The Daley Note: June 28, 2023
Permian Basin natural gas prices have been more resilient than many, including East Daley Analytics, had expected at this point in 2023. Our review points to rising ethane recovery as the likeliest factor, with higher gas demand and DUC builds also potentially contributing factors.
Drilling activity in the Permian has been steady, with basin rig counts hovering around 350 rigs this year. Gas prices at the Waha hub in West Texas have been volatile and taken a dive on maintenance events, such as when Gulf Coast Express (GCX) and Permian Highway Pipeline (PHP) took ~1 Bcf/d of capacity offline in May, which indicates egress is tight. Yet Waha prices have strengthened in June and traded only $0.06-0.13/MMBtu behind the Henry Hub last week. Waha on Tuesday (June 27) traded $0.16 behind the Henry Hub. Given the tightness of egress and underlying supply growth, this is an outcome we hadn’t expected at the start of 2023.
Several factors could be contributing to the tightening Waha basis. Recent data from the Energy Information Administration (EIA) indicates midstream companies are benefiting from higher overseas demand and prices for ethane. Inland Texas and New Mexico ethane production has been growing while PADD 3 ethane exports have been on the rise this year (see figure). New processing plant expansions also enable more ethane recovery in the Permian.
By shipping more Btus as ethane in Y-grade supply, operators can free up space on gas egress pipelines. East Daley already factors in relatively high ethane recovery in our NGL Network Model and NGL Purity Product forecasts, creating ~130 MMcf/d more space on gas egress pipelines. If we assume full ethane recovery in the Permian, operators could lower residue gas supply by another ~350 MMcf/d.
Higher demand is another factor. Texas has seen record-breaking temperatures, prompting the Electric Reliability Council of Texas (ERCOT), the state’s electricity grid manager, to call for conservation. Grid demand is forecast to hit a new record this week. Power plants in West Texas likely have been using more gas in the heat wave, leaving less supply to carry on pipelines.
The early summer heat is also baking Mexico, which could be importing more gas for its own power generation. Several pipelines connect at the border in West Texas and can send gas to Mexico. Market visibility into this trend is poor though due to infrequent postings on Mexico pipelines.
Producers could also be opting to defer well completions. The figure shows a sensitivity case from East Daley’s Permian Basin Producer Scenario Tools. If all drilled but uncompleted wells (DUCs) are removed from the model, we forecast the basin would be producing ~400 MMcf/d more gas, resulting in a grossly oversupplied egress scenario. Conversely, a 25% increase in the DUC count would decrease gas supply by 100 MMcf/d in our forecast, freeing up more egress space. – James Taylor & Ajay Bakshani, CFA.
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