Where is all the Permian Gas?

May 17th, 2017 |

First quarter earnings are in and the general sentiment to start off 2017 is that production growth is back. Specifically, players in the Permian are highlighting growth targets for the year, including Concho Resources (NYSE: CXO) at 21-25% growth, Pioneer (NYSE: PXD) at over 15% growth and EOG Resources (NYSE: EOG) at 18% growth this year.

A look at drilling activity over the last year highlights the very steep ramp up in Permian activity. Monthly wells drilled increased year over year by 233% growing from 150 to 350 wells. While the steep pace of growth is unsustainable, continued gains in drilling efficiency and additional rigs will likely push total drilling levels slightly higher still.

However, with all the discussion of current and planned drilling activity, we are only beginning to see growth in both the EIA 914 natural gas production data and pipeline flow data. There are a few reasons for this. One reason is the effect of pad drilling in the Permian. BTU’s May edition of the US Upstream Outlook Report covers in detail how pad drilling in the Permian is expected to impact production timing. (For more details on this analysis request a free sample of BTU Analytics’ US Upstream Outlook.)  The second reason is the lack of transparency caused by intrastate pipelines in Texas. Intrastate pipelines do not have the more stringent reporting requirements of interstate pipelines, resulting in limited visibility to see the complete picture of Permian gas flows.

One idea we have heard being tossed around about why recent data doesn’t show all of the production growth is flaring. With such aggressive growth in the Permian rig count, it’s likely that midstream may lag behind, leaving some gas temporarily stranded and needing to be flared. Texas Railroad Commission data shows a large spike in flaring activity in the second half of 2016, with nearly all of the increase attributed to a handful of Apache wells in the Alpine High play. While midstream services are currently being built out, planned in-service isn’t expected to be complete until the end of 2018.

Regardless of who is responsible for the flaring, however, total flaring volumes in the state of Texas are still generally low at only around ~70 MMcf/d with Apache’s recent flaring, and 20 MMcf/d without, meaning this doesn’t account for volumes many are expecting to see.

So, where else can we look for signs of production growth? In pricing. The chart below shows the Waha basis spread to Henry Hub. Over the past six months the front end of the curve has blown out, going from an average of $0.10-$0.15/MMbtu below Henry in November 2016 to $0.30-$0.40/MMbtu back for May 2017. This highlights that the market is starting to see signs that Permian production is growing quickly. See a previous market commentary piece for more information on implications to the Permian.

Permian producers are indicating that additional production growth will be back-weighted to the end of the year. But the growth is coming, and those that aren’t prepared for it will feel the pain beginning later this year. For an in-depth look at BTU’s Permian outlook, including detailed analysis found no where else, request information on BTU’s new Permian Package offering.

Author: Jason Slingsby

Jason Slingsby is an Energy Analyst for BTU Analytics, and leads the publication of BTU's North American Upstream Outlook. He is responsible for overseeing regional oil and gas production forecasts as well as analyzing overall market conditions, supply and demand balance, producer rationale, and commodity price forecasting. In addition to managing BTU's flagship product, Jason is focused on researching upstream oil and gas production in Canada and natural gas demand trends in Mexico. Jason holds a Masters degree in Chemical Engineering from the Colorado School of Mines.