Shares of Tellurian (NASDAQ:TELL) surged more than 12% in afternoon trading today, before closing up about 9%, only to surge again in after-hours trading. The big news was about as important as it gets for the company: It announced a 10-year contract with Royal Dutch Shell (NYSE:RDS.A)(NYSE:RDS.B) for 3 million metric tons of liquefied natural gas per year.
What makes this particular deal so important is that it fills up essentially all of the capacity Tellurian expects to get from the first two plants at its long-anticipated Driftwood LNG facility. And that puts the LNG export company on very important step closer to making Driftwood a reality.
Tellurian has been on quite a roll over the past three months, securing nine metric tons per year on long-term agreements, finally getting enough supply locked up to meet the capacity of the first two LNG plants at Driftwood.
Not to overstate the importance of securing this deal, but without locking up all of the capacity from the first two LNG plants Tellurian intends to build, Driftwood was never going to happen. The costs of building the liquefaction plants, the pipelines to bring natural gas to them, and all of the other necessary infrastructure are unlikely to have been economically feasible without securing at least enough capacity to support the initial construction of these two plants.
The hard work is far from done, but the next step -- securing financing -- will be far easier with firm, long-term commitments in hand from some of the largest energy companies in the world. In the press release, CEO Octávio Simões said, "Tellurian will now focus on financing Driftwood, in order to give (construction partner) Bechtel notice to proceed with construction in early 2022."
For Shell, this move is another signal that the global energy giant intends to continue its focus on natural gas. Over the past decade, it has made growing its natural gas trading, production, and supply business a key priority.
Tellurian issued a second press release today, saying that it had exercised its long-term lease option on the 477-acre site in Louisiana where it will build Driftwood. The initial term is 20 years, with extensions that could take the agreement out to 50 years. The next step: securing the necessary funds to pay for Driftwood and the pipeline that will supply it, so that it can issue an FID -- final investing decision -- to Bechtel to move forward with construction.
Let me be clear: Driftwood getting the final go-ahead and being constructed isn't quite a sure thing. It's going to take billions to build, and until the lenders have issued the debt and put the money in Tellurian's accounts, there remains risk that Driftwood doesn't get built, and investors lose money.