Alleviating Permian crude pipeline bottlenecks means more tr

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from SNL Daily Gas Report

Alleviating Permian crude pipeline bottlenecks means more trouble for gas prices

BYLINE: Allison Good

SECTION: Extra


Investment in long-haul oil pipelines from the booming Permian Basin will continue to depress natural gas prices at regional hubs until more takeaway capacity for gas volumes is added, industry analysts at Moody's said.

The rating agency pointed to a group of crude pipelines out of the Permian expected to come online later this year, which will likely keep gas prices in negative territory, forcing producers to pay buyers to take the fuel off their hands unless midstream companies build additional gas infrastructure.

"Oil pipelines going into service in the second half of 2019 will alleviate the oil bottleneck and spur further oil production thereby further aggravating the shortfall in natural gas takeaway capacity," Moody's analysts wrote in an April 11 report. "Two new [gas] pipeline projects from Kinder Morgan Inc. will not alone satisfy all of the demand for Permian natural gas infrastructure, implying room for further midstream development there, but competitive tariffs suggest that demand would not offer outsized investment returns."

The nearly-2-Bcf/d Gulf Coast Express project under development by Kinder Morgan, DCP Midstream LP, Targa Resources Corp. and Altus Midstream Co. is scheduled to come online in the third quarter, while the 2-Bcf/d Kinder Morgan-led Permian Highway project, which has also reached a final investment decision, is scheduled to start up in late 2020. Other proposed gas pipelines have not yet gotten the green light to proceed with construction.

"None of the pipeline options in the hunt ... seem to be making major progress, but we believe this summer when flaring rises significantly, one will move forward," analysts at Bernstein wrote in an April 10 note to clients. "While it seems very unlikely that Permian producers would have to shut in due to gas flaring ... we believe that this summer we will run out of gas takeaway and they will be forced to sign up for a new pipe."

The price for delivery on April 10, meanwhile, reached negative 25 cents/MMBtu in Waha, and the El Paso, Texas, price finished the day at minus-26 cents/MMBtu, according to S&P Global Platts' Gas Daily. On April 8, Waha and El Paso, Permian, had reached positive territory for the first time in over two weeks after a March 18 outage at two compressor stations on El Paso Natural Gas Co. LLC's pipeline west out of the basin was fixed, Platts reported.

The price discounts caused by the Permian gas supply glut are benefiting pipeline operators with uncontracted capacity who can capture that demand, but they limit some producers' ability to shore up their finances, according to Moody's.

"The credit metrics for pure-play [exploration and production, or E&P] companies producing oil in the Permian may improve only modestly until new midstream infrastructure can relieve natural gas bottlenecks, narrow commodity price basis differentials and allow E&Ps to grow oil production," the report said.

Shale drillers in West Texas and New Mexico are eager to offload the gas stripped out of higher-priced crude before the oil can be sold. They can dispose of the unsellable gas by burning it off at the wellhead, but flaring is viewed by both state regulators and landowners as a temporary solution. Adding gas takeaway capacity is the only way to get the gas out of the Permian short of limiting production altogether.

"We're flaring way too much gas. To me, it's a black eye on the Permian Basin," longtime Pioneer Natural Resources Co. executive Scott Sheffield said April 10 during a conference held by Columbia University's Center on Global Energy Policy.

With Permian production expected to approach 13.4 Bcf/d in March and pipeline space significantly lower than the 11 Bcf/d technically available because pipelines to Mexico are not being fully used, the region needs one new 2-Bcf/d pipeline per year to keep pace with drilling, energy investment bank Tudor Pickering Holt & Co.'s Colton Bean said in a recent interview. Bernstein analysts echoed that sentiment in their April 10 note.

"With just one more pipeline planned for 2020 and none after, we'll need at least one [final investment decision] a year to keep up with associated gas growth," the note said.

S&P Global Market Intelligence and S&P Global Platts are both owned by S&P Global Inc.

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Remember that the low or even negative "spot prices" for natural gas only applies to companies that don't have their gas covered by a contract. Most of the gas produced by the Permian Basin companies in our Sweet 16 and Small-Cap Growth Portfolios do have contracts with pipeline companies.