Petronet LNGs $2.5 billion investment to secure 5 million tonnes of liquefied natural gas (LNG) from Tellurian is unlikely work to the advantage of India as the first set of gas from the US-based natural gas companys Driftwood project would reach Indian shores only by fiscal 2023-24.
As per analyst presentations given by Tellurian, the first phase of the 27.6 million tonne per annum (mtpa) Driftwood project will be able to deliver LNG only in 2023. This would mean that Petronet will have to wait for LNG under a long term contract for four long years. The wait is long, given competitively priced LNG is available in plenty in the spot market to meet immediate energy needs of the country.
"The Petronet board in February had disapproved equity investment for securing LNG from the proposed Driftwood project of Tellurian. This was done as gas was available in plenty in the spot market at rock bottom prices. Locking the company into a 40-year contract for LNG sourcing was considered unproductive. How the deal will work to the company's advantage now needs to be seen," said a company source who did not wish to be identified.
Officials at Petronet LNG and Tellurian could not be reached for comments. The Driftwood project is a proposed LNG terminal where actual construction work is yet to start. Though Tellurian has appointed Bechtel as the engineering, procurement and construction (EPC) partner for the project, it is still waiting for investment commitments from partners for starting construction work. So far, only French energy major Total has committed to invest in the project for 2 mtpa of LNG.
The Petronet deal is still some way off as actual negotiation for investment and supplies is yet to be concluded. Sources said that of the 5 mtpa contracted quantity, Petronet may not get even full capacity from the first phase of the 11 mtpa Driftwood project to be ready for delivery by 2023. As the US project is proposed to be constructed in four phases, sources said full capacity may not be reached before 2030. By then the gas market may be looking lot different and may make Petronet's investment unproductive.
For Petronet, another issue of concern would be mobilising huge investment commitment of $2.5 billion for Driftwood. With cash and reserves of just over RS 85 billion, it would have to look at other means of funding its US investment commitment. The government could either rope in more state-run firms to fund the project with Petronet, or permit it to tap the overseas market to raise cheap funds.
The sources also said that given that the Driftwood project is yet to be constructed, Petronet may not need to put its entire $2.5 billion investment commitment at one go for a 18 per cent stake in Driftwood. It could do so in tranches, easing the pressure. The construction cost of the Driftwood project is estimated at over $18 billion. Tellurian is offering an equity interest in Driftwood Holdings, which comprises Tellurian's upstream company, its pipeline and the upcoming terminal that will be able to export 27.6 million tonnes of LNG a year.
Tellurian is selling 51 per cent holding in Driftwood to third parties while it itself would retain 49 per cent stake, or control over 13.6 mtpa of LNG. Tellurian expects to generate $8 per share cash flow from the project. The Driftwood project is expected to deliver low cost LNG priced at $3.5 per million British thermal units (mBtu) by sea under an optimistic scenario and at $4.5 mBtu under a base case scenario. The delivered priced of gas in this range could be $6-8 per mBtu.
The Tellurian deal, once concluded, will be the first long-term LNG deal under the Modi government since 2014. The previous long-term gas supply deals date before 2014. The LNG deal for 7.5 mtpa from Qatar, 1.44 mtpa from Australia, 2.2 mtpa from Russia and 5.8 mtpa from US were concluded by the previous UPA government. The landed price of some of the earlier concluded long-term supply deals are higher at $9-10 per mBtu that are currently being renegotiated by Petronet.
