Viewpoint: Permian gas output to rise after merger

Natural gas output from the Permian basin is expected to rise in 2024, as newly consolidated producers boost drilling and funnel more gas into an oversupplied US market.

Oil prices in the past year have been high enough to support drilling in the Permian, even as sharply lower gas prices led to a strong pull-back in the development of gas fields like the Haynesville shale in east Texas and northern Louisiana. The ongoing development of the Permian, straddling west Texas and southeastern New Mexico, plus additional pipeline capacity, will push production of more associated gas from oil wells to key markets along the US Gulf coast.

The resulting increases in gas supply in 2023 helped push prompt-month gas prices earlier this month to six-month lows below $2.50/mmBtu. Additional supply early next year could help curb withdrawals from US gas storage, leaving inventories at high levels and potentially glutting the market.

Permian gas output has been in the spotlight this year as gas prices slid lower. Gas producers will often rein in drilling when prices collapse, but drilling decisions in the Permian, the second-largest gas field in the US, are based on oil prices rather than gas. Gas production growth there is usually a byproduct of oil output and unfettered by a downturn in gas prices.

A recent acquisition by ExxonMobil of Permian-focused oil producer Pioneer Resources for $59.5bn will likely bolster drilling by allowing the combined company to increase scale and cut costs in the Permian, boosting profitability even at lower oil prices. Pioneer's assets could boost ExxonMobil's push into the Permian basin by increasing its crude production there.

Improved well-level productivity and higher crude prices in 2024 likely will spur more drilling, leading to an increase in associated gas production. Permian gas production is expected to rise by 1.4 Bcf/d (40 mn m³/d), or 6pc, in 2024, the US Energy Information Administration (EIA) said. Production hit an all-time record of 17.8 bcf/d in December, according to analysts with Energy Aspects. Crude production in the Permian is expected to rise by 5,000 b/d to a record 5.986mn b/d in January, according to the EIA's most recent Drilling Productivity Report.

The rising production has already led to the build-out of additional infrastructure needed to ferry that gas to market. The additional capacity largely came through the expansion of existing gas pipeline systems. In late August capacity on WhiteWater Midstream's 2 Bcf/d Whistler pipeline rose by 500mn cf/d. Kinder Morgan by December expected capacity expansions to be finished on the 2.1 Bcf/d Permian Highway pipeline (PHP) and Gulf Coast Express (GCX) pipeline. Those expansions were estimated to raise capacity on PHP and GCX by 550mn cf/d and 570mn cf/d, respectively.

The additional capacity on Kinder Morgan's two lines could provide a short-term buffer ahead of the startup of the 2.5 Bcf/d Matterhorn Express pipeline, which will move gas from the Waha hub to Katy, Texas. The pipeline, a project between WhiteWater Midstream, EnLink Midstream, Devon Energy and Marathon Petroleum's MPLX, is expected to come on line in the third quarter of 2024.

Without capacity additions, Permian gas production would eventually be stranded, potentially pushing prices into negative territory.

Sellers needed to pay buyers to take gas at the Waha hub in west Texas several times in 2023 as spot prices were pushed down by high production, mild weather and constrained takeaway capacity. Prices tended to turn negative when all three factors occurred simultaneously.

The Waha index, an indicator for the value of Permian gas supplies, fell to -$3.025/mmBtu on 13 January, the lowest in 2023. Waha prices averaged below $2/mmBtu from January-November, only topping $3/mmBtu on 30 January. Argus forward curve data for the week ended on 22 December showed Waha prices for January-March 2024 at $1.80/mmBtu.

By David Haydon