Analysis: Sputtering Permian Basin gas production lifts Waha cash, forward prices

An early-summer rebound in Permian Basin gas production has definitively stalled out in recent weeks as drilling, well completions and rig counts across West Texas hit multiyear lows.

In August, Permian production averaged 11.3 Bcf/d – down about 250 MMcf/d compared with levels in the month prior. In July, output hit summer highs at over 12.2 Bcf/d as an onslaught of previously curtailed wells were brought back online, data compiled by S&P Global Platts Analytics shows.

Sputtering production in recent weeks comes as a maturing production profile across West Texas begins taking its toll, leaving output well below its record-high level in February at nearly 13.4 Bcf/d.

In July, Permian producers drilled only 138 wells while completion crews turned just 98 wells to sales – the lowest monthly figures on record dating back to 2013, according to the most recent data from the US Energy Information Administration.

The outlook for Permian drilling and well completions only continues to sour heading into the autumn months. On Aug. 27, the rig count in West Texas was estimated at just 127, or its lowest in nearly 11 years, data published by Enverus DrillingInfo shows.

Prices

At the West Texas Waha hub, lower production levels this summer have sparked a market rally, boosting cash prices to an average $1.27/MMBtu from June 1 to date. On Sept. 1, the spot market was up about 9 cents to $1.67/MMBtu, preliminary settlement data from S&P Global Platts showed.

Forwards markets also appear to be pricing in the lower production.

On Aug. 31, fourth-quarter 2020 forward prices at Waha settled at an average $2.20/MMBtu or their highest since early May, S&P Global Platts' most recently published M2MS data shows.

Earlier this year and prior the rout in crude oil prices, the Q4 strip traded as low as 16 cents/MMBtu as production hit record highs, sparking concerns over the availability of production takeaway capacity.

As the Permian production rebound continues to stall, though, forwards market are now pricing the peak-winter Waha gas market at over $3/MMBtu.

Outlook

Looking beyond the first-quarter, the longer-term outlook for Permian gas prices got another boost recently after a federal judge in Texas ruled against a Sierra Club request to stop construction on Kinder Morgan's 2.1 Bcf/d Permian Highway Pipeline.

According to the midstream operator, the incremental West Texas-to-Gulf Coast flow corridor should enter service as scheduled by first-quarter 2021, opening a long runway for Permian production growth.

While the midstream expansion should help to lift Permian Basin gas prices, particularly during lower-demand shoulder seasons, it's possible that producers won't require the additional capacity for some time.

According to a recent forecast from Platts Analytics, Permian gas production will likely to continue gradually declining through mid-2021 and won't test its prior record-high levels again until late 2022.