Pipeline outage sent Waha gas to record negatives

By Richard Rostad, analyst, Oil & Gas 360

The natural gas takeaway crunch in the Permian has become extreme, with producers paying to get rid of gas instead of getting paid for it.

Gas production in the overall Permian has grown even more rapidly than oil, and the EIA estimates that the basin will produce over 14 Bcf/d in April. This is 53% higher than the 9.2 Bcf/d the Permian produced in January 2018. Oil production, for comparison, has grown by 46% over the same period.

While Waha gas has traded at a discount to Henry Hub for most of the Permian boom, companies were still receiving at least some revenue for their gas. That changed this week, as Kinder Morgan’s El Paso Natural Gas Pipeline, which carries gas from the Permian Basin to California, briefly shut down for repairs.

According to the Intercontinental Exchange, spot prices at Waha dropped to an astounding -$9/MMBTU on Wednesday, meaning producers were paying more than three times as much to get rid of gas than they would have received for the same gas in Henry Hub. This is, unsurprisingly, a record low for natural gas at Waha.

Kinder Morgan lifted force majeure on the El Paso line late Wednesday, prompting a major rally in gas prices. However, the supply crunch has not disappeared, and gas is currently trading at $0/MMBTU.

With oil prices on the rise, Permian production may return to the rapid growth seen in much of 2018. This would only exacerbate the gas takeaway situation, as any increase in oil output will be accompanied by higher associated gas production.

Unlike oil, gas cannot be transported by trucks or rail, so producers are forced to either transport via pipelines or flare any production. With the next major gas pipeline currently on track to begin service in late 2019, producers may be forced to flare or give away millions of dollars in gas.

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