Some Beach - 4 Bcf/d Permian Gas Capacity Headed to the Beach - What Happens to Flows and Basis?

Expectations for Permian natural gas are far from what they were when this year started. Lower crude oil prices and a focus on capital discipline have slashed rig counts by about two-thirds since January and there are few signs of a recovery on the horizon. As a result, just about everyone’s forecast for Permian gas growth is much lower than just a few months ago, with tepid gains through the early 2020s now the industry’s consensus view. However, if you think all this means that Permian gas markets have lost their relevance, think again. Despite the modest production growth anticipated, the basin’s gas flow patterns will soon be thrown into shock as 4 Bcf/d of new outflow capacity to Gulf Coast markets starts up next year, when the Permian Highway and Whistler pipelines begin operation. And that shock will reverberate through regional basis relationships, including at the Waha Hub, which we expect to end 2021 much stronger than it is currently. Today, we begin a series that looks at Permian, as well as Gulf Coast, gas markets over the months and years ahead, highlighting findings from RBN’s new, Special Edition Multi-Client Market Study.

Are Permian gas markets like Tom Brady, still interesting but on the verge of becoming less relevant? Certainly, the volatility of Waha is set to dissipate over the next few years, as less drilling and more pipelines finally rebalance the gas market out in West Texas. That means that periods of negative pricing, which hit again last Friday (and we’ve covered on numerous occasions, most recently in It’s Always Something), are soon to be a thing of the past. But we doubt folks will lose their focus on the Permian anytime soon; after all, it’s still the most actively drilled region in the U.S. by far, and one of the most likely basins to see increased activity should oil and gas prices break out of their current doldrums.

Our Permian natural gas production outlook, shown below in Figure 1, probably looks like a lot of others you’ve seen. Over the near-term, there’s not a lot happening in our Mid Case Forecast (dashed purple line). Though natural gas volumes in the basin hit a record of just over 12 Bcf/d earlier this year, the recent drop in rig counts has lowered that volume modestly. Our estimate shows Permian gas volumes are averaging near 11.5 Bcf/d (see our NATGAS Permian report for details), though they were much lower back in May and June, when producers curtailed volumes due to low crude oil prices (see Just What I Needed). At today’s rig counts, those volumes aren’t recovering very quickly, and we see Permian natural gas production sitting near current levels at the end of this year, growing to an average of 11.9 Bcf/d next year and 12.3 Bcf/d, on average, in 2022. In fact, production in our Mid Case doesn’t cross the 14-Bcf/d mark — just 2 Bcf/d above this year’s high — until 2025. The RBN Mid Case Forecast assumes flat prices for Henry Hub and WTI through 2025 at $2.50/MMBtu and $45/bbl, respectively.