Strengthening Indo-US ties salvages PLL’s deal with Tellurian

Strengthening Indo-US economic ties during COVID-19 pandemic has salvaged plan of Petronet LNG Ltd. (PLL) to invest $2.5 billion in US LNG developer Tellurian’s upcoming Driftwood terminal in Louisiana.

An MoU inked over the proposed deal expired on May 31 raising doubts over PLL’s interest in the project that would deliver first set of gas to Indian shores only by FY24.

Sources have said that PLL has renewed its initial deal with Tellurian that gives both sides time till December to reach final agreement and conclude the investment plan.

The renewal was done last week ahead of a virtual meeting between Oil Minister Dharmendra Pradhan and US Energy Secretary Dan Brouillette where the two sides reaffirmed their commitment to further strengthen Indo-US strategic energy partnership.

Doubts about the deal surfaced as 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 have made little sense 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. However, sources said diplomacy prevailed over economic rationale to move forward on the deal that would bring long term gains for India.

It is expected that PLL renegotiate the whole investment deal given the current the market conditions.

PLL officials could not be reached for comments.

In September 2019, 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 cemt equity stake in the $28 billion Driftwood LNG terminal.

The term of the MoU was to expire on March 31, which was extended to May 31 in February.

But with the expiry of second deadline for converting the MoU into a definitive agreement, doubts surfaced whether the deal, that also saw involvement of top government functionaries for both Indian as 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.

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, 2.2mtpa 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 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, 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 LNG under 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 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 in the project for 2 mtpa of LNG.

Sources said of the 5 mtpa proposed contracted quantity, Petronet may not get even fully 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 gas market may belooking 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 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.

The government could either rope in more PSUs to fund theproject 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. Tellurian expects to generate $8 per share cash flow from the project.

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