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Like Permian oil production, area gas production faces pipeline problem

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Like Permian oil production, area gas production faces pipeline problem

Permian Basin producers with limited oil transportation options might find themselves facing a second and greater dilemma in the near future: associated natural gas production that continues to surge with few major pipeline projects on the horizon to move it.

This transportation shortfall could lead to shut-in production, cutting oil output and revenue for these companies.

While pipeline projects are being put together to take care of the booming oil production, only Kinder Morgan Inc.'s Gulf Coast Express gas pipeline has enough firm commitments to move off the drawing board. The U.S. Energy Information Administration estimated the Permian will produce approximately 10.5 Bcf/d of natural gas in June, or more than 2 Bcf/d more than June 2017. With industry observers like the research firm Sanford C. Bernstein & Co. LLC anticipating the amount of gas production in the Permian will triple by 2025, producers may have little choice but to flare their associated production or shut in their wells entirely.

Currently, there is approximately 4.5 Bcf/d of gas transportation capacity from the Permian to the Gulf Coast, meaning more than 6 Bcf/d is cut off from the Gulf's petrochemical plants and LNG export facilities. That would force Permian production to move in other directions, likely overwhelming the hub at Waha, Texas. In its review of the situation, Bernstein said Permian exploration and productions, or E&Ps, have been reluctant to buy into a gas pipeline for a number of reasons, including history in the area that discourages such investment.

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"In nearly every case, constrained gas gets solved within a few years with most exceptions driven by environmental constraints … If you are an E&P of this mindset, it is your incentive to let others anchor the pipeline for you and be a free rider," the firm said. "Furthermore, Waha has not been constrained in the last two decades … so Permian E&Ps have never had a compelling reason to sign up for gas takeaway before."

Cost effectiveness is another reason producers have hesitated to commit to a gas pipeline. Bernstein said gas from Permian wells only makes up about 5% of a well's total revenue, but transportation costs of $140,000 per year come close to the $210,000 a year to transport oil.

Bernstein estimated that six pipelines, each one carrying 2 Bcf/d at a cost of about $2 billion to build, are required to prevent a chokehold on Permian gas transportation by 2025. That seems unlikely, given that there is no single player in the Permian that is producing a sufficient amount of gas on a daily basis at present to anchor such a pipeline. With Concho Resources Inc. being the top current gas producer at 489 MMcf/d and dozens of smaller producers pushing up the total production, finding wiling customers would be a tough task.

"An anchor would need to be at least 400-500 mmcfd … The lower gas production of Permian E&Ps compared to the typical gas pipeline size leaves almost no contenders who could anchor with their 2017 volumes only," Bernstein said. The firm said that could change by 2021. It estimated seven different E&Ps will produce more than 500 MMcf/d, but it would take something else to push companies to commit to gas pipelines before that time.

That "something" may turn out to be oil. If gas production continues at its current pace and no pipeline capacity is added, wells may be forced to shut in. With oil, the real money-maker, cut off, producers could sign on to gas pipeline projects just to get their crude production back.

"Our strong belief is that in the second half of this year, [when] there are forced shut ins of gas [and] oil is imperiled … it is enough of a scare for E&Ps sign up for the 'gas insurance,'" Bernstein said.