will charge around $1.5 bn payable over a four-year period for
1 million tonnes of LNG, or $1,500 per tonne for the equity, Martin Houston,
co-founder and vice-chairman of the firm, told
reporters on the sidelines of the Singapore International Energy Week
late last year. Houston said that by taking a stake in the project, investors
could eventually deliver LNG at even lower prices than the company claimed at
a conference earlier this year since it has been able to cut costs at the
Driftwood project.
The project will be one of the largest LNG export terminals in the world
and help the U.S. compete for top LNG exporter status against industry
heavyweights Qatar and Australia. More than 80 million metric tons of
capacity are under construction in the U.S., Tellurian recently estimated.
Driftwood is projected to become operational around the year 2022, a period
that until recently many analysts thought would mark the possible beginning
of a global LNG supply crunch. However, with rampant gas and LNG demand
coming out of China as the country works to replace dirtier-burning coal used
mainly for power generation with gas, LNG markets have been revolutionized.
Correspondingly, global supply of the super-cooled fuel could face supply
pressures a number of years ahead of earlier forecasts.
By Tim Daiss for Oilprice.com
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