PLL may scale down deal with US-based LNG project

17th August 2020:New Delhi: Petronet LNG Ltd’s proposed $2.5 billion investment plan in US LNG developer Tellurian’s upcoming Driftwood LNG terminal in Louisiana may be scaled down considering the energy company’s decision to cut first phase cost of the project by a third thereby also reducing production.

Sources said that PLL, which has till December to reach final agreement with a Tellurian and conclude the investment plan, is re-evaluating its plans and would come up with a fresh decision soon.

The changes may include scaling down investment in the project if sufficient quantity of LNG at competitive pricing is not assured. It is expected that PLL might renegotiate the whole investment deal given the current market conditions. The PLL officials could not be reached for comments.

In September last year a non-binding memorandum of understanding was signed between PLL and Tellurian that gave the Indian entity PLL option to buy 5 million tonne per annum (mtpa) LNG from Tellurian’s Driftwood project on the banks of Calcasieu river in Louisiana. In return, Petronet was to also spend $2.5 billion for an 18 per cent equity stake in the $28 billion Driftwood LNG terminal.

“The spot LNG prices have now crashed to about $2 per million British thermal unit (mmBtu) and gas is widely available in the market. It would now make little sense to sign an agreement committing to pay on sea price of $3.5 to $4.5 per mmBtu for 40 years for the gas at this juncture,” said a energy sector analyst asking not to be named.

PLL is also weighing options considering the changed market dynamics that had taken a sharper turn after the outbreak of Coronavirus that had disrupted businesses across the globe and resulted in energy price crash. PLL has remained sceptical about the Tellurian deal from the very beginning. The term of last years MoU between PLL and Tellurian was to expire on March 31, 2020, which was extended to May 31 in February. With diplomatic push, sources said, the term has now been extended till December 31.

The expiry of the second deadline for converting the MoU into a definitive agreement in May generated doubts whether the deal, that also saw involvement of top government functionaries for both Indian as the US, will go through. The Tellurian deal, if concluded, will be 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 7.5 mtpa of LNG from Qatar, 1.44 mtpa from Australia, 2.2 mtpa 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, first set of gas from Driftwood project would reach Indian shores only by FY24. As per analyst presentations given by Tellurian earlier, the first phase of t he 27.6 mtpa Driftwood project will be able to deliver LNG only in 2023.

With the US LNG developer now reducing first phase cost by around 30 per cent to roughly $16.8 billion by deferring some planned pipelines, the phase will now include liquefaction units capable of producing only 14.4-16.6 mtpa of LNG. Sources said of the 5 mtpa proposed contracted quantity, Petronet may not get even fully capacity from the first phase 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 gas market may be looking lot different and may make Petronet’s invest ment unproductive.

For Petronet, another issue of concern would be mobilising huge investment commitment of $2.5 billion for Driftwood. With a cash and reserves of just over Rs 8,500 crore, it would have to look at other means of funding its US investment commitment. Government could either rope in more PSUs to fund the project with Petronet or permit it to tap overseas market to raise cheap funds. 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.