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Permian producers look to LNG exports to take away gas surplus

Producers in the Permian Basin would be delighted to see more LNG export capacity developed on the Gulf Coast and elsewhere to take their associated gas. U.S. exporters appear happy to help, but the relief could take a while.

A representative of Permian producers expressed hope for a quicker solution. "The next pipeline must be linked to LNG," Occidental Petroleum Corp. Senior Vice President for Marketing and Midstream Cynthia Walker said. "Every molecule needs to find an international market."

Tom Martin, the president of the natural gas pipelines group at Kinder Morgan Inc., said new gas pipelines from the Permian through at least 2023 will be driven by the needs of suppliers, not by demand from consumers. Finding new markets, whether through exports, industrial facilities on the Gulf Coast, or redirecting pipeline to send gas northward, will be critical.

"We have to squeeze the rag as hard as we can," Martin said.

Walker and Martin made their comments during a panel discussion at CERAWeek by IHS Markit in Houston. Upstream and midstream executives detailed the plight of Permian producers struggling with a lack of gas pipeline capacity. While much of the Permian conversation has centered on the mismatch between oil pipeline infrastructure and crude oil production in the play, the lack of pipelines for gas may be more pressing. With nowhere to go for much of the estimated 13.4 Bcf/d of gas produced in March, producers have been forced to find storage or flare it off.

"Flaring is unacceptable … we have a commitment to eliminate any nonroutine flaring," Walker said. "It is clearly in the basin at unacceptable levels today."

Some markets originally anticipated for Permian gas have been disappointments for producers. One destination that has not lived up to expectations is Mexico, which has pipelines that remain underused and pipeline projects that are hung up due to bureaucratic hurdles and internal strife. Martin said the increase in gas heading to Mexico from the Permian will be "not a material amount."

"Maybe 2 Bcf/d over the next couple of years," Martin said. "In 2019, I expect to see half a [Bcf/d] from [Kinder Morgan pipeline] Gulf Coast Express go to Mexico. Maybe another half [Bcf/d] to 1 [Bcf/d] in the coming year."

Observers also dismissed the prospect of sending gas to California. Walker said the market for gas in that state is declining.

Houston-based LNG Terminal developer NextDecade Corp. would like to take on some of the Permian supply surge as it looks to build LNG export facilities in Brownsville and Texas City in Texas. Those facilities, however, are several years away, as are many potential LNG export projects. Even with the NextDecade LNG projects and other export projects in operation, NextDecade President and CEO Matt Schatzman said the Permian could overwhelm Gulf Coast markets.

"We would love to solve the problem in the short term, but we're a long-term solution. We're a 2023 solution," Schatzman said. "LNG is going to be a major part of taking care of this supply issue [long term]."

With that in mind, Walker suggested that LNG facilities be built on the West Coast of Mexico, with easier access to Asian markets and less congestion than likely American ports capable of such trade. "We're in uncharted territory," Walker said. "I don't think anyone knows what it means to move that kind of volume [an estimated 20 Bcf/d] through LNG facilities."