Permian natural gas disposal problem is getting worse
Falling prices and massive glut are forcing more producers to burn it or pay for removal
America’s top shale field is becoming increasingly gassy as drilling slows down, undercutting profits for explorers at a time when investors are demanding better returns.
Natural gas has long been a nuisance in the Permian, where a massive glut weighs on prices, with crude producers sometimes having to pay to get it hauled away or burn it off in a controversial practice known as flaring. Now the problem is intensifying as wells age and fewer new wells are drilled.
Shale wells produce a spew of oil when they’re first fracked, but over time, production falls — sometimes as much as 70 percent in the first year — and gas becomes a bigger part of the mix.
“Activity levels are no longer what they were,” said Artem Abramov, head of shale research at Rystad Energy. “The oil ratio is no longer sufficient to offset gas in older wells, so we’re seeing some increase in basin-wide” gas-to-oil ratios.
In the Midland portion of the Permian, the average well produces about 2,000 cubic feet of gas for each barrel of oil in its first year, according to Tom Loughrey, a former hedge fund manager who started shale data company Friezo Loughrey Oil Well Partners LLC, or FLOW. Over the lifetime of those wells, about 30 years or so, that rises to an average of about 5,000. It can climb as high as 7,000 in the gassier Delaware.
It’s an issue that’s made worse when subsequent wells are drilled too close to the initial one, or when there’s interference from another producer’s neighboring wells.
In April, gas traded at the Waha hub in West Texas dropped to minus $4.63 per million British Thermal units. In other words, producers had to pay to get their gas taken away.
Smaller producers with rising gas ratios have taken the hardest hit as prices tanked. Over the last year, Approach Resources Inc. has reported oil production that was less than one quarter of its total output. The company filed for bankruptcy protection in November.
Producers in the Permian are already flaring record levels of natural gas. The Texas Railroad Commission, which oversees the oil and gas industry in the state, has granted nearly 6,000 permits allowing explorers to flare or vent natural gas this year. That’s more than 40 times as many permits granted at the start of the supply boom a decade ago.
While flaring gets rid of the methane, it still releases carbon dioxide and other particulates into the air. The agency’s tendency to approve all flaring permits is now the subject of a lawsuit brought by pipeline operator Williams Cos. The company recently lost a case in front of the commission, arguing that producer Exco Resources Inc. should use Williams’ pipeline system instead of burning off unwanted gas.
U.S. Energy Secretary Dan Brouillette put the Permian’s gas problem down to infrastructure.
“Even if we could capture the gas, it’s not clear we could get it to the marketplace,” he said in an interview in Washington last week. “We just need more pipeline capacity.”