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Tellurian faces setback in $12.5-B Driftwood LNG project

3/1/2023

Tellurian is facing a new setback in a long-running effort to advance a $12.5-B U.S. LNG export project.

Commodities trader Gunvor Ltd can walk away from a 10-year, $12 B commitment to buy LNG if Tellurian's Driftwood LNG project lacks a financial go-ahead, project financing and a full construction authorization by Feb. 28.

A Gunvor exit, the project's third since September, will not be a fatal blow. Tellurian has changed its mind on selling equity in the plant to customers and has missed several go-ahead targets while chasing potential investors, said analysts.

Tellurian and Gunvor spokespeople declined to comment ahead of the deadline.

The timetable is unlikely to be met, said Alex Munton, global gas and LNG director at energy consultants Rapidan Energy Group. Tellurian needs one or more equity investors to win customers and secure project financing, he said.

"Banks are telling Tellurian we want to see a lot of equity put in" by investment-grade partners that can help shoulder the plant's costs. "The real hammer blow for these projects is the cost of capital," said Munton. Cost of capital has climbed with interest rates.

Lavish executive pay, missed financial investment decisions and recent departures have unnerved customers. Two board members, Claire Harvey and James D. Bennett, abruptly resigned last month. Neither "was ever comfortable with the risk profile and strategic direction of the Company," Tellurian said in a securities filing.

A Gunvor departure would follow prior exits by Vitol Inc and Shell Plc. But Indian gas distributor GAIL (India) Ltd this month proposed buying an up to 26% stake in a U.S. LNG project, offering a ray of hope for Tellurian.

GAIL asked for proposals and said it would also consider a long-term purchase agreement. The tender could be a negotiating tactic as GAIL looks to pit U.S. LNG suppliers against existing Qatari and Russian LNG suppliers, said Rapidan's Munton.

Driftwood LNG needs to raise $1.5 B in mezzanine financing, $7 B in project debt, and about $3.2 B in equity, co-founder Charif Souki said in a Feb. 14 broadcast.

A number of banks would be "happy to participate" in the project debt, Souki said, adding "the time could not be better to get something like this done" with equity investors.