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What's Your Permian Gas Worth(less)?

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The Daley Note: October 27, 2022

Waha natural gas prices plunged into negative territory this week as planned and unplanned maintenance added to constraints on Permian takeaway. The wild Waha price volatility should be temporary as pipelines return to full service, but we see much bigger structural issues on the horizon, according to our Permian Supply and Demand basin forecast. 

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Kinder Morgan's (KMI) Gulf Coast Express (GCX) and El Paso Natural Gas systems are responsible for the latest outages. GCX had scheduled maintenance this week to inspect and repair compressors, limiting pipeline throughput to 1.325 Bcf/d on Wednesday (Oct. 26). But in an updated post to customers, GCX cited "unforeseen circumstances" that would require an additional 100 MMcf/d cut on Wednesday. In addition, the El Paso system saw its Plains North interconnect with Natural Gas Pipeline of America (NGPL) unexpectedly lose service to North Texas. The incidents together amount to nearly 1.2 Bcf/d of lost Permian egress.

These maintenance events sent Permian natural gas prices plummeting. Waha day-ahead gas traded as low as -$1.34/MMBtu Wednesday, according to Bloomberg data, trailing the Henry Hub benchmark by $6.54. Waha recovered somewhat in trading Thursday to -$0.97/MMBtu, resulting in a spread of $6.23 to the Henry Hub. E&Ps without firm transport or pre-arranged sales are effectively paying third parties to take their gas in order to keep Permian oil flowing.

Permian Pipeline Egress-1

The latest outages compound takeaway issues for Permian shippers. El Paso's Line 2000 from West Texas to the Southern California border has been operating at reduced pressure following a rupture in late 2021. The work on GCX is scheduled to be completed by Friday (Oct. 28), which should bring some relief to Permian shippers. Nevertheless, the price volatility highlights the precarious balance as Permian gas production continues to grow.

East Daley reviews gas supply and pipeline egress every month in our Permian Supply and Demand basin report. Since the start of 2022, we've been warning of constraints on the horizon based on rising commodity prices and increasing Permian rigs. We break down Permian supply trends by G&P systems as well as pipelines; click here for a free sample of our Permian Supply and Demand basin report.

The figure shows East Daley's latest high-level forecast from the Permian Supply and Demand report. We model effective Permian egress capacity (considering outages like El Paso Line 2000, as well as market and seasonal factors) to run effectively full by late 2022 into early 2023. According to our forecast, the recent weakness seen in Permian prices is set to become a market fixture in 2023 rather than a temporary phenomenon. We anticipate more volatility, and potentially more flaring, ahead for Permian operators.

We plan to release our updated Permian Supply and Demand forecast next week; please reach out for additional information. – James Taylor Tickers: KMI.

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