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Shortage of pipe for associated gas could limit Permian oil boom, analysts warn

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Shortage of pipe for associated gas could limit Permian oil boom, analysts warn

Energy pipeline analysts are sounding the alarm about a takeaway shortage for associated natural gas from oil production in the prolific Permian Basin that could prompt drillers to shut in production and jeopardize plans to ease a looming crude oil transportation bottleneck.

Pipeline companies are scrambling to construct Permian crude takeaway capacity amid a pipe shortfall that is expected to last well into 2019, but the same surge of projects has not been seen for the associated natural gas production. Permian gas might soon have nowhere to go, with June production expected near 10.5 Bcf/d but only 4.5 Bcf/d of transportation capacity to the Gulf Coast available.

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Analysts at the energy investment bank Tudor Pickering Holt & Co. said that while the "deluge of [oil] pipeline announcements," including Exxon Mobil Corp. and Plains All American Pipeline LP's joint venture, is stoking fears of a Permian overbuild in the 2020s, midstream companies have not shown a similar urgency regarding associated gas. That oversight could cost crude oil pipeline developers.

"Permian natural gas constraints remained unaddressed with only one ... project [with a final investment decision]," they wrote in a June 13 note to clients. "Given an average Permian gas-to-oil ratio of ~3.1:1, [the] range of crude takeaway additions would necessitate ~8-10 bcf/d of contemporaneous natural gas takeaway capacity to allow full utilization. ... Those barrels will not be able to flow unless proposed natural gas projects see commitments and soon."

Kinder Morgan Inc.'s Gulf Coast Express pipeline is the only green-lit Permian gas takeaway project. During the CERAWeek conference in March, Exxon Mobil subsidiary XTO Energy Inc. President Sara Ortwein said the pipeline's 1.98-Bcf/d capacity will help alleviate the gas transportation bottleneck once it begins service in the fourth quarter of 2019, but "we'll need another one after that."

There is a chance that NAmerico Energy Holdings LLC's proposed 1.85-Bcf/d Pecos Trail pipeline could fill that gap, but plans to begin commercial service during the third quarter of 2019 depend on whether the company can secure enough shipper commitments to move the project forward. If Pecos Trail is scrapped, the Permian may not have its next natural gas pipeline until the second half of 2020.

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Midstream companies' reluctance to commit to multibillion-dollar projects reflects the high leverage and stock market underperformance plaguing balance sheets, which has led pipeline heavyweights like Williams Cos. Inc. and Enbridge Inc. to focus on corporate restructuring in the wake of federal tax changes for master limited partnerships.

A consequence of that hesitation to invest in new outlets for Permian gas is that West Texas drillers could face shut-ins.

"This issue has taken a back seat in investors' minds," equity analysts at Barclays said in a June 12 note to clients. "Our concern has ... more to do with forced shut-ins when the natural gas physically will have no place to go. This would potentially result in decelerating growth rates on Permian [gathering and processing] systems until additional natural gas capacity is online at the end of next year."

Flaring would help to prevent producers from shutting in their wells, but the analysts added that the Railroad Commission of Texas is not likely to revise state regulations currently under review to allow for unlimited flaring.