A big push is on to mitigate and ultimately fix the Permian’s natural gas takeaway constraints, which in recent months have widened the price spread between gas at Waha and at Henry Hub to levels not seen in years. Despite the efforts to quickly add incremental capacity to existing pipelines and build greenfield pipes, however, the momentum behind Permian crude production growth — and, with it, the production of more associated gas — make a months-long blowout in the Waha basis in 2019 a good bet.  Questions about the degree and duration of that basis pain and the amount of new pipeline capacity that will be needed (and how soon) can only be answered by taking a detailed look at what’s been happening and what’s being planned. Today, we discuss highlights from our new 24-page report on Permian gas takeaway constraints and their effects.

In January 2017 — just a year and a half ago — Permian natural gas production was sitting just above 5.5 Bcf/d, up by little more than 0.5 Bcf/d from the previous January. Crude oil prices — the primary driver of the crude-focused drilling and associated gas production volumes in the Permian — were barely above $50/bbl. The rig count in the basin was still in recovery phase, totaling about 270 after having dropped to a low point of 134 in mid-2016. Outflows of Permian supply were still well below the takeaway capacity out of the basin and near-term prospects for demand growth from exports to Mexico were still a realistic possibility. Spot gas prices at the Waha Hub, the benchmark location for Permian supply, were trading not far from historical ranges: about 15-20 cents/MMBtu behind the Henry Hub national benchmark in Louisiana.

Well, what a year and half it’s been! Crude oil prices have rebounded to near the $70/bbl level. The production economics in parts of the Permian are so favorable that significant crude production growth is likely under even pessimistic oil-price scenarios. The rig count in the basin has climbed to more than 470, and the crude production boom in the Permian has led to a precipitous rise in associated natural gas liquids (NGLs) and dry gas production from the West Texas/southeastern New Mexico basin. As shown in Figure 1, gas production from the basin in recent weeks (right end of navy blue line in Figure 1) has been averaging more than 8.0 Bcf/d — 2.5 Bcf/d higher than in January 2017 (left end of orange line).