Permian drillers with permits to flare gas associated with their shale oil wells are better positioned to survive a looming crunch in natural gas takeaway capacity out of the play, a Sanford C. Bernstein & Co. analysis said.

Already producers have to dump Permian gas into the local market because they cannot ship it elsewhere, as evidenced by the steep $1.79/MMBtu November discount at the Waha Hub compared to the Henry Hub benchmark. The problem will get worse going into 2019, Bernstein said. More gas from new shale oil wells will have to be burned off so oil continues to flow, according to the investment research firm.

"We've argued before that Permian gas takeaway is congested, with Waha currently trading ~$1.70 below Henry Hub," Bernstein upstream analyst Bob Brackett told his clients Oct. 12. "Permian dry gas growth of +1 Bcf/d in 2019 is constrained by takeaway until 4Q19, when +1.9 Bcf/d [Gulf Coast Express Pipeline LLC] and +1.5 Bcf/d of Mexican exports bring relief."

"In the meantime, lack of takeaway would force producers to either flare or shut in wells," Brackett said. "Currently ~400 MMcf/d of the Permian gas is being flared, and we expect to see that number go up as gas pipelines hit capacity."

Other observers are watching pipeline constraints. "Waha spot prices have been under pressure of late, [with] current trading under $1.20 after averaging ~$2.00 YTD, another sign that pipelines out of the basin are running near capacity," Jefferies LLC oil and gas analyst Zach Parham said Oct. 4.

Operators can flare gas at new wells for 10 days and then get permits every 45 days for the next 180 days without a hearing from the Texas Railroad Commission. Bernstein scraped the state commission's permit database and found that nearly 1 Bcf/d was flared through the third quarter, up 60% from the same time in 2017. About 300 MMcf/d of flaring is already permitted for the first quarter of 2019.

"We need at least 0.7-0.8 Bcf/d to match gas production growth, which seems likely given that roughly 1.5 Bcf/d [of flaring permits] was approved in 3Q'18," Bernstein said.

Occidental Petroleum Corp., Surge Operating LLC, Concho Resources Inc. and Pioneer Natural Resources Co. all hold more than 100 flaring permits for this year, which Bernstein said is a positive for their ability to keep oil production flowing. Bernstein does not cover Occidental, but it has Pioneer at "outperform" for its access to oil and gas pipeline capacity and Concho as a "market perform" with reservations about its exposure to Permian congestion in 2019.

Bernstein regards as unlikely the "doomsday" scenario of the Texas Railroad Commission clamping down on flaring permits or forbidding the practice outright.

"Commissioner Ryan Sitton has said that lack of takeaway alone has not been a reason for granting permits historically — operators would have to come up with a more comprehensive case for flaring," Bernstein said. "The RRC appears concerned that allowing extensive flaring would put operators who paid up for pipeline capacity at a disadvantage. That being said, the RRC, to our knowledge, has never denied a flaring permit in the last few years."

The Environmental Defense Fund's Texas regulatory and legislative affairs manager, Colin Leyden, said it appears Texas Railroad Commission officials are holding fast to current permitting rules in the face of repeated requests by producers for a relaxation. "For our purpose, that's good," Leyden said.

"The industry continues to struggle with waste and pollution," Leyden said. He observed that the size of pollution problems from leaking methane and flared gas are hard to determine due to the lack of air quality monitoring stations in sparsely populated West Texas.