Updated September 25, 2023
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September 25, 2023 - Prompt-month Waha prices have fallen over 50c in the past month. The region often operates at high pipeline utilization rates, leaving the basin with little tolerance for planned or unplanned outages. The Waha forward curve shows future summer and winter strips coalesce around -$0.40 and -$0.70, respectively. The two brownfield expansions due online in the balance of this year could provide temporary egress relief and help prices, but likley to be short-lived as producers quickly backfill new capacity. Waha basis in 2025 has a better chance of realizing narrower discounts as the large 2.5 Bcf/d Matterhorn pipeline is expected into service at the end of 2024. |
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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 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. Recently, rigs have neared 317. |
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Permian Rig count from Baker Hughes
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Total production growth: According to PointLogic, modeled dry gas production for the Permian Basin is averaging near 17.88 Bcf/d in September. Permian production is expected to approach 18.4 Bcf/d by the end of 2023 and grow by 5 Bcf/d through December 2028, according to S&P Global. |
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Expectation of constraints. Lower 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. 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 December 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 November 2026, 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 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 3Q2027. 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. |