PA Consulting energy expert Michael Bennett is quoted in Natural Gas World discussing US natural gas trends.
The article notes that the Kinder Morgan-led Gulf Coast Express pipeline entered service on September 25, alleviating some of the natural gas takeaway capacity constraints in the Permian Basin. The pipeline’s start-up is a particularly welcome development for operators given that natural gas is a by-product of drilling for oil in the basin, and regional producers have been struggling, as there is a shortage of infrastructure for handling it. The Permian is now estimated to be the largest US shale region by gas output growth despite the fact that drillers are prioritizing oil.
The $1.75bn Gulf Coast Express pipeline adds 2bn ft³/day of gas takeaway capacity out of the Permian. The pipeline will carry gas from the Waha area of West Texas to the Agua Dulce hub near the Texas Gulf Coast. From there the gas can be sent to LNG terminals along the coast, or across the border to Mexico via connecting pipelines.
Michael says: “The start-up of Gulf Coast Express was definitely good news for the natural gas industry, and especially producers in the Permian Basin.”
Gulf Coast Express is already fully subscribed under long-term contracts, and is anticipated to fill up relatively quickly, leaving the basin’s producers waiting for more gas pipeline capacity to enter service. Several other pipelines of roughly the same capacity as Gulf Coast Express are already under development. Kinder Morgan is also involved in one of these projects, partnering with EagleClaw Midstream Ventures and Altus Midstream on the Permian Highway pipeline, which is due to enter service in late 2020. The other major Permian gas pipeline project to have reached a final investment decision (FID) is Whistler, which is being developed by MPLX, WhiteWater Midstream and a joint venture between Stonepeak Infrastructure Partners and West Texas Gas. It is expected to come online in 2021.
In the shorter term, Michael anticipates at least three 2bn ft³/day pipelines entering service over the next two years or so, in addition to Gulf Coast Express. “That should allow production to continue to grow. We’re looking for Permian production to reach 13bn ft³/day by 2022, and that’s slightly over a doubling since 2017.” As previously with the Permian, this growth will be driven by drilling for oil rather than for natural gas, with additional gas takeaway capacity removing one of the hurdles for producers.
The gas pipeline capacity additions will relieve some of the downward pressure on natural gas prices in the Permian. This wll be welcomed after prices at the Waha hub traded in negative territory earlier this year, as producers had to pay for their gas output to be taken away. Some operators responded to this by curtailing output, with Apache Corp temporarily halting production at its gas-rich Alpine High project in the Permian. The company is one of the shippers on Gulf Coast Express and has already started using the pipeline.
When Kinder Morgan started filling Gulf Coast Express in August, gas prices at the Waha hub rose to their highest since March, with the differential between Waha and the Henry Hub benchmark narrowing to its lowest since January.
Michael expects Waha to trade at a discount to Henry Hub over the next few years. “We still see $0.50 or $0.40 [per million British thermal units] discounts as the norm, especially when you get out into 2023 or so. There’s just so much supply, and because the supply is so affordable and economic due to its associated nature, producers can still crank out production while still receiving discounts to Henry Hub.”
Producers hoping that Gulf Coast Express – and the expectation of additional new pipeline capacity – will help to reduce flaring of excess gas in the Permian Basin may also be somewhat disappointed. Flaring in the region has reached record highs this year and with both oil and gas output set to grow further still, takeaway capacity will remain insufficient to cater for all of the gas being produced.
Michael adds: “I think the new pipelines will help, but we wouldn’t expect flaring to decrease dramatically anytime soon. There are still processing constraints and gathering constraints, and the lead time on the rest of the pipelines is still two or three years out.”
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