Texas-Sized Gas Conundrum Plagues America's Busiest Oil Play
By Ryan Collins
and Naureen S Malik
March 28, 2018, 1:00 PM CDT Updated on March 29, 2018, 12:30 PM CDT
West Texas has become one of the worst gas markets in the U.S.
Prices in the basin may drop to zero next month: Ion Energy
America’s most prolific oil field is now its worst market for natural gas.
A pipeline shortage that’s leaving gas trapped in West Texas’ Permian Basin means prices for the fuel there are the lowest of any major U.S. hub, wresting that distinction from Appalachia’s Marcellus Shale. Prices for Permian gas, produced alongside oil in the play, have tumbled 32 percent from a year ago, while output rose to a record. And the pipeline crunch is also pummeling the region’s oil market.
All that gas production is creating a dilemma for drillers, who may be forced to curtail oil output if they can’t get their gas to market. Producers can burn off some of the gas -- a process known as flaring -- but state regulators typically won’t allow that to happen indefinitely. And as mild spring weather limits demand for the heating fuel, explorers may be giving their gas away, according to broker Ion Energy Group LLC.
In the next three to four weeks, “natural gas prices in the Permian can go to zero because it’s literally a byproduct,” Kyle Cooper, consultant for Ion Energy in Houston, said by telephone. “There’s so much gas coming the system really pushes and fights to get it out.”
The low-cost crude oil reserves buried in the Permian’s layers of shale have drawn explorers in droves, but roughly a third of the output from those wells is gas, according to RS Energy Group. As gas production from the play surges, however, pipeline capacity has failed to keep pace.
One emerging outlet for the glut: Mexico. Demand for the fuel has jumped in the nation’s newly deregulated electricity market as a raft of new gas-fired power plants are built. And while companies from Sempra Energy to TransCanada Corp. are developing conduits to shuttle gas from Texas to Mexico, several of those projects are facing delays south of the border, often due to opposition from indigenous groups.
Volume on pipes to Mexico “looks to be very light,” Colton Bean, director of midstream research at Tudor Pickering Holt & Co., said by telephone. “The issue is you haven’t necessarily built out the in-country connectivity on the other side of the border.”
For more on delays to Mexican gas pipelines, click here
Another factor working against Permian producers: the calendar. Gas for delivery at the Waha hub in West Texas has already slid 14 percent so far this month to trade at $1.82 per million British thermal units Thursday, a 31 percent discount to supplies of the fuel at Louisiana’s Henry Hub, the benchmark for U.S. futures. And the Permian rout will only deepen in the coming weeks as mild spring weather curtails heating demand and wind generation picks up, displacing gas-fired power plants, Cooper said.
Permian gas could average $1.85 per million British thermal units this year, Tudor Pickering analysts wrote in a March 6 research note. But on some days, it could go to zero or even turn negative, according to Cooper.
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