By: Midland Reporter-Telegram – West Texas producers got an unfortunate sense of déjà vu this week, watching natural gas prices at Waha sink to negative $2 per Mcf.
It brought back not only painful memories of crude prices falling to a negative $38 per barrel in April of 2020 but of Waha prices going negative beginning in 2019.
“It’s not very often you see a drop in hub prices from $5 per MMBtu to negative $2 per MMBtu – over 140% – over the course of just a few days,” Chetan Sharma, senior associate at the energy-focused Software as a Service firm Enverus, told the Reporter-Telegram by email.
Sharma noted that natural gas associated with crude production in the Permian Basin has grown and continues to grow. But the bigger issue, he wrote, is pipeline maintenance that has reduced takeaway capacity by at least 1 billion cubic feet, leaving much of that gas stranded in the area. That, he wrote, has loosened the Waha market.
Another factor, he wrote, is that gas markets are in what’s called the shoulder season as weather transitions from summer to winter and is typically associated with weaker seasonal demand. Mild weather in West Texas has kept demand in check, he noted.
Rob Wilson, vice president of analytics, and James Taylor, senior energy analyst at East Daley Analytics, said the pipelines going down for maintenance appeared to be a shock to the markets.
“It took the market by surprise and sent Waha into the dirt,” commented Wilson. He predicted that once maintenance work ends, expected by the end of this month, Waha prices should rebound in a robust way.
But even before the pipelines went into maintenance, falling Waha prices signaled that takeaway capacity was getting tight, observed Taylor. “This threw that into overdrive.”
To cope, Wilson said operators would turn to their traditional practice of flaring natural gas that they can’t move to pipelines.
This week’s plunge in prices is foreshadowing volatility to Waha prices because pipelines are running so full, Taylor added.
There may be some easing of takeaway constraints on the horizon, said Wilson, listing a planned 550 Mcf expansion of the Permian Highway due in the fourth quarter of 2023 and a 500 Mcf expansion of the Whistler pipeline, expected in the third quarter of 2023.
But what will really provide relief to Waha producers is the planned Matterhorn Express pipeline with a capacity of 2 billion cubic feet per day. It is due to be placed into operation in the third quarter of 2024.
“It’s going to be tight for a while,” Wilson said, especially since his firm expects Permian gas production growth of 1 Bcf next year.
What may provide some help is a rise in winter-related demand in California, allowing more gas to be shipped west via the Line 2000 pipeline as well as opportunities to ship more gas to the Midcontinent to meet winter demand.
Amid the tightening takeaway capacity, Wilson and Taylor advised producers to take any opportunity to hedge production, especially once Waha prices recover, and contract for firm transportation.
