Blame It on Texas, Part 2 - Gas Flows Shifting Across Texas As New Supply Outpaces New Demand

Natural gas production in the Permian has increased by about 1 Bcf/d since last November to about 8 Bcf/d today. That incremental gas production has used up virtually all of the remaining interstate and intrastate pipeline capacity out of the region, including the all-important pipes that move gas to the Houston area and East Texas. There’s considerable takeaway capacity still available on pipes from the Waha Hub to the Mexican border, but they can’t fill up until connecting pipelines and new gas-fired power plants are completed within Mexico. Permian supply is coming on faster than takeaway pipelines and demand can’t handle it. Something’s got to give. But what? Today, we continue a series on Permian gas with a look at the effects of Permian and Gulf Coast gas supply growth on Texas gas flows and pricing.

In Part 1, we discussed the fact that Permian gas production is associated — driven by crude oil — and with West Texas Intermediate (WTI) prices north of $70/bbl, production of oil and large volumes of associated gas is likely to continue rising, even with the crude takeaway constraints that have sent crude price differentials soaring in recent weeks (see All Dressed Up With Nowhere to Go). We noted that Permian gas prices have been hit hard too, falling as low as $1.34/MMBtu late last month (April 23) to a level barely half that of the Henry Hub price. Help is on the way in the form of new takeaway pipelines (both for crude and gas), but that help won’t be coming until sometime next year. The period between now and then looks like it will be a rough patch for Permian gas pricing.

NATGAS Permian Report

The NATGAS Permian Report is a weekly natural gas fundamentals analysis focusing entirely on the key market drivers within the Permian basin. The report contains details and forecasts around natural gas production, demand, and pricing. It offers a summary of pipeline outflows and capacities from the Permian to neighboring regions, outlining the key shifts in flows to the West, MidCon, and Texas intrastate markets. 
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Today, we shift our focus to the effects of the supply growth — from the Permian and other basins — on gas flows across Texas. Gas flows within Texas are rapidly shifting as the market adjusts to a growing supply-demand imbalance in the state. By far, the most significant driver of this is the steep climb in associated gas volumes from all the crude-focused drilling happening in the Permian. Gas production is rapidly outpacing both takeaway capacity and demand, with flows on the outbound transportation corridors filling up. As we detailed recently in Omaha, outbound flows from the Permian are growing in just about every direction and filling up whatever capacity was left. This is, in turn, setting off fierce competition, both for what little space remains on existing outbound pipelines and for downstream demand. Some of the outbound routes are more profitable (and competitive) than others.

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