Permian Activity Is Firing Up But Holding Back Regional Natural Gas Prices

Industry discourse suggests that the Permian Basin is powering U.S. shale oil and gas output. In fact, the hydrocarbon rich basin between western Texas and southeastern New Mexico is rarely out of energy market chatter these days.

According to the U.S. Energy Information Administration (EIA), the Permian may experience the biggest boost in production levels in the entire country. It is forecast to climb by 42,000 barrels per day (bpd) to 4.136 million bpd in May.

There is little reason to doubt that projection, according to Matt Johnson, National Account Manager at Frac spread count specialists Primary Vision. “The basin has seen a steady increase in activity for almost two straight months. It has recovered nicely since January by about ~30 spreads. So from an activity standpoint (i.e. completions, frac jobs and active frac fleets/spreads) as we move out of winter, things are looking pretty good.”

The bump in activity follows trends seen in recent years, going by Primary Vision data. “In three of the past four years in which we have examined the Permian, activity rose in 2015, 2017 and 2018 in the months after winter roughly from February to July. The current year looks likely to follow that path,” Johnson adds.

That means more Permian oil and gas is coming onstream. In 2018, the basin accounted for 20% of the total U.S. oil production and at the same time accounted for 7% of the country’s dry natural gas. Getting the maximum bang for bucks spent on the latter is what is once again worrying exploration and production (E&P) companies.

This abundance could turn out to be a pricing curse, according to Moody’s. The rating agency’s analysts believe abundant associated natural gas resulting from active drilling for oil in the basin is keeping Permian natural gas commodity prices “especially low due to the region’s limited takeaway options.”

That will serve to be a drag on E&P investment returns. Primary issue is a shortage of pipeline capacity to carry oil and natural gas out of the Permian causing a short-term weakening of realized commodity prices. For natural gas players, the problem is unlikely to go away anytime soon, says James Wilkins, VP-Senior Analyst at Moody’s.

“New natural gas pipelines will likely go into service in the second half of 2019 and 2020, alleviating the bottleneck, but natural gas prices in the Permian Basin will continue to suffer from high basis differentials as E&Ps pursue growth in oil production.”

Of course, new natural gas pipeline projects provide attractive avenues for midstream companies, Wilkins adds. “The area has provided good opportunities for gathering and processing assets, which require less time to build than long haul pipelines.”

The NYMEX Natural Gas contract is once again back in sub $3/MMBtu territory (at the time of writing); with a less than satisfactory weekly range of $2.49-$2.92, according to Reuters data.

In order to maximize returns, most U.S. E&P companies are looking to export to Asia’s lucrative natural gas markets. So if there are incremental midstream opportunities to get the resource to coast, some in the Permian are hoping they get realized real soon, and atop that lot are the natural gas players.

The author is an oil & gas analyst and market commentator. Follow him on Twitter @The_Oilholic


Kabir Ismail is a blogger, website developer/administrator and a comrade.

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