Freezing weather returns to the Permian in renewed risk to gas production, prices

Low temperatures across West Texas are forecast to dip well below freezing from Jan. 20 to Jan. 23, potentially bringing wellhead freeze-offs and gas production curtailments to the Permian Basin.

An updated forecast for Jan. 20 showed temperatures in Midland, Texas dipping to about 22 degrees Fahrenheit overnight, followed by a subsequent drop to just 19 degrees from Jan. 21 to Jan. 22.

Subfreezing temperatures, which hit West Texas earlier this month, have often been associated with gas production declines in the Permian, either from voluntary curtailments or wellhead freeze-offs. Last winter's now infamous polar vortex event, which brought sub-zero temperatures to the Permian, triggered a historic price spike there, briefly sending prices at Waha to over $250/MMBtu.

On Jan. 20, spot gas markets across the Lone Star State were actually down on the day, despite the freezing weather forecast. At the Waha Hub in West Texas, cash prices were down over 80 cents to $3.86/MMBtu. In East Texas, prices at Houston Ship Channel and Katy Hub were also down about 20 to 30 cents to around $4.20/MMBtu at both locations, preliminary settlement data from S&P Global Platts showed.

In the forward market, meanwhile, traders have long been bracing for a potential spike in gas prices at Waha this winter. In late December, the hub's January 2022 forward contract briefly traded at upwards of 50 cents premium to Henry Hub. Since the start of the new year, the balance-of-month contract has traded as high as 44 cents premium to the benchmark. On Jan. 19, the balmo price was up 7 cents from the prior settlement to a 4 cents premium, S&P Global Platts' most recently published M2MS forward data showed.

Freeze-off risk

While the perceived risk of another freeze-off may just be recency bias, concern over the potential for another such event is very real for market participants and regulators. In addition to driving forward-market volatility at hubs in West Texas and the Midcontinent, the February 2021 freeze has motivated the Texas Railroad Commission to take regulatory action.

Following an extensive inquiry into the Polar Vortex event last February, the TRCC last year proposed winterization standards for the state's oil and gas producers intended to avert a repeat of last winter's statewide energy emergency.

After proposing an initial winterization scheme, the Texas regulator came under scrutiny from industry experts, lawmakers and public interest groups, for what they called an exemption loophole. In the originally proposed plan, most natural gas production, storage or midstream operators would have been allowed to file for an exemption to the winterization standard by submitting the appropriate paperwork to the TRCC and paying a $150 fee.

On Nov. 30, though, the Texas regulatory body voted unanimously to close the earlier exemption loophole by designating certain natural gas entities as "critical" during an energy emergency with the new standard imposing basic winterization requirements on certain natural gas suppliers and customers.