Some Beach, Part 2 - New Permian-to-Gulf Gas Pipelines to Shake Up Regional Flows and Basis

Permian natural gas production is now expected to grow at a subdued pace over the next five years, as lower oil prices and a focus on capital discipline have slashed rig counts. Few observers see the Permian situation changing anytime soon, especially as crude oil prices continue to hover around $40/bbl. That said, the Permian gas market will be anything but dull over the months and years ahead. More than 4 Bcf/d of new outbound pipeline capacity from the Permian to the Gulf Coast will be coming online next year, throwing natural gas flows from West Texas into flux and deeply impacting neighboring markets. While natural gas basis at the Permian’s primary Waha hub should improve dramatically, outflow to the Midcontinent will likely fall sharply and potentially reverse, and the Texas Gulf Coast will see an influx of supply on the new pipelines. Today, we continue a series that highlights findings from RBN’s new, Special Edition Multi-Client Market Study.

In Part 1 of this series, we provided an updated view of Permian natural gas production, flows, and the trajectory of basis over the next few years. In summary, Permian production growth will be far too anemic to fill the 4 Bcf/d of new outbound pipeline capacity coming online next year. That will keep Waha basis prices relatively strong, and there are important implications for the natural gas markets adjacent to the Permian. The Permian has limited local demand and sends the vast majority of its production out to neighboring gas markets, as shown below in Figure 1. These flows are set to change dramatically in the years ahead, but first, it’s useful to get an understanding of the current state of affairs.

Shown below are average outflows by path this year, with flows the last couple of months based on our estimates. Flow Path A represents the gas that exits the Permian and heads north toward the Midcontinent gas markets. Pipelines in this corridor include Kinder Morgan’s El Paso Natural Gas (EPNG) and Natural Gas Pipeline (NGPL), Berkshire Hathaway’s Northern Natural Gas (NNG), and ONEOK’s Red River Pipeline. Combined, the four pipes are expected to average about 1.5 Bcf/d of flow in 2020, which is near estimated capacity of 1.9 Bcf/d and down slightly from 2019 average flows of 1.7 Bcf/d. Still, outflows north have served as a major relief valve over the last few years, especially during the most constrained periods preceding the completion of Kinder Morgan’s Gulf Coast Express (GCX for short and Path F in Figure 1) last fall. We will get to it later, but these outflows north will shift in a big way as new capacity to the east opens up next year.

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