Key Findings
At first glance, Tellurian Inc.’s proposed Driftwood liquefied natural gas (LNG) project looks like a cause for optimism for the U.S. LNG market after a dismal 2020 saw demand and prices plummet during the COVID-19 pandemic.
Driftwood’s revenues come with potential volatility, and they may not cover capital costs. A closer look at Tellurian’s history, finances and the structure of its newly announced LNG deals should give investors ample reason for skepticism.
Executive Summary
Global liquefied natural gas (LNG) markets suffered through a dismal 2020 as the COVID-19 pandemic raged. But the rapid rebound in both demand and prices has rekindled speculation about a new round of construction for projects in the United States. Some of this speculation has been fueled by the public relations efforts of Tellurian Inc., the backer of the proposed Driftwood LNG project near Lake Charles, La., with a Phase 1 capacity of 11 million tons per year (MTPA) and an estimated price tag of $12 billion.
Tellurian recently announced that the company had secured LNG purchase agreements with Shell and international commodities traders Vitol and Gunvor to buy LNG from Driftwood, Tellurian’s only project. Each buyer would purchase 3 MTPA for 10 years, with prices tied to Asian and European spot natural gas pricing benchmarks. Tellurian now says it will focus on financing the project based on these contracts, and aims to give its construction contractor, Bechtel, the go-ahead sometime early next year. Tellurian, which has already secured its main permit from the Federal Energy Regulatory Commission (FERC), said the new contracts will give lenders security to provide more than 65 percent of the money needed to build the $12 billion terminal, and will allow the company to attract project sponsors to put up another $3 billion of owner equity, which is the next step toward a Final Investment Decision (FID) later this year or in 2022.
Yet a closer look at Tellurian’s history and finances, as well as the structure of the new LNG deals, reveals a far less rosy view for the company’s prospects. All U.S. LNG projects now in operation were anchored by firm, 20-year contracts with guaranteed liquefaction fees that assured enough revenue to cover debt repayments, operating costs, and profit. In contrast, Tellurian’s new contracts offer less security and more risk. After just 10 years—long before Tellurian has paid off Driftwood’s capital costs—the company will have to sign new contracts at unknown terms with undefined buyers. The new contracts could leave Tellurian’s equity investors and lenders stranded if long-term LNG prices fall.
In addition, under the new contracts, Driftwood’s LNG revenues will be linked to volatile international LNG price indices that can’t be hedged effectively, and whose revenues may not cover the plant’s financing and operating costs. Tellurian claims it can reduce its long-term gas price risks by producing its own gas for LNG export. But transforming the company into a major gas producer as well as an LNG developer would require billions of dollars of up-front capital expenses, and the company has put forward no credible financing plan for its gas production ambitions.
Neither the financial shortcomings of the recent LNG contracts nor the hype surrounding them are new to Tellurian. The company has led its investors on a roller-coaster ride for years, making frequent shifts in business strategy even as its stock price soared, then collapsed, then gained some ground, then sagged again. Meanwhile, Tellurian has burned through hundreds of millions of dollars of investors’ cash with few tangible results. While Tellurian’s new LNG contracts seem to offer a rare bit of good news for the company, bankers may not find Driftwood’s financial prospects nearly as enticing as announcements by the company and its boosters.
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