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New Permian Gas Pipelines Will Reduce Flaring, But What About Prices?


© 2019 Bloomberg Finance LP

The NYMEX Henry Hub price for natural gas has firmed up in recent weeks, rising over the $2.50/Mmbtu mark in early September 9 trading thanks to the ongoing heat wave in Texas and other states where natural gas provides a high percentage of power generation. While that price is low in the context of the past 20 years, it is a significant improvement from its close on August 12 of $2.105/Mmbtu.

Index prices for Permian Basin gas, where the Waha Hub spot price has averaged just $.72/Mmbtu during the first 8 months of this year due to lingering constraints on pipeline takeaway capacity, have also risen, closing at a recent high of $2.10/Mmbtu on August 28. That increase is mainly due to the market anticipating the startup of Kinder Morgan ’s new, $1.75 billion Gulf Coast Express line, which is scheduled to go into service later in September.

The addition of Gulf Coast Express’s 2 bcf per day of new capacity will provide welcome relief for Permian producers, some of whom have had to resort to actually paying shippers to take their gas in some cases over the last year, and essentially all of whom have been flaring far more natural gas than they would prefer. Rystad Energy reported in June that flaring in the Permian reached an all-time high during the first quarter, flaring as much as 661 Mmcf per day.

So, the completion of Gulf Coast Express and the anticipated opening of several more new natural gas and natural gas liquids pipelines scheduled for the coming 12-18 months will further reduce flaring and help to narrow the steep discounts to the Henry Hub NYMEX price seen at Waha and other Permian index points. However, Rystad also notes that a disproportionate share of the flaring is coming from the Midland North part of the Basin, almost 100 miles away from Gulf Coast Express’s origination point at Waha, near Pecos, Texas. The Gulf Coast Express system does have a lateral up to the Midland area, so it should have some positive impact, but how much is uncertain.

Here’s the other big question: As all this additional natural gas starts to come onto the market, how will that impact the NYMEX price? With supply already substantially out-stripping demand in the U.S., the hope is that most of this added gas will be able to find a home in international markets via LNG exports. Recent expansion announcements at Freeport LNG and Cheniere Energy ’s Corpus Christi LNG export facility are encouraging in that regard.

Gulf Coast Express’s delivery point at the Agua Dulce hub, which lies approximately 30 miles west of Corpus Christi, should also allow much of the rest of the gas to flow to south on pipelines delivering into Mexican markets. If all of that goes as planned, then any negative impacts to U.S. natural gas prices from this major new pipeline should be minimal.

But that’s just the first of several new natural Permian-related gas pipelines scheduled to go into service in the coming years. Kinder Morgan itself, in partnership with Eagle Claw Midstream and Altus Midstream, has plans for a second major line, the Permian Highway system. The rights of way for the line have been staked and pipe acquired for this 2.1 Bcf/day project, and construction is expected to commence soon, with an anticipated in-service date in late 2020.

However, because this project’s route would take it through the Texas Hill Country, where oil and gas development has been rare, it has drawn a good deal of public opposition. It remains to be seen whether the opposition will be able to delay the project’s anticipated timeline.

The other major new Permian-related pipeline project that has reached a final investment decision is the Whistler Pipeline, another 2 Bcf/day system that would largely parallel the Gulf Coast Express system’s route from Waha through South Texas to Agua Dulce and beyond. The Whistler project is a partnership between MPLX, WhiteWater Midstream, and a joint venture between Stonepeak Infrastructure Partners and West Texas Gas. The project has an anticipated in-service date in the third quarter of 2021.

Thus, the addition of almost 6 Bcf/day of new takeaway capacity should affect a major reduction in the Permian’s chronic flaring issue over the next 12-24 months, which will be a happy result for all stakeholders. But the question remains, how will all this additional natural gas flowing into an already over-supplied market impact natural gas prices?

While many very smart people will make educated guesses in the coming months, no one really knows what the answer will ultimately become. Like every other aspect of the oil and gas business, it’s a risk.

