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Race for west Texas gas pipelines heats up

02 May 2017 20:30 (+01:00 GMT)
Race for west Texas gas pipelines heats up

Houston, 2 May (Argus) — West Texas producers are no strangers to pipeline projects vying for new crude supplies, but another battle is brewing in the Permian basin over a coming deluge of natural gas.

At least three possible pipeline projects could take gas from the Permian to the Texas Gulf coast, where demand for low-cost supplies is growing among industrial users and exporters.

The projects, which aim to address potential capacity constraints, would ferry gas from the Waha hub in west Texas to the Agua Dulce hub near Corpus Christi in south Texas.

The new infrastructure could give west Texas gas prices a boost by connecting surplus supplies to high-demand markets.

"As a shipper, the Gulf coast is where you want to send your gas," said Roz Elliott, a spokeswoman with DCP Midstream, which is developing one of the pipeline projects with Kinder Morgan.

Texas has long history of providing gas to markets in the western US, midcontinent and northeast. Output from the Permian basin in west Texas and southeastern New Mexico is climbing as producers ramp up drilling because of higher energy prices and low development costs. Oil is the primary target for producers, but a surge in so-called associated gas from oil wells has made the Permian the second-largest US gas field by volume

But Texas' role supplying other US regions is changing in the face of waning demand in the western US — where power from renewables is competing with gas — and by a flood of supply from the Marcellus and Utica shales, two mammoth gas fields in the northeast US.

Permian growth has resulted in some of the lowest US gas prices in the country. Prices there have moved to steep discounts against the Henry Hub, a sign that supplies are outstripping demand.

Discounts at the Waha hub to Henry hub expanded in April to an average of about 32¢/mmBtu from 16¢/mmBtu a year earlier. Permian receipts into the El Paso Natural Gas pipeline in April were at a 39¢/mmBtu discount to the US benchmark, widening from an average of 19¢/mmBtu.

At the same time, discounts for south Texas gas have narrowed on growing demand for exports to serve demand in Mexico and for gas to supply Gulf coast petrochemical plants. South Texas receipts into the Texas Eastern Transmission system in April were at a 4¢/mmBtu discount to the Henry Hub, shrinking from 7¢/mmBtu a year earlier.

Kinder Morgan is working to address market concerns in the Permian with its proposed 430-mile (692km), 1.7 Bcf/d (48mn m³/d) Gulf Coast Express pipeline. During a non-binding open season that ended in April, potential shippers submitted bids well in excess of the proposed capacity, leading Kinder to consider expanding the scope of the project.

Kinder may also boost capacity on its El Paso Natural gas pipeline system to take more gas from southeastern New Mexico into Waha and on to the Texas coast. DCP is jointly developing the pipeline with Kinder Morgan. DCPis a shipper on the line, markets about 600mn cf/d of Permian gas and is the area's biggest gas processor, with capacity of about 1.3 Bcf/d.

Kinder's Gulf Coast Express so far appears to be in front of other competing projects. Enterprise Products Partners and private-equity backed NAmerico Energy are eachconsidering that would follow a similar path as Gulf Coast Express. NAmerico is in talks with potential shippers on a 1.7 Bcf/d line known as Pecos Trail. Enterprise has yet to establish the timing or capacity of its project.

"There should be enough volume for all three" pipelines, the energy investment bank Tudor Pickering Holt said in a recent research report, noting that Permian output could grow by more than 5 Bcf/d by 2020.

Those supplies could feed Cheniere Energy's planned LNG export terminal near Corpus Christi. That terminal will be able to send as much as 1.4 Bcf/d to overseas markets by 2019.

The lines could also meet growing demand in Mexico through Net Midstream's 2.1 Bcf/d Mexico line, which ties into the Agua Dulce hub. The US in February sent about 4.02 Bcf/d through pipelines to Mexico, up by 16pc from a year earlier. Most of that gas was sourced from south Texas.

Permian gas output rose in March to 7.8 Bcf/d, up by 15pc from a year earlier. Output there could top 8.1 Bcf/d in May, according to US government estimates.

The rig count in the Permian has surged on higher prices and so have acquisitions as companies such as ExxonMobil, Marathon Oil and EOG Resources buy bigger stakes in that field. The rig count in the Permian last week reached 342, more than double year-earlier levels. Operators this year have deployed an average of about five rigs a week in the Permian, a rate that does not show any signs of slowing.

"Hardly a deal got done where folks have not talked about adding more rigs or at least increasing productivity," said Tony Scott, managing director for the energy analysis and consulting firm BTU Analytics.