New Permian Basin gas pipeline will carry 2 Bcf/d from Waha to Gulf; sponsors already considering upsizing to 48-inch due to early demand

Permian gas producers may have relief on the horizon, as Kinder Morgan (ticker: KMI), Blackstone-backed EagleClaw Midstream, and Apache (ticker: APA) announced plans to develop a new pipeline from the basin yesterday.

The Permian Highway Pipeline Project will transport gas from the Permian to the Gulf Coast and Mexico, two of the largest growth markets in American gas.

The 42-inch pipeline will carry 2 Bcf/d for about 430 miles, at a construction cost of $2 billion. Kinder Morgan reports that there is significant interest among producers, so it is considering upgrading this design to a 48-inch line. The PHP project is currently expected to begin transporting gas in late 2020.

Gas in the pipeline will be sourced from several different systems; Kinder Morgan, EagleClaw and Apache each have their own gathering and transportation infrastructure. In addition, the new pipeline will have interconnections to existing pipeline systems in the Waha area, and will connect to many pipelines in Gulf.

Kinder Morgan and EagleClaw will hold be the initial partners, with 50% ownership. Apache has also been working on the development of the pipeline, and has the option to acquire up to 33% equity from Kinder Morgan and EagleClaw. Apache will commit up to 500 MMcf/d, meaning the pipeline is already one-quarter full. EagleClaw will also be a major shipper on the line, though it has not committed to specific volumes yet.

Waha gas trades at $1.22 differential

This new transportation capacity is desperately needed, as gas in the basin is facing similar constraints to oil. Gas producers are currently facing differentials even larger than those seen in oil. Gas at Waha is trading for $1.22/Mcf less than they are at Henry Hub, and the differential has averaged $0.83/Mcf over the past three months. Relative to the overall price, this differential is significantly larger than the Midland-WTI differential experienced by crude.

Permian producers are rapidly running out of gas takeaway, and some are considering flaring gas. Not all producers are in such dire straits, however, and some have already set up their own takeaway arrangements. WPX (ticker: WPX), for example, has gas and crude oil takeaway already in place, as WPX president and COO Clay Gaspar discussed with Oil & Gas 360.

For E&Ps that have not yet achieved this, however, the new Permian Highway Pipeline will provide significant relief when it comes online in two years.

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