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© 2019 Bloomberg Finance LP

The NYMEX Henry Hub price for natural gas has firmed up in recent weeks, rising over the $2.50/Mmbtu mark in early September 9 trading thanks to the ongoing heat wave in Texas and other states where natural gas provides a high percentage of power generation. While that price is low in the context of the past 20 years, it is a significant improvement from its close on August 12 of $2.105/Mmbtu.

Index prices for Permian Basin gas, where the Waha Hub spot price has averaged just $.72/Mmbtu during the first 8 months of this year due to lingering constraints on pipeline takeaway capacity, have also risen, closing at a recent high of $2.10/Mmbtu on August 28. That increase is mainly due to the market anticipating the startup of Kinder Morgan ’s new, $1.75 billion Gulf Coast Express line, which is scheduled to go into service later in September.

The addition of Gulf Coast Express’s 2 bcf per day of new capacity will provide welcome relief for Permian producers, some of whom have had to resort to actually paying shippers to take their gas in some cases over the last year, and essentially all of whom have been flaring far more natural gas than they would prefer. Rystad Energy reported in June that flaring in the Permian reached an all-time high during the first quarter, flaring as much as 661 Mmcf per day.

So, the completion of Gulf Coast Express and the anticipated opening of several more new natural gas and natural gas liquids pipelines scheduled for the coming 12-18 months will further reduce flaring and help to narrow the steep discounts to the Henry Hub NYMEX price seen at Waha and other Permian index points. However, Rystad also notes that a disproportionate share of the flaring is coming from the Midland North part of the Basin, almost 100 miles away from Gulf Coast Express’s origination point at Waha, near Pecos, Texas. The Gulf Coast Express system does have a lateral up to the Midland area, so it should have some positive impact, but how much is uncertain.

Here’s the other big question: As all this additional natural gas starts to come onto the market, how will that impact the NYMEX price? With supply already substantially out-stripping demand in the U.S., the hope is that most of this added gas will be able to find a home in international markets via LNG exports. Recent expansion announcements at Freeport LNG and Cheniere Energy ’s Corpus Christi LNG export facility are encouraging in that regard.

Gulf Coast Express’s delivery point at the Agua Dulce hub, which lies approximately 30 miles west of Corpus Christi, should also allow much of the rest of the gas to flow to south on pipelines delivering into Mexican markets. If all of that goes as planned, then any negative impacts to U.S. natural gas prices from this major new pipeline should be minimal.

But that’s just the first of several new natural Permian-related gas pipelines scheduled to go into service in the coming years. Kinder Morgan itself, in partnership with Eagle Claw Midstream and Altus Midstream, has plans for a second major line, the Permian Highway system. The rights of way for the line have been staked and pipe acquired for this 2.1 Bcf/day project, and construction is expected to commence soon, with an anticipated in-service date in late 2020.

However, because this project’s route would take it through the Texas Hill Country, where oil and gas development has been rare, it has drawn a good deal of public opposition. It remains to be seen whether the opposition will be able to delay the project’s anticipated timeline.

The other major new Permian-related pipeline project that has reached a final investment decision is the Whistler Pipeline, another 2 Bcf/day system that would largely parallel the Gulf Coast Express system’s route from Waha through South Texas to Agua Dulce and beyond. The Whistler project is a partnership between MPLX, WhiteWater Midstream, and a joint venture between Stonepeak Infrastructure Partners and West Texas Gas. The project has an anticipated in-service date in the third quarter of 2021.

Thus, the addition of almost 6 Bcf/day of new takeaway capacity should affect a major reduction in the Permian’s chronic flaring issue over the next 12-24 months, which will be a happy result for all stakeholders. But the question remains, how will all this additional natural gas flowing into an already over-supplied market impact natural gas prices?

While many very smart people will make educated guesses in the coming months, no one really knows what the answer will ultimately become. Like every other aspect of the oil and gas business, it’s a risk.


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