Over a year ago, BTU Analytics began publishing in our Upstream Outlook concerns of West Texas natural gas capacity constraints and impacts to the natural gas market. Since then, BTU Analytics has published several free pieces on the issue (Permian Gas Takeaway Headed For Tight Times and Permian Shut Ins Ahead?), in addition to deeper dives on the outlook for Waha and Dominion South basis for our subscription clients. In the month of September, the growth in Permian natural gas volumes has begun to materially impact Western natural gas flow dynamics and basis relationships.
Recent natural gas pipeline flow data highlights how Permian natural gas is displacing other producing regions from their current demand markets. Today’s market commentary will focus on that displacement. We’ll start by reviewing the demand centers that Permian natural gas can serve and which of the outlets from the Permian have actually seen an increase in flows over the last year. After discussing which producing regions have been affected by an increase in flows out of the Permian, we’ll review what affect this has had on pricing at the affected hubs.
The Permian has four main regions to market its natural gas, as illustrated by the graphic below. The gas can flow eastbound toward Gulf Coast demand centers. Flows east represent the largest outflow from the Permian but have remained relatively unchanged year-over-year due to the region hitting capacity constraints east in 2015. Flows east will remain capacity constrained until one or more of the proposed new projects (Gulf Coast Express, Pecos Trail and Permian to Katy) are completed in late 2019 or early 2020. Kinder Morgan, DCP and Targa recently announced that they signed a letter of intent to commit significant volumes to Gulf Coast Express.
Mexico offers another outlet for West Texas gas, but exports to our southern neighbor are also constrained, only this time by demand on the other end of the pipe, with volumes from West Texas rising an estimated 88 MMcf/d between 3Q’17 and 3Q’16.
Permian Gas has open capacity to head north towards Midcontinent hubs, but pressure from Midcontinent and Rockies gas typically limits the viability of this outlet without increased discounting of Waha gas relative to Midcontinent gas prices.
Lastly, associated gas from the Permian can head west towards Arizona and California. As seen in the chart below, westbound natural gas flows out of Texas have increased by 450 MMcf/d in the third quarter compared to the same period last year. This increase is driven mainly by greater flows on Transwestern, which is up almost 200 MMcf/d in 3Q’17, and flow reversals on the El Paso North Line, which have effectively increased flows to the Southwest by another 210 MMcf/d. Due to flat total demand in the Southwest in 3Q’17 versus the prior year, the increase in Permian flows must influence other producing regions supplying the Southwest market.
In addition to West Texas, the southwestern U.S. receives natural gas from two other regions. Volumes from the Pacific Northwest originate in Canada and the Rockies and the region sends gas south into California primarily via the PG&E system at Malin. The Southwest is also served directly from the Rockies on the Kern River, TransColorado, Paiute, Ruby and Northwestern pipelines. The volumes coming from the Pacific Northwest have not been materially affected by Permian activity, with flows an average 11 MMcf/d lower in 3Q’17 than in 3Q’16. The Rockies, however, is much different, as illustrated by the graph below. Flows out of the Rockies fell by 270 MMcf/d in 3Q2017 compared to the same period in 2016, with most of the decrease falling on Kern and TransColorado pipelines.
Displacement of Rockies gas from the California market by the Permian has required natural gas prices in the Rockies to discount higher in 2017 to prevent the loss of even more market share. Despite Rockies production declining year-over-year, pressure from Permian and other supply basins has led to a downward spiral in basis before winter weather sets in. The chart below shows CIG and Waha discount to Henry Hub over the past year. Both Waha and CIG basis have expanded since mid-September, about 38 and 23 cents, respectively.
While Hurricane Harvey has certainly contributed to pricing noise, there’s no doubt that gas displacement out of the Permian has tied Rockies’ basis to Waha. If more gas from West Texas displaces Rockies gas, where will it go? Answers to that and where BTU sees basis evolving in the future can be found in the Henry Hub Outlook. Request a sample today.