Blame It on Texas - Pipeline Alternatives Gunning to Provide Permian Relief

Natural gas supply growth from the Permian Basin has flooded the Texas market in recent months, filling up takeaway pipelines and sending Waha spot prices to steep discounts relative to its downstream markets. Incremental demand — from exports to Mexico for gas-fired power generation as well as for power demand in Texas — has provided some relief for West Texas prices in recent weeks. But Texas power demand is seasonal and, while Waha’s exports to Mexico are expected to continue growing, it’s likely to be on a piecemeal basis. Thus, longer term, new Permian takeaway capacity will be needed to balance the Waha market. To that end, there are a bevy of takeaway projects vying to expand capacity from the Permian. These projects — their timing and routes — will drive the Texas gas flows and pricing relationships over the next several years. Today, we continue our series on Permian gas, this time delving into the various takeaway capacity projects competing to move Permian supply to market.

In Part 1 of this series, we laid out the basis for the likely scenario that the Permian region is headed for extreme supply congestion later this year. Permian gas production is associated — driven by crude oil — and with West Texas Intermediate (WTI) prices averaging $70/bbl during May, production of oil and large volumes has propelled associated gas volumes to new heights. The supply growth has happened much faster than many expected and 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).

The problem is that gas is facing takeaway constraints of its own, with production volumes fast-approaching existing pipeline capacity. As we detailed in our flow analysis in Part 2, outbound flows from the Permian are growing in just about every direction, and pipeline utilization rates are running high, or even at capacity in the case of northbound routes to the Midwest and eastbound routes to the Gulf Coast markets, which are particularly attractive given the burgeoning LNG export demand there (also see Omaha for more on changing flow patterns). As a result, Permian gas prices were hit hard, falling as low as $1.34/MMBtu late last month (April 23), a level that was barely half of the Henry Hub price on the same day. Prices (and the differential to Henry) since then have rebounded as summer power demand kicked in. But with regional gas supply expected to continue rising and Permian producers effectively barreling towards this takeaway capacity “wall,” the oversupply problem is far from resolved.

One possible relief valve in the near term is exports to Mexico. As we noted in Part 2, there is plenty more pipeline capacity available to export gas south from Waha to Mexico, and we expect those southbound exports to serve as an important — if only partial — relief valve for Permian gas. However, those flows are dependent on Mexico’s pipeline build-out and power generation projects, which have been notoriously slow to come online and remain a wild card. Notably, exports to Mexico showed their first meaningful bump in months, according to flow data in RBN’s NATGAS Permian report, following the in-service of a new connection between Mexico’s Tarahumara Pipeline and the 600-megawatt Chihuahua II combined-cycle gas-fired power plant on May 13 (2018). Tarahumara is supplied exclusively by the Roadrunner Pipeline on the Texas side, which posted a 100-MMcf/d increase in flows to the border last week. The next 100-MMcf/d jump in exports may come in July, under the assumption that another power plant is tied in to the pipeline grid, this time likely to the El Encino-La Laguna pipeline.