Covid Disruptions, Gas Price Crash Pushes Petronet LNG out of $ 2.5-billion Deal with Tellurian
In what may be a big casualty of COVID-19 related market disruptions, India's Petronet LNG Ltd has shelved it's $2.5 billion investment plan in US LNG developer Tellurian's upcoming Driftwood LNG terminal in Louisiana.
Government sources said that with low spot LNG prices and gas widely available in the market, it would make little sense to sign an agreement committing to pay on sea price of over US$4.5/mmBtu for 40 years for the gas.
The delivered price of gas would be even higher. Thus, there was no need to pursue the deal at this juncture they said.
At its results call on Wednesday, PLL managing director and CEO AK Singh also mentioned that at present the company had no MoU (memorandum of understanding) for investment in Tellurian's gas project in US.
As per the second extension given to the MoU reached between Tellurian and PLL in September 2019, the agreement was to be reached latest by end-December 2020. But as per Mr Singh, as the US gas company did not approach them for further extensions, there was no investment MoU with PLL now.
A PLL official also said that with prices at record low levels and easily available, the company is more concerned about signing LNG supply contracts rather than investing in greenfield project that will meet has needs after five to seven years.
In September last year, a non-binding MoU was signed between PLL and Tellurian that gave the Indian entity PLL the option to buy 5 million tonnes per annum (mtpa) LNG from Tellurian's Driftwood project on the banks of the Calcasieu River in Louisiana. In return, Petronet was to spend $2.5 billion for an 18% equity stake in the $28 billion Driftwood LNG terminal.
The term of the MoU was to expire on 31 March 2020, which was extended to 31st May in February. It was again extended till December-end. But with deadline latest extension also ending, PLL also seemed in be on no mood to commit investment.
The change of government in US has also made decision to move out from the project easier.
As a test to determine gas prices available on long-term contract basis now, PLL last year invited bids for one million tonne per annum of LNG for 10 years. It asked bidders to quote a price below Japan/Korea Marker (JKM) that takes the price on long term as well as closer to spot prices.
Though Tellurian placed its bid for the supply contract, it did not qualify from a list of 13 other suppliers.
The Tellurian deal, if concluded, would have been the first long-term LNG deal under the Modi government since 2014. The previous long-term gas supply deals were signed before 2014. The deal for 7.5mtpa of LNG from Qatar, 1.44mtpa from Australia, 2.2mtpa from Russia and 5.8 mtpa from the US were concluded by the previous UPA government.
The landed price of some of the earlier concluded long-term LNG supply deals is higher at $9-$10 per mmBtu that is being renegotiated by PLL now.
Under the Tellurian deal, the first set of gas from the Driftwood project would have reached Indian shores only by FY23-24.
As per analyst presentations given by Tellurian, the first phase of the 27.6mtpa Driftwood project will be able to deliver LNG only in 2023. This would have meant that Petronet would have to wait for the LNG under a long-term contract from the US project for four long years. The wait is long given competitively priced LNG is available in plenty in the spot market to meet the immediate energy needs of the country.
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 $500 million in the project for 2mtpa of LNG.
Sources said of the 5 mtpa proposed contracted quantity, Petronet may not get even full capacity from the first phase 11mtpa 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 a lot different and could make Petronet's investment unproductive.
Tellurian is selling 51% holding in Driftwood to third parties while it itself would retain 49% stake or control over 13.6mtpa of LNG. Tellurian expects to generate $8 per share cash flow from the project.
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