Long Time Comin’ – More Permian Gas Takeaway Is Coming. What About Stronger Waha Prices?

Permian wells are churning out 22 Bcf/d of residue natural gas — one-fifth of total U.S. production — but for many producers that gas abundance is a hindrance. A persistent shortfall in pipeline takeaway capacity has made negative (sometimes very negative) prompt-month and cash prices at the all-important Waha Hub an all-too-regular thing. But there’s good reason to believe the situation will soon be changing for the much-better. A massive tranche of new takeaway capacity will be coming online over the next few months, ending the shortfall for at least a few years, and gas demand from LNG exporters and power generators will be ramping up fast. In today’s RBN blog, we begin an in-depth examination of Permian takeaway capacity, Waha prices, and the potentially far-reaching impact of solidly positive gas prices on producers’ development strategies.

The Permian’s expansion into the world’s largest, most productive crude oil play over the past 15 years came with a market-changing side effect: an equally impressive expansion in the production of associated gas (natural gas + NGLs). Producers’ primary focus was (and still is) on crude — to quote bank robber Willie Sutton, “That’s where the money is” — and their #1 priority has been supporting the development of the pipelines, storage and other infrastructure needed to produce it and get it to market. At the same time, however, they and their midstream partners had no choice but to deal with the vast and fast-increasing volumes of associated gas emerging from Permian wells with high-value oil.

Massive sums have been invested in building out gas gathering systems, processing plants and takeaway pipelines, not just for natural gas but for NGLs. But it’s almost always been a game of catch-up. Producers didn’t want to make long-term pipeline-capacity commitments, and that reluctance ultimately crushed the spread that justified the pipeline to begin with. That led to a game of chicken, where ultimately the biggest producers had no choice but to pony up to get the pipelines built and smaller producers suffered when their interruptible gas was sold at negative prices. (We coined it “the midstream conundrum.”)

Constraints in Permian gas takeaway, often exacerbated by pipeline maintenance that temporarily took some capacity offline, had consequences, primarily in the prompt-month and cash prices that shippers without sufficient pipeline space were offered for their gas at the Waha Hub in West Texas’s Pecos County. The left graph in Figure 1 below shows natural gas production in the Permian (black line), gas consumption within the basin (“Demand”; dark-brown layer), flows to Mexico (beige layer), pipeline capacity out of the region (green layer), and periods when takeaway constraints frequently caused Waha prices to turn negative (dashed circles). [Note that most producers are not selling their gas at Waha prices. A lot of them have capacity on pipelines that can get their gas to downstream markets.]