Waha gas forwards remain bullish, despite permitting setback for Permian Highway

Permian forward gas prices continue to trade near an 11-month high this week, despite a recent regulatory setback to Kinder Morgan's Permian Highway Pipeline.

On April 21, the Hays County Commissioners Court voted following an executive session to withdraw permits allowing Kinder Morgan to cut through and drill underneath Hays County roads while building the Permian Highway project, a county press release shows.

"The pause in the permits is not impacting current construction activities," Katherine Hill, senior corporate communications specialist for Kinder Morgan, said in an email Tuesday. "The project is on schedule to be in service in early 2021."

Permian forward prices have remained unmoved by the recent news.

At market close Monday, first-quarter 2021 gas prices at the Permian Basin's benchmark Waha Hub remained near a recent 11-month high, settling at an average $2.47/MMBtu as traders continue to anticipate an easing to midstream gas capacity constraints by later this year.

Since early March, the outlook on Permian drilling and production has undergone a seismic shift after more than 20 operators in West Texas announced major cuts to capital expenditures and rig counts.

After tumbling into negative territory earlier this month, a continued rout in the West Texas Intermediate crude market has severely weakened the outlook for Permian oil production – potentially calling into question the immediate need for additional midstream capacity to move associated gas volumes on the 2.1 Bcf/d Permian Highway Pipeline.

COUNTY PERMITS

On Tuesday, Hill acknowledged the Hays County permitting pause, saying that Kinder Morgan continues to work directly with county officials to address their concerns.

The latest permitting setback for Permian Highway comes after drilling operations at a horizontal directional drill site in Blanco County, Texas were initially suspended on March 28 when work crews experienced an underground drilling fluid leak.

Drilling operations at the Blanco County site have remained suspended since, though no subsequent incidents impacting county acquirers have been reported, according to Kinder Morgan. Other construction activities on the pipeline and compressor stations have continued as planned.

PERMIAN MARKETS

Last week, rig count in the Permian Basin tumbled to 262 – down 40 on the week. Since early March, producers have pulled more than 165 rigs from the basin, data published Thursday by Enverus DrillingInfo showed. Permian drilling had reached a multiyear high in late-2018 when the rig count hit 500.

As continuing pandemic-related demand destruction for crude oil weakens, the production outlook in West Texas, record-high Permian production around 5 million b/d is forecast to begin declining by mid-summer, falling to a projected 4.6 million b/d by December.

Over the same period, gas production is expected to see minimal growth, rising to an estimated 12.6 Bcf/d by late 2020 – only about 500 MMcf/d above its previous monthly record high in December 2019.