Tellurian Plans Big Increase in US Output

Tellurian chairman Charif Souki is preparing to capitalise on an expected steep surge in US Henry Hub prices to $5/mn Btu this winter, with a major step-up in the company's gas output. It could be producing 150mn ft³/day the end of next year, three times today's amount. This would change the nature of the company, he said.

He said that price was the "almost inevitable" consequence of the supply-demand balance and it would have "repercussions for the rest of the world." Henry Hub hit $3/mn Btu in October but has since lapsed at time of press. US LNG contracts are linked to Henry Hub.

In a weekly podcast late November 12 he said that the rig count was too low and storage depletion would be too high for prices not to reach $5/mn Btu. And a dramatic increase in rigs, from 70 to "well over 200" would be needed to restore production. This however would be "physically very difficult to accomplish," meaning a big depletion in storage. Production has gone this year from 95bn ft³/day to 88bn ft³/day. Demand is 85bn ft³/day at home and another 10bn ft³/day are liquefied and exported.

Tellurian, he said, is ready to drill at 100 locations when the Henry Hub price reaches $3.15/mn Btu which "we are very close to now." Cashflow could exceed $7mn/month in the first half of next year, depending on Henry Hub and Tellurian production would be worth more than the entire company is worth today by the end of the year, he said.

Tellurian's focus has been on exporting LNG from a projected LNG plant, Driftwood. The selling point for capacity holders is that the gas comes from the Permian basin which is mainly an oil province. The gas is therefore a by-product and trades at a discount to Henry Hub. This gives a bigger netback from sales to export markets.

US gas prices are rising partly because oil production is falling and with it, associated gas output. The more the Henry Hub price rises, the smaller the competitive advantage of US LNG exports.