Permian Gas Price And Fundamentals

Recent News:

• (May 15, 2023) - After initiating scheduled maintenance on May 9, which reduced the throughput by up to 1 Bcf/d to the Gulf Coast, the Permian Highway Pipeline planned to resume its full capacity of 2.1 Bcf/d over the weekend.
• (April 19, 2023) - Kinder Morgan delayed the Permian Highway Pipeline expansion from November to December 2023. This delay caused a flurry of hedge activity as some operators were hedged on Houston Ship Channel and now needed to reverse that hedge for select months.
• (January 20, 2023) - The El Paso Natural Gas Line 2000 segment repair work may be completed by the end of January after being shut since August 2021 due to a rupture. The pipeline will provide much-needed takeaway capacity (around 500 MMcf/d or 0.5 Bcf/d) out of the Permian Basin and allow more gas to flow to gas-starved markets in Southern California. 
• (December 22, 2022) - As cold weather forecasts threatened West Texas, near-term Waha basis rose, and the following Winter 2023-2024 strip rose with it. Instead of the market anticipating changing fundamentals, we assign this small rally to trader expectations that next winter may perform much like this one, if cold weather arrives. 
• (December 13, 2022) - Waha prompt prices improved significantly amid bullish lower-48 weather forecasts. Weather models show the second half of December to be the coldest since 2013.
• (December 6, 2022, EIA) - US revises forecasts for natural gas production in 2023, expecting to average around 100 Bcf/d for the first time. EIA said growth in natural gas production has been limited in the Permian Basin because of pipeline constraints and now forecasts that those constraints will be resolved more quickly than previously forecast.
• (November 14, 2022, Bloomberg) - Flaring in the Permian is expected to rise due to increased production and lack of takeaway capacity. The first major pipeline expansions to help with the bottleneck won't start operating until 2H2023

May 19, 2023 - Waha prices rebounded after the Permian Highway Pipeline (PHP) scheduled a return to full capacity of 2.1 Bcf/d over the weekend. Earlier in the week, maintenance operations on the PHP had reduced outbound capacity and pushed spot prices in the Permian Basin into negative territory. During this time, producers, constrained by pipeline capacity, resorted to paying others to accept their gas in order to keep oil production steady

The lack of egress has continued to pressure Waha basis this year, but the Summer 2023 strip is off the lows. 

The widening of Waha basis comes as estimated production levels have eclipsed 17 Bcf/d as of May 19. Spare eastbound pipeline capacity is often strained and is expected to continue until some reprieve is achieved in 3Q of 2023. Improvement in forward strips beyond the Summer 2023 strip coincides with extra eastbound egress capacity. However, Permian gas growth is expected to fill new capacity rather quickly, leading to continued downward pressure on Waha. The Waha curve, through the end of 2024, will continue to be at risk. The big greenfield 2.5 Bcf/d Matterhorn pipeline should come online in December of 2024, providing relief. This has us less worried about Waha in 2025, albeit the pace of production will dictate how long that relief lasts.

The most acute risk for Waha prices is this summer before Whistler's expansion is set to come online. A negative flat price for Waha is possible as egress is tested. Any combination of low demand and or pipeline maintenance (planned or unplanned) could push Waha negative. 

Permian Basin Gas Overview

The Permian covers an area about 250 miles wide and 300 miles long, an immense 75,000 square miles. The greater Permian Basin accounts for nearly 40 percent of all oil production in the U.S. and nearly 15 percent of its natural gas production, according to the Federal Reserve Bank of Dallas.

Map of west Texas and New Mexico. The Waha Hub is located in Pecos County and is a major physical gathering point for natural gas from the region. Red lines are major pipelines in the area.

Source: WellDatabase

 Rig Count

Active rigs in the Permian made a steep recovery in 2022 versus the Covid-19-induced lows in 2020. As commodity prices have risen, the Permian has been the preferred basin for deploying drilling rigs. Recently, rigs have flattened out near 350.

Permian Rig count from Baker Hughes

Total production growth:

According to PointLogic, modeled dry gas production for the Permian Basin is averaging near 17 Bcf/d so far in March. Permian dry gas is expected to grow 1.6 Bcf/d in 2023, close to the planned takeaway capacity expansions of 1.6 Bcf/d scheduled for this year, including the Whistler (0.5 Bcf/d), Permian Highway Pipeline (0.55 Bcf/d), and GCX (0.6) expansion projects. (GCX not yet FID'd)

Expectation of constraints. Lower basis prices, or large discounts to Henry Hub, usually imply some sort of egress capacity constraint or increased need for capacity out of the basin. The weakness for Waha suggests the region could run into takeaway capacity constraints in Summer 23.

WhiteWater announced on May 2 that the Whistler Pipeline would be expanded to 2.5 Bcf/d, an increase of 0.5 Bcf/d. Whistler pipeline has gained the final investment decision (FID) and is scheduled to be operational in September 2023.

Kinder Morgan announced a final investment decision (FID) on its Permian Highway Pipeline expansion on June 29, 2022. The project involves adding compressors on PHP to increase the pipeline's capacity by 550 MMcf/d. The project's target in-service date is December 2023, pending additional customer agreements.

Kinder Morgan announced the start of an open season for the Gulf Coast Express expansion on May 16, 2022. The project entails adding compressors to the GCX pipeline to enhance its capacity from the Permian Basin to South Texas markets by 570 MMcf/d. The project is expected to be operational in November 2026, subject to additional customer agreements. 

WhiteWater announced a final investment decision (FID) on its Matterhorn Express Pipeline on Thursday, May 19, 2022. It will transport 2.5 Bcf/d of natural gas from West Texas' Permian Basin to Houston's Katy area. The 490-mile is expected to be in service in 3Q2024.

Energy Transfer proposed their new Warrior pipeline. "Given the proposed route and our ability to utilize existing assets, we believe we could complete construction of (the Warrior) project in two years or less once we have reached FID (final investment decision)," said Energy Transfer's CFO Thomas Long on an earnings call on May 4. Analysts estimate the project to add around 1.5 Bcf/d of transport capacity with about 260 miles of new pipe from the Permian Basin to the Dallas area. The estimated in-service date is 3Q2027.

Kinder Morgan reportedly plans another Permian project called the Permian Pass Pipeline. Analysts estimate the pipeline capacity to be around 2 Bcf/d, and it would transport gas from the Permian basin to Katy, Texas. If KMI goes ahead with the project, it is expected to come online sometime around 4Q2025.

Producers hedging: When producers hedge with swaps, they take a short position – they sell swaps. These hedges are almost always placed with trading counterparties or swap dealers. These positions eventually appear on the exchanges as the counterparties place offsetting positions to lay off their risk.

Hedging considerations

Waha basis can be hedged with swaps. Waha is usually hedged as part of a complete natural gas hedge. The general recommendation is to hedge NYMEX Henry Hub natural gas and Waha basis in two steps but simultaneously. Contact us at info@aegis-hedging.com if you need to work through the details.