Run for the Roses - An Update on the Race to Add Permian Gas Pipeline Capacity

The first Saturday in May is only a couple of days away, so brush off your seersucker jacket or find that Kentucky Derby hat, as it’s the only time of year most Americans watch an actual horse race. That’s kind of how it goes with the Permian natural gas market as well, with only intermittent interest from general gas market participants, usually when there’s a pipeline capacity issue leading to a noticeable impact on prices. Now is one of those times. Permian gas production is racing higher and the pipelines to get gas to market are quickly getting jammed up. Daily prices in the Permian are trading about 10% lower than those in Louisiana and the forward basis markets suggest they will deteriorate further in the months ahead. Naturally, midstream companies are quickly trotting out new pipeline projects, but sorting out the contenders is much like picking the winner on Saturday. You need data and at least a little luck, and we’re here to help out with the former. In today’s RBN blog, we lay out what we know and how we view the Permian gas pipeline derby.

Kentucky Derby-themed blogs are not a mainstay here at RBN — maybe they should be — but Permian gas is one of our favorite topics. We stated in our 2022 Permian Outlook that we expected Permian natural gas production to gallop higher this year, and that view has only been bolstered by crude oil prices hovering near $100/bbl. Like the field entering the first turn at Churchill Downs (see photo below), the pace of Permian gas growth is brisk, with the latest numbers showing about 14.5 Bcf/d being produced this month. Those numbers come from our weekly NATGAS Permian report — essentially our Daily Racing Form of Permian gas fundamentals — which also shows production is headed to around 15.5 Bcf/d by the end of this year. Higher production gobbles up capacity on the pipelines leaving the basin, and most Permian gas observers know all about the negative prices that can occur when that happens, a topic we touched on most recently in Play It Again. In other words, we’ve seen this race before, and midstream companies are chomping at the bit to bring new capacity to the Permian gas market. However, sorting out the contenders and predicting a winner might not be as easy as it looks.