Infrastructure – Negative natural gas prices have returned to the Permian Basin, despite the start of Matterhorn Express Pipeline just six months ago. Maintenance and weak seasonal demand explain much of the drop, though East Daley also assumes from price trends that Matterhorn has been running close to full.
Permian gas prices have been under pressure since late February. Waha spot prices fell below zero in mid-March, trading to a low of -$1.18/MMBtu on March 18, and prices remained mostly negative the rest of the month. Prices have rebounded some in early April, though East Daley expects more volatility ahead.
Pipeline maintenance has been a key factor contributing to price weakness. The El Paso Natural Gas (EPNG) system owned by Kinder Morgan (KMI) has been conducting regular maintenance since February 24, cutting capacity on key segments like Cornudas (up to 700 MMcf/d) and the North Mainline (up to 750 MMcf/d) at various times.
Weak demand is also pressuring prices. Texas gas consumption typically falls to seasonal lows in March and April, when spring temperatures idle furnaces but are still too low to create much cooling demand. Wind turbines also tend to run strongest in the spring and crowd out gas generation. Reflecting soft market conditions, Transwestern Pipeline in late March issued several critical notices for underperformance in the Phoenix, AZ market, citing shippers for taking less gas than they nominated.
Permian production growth and tightening egress is another factor, reflected in the rapid increase in flows on Matterhorn. Volumes on the new line to Katy have ramped since February, according to interstate pipeline samples East Daley tracks. Pipes recently posted receipts from Matterhorn of over 1.5 Bcf/d for 11 consecutive days, from February 23 to March 5 (see figure above). Deliveries to interstate systems in March averaged 1.49 Bcf/d, a new high.
The Matterhorn ramp has occurred during a period when Waha basis to Henry Hub has deteriorated, falling from a ~$1/MMBtu discount at the start of February to a $3 spread by the end of the month (see price chart). Waha further weakened in March as Matterhorn interstate flows held strong, reaching a $5 spread to Henry Hub.
See East Daley Analytics’ Houston Ship Channel Supply & Demand Report for more information. We assume Matterhorn has 2 Bcf/d capacity and that our flow data is conservative, since the 42-inch line also connects to several intrastate pipes in the Katy market where visibility is limited. The pipeline would be maxed out if those intrastate deliveries have approached 400-500 MMcf/d recently, a reality suggested by negative Waha prices.
Waha prices jumped to over $1/MMBtu in the first week of April, trading Tuesday (April 8) at $1.47. However, pipelines plan more maintenance work this month that will keep the market on its toes. Operators have scheduled major maintenance events for April 8-11, when Gulf Coast Express is due to take 820 MMcf/d offline, and April 22-25, when Permian Highway Pipeline plans to remove 950 MMcf/d of capacity. EPNG will also continue its maintenance in April and restrict key segments like Line 2000 and the North Mainline. At peak, pipelines plan to take up to 1.8 Bcf/d of pipe capacity offline this month.
Upstream – Tokyo Gas subsidiary TG Natural Resources (TGNR) has acquired a 70% stake in Chevron U.S.A.’s (CVX) East Texas gas assets for $75MM in cash and $450MM in capital carry, enabling long-term development in the Haynesville formation.
The deal encompasses 71,000 net contiguous acres in Panola County, TX that are largely unexplored. CVX’s Haynesville acreage was one of the few remaining undeveloped parcels in the region, allowing TGNR to develop the plot with ideal well spacing.
The additional acreage extends TGNR’s drilling inventory beyond 20 years and supports Tokyo Gas’ strategy of bolstering its position in US shale near export facilities. This transaction follows TGNR’s $2.7B acquisition of Rockcliff last year, and comes amid heightened merger and acquisition (M&A) activity in the Haynesville.
East Daley Analytics shares a similar view of the value of the Haynesville, as the basin is well positioned to supply the coming waves of LNG growth. In the Macro Supply & Demand Report, we forecast the Haynesville to grow 1.2 Bcf/d over the next year, with ~20% of that growth coming from East Texas acreage (see figure).
M&A is heating up ahead of the turnaround. Citadel recently acquired Paloma Natural Gas for $1.2B, setting a high benchmark for the basin. Aethon, a private operator with over 2 Bcf/d of production across Louisiana and East Texas, could be a future acquisition target. The company has significant assets in the Western Haynesville, where wells report initial production (IP) rates above 30 MMcf/d, and could command over $7B based on recent transactions.
Storage – Traders and analysts expect the Energy Information Administration (EIA) to report a 53 Bcf net storage injection for the week ending April 4. A 53 Bcf injection would be 36 Bcf greater than the 5-year average for the week, dropping the deficit to just 54 Bcf. The storage deficit versus last year would drop by 37 Bcf to 454 Bcf.
Estimates point to a fourth week in a row with a declining deficit, and actual storage injections have come in above consensus estimates for two consecutive weeks. Gas prices have dropped accordingly as traders worry that market conditions are loosening.
South Central storage injections have exceeded expectations the past few weeks, leaving many wondering if there is extra production in the region that is escaping pipeline scrapes and flowing into salt and non-salt facilities. The notion of ‘secret production’ looms large, particularly in Texas with its many intrastate pipelines. We see East Texas and the Permian as potential sources of unseen supply growth moving to central Texas storage facilities. Henry Hub cash is below $4/MMBtu for the first time since April 1, while the prompt month has plummeted over $0.60 (-15%) over the same period.
Rigs – The US rig count increased by 1 for the March 29 week to 562 rigs. Basins adding rigs include the Marcellus NE PA (+2) and Eagle Ford (+1). The Bakken lost 2 rigs and the Permian lost 1 rig on the week.
On the midstream side, Energy Transfer (ET) is up 6 rigs with additions on its Eagle Ford, Anadarko and Permian systems. Targa Resources (TRGP) is down 3 rigs total with reductions on its Midland and Delaware systems.
East Daley’s weekly Rig Activity Tracker monitors rig activity by basin and by gathering and processing (G&P) system to better understand midstream impacts. We allocate rigs and monitor flows through 150+ public and privately owned G&P systems in every North American basin. Reach out for more information on the Rig Activity Tracker.
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