Trapped in the Permian
Shortage of pipelines means glut keeps building and prices keep sliding
A shortage of pipelines means a natural gas glut keeps building.
America’s most prolific oil field is now its worst market for natural gas.
A pipeline shortage that’s leaving gas trapped in West Texas’ Permian Basin means prices for the fuel there are the lowest of any major U.S. hub, wresting that distinction from Appalachia’s Marcellus Shale. Prices for Permian gas, produced alongside oil in the play, have tumbled 30 percent from a year ago, while output rose to a record. And the pipeline crunch is also pummeling the region’s oil market.
All that gas production is creating a dilemma for drillers, who may have to curtail oil output if they can’t get their gas to market. Producers can burn off some of the gas — a process known as flaring — but state regulators typically won’t allow that to happen indefinitely. And as mild spring weather limits demand for the heating fuel, explorers may be giving their gas away, according to broker Ion Energy Group.
The low-cost crude oil reserves buried in the Permian’s layers of shale have drawn explorers in droves, but roughly one-third of the output from those wells is gas, according to RS Energy Group. As gas production from the play surges, however, pipeline capacity has failed to keep pace.
Another factor working against Permian producers: the calendar. Gas for delivery at the Waha hub in West Texas slid during March and last week was trading at about a 30 percent discount to the fuel at Louisiana’s Henry Hub. The Permian rout will only deepen as mild spring weather curtails heating demand and wind generation picks up, displacing gas-fired power plants, said Kyle Cooper, consultant for Ion Energy in Houston.
The current discount at Waha is “clearly already reflecting the concern that people can’t easily get all the Permian natural gas out to other markets,” he said.
Pipeline developers including Kinder Morgan are proposing new conduits to ease Permian bottlenecks and transport the fuel to demand centers. But relief won’t come immediately: Kinder’s Gulf Coast Express, a nearly $1.8 billion line connecting the basin to eastern Texas, is slated to start operating in October 2019.
Tellurian, which is developing a gas export terminal in Louisiana, announced an open season on March 20 for a 625-mile pipeline from West Texas to Louisiana. That project may begin service in 2022.
Drillers like Apache Corp. have moved to insulate themselves from the Permian gas collapse by hedging output and locking in long-term supply contracts. The company, along with Pioneer Natural Resources Co. and Exxon Mobil Corp., has signed up for capacity on Gulf Coast Express.
But until new pipelines enter service, the risk of Permian production cuts looms. Conduits in the basin are “full to bursting,” pushing oil prices in the region to a discount versus the national benchmark at Cushing, Okla., according to the consultancy Facts Global Energy.
“The ultimate downside scenario is you have to effectively slow down on your oil production because you can’t evacuate gas from the basin,” said Colton Bean, director of midstream research at the Houston investment bank Tudor Pickering Holt & Co.
As pipelines continue to get crowded, some drillers are likely to boost production of compounds extracted from gas, such as ethane used to make plastic. The problem of limited space isn’t nearly as dire on conduits for natural gas liquids.
Until new pipelines enter service, the risk of Permian production cuts looms.