Driftwood LNG is moving forward

Tellurian has recently confirmed that it will start building the first phase of Driftwood LNG in April 2022

18 February 2022

Tellurian has recently confirmed that it will start building the first phase of Driftwood LNG in April 2022

18 February 2022

Sara Pourghorbani
Gas & LNG Specialist

Tellurian has recently confirmed that it will start building the first phase of Driftwood LNG in April 2022. The plant will be located in Louisiana and will produce between 9.5 and 11 mtpa of LNG at completion. Driftwood has overcome significant headwinds to get this far, helped by a pioneering price indexing and by re-framing its commercial structure and terms as well as taking advantage of the credentials of its management team.

Record-breaking gas prices in 2021, coupled with geopolitical tensions in Ukraine and the uncertain future of Nord Stream2, have created a compelling case for more US LNG projects to be approved and we expect up to 25% of global LNG supplies to come from the US by 2030. Flexible commercial terms and distance to European markets will make US LNG an attractive option for its European customers. However, US LNG producers will continue to face cost pressures (evident in Driftwood’s journey) as they will have to ultimately compete with low-cost supplies from Qatar and Russia.

Driftwood has overcome significant headwinds

The inception of the Driftwood project in 2016 coincided with a slump in commodity prices, gloomy forecasts for the prospects of natural gas consumption and a rapid growth of renewable energies. After several years of seemingly struggling to secure offtake agreements and finance, Tellurian undertook a bold move by offering US shale gas indexed at Platts’ JKM (North Asian spot LNG prices) and Dutch TTF indices – netback any transportation costs. The project has now signed 9 mtpa of purchase agreements with Vitol, Gunvor and Shell for 10 years, paving the way for securing the financing.

To mitigate its own exposure to Henry Hub volatilities, Tellurian have gone against the wave and adopted a supply-chain integrated commercial structure, whereby feedgas is supplied directly from its Haynesville shale acreage through a 96-mile pipeline. However, this has added to the project’s initial capital outlays as further investments are needed to build the pipeline and drill additional wells to produce the required 1.5 bcf/day of feedstock.

Project economics still looks challenging

To stay ahead of competition, Driftwood LNG developers have faced pressures from investors to cut costs as far as possible. “Greenfield” US LNG projects, such as Driftwood, will cost significantly more than their peer “brownfield” developments. To respond to these cost pressures, Tellurian announced a 30% cost reduction in 2020. In its latest investor presentation (November 2021), Tellurian have put the total cost of developing the liquefaction plant at $709/tonne and the overall project’s cost at nearly $1,100/tonne.

Our analysis shows that if we take the former figure of $709/tonne, to compare like-for-like with the EPC costs of other US LNG projects that have taken FID, Driftwood comes in only cheaper than Corpus Christi Trains 1&2, which was another greenfield development. The more recent brownfield developments such as Golden Pass and Freeport have cost in the range of $500 – $600/tonne. It is also noteworthy that the sales agreements Driftwood has signed are for 10 years, possibly ending before the recovery of its initial capital outlays, meaning the company will need to sign new contracts after 10 years to recoup the US$12 billion investment (assuming no further cost increases!).

The stars are aligning for more US LNG projects

Despite the challenges, the project owes its success to a renewed optimism in the future of gas, particularly in the past few months. Recent developments in energy markets may have highlighted some of the pitfalls of renewable energy intermittencies and bolstered a case for gas as a more practical and economic stop-gap in the path to net-zero economies. Meanwhile, Russia-Ukraine tensions are expected to cast a long shadow over the future of Nord Stream 2 and Europe’s energy security. European governments may already be looking at ways to reduce their dependency on Russian gas through a combination of more investment in renewables, as well as finding alternative gas supplies.

Flexibility coupled with its proximity to European markets and political alignments, makes US LNG a suitable candidate to fill this space. In our base case scenario, we expect up to 25% of global LNG supply to come from the US by 2030. Brownfield developments such as Freeport and Corpus Christi expansions have a greater chance of moving forward. Post 2030s, there is scope for additional US LNG as the existing production capacities in Latin America and Asia Pacific decline, but this largely depends on LNG developers being able to keep their base cost down.

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