The Permian Basin is running out of pipeline to take away natural gas associated with shale oil drilling, meaning producers may soon get just pennies for their million British thermal units, or worse, pay to have gas removed so the oil can flow, a veteran analyst said.
Speaking about possible limits on the continued growth of shale oil and gas production in the U.S., RBN Energy LLC CEO Rusty Braziel said there is 8.5 Bcf/d of pipeline takeaway capacity out of the Permian which currently has 7.5 Bcf/d of gas production. "Production will exceed capacity this year," perhaps as soon as April, Braziel told executives at a short-term oil outlook event at the Center for Strategic and International Studies in Washington, D.C. on Feb. 27.
"Permian producers have a problem," Braziel said. To keep producing oil and liquids they need an outlet for the natural gas mixed into production from the well. Unlike oil, gas cannot be reasonably trucked, or shipped by rail, leaving flaring — burning the gas off at the wellhead — as the only solution to keep the oil flowing.
Producers are ambivalent about what happens to "free" gas because their focus is solely on volumes of $50-plus per barrel oil prices, according to Braziel, and the $2.50/MMBtu gas just gets in the way. RBN's models show producers having to pay $2/MMBtu to move gas to the Waha Hub once another billion cubic feet or more of gas flows out of the Permian this year.
"It breaks our [pricing] model. By the second quarter of 2019, basis goes to 'negative infinity,'" Braziel said, creating a world where shale oil producers will have to bid up the cost of moving gas away from their shale oil wells.
The issue does not go away until new pipeline is built, he said, with the closest candidate being the nearly 2 Bcf/d Gulf Coast Express Pipeline LLC from Waha to Agua Dulce near the Texas Gulf Coast. Gulf Coast Express, a joint development of a Targa Resources Corp. affiliate and DCP Midstream LP and led by Kinder Morgan Inc., is scheduled for completion in the second half of 2019.
An alternative for the excess gas is to flare it. "That's a wild card," Braziel said. "Will the Texas Railroad Commission let flaring take place? The RRC is untested on how it will handle pipeline constraints." Regulators are not big fans of flaring because royalties are usually not paid for gas burned off at the well head.
The final alternative is the hard constraint on shale oil's growth, Braziel said: drillers would have to stop until more pipeline capacity is built. Three more projects are scheduled to open in 2020, he said.
Oil and NGL sales will keep drillers profitable even if they have to pay to have the gas taken away if gas prices go lower than zero, Braziel said. "But, if they have to stop drilling," he said, "that is a world we have never seen before."
