Nat gas bottleneck threatens Permian growth: Correction

Corrects 2028 natural gas output estimate in the second paragraph.

Natural gas pipeline constraints out of the US' booming Permian basin could add another obstacle to crude production growth in the region.

Gas production from the Permian, spread across Texas and New Mexico, is already close to existing pipeline capacity at about 8.5 bcf/d (87.6bn m³/yr). It is forecast to rise to 14.9 bcf/d by 2023 and to 20 bcf/d by 2028, consultancy BTU Analytics senior energy analyst Matthew Hoza says.

Much of the region's natural gas production is a byproduct of oil production — as most producers are aiming for more profitable oil output. But there are limits on the volumes of natural gas that can be flared at a well site, meaning without expanded gas pipeline capacity sustaining crude production growth may become a challenge.

"This issue can extend for much longer than I think a lot of people are looking at today," Hoza says.

A modest amount of new gas pipeline capacity is due on stream this year in the region. US firms Enterprise Products Partners and Energy Transfer Partners plan to resume service on the 160mn cf/d Old Ocean pipeline between Ellis county and Brazoria county on the Gulf coast, which has been idle since 2012. Enterprise and Energy Transfer plan to finish expanding their jointly owned 800mn cf/d North Texas pipeline in the fourth quarter. But Permian operators will have to wait until late next year for a major new gas pipeline. Midstream operator Kinder Morgan's 2bn cf/d Gulf Coast Express line in Texas, running from Waha to the Agua Dulce hub near Corpus Christi, is due to start up in October 2019.

Producers may seek permission to increase gas flaring if the capacity additions prove insufficient. "At the growth rate we are at right now, particularly with oil continuing in the $70/bl range, I think there is a very strong chance that there will be a big debate on how much flaring will be allowed," US gas infrastructure firm Williams' chief executive, Alan Armstrong, says.

Another option would be to shut wells, particularly "old [vertical] wells that are relatively low oil producers and gassier producers", US independent Pioneer Natural Resources chief executive Tim Dove says. The Permian has about 45,000 "legacy" gas wells producing about 700mn cf/d, Hoza says.

Pipeline capacity constraints are a bigger problem for gas than oil. Moving oil by rail or trucks "will definitely harm [price] differentials, but on the gas side you really do not have alternatives", Hoza says.

Avoiding congestion

Some leading Permian producers have partially protected themselves by signing contracts to move their gas out of the congested Gulf Coast region. Around 75pc of Pioneer's Permian gas production is sent to southern California under firm transportation agreements while the rest is mainly sold under term contracts at Waha.

"What that has done is allow us to make sure that our volumes will continue to flow uninterrupted and at strong realized prices," Dove said. "Our realizations today are about 60¢/mn cf higher due to the southern California sales than they would be if we were selling all the gas in basin. So not only is this allowing us to move volumes, but it is allowing us to add value in doing so."

Other Permian-focused independents have also played down the impact of the infrastructure constraints. Energen has firm transportation agreements to meet all of its gas requirements, chief executive James McManus says. And it has hedged part of its output to insulate itself from weaker gas prices in the Permian.

Rival independent Parsley Energy has an agreement with midstream company Targa Resources to gather, process and sell 80pc of its Permian gas output. And Occidental Petroleum has "oil and gas transportation agreements to the Gulf coast with volumes in excess of our current equity production", the firm says.