S&P Global Platts – Producers in the New Mexico portion of the Permian Basin have shown resiliency amid depressed commodity prices and falling rig counts.
Production out of the Permian’s Delaware sub-basin in New Mexico continues to inch towards the record high of 2 Bcf/d set last March 23, with output having averaged 1.92 Bcf/d month-to-date, reaching as high as 1.97 Bcf/d on Wednesday, according to S&P Global Platts Analytics.
Though marginal, rig counts in the New Mexico side of the Delaware Basin have added two rigs since the start of the year, pushing current totals up to 83 rigs operating in the basin. Despite rig counts steadily falling from the all-time high of 93 rigs set last September 25, rigs fell to a year-to-date low of 80 by late November but were still able to drive production growth to its strongest monthly averages to date in December at 1.88 Bcf/d, then recently eclipsed by the month-to-date output of 1.92 Bcf/d currently.
While the Permian basin, in general, saw drilling activity slow, the New Mexico portion of the Delaware sub-basin attracted significant attention throughout the year. While the Midland and Texas portion of the Delaware basin lost a substantial number of rigs, the New Mexico portion of the Delaware basin held constant throughout 2019.
Overall, Delaware rig counts in New Mexico were relatively resilient through 2019 when compared with the rig declines experienced in the Texas portion of the basin, which fell roughly 21% while shedding approximately 16% in the Midland basin in Texas. According to Platts Analytics’ dry gas forecast, modeled estimates for production growth in the New Mexico portion of the Delaware are projected to outpace the Texas portion by approximately 17% in 2020 adding incremental bearish sentiment to regional pricing as additional US Southwestern supply looks for a home.
Drilling activity in the New Mexico portion of the Delaware Basin has remained consistent over the past year, while the Texas portion of the Permian has declined dramatically year over year.
Production managed to continue growing, in large part due to increasing well efficiencies and the utilization of drilled but uncompleted well inventory, according to Platts Analytics. Efficiency gains and DUCs more than made up for the lack of drilled wells in 2019 and will likely be relied upon even more this year as the full effects of diminished drilling activity are realized.
The production growth continues despite pipeline capacity constraints for new gas production combined with prices at the Waha hub likely to hit negative values even more often this year than during 2019.
Waha forward gas prices settled in negative territory on January 21 at minus 2 cents/MMBtu, the first time any 2020 contract has settled negative this year. While Waha futures contracts have settled in negative territory multiple times early last year, the negative settlement on Tuesday was roughly two month earlier than the first negative settlement in 2019, which was also for the April contract.
The earlier call for negative prices this year comes as concerns continue to mount surrounding the availability of pipeline takeaway capacity this year as the Permian Highway project is now slated to be begin in the first quarter of 2021 instead of beginning of during the fourth quarter of 2020.
The lack of new natural gas takeaway capacity this year coupled with a significant increase in oil takeaway capacity sets the stage for a year of continued oil driven production growth out of the Permian and severe downward pressure on Waha prices.
