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Onslaught of Permian oil-associated gas straining western US markets

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Onslaught of Permian oil-associated gas straining western US markets

Pipeline bottlenecks and booming production have forced producers in the Permian Basin to flare as much as 1.2 Bcf/d of unwanted gas and sent prices for the fuel at the Waha hub plummeting to negative values.

As drillers seek to boost oil production in the West Texas region, gas associated with that output has swamped Waha, the main pricing and pipeline point for gas moving out of the basin. That has led to large amounts of natural gas being burned off, or flared, in an effort to maintain balance in the pipeline system. The problem is "record production from the Permian with no place for it to go," said Clint Stockman, a vice president of ConocoPhillips, which produces oil and gas in the region.

"Gas production reached a record high in April and all of a sudden the economics of natural gas became pretty evident," Stockman said Aug. 6 during a panel discussion on challenges facing producers in the U.S. West. "You can see trades as low as negative-$9/MMBtu on the day. It's just incredible."

Low prices at Waha have been a challenge for producers in the West who do not have oil production to bolster their income. In addition to takeaway constraints at the northwest Texas hub, outages at facilities owned by Kinder Morgan Inc. and Atmos Energy Corp. created additional headaches for producers earlier in the year.

The bottleneck at Waha is expected to ease once Kinder Morgan's Gulf Coast Express system goes into operation in October. The Houston-based midstream giant is also leading a consortium that plans to have the Permian Highway pipeline online in 2020, and a group that includes MPLX LP and Targa Resources Corp. plans to have the Whistler pipeline in service by 2021.

"Even with that it's a very challenging place," said Tony Scott, managing director of BTU Analytics LLC, another panel member at the LDC Gas Forums Rockies & West conference in Los Angeles. "Gulf Coast Express will be physically full probably from day 1 and then backfilled within a couple of months with incremental supply. And then we're really waiting on that next big project."

Stockman agreed that transportation constraints will probably continue for the next several years, but the payoff will be access to the U.S. Gulf Coast and LNG export markets, which all the new pipelines will provide.

"We've got this gross supply glut showing up in the Permian and a huge market showing up on the Gulf Coast," Stockman said. "You will see constraint and relief, constraint and relief for the next several years. That's where we are in the Permian."