Blame It on Texas - Natural Gas Basis Implications of Permian Production and Takeaway Capacity

Gas producers in the Permian are facing the prospect of severe transportation constraints over the next year or so before additional gas takeaway capacity comes online. Left unchecked, continued production growth could send gas at Waha spiraling to devastatingly low prices for producers. However, there are a number of ways producers and other industry stakeholders could mitigate the growing supply congestion in West Texas, at least in part, and possibly dodge the proverbial bullet. The longer-term solution will come in the form of new pipeline capacity, which will shift vast amounts of Permian gas east to the Gulf Coast and potentially create a new problem — supply congestion and price weakness along the Gulf Coast, at least until sufficient export capacity is built there to absorb the excess gas. Today, we wrap up our Permian gas blog series, with our analysis of how these events will unfold, including an outlook for Waha basis.

In Part 1 of this series, we discussed the meteoric rise of Permian gas production as a byproduct of the crude-focused drilling boom in the basin. The supply growth has happened much faster than many market participants expected and both crude oil and gas production growth is now facing prolonged periods of takeaway constraints and constraint-driven supply price discounts unless either producers slow down or more takeaway capacity is built (see All Dressed Up With Nowhere to Go for more on the crude takeaway).

In Part 2, we took a closer look at the effects of rising production on outbound gas flows, pipeline utilization and prices. Gas flow data indicates that Permian outflows have increased in just about every direction, and pipeline utilization rates are at or near capacity (also see Omaha for more on changing flow patterns). As the pipes approached capacity limits in recent months, Permian gas prices took a hit, falling well below Henry Hub and other downstream pricing hubs. That pressure has eased in recent weeks as power demand kicked in for summer and exports to Mexico ticked up slightly. But that reprieve is likely to be temporary as long as Permian gas production continues growing and exhausting takeaway options.

To address the impending takeaway capacity shortage, midstreamers are scrambling to build new pipeline capacity from the Permian. As we detailed in Part 3, there are six publicly announced pipeline projects vying to relieve Permian constraints, all with routes that move gas east to where the demand is growing the most — at the Gulf Coast. Announcements for two of these — Enterprise and Energy Transfer Partners’ (ETP) recommissioning of their Old Ocean Pipeline (in conjunction with the expansion of their North Texas Pipeline, or NTP), and Williams’ Bluebonnet Express happened in just the past few weeks. Additionally, Tellurian has said that, based on supplier response, it’s moved up the target completion date for its Permian Global Access Pipeline (PGAP) to late 2021/early 2022, potentially a full year from its original target of late 2022. There also are at least another three “stealth” projects that we know of. So that makes at least nine projects that we’re aware of that, if they were all built, would add 16 Bcf/d of new capacity between late 2018 and 2021.