New Pipelines Coming, But Waha Basis at Risk Until They Do
Just a year and a half ago, Permian natural gas production was sitting just above 5.5 Bcf/d, up little more than 0.5 Bcf/d from the prior year. 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 from the oil price collapse of 2014, totaling about 260, 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.
Since then, however, the landscape for Permian gas producers has taken a treacherous turn. 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 — still all crude-focused — has climbed by more than 50% to about 470. The crude oil 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.
In this Drill Down Report, we focus on the effects that surging gas supply from the Permian is having on pipeline utilization and prices in Texas, including developing constraints. We then provide detailed discussion of the infrastructure expansions announced to solve the problem, before combining our supply and takeaway capacity outlook to present a thesis for how we see the Permian and overall Texas market evolving over the next five years.
Key take-aways from the report include:
- The meteoric rise of associated gas production in the Permian - driven by prolific and economically favorable crude-focused drilling - is wreaking havoc on West Texas gas infrastructure and capacity constraints are closing in.
- About 12 Bcf/d of new, large-scale pipeline takeaway capacity is planned to provide relief for Permian producers, mostly in the 2019-22 timeframe and all targeting the Gulf Coast market.
- However, production growth is expected to outpace takeaway capacity additions over the next year and a half or so, and the Permian gas market is expected to face severe constraints and deep price discounts in 2019.
- Waha basis may weaken to a more than $2.00/MMBtu discount to Henry Hub in early to mid-2019, unless producers and midstreamers find ways to mitigate constraints in the interim.
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