Permian Gas Price And Fundamentals

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.

Recent News:

• (September, 25, 2023) - The Permian Highway Pipeline (PHP) provided a second update on Sept. 19 in regard to the outage issued on Sept. 15 that all repairs were completed and capacity would be restored to full capacity of 2.1 Bcf
• (September 12, 2023) - Saguaro Connector dependent on Mexican LNG export terminal. Oneok said that their planned 2.8 Bcf/d Saguaro Connector, which will link gas produced in the Permian Basin to Mexico's pipeline system, is dependent on the LNG facility obtaining an FID. The terminal in question is the Saguaro Energía liquefaction terminal planned for Mexico's Pacific coast.
• (July 28, 2023) - Due to an operational incident, Kinder Morgan has halted the Permian Highway Pipeline, causing gas flow to cease and spot Waha prices to go negative. They expect to restore normal capacity by August 1.
• (May 15, 2023) - After initiating scheduled maintenance on May 9, which reduced the throughput by up to 1 Bcf/d to the Gulf Coast, the Permian Highway Pipeline planned to resume its full capacity of 2.1 Bcf/d over the weekend.
• (April 19, 2023) - Kinder Morgan delayed the Permian Highway Pipeline expansion from November to December 2023. This delay caused a flurry of hedge activity as some operators were hedged on Houston Ship Channel and now needed to reverse that hedge for select months.
• (January 20, 2023) - The El Paso Natural Gas Line 2000 segment repair work may be completed by the end of January after being shut since August 2021 due to a rupture. The pipeline will provide much-needed takeaway capacity (around 500 MMcf/d or 0.5 Bcf/d) out of the Permian Basin and allow more gas to flow to gas-starved markets in Southern California. 
• (December 22, 2022) - As cold weather forecasts threatened West Texas, near-term Waha basis rose, and the following Winter 2023-2024 strip rose with it. Instead of the market anticipating changing fundamentals, we assign this small rally to trader expectations that next winter may perform much like this one, if cold weather arrives. 
• (December 13, 2022) - Waha prompt prices improved significantly amid bullish lower-48 weather forecasts. Weather models show the second half of December to be the coldest since 2013.
• (December 6, 2022, EIA) - US revises forecasts for natural gas production in 2023, expecting to average around 100 Bcf/d for the first time. EIA said growth in natural gas production has been limited in the Permian Basin because of pipeline constraints and now forecasts that those constraints will be resolved more quickly than previously forecast.
• (November 14, 2022, Bloomberg) - Flaring in the Permian is expected to rise due to increased production and lack of takeaway capacity. The first major pipeline expansions to help with the bottleneck won't start operating until 2H2023

Permian Basin Gas Overview

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.

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

 Rig Count

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.

Permian Rig count from Baker Hughes

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.

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.

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.