Houston — Permian Basin oil producers could become the driving force behind the US' second wave of LNG supply.
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That was the seemingly contrarian wisdom of a panel of chief executives at Gastech, the annual global conference held this week in Houston.
Investments in infrastructure and new drilling techniques have seen Permian Basin oil production double since 2017 to over 4.3 million b/d this year, according to data from S&P Global Platts Analytics. Along with oil and liquids, though, producers have been inundated with gas, the price of which actually turned negative earlier this year as production overwhelmed the basin's transport capacity.
The promise of new midstream capacity, which will about bring 6 Bcf/d of new capacity to the Texas interstate market by the early 2020s, has offered little comfort for some producers.
"These producers need to move this gas. It's a byproduct of oil production," said Next Decade Chairman and CEO Matt Schatzman. "We're not going to be flaring ten [or] fifteen billion cubic feet of gas," he said.
Even the possibility that Texas and its neighboring markets could become saturated with surplus gas supply in the next decade has some producers looking to take their chances beyond the US border.
On Sunday, Cheniere Energy announced its second supply-push agreement with an upstream producer. The deal will see Cheniere liquefy, export and market a portion of EOG Resources' gas production. In exchange, EOG will receive a gas price indexed to the Platts JKM, the benchmark price for LNG delivered to Northeast Asia. The agreement follows a similar one announced by Cheniere in June with Apache Corporation.
According to Schatzman, a wave of comparable deals could come in the early 2020s.
"The Permian Basin is going to change the global LNG landscape," he said. "Every incremental hydrocarbon produced [there] from this day forward - whether its oil, liquids or gas, needs to be exported."
That supply glut could transform the US export market as Permian producers become increasingly willing to accept any market-clearing price for gas that, ultimately, is intended only to enable oil- and liquids-production growth.
As ever larger volumes of low-priced gas reach the Texas Gulf Coast in the years ahead, supply-push agreements could radically change the way LNG-terminal developers compete.
Fierce competition among second-wave developers has, in recent months, seen portfolio players win increasingly attractive offtake agreements that limit their exposure to commodity- and even shipping-price risk.
Through supply-push agreements like those signed by Cheniere, though, terminal developers might get the kind of financial backing they require to fund terminal construction--something that's traditionally come through offtake agreements with buyers.
For companies like Sempra Energy, developer of the 11 million mt/yr Port Arthur LNG export project in East Texas, supply-push agreements could offer a solution for unwanted price risk.
"Given our shareholders at Sempra, we want to minimize basis differential risk," said Justin Bird, president at Sempra LNG, at Gastech. According to Bird, the producer has already been negotiating similar kinds of commercial arrangement with potential exporters.
"Some alternative index deals we're doing would almost be a synthetic toll, where someone with upstream gas brings it to our facility, we liquefy it and they offtake it," he said.
-- J. Robinson, firstname.lastname@example.org
-- Edited by Richard Rubin, email@example.com
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