The Permian Basin remains the country’s most bountiful play for oil production, but natural gas has become a major dilemma.
Lack of sufficient infrastructure has left the Permian overflowing with gas, giving the basin the dubious distinction of having the lowest prices of any major U.S. hub. The prices will only get worse as long as the pipeline shortage makes it hard to move the abundance of gas to market.
Some relief is on the way with the 430-mile Gulf Coast Express that will move gas from West Texas to eastern Texas, but the $1.75 billion project isn’t expected to come online until October 2019. The next pipeline won’t show until 2022 at the earliest.
“What is needed is infrastructure,” Jake Fells, senior energy analyst at BTU Analytics, told Hart Energy. “The Gulf Coast Express is under construction, but even when that comes online we are going to need another pipeline right on its heels or else we are going to end up right back in the same situation in 2020.
“As of now there really aren’t any concrete projects on the way and these things take about two years to build. So, unless we get another big pipeline announcement going on the construction path in the next few months then we are going to probably be looking at being in this situation for the next several years.
“So we not only need infrastructure, but we need a lot of infrastructure out of the Permian.”
As long as relief is delayed, gas will continue to saturate the region and prices will continue to fall. That by itself wouldn’t be the worst thing but the lack of pipelines could also hurt the region’s oil market.
While gas prices in the region have fallen significantly from last year, natural gas production has increased to record levels. That could force drillers in the Permian to reduce oil output until they can get more of the associated gas to market.
“We think there could be a divergence between activity completions and drilling where we start building this large inventory of drilled but uncompleted wells,” Fells said. “That’s one part of the equation—companies can’t complete the wells as fast as they can drill them.
“The other side we expect to come into play—if you reach a point where you have to start curtailing production because of gas constraints—is they can turn off more gassy wells to turn on a bunch of wells that have liquids and gas. So, basically, clearing up a system to allow more crude to come online,” he said. “We think shut-ins are a possibility this summer to make way for crude production and just replacing a whole bunch of wells that are only producing gas with maybe a newer well. So that’s an option.”
But the good thing for the oil companies is the strong oil price. West Texas Intermediate was at $50 a barrel last year but has jumped to around $70 this year, which has pleased Permian developers immensely.
Gas prices, however, could certainly drop more.
“We don’t think it’s out of the realm of possibility that we see negative prices at some point either later this year or into 2019,” Fells said. “Things can definitely get a lot worse on the gas side.
“On the crude side, you are seeing differentials blowing out because there are no infrastructure constraints on the crude side.”
Fells cited the differing factors that influence gas prices vs. oil prices as another major reason for the gap. Oil is influenced more by geopolitics, specifically the situation in Venezuela, the OPEC production agreement and the Iran sanctions. Gas is influenced more by domestic issues and market fundamentals.
“Until we get some this G demand coming online, until we get some pipelines out of the Permian, it’s getting all of this pent-up gas that’s going to make prices worse and worse until you are physically full out of the Permian and you can’t move another molecule,” he said.
“Things can most certainly get worse on the gas side.”
But Fells said things in the Permian aren’t nearly as dire as some make it out to be.
“On the margins, I’m sure they would rather see higher gas prices than lower gas prices, of course,” Fells said. “But overall they generally insensitive to what the gas prices are. So if prices don’t go up and oil stays at $70, you still have probably a lot of happy Permian producers.”
Terrance Harris can be reached at tharris@hartenergy.com.
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