Permian Natural Gas Prices Fall as Production Grows

The natural gas spot price spread between the Permian Basin, as priced by the Waha Hub in western Texas and the U.S. national benchmark Henry Hub in Louisiana, has grown considerably in the past year, writes the Energy Information Administration (EIA). Natural gas prices at Waha are nearly a dollar per MMBtu lower than Henry Hub prices. This spread widened as the ability to transport the increased natural gas production in the Permian Basin in western Texas and southeastern New Mexico was constrained by existing pipeline capacity.

Based on estimates in EIA’s most recent Drilling Productivity Report, production of natural gas in the Permian Basin averaged 10.4 Bcfd in June 2018, which was 2.1 Bcfd more than in June 2017. Much of the increase in output is associated natural gas, or gas produced as a byproduct of ever-rising crude production from oildirected rigs. As a result, the increase in natural gas production closely correlated with the increase in crude oil production in the Permian, which averaged 3.3 MMbbld in June 2018, up 900,000 bbld from the June 2017 level.

EIA notes that as Permian Basin oil production grows, producers must find outlets for the associated natural gas. Once pipeline capacity is fully used, choices are limited. The widening price differential between Waha and Henry Hub indicates pipeline capacity is already somewhat constrained.

Producers may flare or vent natural gas, although these disposal methods are regulated in Texas and New Mexico. Both states allow flaring from wells during drilling and immediately after completion. However, after a certain amount of time, producers can only flare natural gas after receiving exemptions from the respective state regulatory agencies. If natural gas production continues to grow, and natural gas prices continue to fall, some producers in the area may cease oil production to avoid producing associated natural gas.

Two pipelines, Comanche Trail and Trans-Pecos, were completed in 2017 to export Permian natural gas to Mexico. Although these lines have a combined takeaway capacity of 2.6 Bcfd, they are not expected to see significant flows until late this year or early next year when downstream pipeline infrastructure in Mexico enters service. The only other project expected to come online in 2018 is the combined expansion of the North Texas Pipeline and resumption of service on the Old Ocean Pipeline, which collectively will increase pipeline capacity out of the Permian by 0.15 Bcfd.

New pipelines are currently in development to carry natural gas from the Permian Basin to the Gulf Coast: the Gulf Coast Express Pipeline, 2.0 Bcfd capacity; the Permian to Katy Pipeline, 1.7 Bcfd; and the Pecos Trail Pipeline, 1.9 Bdfd. Of the three projects, only the Gulf Coast Express is under construction, with an expected in-service date of October 2019. The proposed pipelines from the Permian Basin are intended to meet Gulf Coast demand for natural gas, which includes new liquefied natural gas (LNG) export facilities and regional industrial use.

(SOURCE: The Weekly Propane Newsletter, August 6, 2018. Receive once- or twice-weekly updates on the latest posted and spot prices at all major terminals and refineries around the U.S. with a subscription to the Weekly Propane Newsletter. Included is market analysis and expert commentary not found elsewhere. Also featured is a center spread of posted prices, which includes hundreds of postings that are completely updated each week. The Newsletter provides up-to-date news items of interest to propane industry insiders and serves as third-party pricing verification for index-pricing clients. Click the Subscription tab to subscribe.)