Poten Execs Talk Driftwood’s Customer Problem, Permian Gas for Asia

Tellurian Inc.’s Driftwood LNG LLC project in Lake Charles, Louisiana, has one fundamental problem that is holding back its development, Poten & Partners Inc.’s senior advisor Gordon Shearer said.

In a word: clientele.

“It doesn't have enough customers to underwrite the investment, and in the absence of customers, you don’t have a project. And that’s true for a lot of U.S. projects—they don’t have enough customers,” Shearer told attendees during the company’s panel, LNG: After the Pandemic at The Houstonian Hotel.

Driftwood is seeking up to $2 billion in financing from equity partners to move the project forward, Tellurian executive chairman Charif Souki reiterated in late-April.

Driftwood LNG is being developed in two phases. Phase I could provide 11 million tonnes per annum (mtpa) by early 2026 and Phase II could add another 16.6 mtpa. The estimated cost for Phase I is around $14.5 billion, Tellurian revealed in May 2023 in a corporation presentation.

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“None of the North American projects are going to be financed on somebody's balance sheet 100% with corporate funding, it just doesn't happen,” Shearer said.

The executive said Golden Pass could be an exception since it’s being backed by Qatar Petroleum and Exxon Mobil.

“And for them, project financing is probably an option, but for everybody else project financing is a necessity not an option,” Shearer said.

Shearer said the problem with LNG relates to commoditization since there was no real commodity market.

“If it was an oil product project, and it met the oil price criteria, it’d be easy to finance because everybody is familiar with oil pricing, it’s liquid, it’s transparent. [On the other hand], it’s LNG. It doesn't have liquidity, it doesn't have transparency. You build it, they may not come—or if you export it, they may not get unloaded.”

Michael D. Tusiani, Poten & Partners chairman emeritus, was optimistic about U.S. LNG projects. During the forum, he said the model was great and suffered from an “insurance problem” more than anything.

“You’re a long-term buyer of LNG, no minimum requirement. You pay a fee to the insurance premium, right? So I think that when buyers look at that, they look at the U.S. very favorably because you have something that’s very unique,” Tusiani said.

Mexican LNG locations and the Permian gas question

During the breakfast, Shearer fielded questions about the global LNG industry and Mexico and its plans to use U.S. piped-gas imports to supply a number of Mexican LNG export facilities.

Robust production from shale gas has helped anchor higher U.S. LNG exports to Europe amid a supply glut caused by the Russia-Ukraine conflict. Shale producers near the U.S.-Mexican border, especially in the Permian Basin, have also benefited from steady gas demand south of the border.

There, U.S. piped-gas exports to Mexico averaged around 5 Bcf/d in April of 2023, according to data from the Energy Information Administration (EIA). There’s potential for that figure to rise by about 6.1 Bcf/d to feed planned Mexican LNG export facilities, according to a recent study by BTU Analytics, a FactSet company.

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At least four facilities are planned for Mexico’s Pacific Coast. These facilities are advantaged since their cargos would bypass the Panama Canal, which has become a bottleneck for U.S. LNG exporters, Shearer said in response to a question by Hart Energy.

“So exports off the West Coast of Mexico do make sense. You've got to get the gas there, which is not always trivial and means you've got to go through Mexican permitting as well as U.S. permitting,” Shearer said.

“And, frankly those projects are going to be Asia focused. They're not going to have that option really of supplying Europe… they're not going to be competitive,” he said. “So they are going to be 100% Asia-focused projects, just like LNG Canada is or any other British Columbia project. Are there enough locations in Mexico to support big industry? That's an open question. And that's Permian gas and that's almost more a function of what the Permian does too.”