Updated March 23, 2023
Recent News:
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February 22, 2023 - Waha basis strips have found strength in 2023, especially in the time period before the infrastructure is expected to come into service and provide takeaway relief to the basin. The prompt-month contract has improved to about $1/MMBtu back from Hub. The improvement starkly contrasts the -$3.70 Waha bases traded in October of last year. Interestingly, the basis has improved so much even though egress capacity is still an issue and new infrastructure isn't due until at least Q3 2023. The corollary between Waha basis strength and Nymex deterioration is unavoidable. As Henry Hub prices have fallen nearly $5/MMBtu YTD, the Waha basis for the Summer 2023 strip has improved by $2.02/MMBtu. One explanation could be that a low Waha price could stimulate more demand for gas in the power sector. Spark spreads in ERCOT imply even the most inefficient heat rate power plant would want to run Waha-sourced gas. This economic incentive could be providing the extra bid for Waha gas relative to Henry Hub. |
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Permian Basin Gas Overview
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The Permian covers an area about 250 miles wide and 300 miles long, an immense 75,000 square miles. The greater Permian Basin accounts for nearly 40 percent of all oil production in the U.S. and nearly 15 percent of its natural gas production, according to the Federal Reserve Bank of Dallas. |
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Map of west Texas and New Mexico. The Waha Hub is located in Pecos County and is a major physical gathering point for natural gas from the region. Red lines are major pipelines in the area. Source: WellDatabase |
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Rig Count |
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Active rigs in the Permian have made a steep recovery in 2022 versus the Covid-19-induced lows in 2020. As commodity prices have risen, the Permian has been the preferred basin for deploying drilling rigs. |
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Permian Rig count from the U.S. Department of Energy (monthly)
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Total production growth: According to PointLogic, modeled dry gas production for the Permian Basin is averaging near 16.9 Bcf/d so far in February. Permian dry gas is expected to grow 1.6 Bcf/d in 2023, close to the planned takeaway capacity expansions of 1.6 Bcf/d scheduled for this year, including the Whistler (0.5 Bcf/d), Permian Highway Pipeline (0.55 Bcf/d), and GCX (0.6) expansion projects. (GCX not yet FID'd) |
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Expectation of constraints. Cheaper basis prices, or large discounts to Henry Hub, usually imply some sort of egress capacity constraint or increased need for capacity out of the basin. The weakness for Waha suggests the region could run into takeaway capacity constraints as soon as Summer 23. WhiteWater announced on May 2 that the Whistler Pipeline would be expanded to 2.5 Bcf/d, an increase of 0.5 Bcf/d. Whistler pipeline has gained the final investment decision (FID) and is scheduled to be operational in September 2023. Kinder Morgan announced a final investment decision (FID) on its Permian Highway Pipeline expansion on June 29, 2022. The project involves adding compressors on PHP to increase the pipeline's capacity by 550 MMcf/d. The project's target in-service date is November 2023, pending additional customer agreements. Kinder Morgan announced the start of an open season for the Gulf Coast Express expansion on May 16, 2022. The project entails adding compressors to the GCX pipeline to enhance its capacity from the Permian Basin to South Texas markets by 570 MMcf/d. The project is expected to be operational in December 2023, subject to additional customer agreements. WhiteWater announced a final investment decision (FID) on its Matterhorn Express Pipeline on Thursday, May 19, 2022. It will transport 2.5 Bcf/d of natural gas from West Texas' Permian Basin to Houston's Katy area. The 490-mile is expected to be in service in 3Q2024. Energy Transfer proposed their new Warrior pipeline. "Given the proposed route and our ability to utilize existing assets, we believe we could complete construction of (the Warrior) project in two years or less once we have reached FID (final investment decision)," said Energy Transfer's CFO Thomas Long on an earnings call on May 4. Analysts estimate the project to add around 1.5-2.0 Bcf/d of transport capacity with about 260 miles of new pipe from the Permian Basin to the Dallas area. The estimated in-service date is 3Q2024. Kinder Morgan reportedly plans another Permian project called the Permian Pass Pipeline. Analysts estimate the pipeline capacity to be around 2 Bcf/d, and it would transport gas from the Permian basin to Katy, Texas. If KMI goes ahead with the project, it is expected to come online sometime around 4Q2025. |
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Producers hedging: When producers hedge with swaps, they take a short position – they sell swaps. These hedges are almost always placed with trading counterparties or swap dealers. These positions eventually appear on the exchanges as the counterparties place offsetting positions to lay off their risk. Hedging considerations Waha basis can be hedged with swaps. Waha is usually hedged as part of a complete natural gas hedge. The general recommendation is to hedge NYMEX Henry Hub natural gas and Waha basis in two steps but simultaneously. Contact us at info@aegis-hedging.com if you need to work through the details. |