Permian oil pipelines aggravate gas glut

Natural gas prices in the Permian basin are plumbing new lows this spring as long-awaited oil pipelines start service, leaving west Texas markets awash with new gas supplies.

Prices at Waha in west Texas dropped to a record low yesterday of -$3.35/mmBtu, and have averaged a -$1.35/mmBtu in the past week, flipping from an average of $1.92/mmBtu a year earlier. Waha prices in the month-ahead market for April averaged -11¢/mmBtu.

The biggest driver of these natural gas lows are a string on new oil infrastructure projects that have helped ease Permian bottlenecks that limited oil production growth. Enterprise started service last month on a 45,000 b/d expansion of the Midland-to-Sealy pipeline; In February, Enterprise began filling a 200,000 b/d converted NGL line that runs to the Houston, Texas, area; and Plains All American started its Sunrise pipeline expansion, a 500,000 b/d line that is probably moving about 300,000-350,000 b/d.

Permian basin oil wells produce large amounts of gas, meaning as oil output grows so do natural gas flows, keeping pressure on prices. The Permian is the second-largest largest gas field by volume, trailing only the Marcellus shale in Pennsylvania and the surrounding states.

Recent oil pipeline expansions have resulted in an additional 500mn cf/d (14mn cf/d) of associated gas output, the energy consultancy BTU Analytics said. Gross gas production from the Permian topped 13.6 Bcf/d (385mn m³/d) in February, up by 38pc from a year earlier, according to the most recent US government data.

Natural gas pipelines have not kept pace with oil, leading to an oversupply that is forcing prices at key west Texas gas indexes below zero. Those negative prices can affect the profitability of oil wells and lead to increases in flaring.

The next major expansion of gas takeaway capacity, Kinder Morgan's $1.75bn, 2 Bcf/d Gulf Coast Express, is scheduled to start service next October.

Pipeline companies have added pipeline capacity from west Texas into Mexico, but those projects have yet to offer any significant outlet for production, because of infrastructure delays on the other side of the border. A minor amount of capacity has also been added on intrastate lines in Texas.

Permian prices have also faced downward pressure as winter cold subsided and as a force majeure on the El Paso Natural Gas pipeline system limited Permian gas flows to the west.

The US gas market entered its spring shoulder season on 1 April, a period usually marked by low weather-related demand.

A blast of cold weather can stoke demand for Permian gas by allowing those supplies to displace gas in other areas like the the Rocky Mountains.