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Permian freeze cuts gas production as frigid weather promises more to come

Highlights

Output down 1.7 Bcf/d, or about 12% vs. prior week

West Texas temperatures to hit 10 degrees, Feb. 3-4

Waha balmo contract eases to $7.25, March rising

  • Author
  • J Robinson
  • Editor
  • Richard Rubin
  • Commodity
  • Natural Gas

Permian Basin gas production on Feb. 3 suffered its steepest decline yet this winter as frigid weather across West Texas fuels a wave of freeze-offs there. With low temperatures in nearby Midland and Odessa forecast to remain in the teens to low-20s Fahrenheit through the weekend, the cut to West Texas gas supply could be prolonged.

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Initial production estimates on Feb. 3 showed Permian production dropping to about 12.2 Bcf/d marking a nearly 1.7 Bcf/d, or 12%, drop in output compared with the prior week average.

From Feb. 2 to Feb. 3, low temperatures in the region dropped to around 15 degrees. From Feb. 3 to Feb. 4, low temperatures in Midland and Odessa are expected fall further to just 10 degrees. Through the upcoming weekend, the weather is forecast to warm, but only modestly with low temperatures remaining in the mid-teens to mid-20 F, forecast data from S&P Global Platts Analytics shows.

In early January a similar cold spell, which was comparatively short-lived and less extreme, caused a wave of wellhead and gathering-line freeze-offs that briefly cut Permian production by about 1.7 Bcf/d. While the subsequent rebound was quick, output remained about 300 to 400 MMcf/d below its pre-freeze level for about three weeks, only making a full recovery by late January.

Prices, forwards

The anticipation of widespread freeze-offs and a potentially prolonged contraction in Permian gas production has recently reset the outlook for February, and even March gas prices in West Texas.

Earlier this week, weather forecasts calling for frigid temperatures fueled a sharp rise in Waha's balance-of-month gas contract to $8.35/MMBtu – the highest winter forward price recorded yet this season.

The balmo contract has since weakened, falling to $7.25/MMBtu on Feb. 3. Forward prices for March, meanwhile continued to rise, ending the trading day at $4.90/MMBtu – the contract's highest since early November, S&P Global Platts' most recently published M2MS data shows.

While the surge in Waha's cash price to around $7.30/MMBtu on Feb. 2 fell short of the balmo market's earlier level, forwards traders still have good reason to be concerned over the potential for a prolonged premium on West Texas gas that could result from a lingering production decline in the Permian.

Freeze-offs

Last February, a historic polar vortex event hit Texas and the US Midcontinent oil and gas producing states hard, bringing sub-zero temperatures to the Permian, the SCOOP-STACK and the Anadarko basins.

While far more extreme compared with the current cold front, the resulting production impact in the Permian and other locations was of unprecedented magnitude. Revised data on Permian production now shows the full hit from last February's freeze at about 5 Bcf/d – a drop that briefly wiped out nearly 40% of the basin's output. Although the decline resulted partly from voluntary shut-ins, it still took over a month for Permian production to fully recover from the freeze.

In the current scenario, the prolonged drop in temperatures across West Texas – which are forecast to dip even lower from Feb. 3 to Feb. 4 and remain below freezing until Feb. 7 – will likely result in further production declines across the Permian. What remains to be seen is whether newly enacted winterization standards enforced by the Texas Railroad Commission have sufficiently battled-hardened the basin's infrastructure to allow for a comparatively quick rebound in output.