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Permian Highway enters service, brightening gas market outlook for West Texas

Highlights

2 Bcf/d project offers runway for production growth

New capacity to support Permian prices beyond winter

Premium Gulf Coast markets pull supply eastbound

Denver — Kinder Morgan on Jan. 4 said its Permian Highway Pipeline has begun full commercial service, bringing West Texas producers long-awaited new gas transmission capacity and a potential lift to prices.

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After flowing commissioning volumes the past several weeks, the intrastate gas transport project entered service on Jan. 1, Kinder said, opening a new corridor to the Houston metro-area suburb of Katy with expanded access for Permian producers to the Gulf Coast industrial and export markets.

"We believe that the Permian Basin will remain an important supply basin for decades," Kinder Morgan natural gas midstream President Sital Mody said in a press release. "Our strong network of pipelines provides the ability to connect this supply to critical markets along the Gulf Coast."

Permian gas market

The startup of Kinder Morgan's second major takeaway project from West Texas promises to unshackle Permian production over the longer term and allow operators to grow output at sustainable prices.

In December, Permian gas production averaged just 10.7 Bcf/d, remaining well below prior record-highs around 13 Bcf/d, as a slowdown in drilling activity continues. Over the past nine months, operators in West Texas have pulled nearly 250 rigs from the region, leaving just 182 as of Dec. 30, Enverus data shows. According to a forecast from S&P Global Platts Analytics, though, the steady resumption of drilling activity in the Permian could see output there grow to over 12 Bcf/d by later this year.

Production weakness and elevated winter demand in the Permian over the past month are likely the main drivers behind recent price strength at the basin's benchmark Waha Hub. In December, the cash market there averaged nearly $2.40/MMBtu, or its highest since January 2018. On Jan. 4, the spot market was up about 7 cents to $2.41, preliminary settlement data from S&P Global Platts showed.

Permian gas prices have likely garnered additional support from the new eastbound capacity on Permian Highway Pipeline, or PHP, a factor that will become increasingly critical heading into the lower demand season in late March, April and May.

Last spring, strong production, weak demand and limited production takeaway capacity kept Waha's cash market average to just 22 cents in April. In the spring season prior – before the startup of Kinder Morgan's 2 Bcf/d Gulf Coast Express Pipeline – spot gas prices at Waha traded largely in negative territory, averaging minus 20 cents in April and minus 24 cents in May 2019.

According to Platts Analytics, the startup of PHP should intensify the "tug of war" for Permian gas as the Southwest, Midwest and East Texas markets are forced to bid up prices in competition for supply.

Over the past several months, lower Permian production has already reduced utilization rates on less-premium transmission corridors to the west and the north. In both the Southwest and the Midcontinent, cash and forwards prices have rallied in response as end-users bid up their respective markets to attract additional Permian supply.

Background

Kinder's Permian Highway Pipeline faced various hurdles to its startup last year and in 2019. In late March, drilling operations were suspended along a stretch of the project's construction route in the Hill Country after crews experienced an underground drilling fluid leak. In 2019, Kinder faced land acquisition and permitting challenges in the Hill Country amid local opposition to the project.

PHP is fully subscribed under long-term contracts. Kinder Morgan Texas Pipeline, a subsidiary of KMI, EagleClaw Midstream and Altus Midstream each hold equal ownership interest of 26.7%, with an affiliate anchor shipper on the pipeline holding the remaining 20% interest.