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Covid-19, gas price crash may push back PLL's $2.5-bn deal with Tellurian
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SME Times News Bureau | 13 Jul, 2020
In what may be a big casualty of
Covid-19 related market disruptions, India's Petronet LNG Ltd. may push
back its $2.5 billion investment plan in US LNG developer Tellurian's
upcoming Driftwood LNG terminal in Louisiana.
Government sources
said that with spot LNG prices now crashing to about $2 per million
British thermal unit (mmBtu) and gas widely available in the market, it
would 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. The delivered
price of gas would be even higher.
The deal would have to be renegotiated given the current market prices, sources said.
In
September last year a non-binding memorandum of understanding (MoU) was
signed between PLL and Tellurian that gave the Indian entity PLL the
option to buy 5 million tonne 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 March 31, 2020, which was extended to May 31 in February.
But with the expiry of the second deadline for converting the MoU into a
definitive agreement, doubts have surfaced whether the deal, that also
saw the involvement of top government functionaries for both India and
the US, will go through.
"The Tellurian deal is still under board
consideration and cannot comment now. MoU has expired but may be
extended. Status will be known this year," PLL said during an analyst
call last month.
But government sources said that neither PLL or
Tellurian have had talks on extending the terms of the MoU or signing an
agreement on earlier agreed terms so far and if the deal is salvaged it
would be based on renegotiation of the gas price and investment terms.
As
a test to determine gas prices available on long-term contract basis
now, PLL recently 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, will be 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 7.5 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, the first set of gas from the Driftwood project would reach Indian shores only by FY24.
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 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 2 mtpa of LNG.
Sources said of the 5 mtpa
proposed contracted quantity, Petronet may not get even full capacity
from the first phase 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 a lot different and could make Petronet's
investment unproductive.
For Petronet, another issue of concern
would be mobilising the huge investment commitment of $ 2.5 billion for
Driftwood. With cash and reserves of just over Rs 8,500 crore, it would
have to look at other means of funding its US investment commitment. The
Government could either rope in more PSUs to fund the project with
Petronet or permit it to tap the 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.
Tellurian expects to generate $8 per share cash flow from the project.
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