Takeaway capacity constraints for natural gas pipelines in the Permian basin remain the key factor pushing spot prices in the region into negative territory, aided by several variables that have disrupted supply and demand fundamentals.
Sellers needed to pay buyers to take gas at the Waha hub in west Texas during three trading session so far in March, with the Waha index hitting a seven-month low of -54.5¢/mmBtu on 5 March. The spread between the Waha hub and the US benchmark, the Henry Hub, has been larger than $1/mmBtu since 4 March. Waha prices act as a bellwether for the value of gas supplies at the Permian basin, which straddles west Texas and southeast New Mexico.
A mostly mild winter demand season has combined with above-average gas storage inventories, robust Permian gas production and lower LNG export capacity out of the Texas Gulf Coast to push down Permian prices, but pipeline disruptions remain the main element, according to Connor McLean, senior energy analyst for BTU Analytics, a FactSet company.
"The Permian is always an infrastructure story in that you wouldn't have Waha basis where it is, or really Waha outright trading where it is, if there was excess pipeline capacity out of the region," McLean said.
One-day maintenance on Kinder Morgan's 2.6 Bcf/d (74mn m³/d) Permian Highway pipeline (PHP) on 6 March pushed Waha prices negative in the previous session. Prices returned negative between 11-12 March as force majeures on the El Paso Natural Gas and Transwestern pipeline systems constrained supplies.
The 2.1 Bcf/d Gulf Coast Express (GCX) pipeline, which moves gas from Waha to Agua Dulce near Corpus Christi, is set to begin maintenance on 9 April, which will reduce capacity there by 23pc through 2 May. That significant loss in capacity will push down pricing for a longer period, which McLean noted has already affected Waha's April contracts.
The April price for Waha on Tuesday was 41¢/mmBtu, down by 39pc from the start of March, according to Argus forward curves data. The May price on Tuesday was also below $1/mmBtu at 59¢/mmBtu, while the June price was $1.06/mmBtu.
McLean noted that it would take a significant increase in demand to offset what will amount to a 500mn cf/d reduction in Permian takeaway capacity.
"I don't want to promise negative pricing outright, but it's not like this is negative riding into June — this is April," he said.
Expansions on existing pipelines in the Permian were expected to serve as a temporary debottlenecking solution as new pipelines remained under consideration. But expansions on the PHP and WhiteWater Midstream's 2.5 Bcf/d Whistler pipeline that came on line at the end of 2023 quickly filled, while a planned expansion on GCX has yet to become realized.
The speed at which the additional capacity was filled for PHP and Whistler showcased the high volumes of associated gas production stemming from oil-directed Permian drilling, according to Eugene Kim, research director for consultant group Wood Mackenzie. Kim noted that the planned startup of the 2.5 Bcf/d Matterhorn Express pipeline — which will move gas from the Waha hub to Katy, Texas — should provide a temporary buffer.
"We assume Matterhorn will start up in September," Kim said. "That should relieve the takeaway constraints, but more will be needed as Permian production continues to grow."
