Next-day natural gas prices for March 20 at the Waha hub in West Texas plunged to a record low due to an equipment failure in New Mexico that stranded gas in the Permian basin.
Spot prices at the Waha hub collapsed to an average of just 12 cents per million British thermal units (MMBtu).
That fell below the contract’s prior all-time low of 21 cents in February and compares with an average of $1.72/mmBtu so far this year, $2.10 in 2018 and a five-year (2014-2018) average of $2.80, according to data available on the Refinitiv Eikon going back to 1991.
The equipment failure was on El Paso Natural Gas Pipeline Co. LLC’s Lordsburg and Florida compressor stations. That failure, which caused El Paso to declare a force majeure, cut the operational capacity through the stations by about 0.2 billion cubic feet per day (Bcf/d) to around 0.4 Bcf/d starting on March 19.
El Paso, which is a unit of Kinder Morgan Inc. (NYSE: KMI), said the reduction will remain in effect until further notice.
The Permian is the biggest oil-producing shale basin in the United States and since much of that oil comes out of the ground with gas, it is also the nation’s second-biggest shale gas producing region, behind Appalachia in Pennsylvania, West Virginia and Ohio.
With production of both oil and gas more than doubling to record highs over the past five years, the pipeline infrastructure in the Permian has not been able to keep up with the rapid growth in output.
That has caused the basin’s existing oil and gas pipes to become constrained and forced some producers to burn or flare off some of the gas associated with oil production.
Those gas constraints have trapped gas in the Permian and depressed Waha prices, boosting the discount Waha trades at below the U.S. Henry Hub benchmark in Louisiana.
That spread reached $2.79/mmBtu for March 20, its widest since December. That compares with an average discount of $1.21 so far this year, $1.06 in 2018 and a five-year (2014-2018) average of 34 cents.
Several new pipelines are being built or developed to enable more gas to flow out of the Permian, including ONEOK Inc.’s (NYSE: OKE) WesTex and Roadrunner projects, Kinder Morgan’s Gulf Coast Express and Permian Highway projects and NAmerico Energy Holdings’ Pecos Trail.
Drillers will, however, have to wait until late 2019 and beyond for those projects to enter service.
Kinder Morgan's pipeline, Lockridge, is designed to remove natural gas from the Permian Basin where pipeline capacity has not kept up with the amount of gas associated with oil production.
Geologists have said the Foz do Amazonas basin offshore Brazil could contain up to 14 billion barrels of petroleum, more than the entire proven reserves in the Gulf of Mexico.
Supply of the 1.3 billion cubic meters of gas is expected to begin in December and last for 30 months, or until the Karish and Tanin gas fields begin commercial operation.