ANALYSIS: Tightness-fueled tug of war for Permian gas supplies to persist in Texas market

Houston — The gas supply shortness in the US Southwest that has been driving up prices and pulling Permian Basin volumes that would otherwise be going to Gulf Coast demand centers is expected to continue in the near-term until production is able to rebound, S&P Global Platts Analytics data showed.

A driving factor has been low supply amid growing demand, mainly in the form of LNG feedgas consumption.

The dynamics mean that even with Kinder Morgan's Permian Highway Pipeline entering full commercial service in January, Texas Gulf Coast is still needing to price at a premium to incentivize gas flowing there.

Kinder, which also operates Gulf Coast Express, had been talking about adding a third Permian gas pipeline, but has since shelved the idea. Company executives said recently they don't expect the need for Permian Pass to materialize until the middle of the decade.

The tightness has driven demand hubs like Houston Ship Channel and Texas Eastern South Texas to price at a premium to incentivize stronger inflows from either the Permian or Henry Hub areas. This price premium has been present despite PHP entering service on Jan. 1, increasing Permian takeaway capacity to the Katy area by 2 Bcf/d.

This market tightness had been forecast by Platts since Q4 2020 and has gained more market attention recently as the forwards for both HSC and STX were trading at premium to Henry Hub for most of 2021 and into the beginning of 2022.

The key drivers of these lingering premiums are lower production, which has increased the competition for Permian gas between the Southwest and East Texas markets, and steady/stable LNG demand that is expected throughout 2022, keeping utilization rates at Freeport LNG and Cheniere Energy's Corpus Christi Liquefaction high for much of the year.

Platts Analytics forecast Texas production to average 22.9 Bcf/d in 2021, 200 MMcf/d below the 2020 average. Prior to the production declines caused by the coronavirus pandemic, Texas production topped out at 24.3 Bcf/d in March 2020.

According to Platts Analytics' most recent CellCast forecast, Texas production is not forecast to reach pre-pandemic levels until July 2022. During that same time, LNG feedgas demand is forecast to grow by 2 Bcf/d in Texas alone.

With Texas being a net exporter of gas, outflows will need to be cut slightly to meet the higher regional demand. For a region like the Southwest, which relies heavily on imports from Texas, regional prices must increase to pull Permian volumes west instead of flowing east to the Texas Gulf Coast.

The higher western prices have caused a tug of war between the Texas Gulf Coast and Southwest that is not expected to subside until production volumes are able to fully rebound and surpass pre-pandemic levels.

LNG outlook

While the global LNG winter-buying spree is quickly giving way to shoulder-season lulls in demand -- a factor that might alleviate some of the gas supply tightness in the US Southwest -- Platts Analytics is forecasting Gulf Coast LNG terminals to be running near full capacity through the end of 2021, based on contractual obligations and current netbacks pricing.

All that helps explain why Kinder Morgan CEO Steve Kean said Jan. 20 during an investor presentation that Permian Pass won't advance this year, next year, or anytime soon.

"It's not that we're not having any conversations with people," Kean said. "There are some very long-term planners out there, as you know, in the producer community. And so we continue to talk about it. But it's a ways off."

The trajectory of growth in rig activity in the Permian will tell the company a lot "over the coming months and a couple of years," Tom Martin, president of Kinder's gas pipelines unit, said during the presentation.