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Up In Smoke – Will Gulf Coast Express Provide Relief?

Since Waha prices remain near zero, the outlook and timing of new natural gas pipelines from the Permian remains critical. In response to the low prices several producers, including Apache, have shut-in or deferred production until new infrastructure comes online. Additionally, Permian flaring continues to hit new peaks. However, if producers continue to grow unmarketed production, will Gulf Coast Express provide any relief to Waha prices when it starts or just unleash a wave of new supply?

In September, BTU Analytics published Where, Oh Where Does the Permian Flare, which utilized satellite data to highlight real time flares and estimate volumes of flared natural gas from the satellite data. Now that state reported production data is complete for 2018 in New Mexico and Texas, we will review how those estimates performed compared to reported flared volumes in West Texas and New Mexico. The chart below highlights reported vented and flared volumes in New Mexico and West Texas.

Permian Flaring 2016-2018
Permian Flaring 2016-2018

As indicated in our previous post, flared volumes were escalating rapidly over the summer of 2018. By the end of 2018, vented and flared volumes reached a new peak of over 0.5 Bcf/d. Satellite imagery indicates the volumes flared may have decreased slightly since December. However, a significant amount of natural gas continues to go up in smoke. Following the start of Gulf Coast Express, operators currently flaring natural gas may quickly move these volumes to processing facilities. Thus, providing a significant source of incremental supply available for Gulf Coast Express.

The second driver of supply growth is that producers are expected to see a surge in activity in the second half of 2019, with the start of Cactus II and EPIC oil pipelines, which will provide relief to oil constraints in the region. The chart below highlights the number of horizontal wells to sale by quarter, both historical and BTU Analytics’ forecasted wells to sale for the second half of 2019. Similar to 2018, operators will be ramping up completions and turning wells to sale following the completion of new infrastructure. BTU Analytics expects operators to bring 1,500 new wells on line in 4Q 2019 or 25% more than they brought on in the first quarter of 2019.

The combination of new wells being turned to sale and currently shut-in and/or flared volumes could rapidly fill Gulf Coast Express. Once Gulf Coast Express fills the cycle of price weakness at Waha will begin again. After Gulf Coast Express fills, producers will be waiting on the next pipeline, Kinder Morgan’s Permian Highway Pipeline. Currently, this project stands another 12 months behind Gulf Coast Express’ completion of October 2019. Permian Highway, though, could become embroiled in a legal battle, potentially delaying the pipeline past its planned in service date, with environmentalists employing the same tactics utilized to delay multiple Appalachian pipelines (Rover, Mountain Valley Pipeline, Atlantic Coast Pipeline, etc…). To stay updated on the latest infrastructure developments impacting natural gas markets request a sample of our Gas Basis Outlook.

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Anthony (Tony) Scott has built an in-depth understanding of the North American energy market by providing investment advisory services and leading teams of analysts focused on the North American energy complex for over 15 years. Mr. Scott cofounded BTU Analytics in 2014 as a boutique consulting firm focused on North American Energy markets. BTU Analytics grew into providing premier research and data services for the energy market and was acquired by FactSet Research Systems in July 2021. Mr. Scott currently is the VP of Energy Analysis for FactSet focused on developing their deep sector product offerings in Energy markets.

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