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Waha Hub gas prices hit negative territory as Permian pipe restricts flow

Unplanned equipment failures at two compressor stations on El Paso Natural Gas Co. LLC's pipeline westbound out of the Permian Basin sent prices at the West Texas Waha hub plunging into negative territory March 21, highlighting the lack of capacity to take away natural gas associated with the Permian's shale oil wells.

Drillers need the gas that comes up with oil removed before the higher-priced crude can be sold. As shale oil wells have proliferated throughout the Permian, on the border between Texas and New Mexico, the available pipeline capacity has become crowded. The market was so overwhelmed with gas production at the Waha and El Paso West Texas hubs March 21 that producers were theoretically paying customers to take their gas.

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The El Paso pipeline, a Kinder Morgan Inc. company, said on its pipeline bulletin board that the compressor at its Lordsburg 1C station would return to service April 5, and a second compressor at the Florida El Paso 1C station would return April 8. Until then, capacity on the line has been cut by about one-third to 384,700 Dth/d. El Paso blamed the restrictions on equipment failures.

Prices at Waha ended March 21 trading at minus-3 cents/MMBtu after losing 24 cents, while El Paso, West Texas finished the day at minus-4 cents/MMBtu after losing 21 cents, according to S&P Global Platts' Gas Daily.

After a pipeline disruption in February, RBN energy analyst Sheetal Nasta predicted how quickly the market could turn.

"With gas production pushing against available takeaway capacity, all it takes is an otherwise minor/routine maintenance event on even one West Texas takeaway pipeline to send regional gas prices spiraling into negative territory," Nasta said Feb. 14 after pipeline maintenance sent Waha prices plunging. "Waha Hub gas prices last week collapsed to their lowest level ever, with intraday trades even going negative."

The problem has become acute in the past year as production has grown rapidly and pushed up against available pipeline limits. Analysts firms such as RBN have warned of the problems for more than a year. The U.S. Energy Information Administration expects Permian gas production to cross 14 Bcf/d in April. In April 2017, Permian production averaged about 7.96 Bcf/d.

"Prices at the Waha Hub in West Texas ... averaged $1.67/MMBtu [March 13], $1.14/MMBtu lower than Henry Hub prices. [March 20], prices at the Waha Hub averaged $0.26/MMBtu, $2.57/MMBtu lower than Henry Hub prices," the EIA said in a weekly update issued March 21. "This is the lowest price since February, when prices fell to $0.09/MMBtu when another force majeure on the El Paso system limited westbound flows out of the Permian Basin."

S&P Global Market Intelligence and S&P Global Platts are owned by S&P Global Inc.