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Analysis: Lower Permian gas production, higher prices to drive shift in regional flow dynamics

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Analysis: Lower Permian gas production, higher prices to drive shift in regional flow dynamics

Highlights

September production drops to average 10.6 Bcf/d

Waha cash trades at $1.40, 2021 curve at $2.65/MMBtu

Pipeline utilization to Midcon, San Juan likely to drop

Denver — The recent drop in Permian gas production could soon drive a significant shift in regional flow dynamics, with higher West Texas gas prices posing a risk to supply flowing to Midcontinent and San Juan markets.

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Following a 4 Bcf/d, or more-than-30%, decline in the wake of the March oil-market collapse, Permian Basin gas production has struggled to mount a recovery this year.

In September, output has averaged just 10.6 Bcf/d as the basin's growing inventory of aging wells reverses a mid-summer rebound that was largely fueled by previously curtailed production.

Earlier this summer, production briefly topped 12 Bcf/d. During the first-quarter, Permian output climbed into the low 13 Bcf/d range, data compiled by S&P Global Platts Analytics shows.

With Permian supply now sputtering, West Texas gas prices have rallied in recent months.

In the past 30 days, the Waha cash market has averaged over $1.40/MMBtu as constraints on the Permian's principal production-takeaway pipelines and flow corridors continues to ease.

With lower production levels expected to endure, forwards markets have also rallied. At Waha, balance-2020 gas prices are now trading at nearly $2/MMBtu. For 2021, the calendar-year curve has edged up to an average $2.65/MMBtu, S&P Global Platts' most recently published M2MS data shows.

Lower pipeline utilization rates, in combination with higher Waha gas prices, are changing West Texas market dynamics, putting supply on some Permian production-takeaway corridors disproportionately at risk, according to Platts Analytics.

Midcontinent, San Juan markets

Heading into 2021, pipeline corridors flowing northbound from the Permian into the Midcontinent and northwest into the San Juan region, could see significant declines in utilization, based on current forward-market price spreads. Following the steep drop in Permian gas production earlier this year, utilization on both the northbound and westbound outflow corridors has already declined considerably compared with prior first-quarter averages.

At the NGPL Midcontinent hub, forwards markets are pricing-in a modest premium to Waha of just 4 to 8 cents during first-half 2021. For H2 2021, the hub is priced at an average 6 cent/MMBtu discount.

Gas prices at the El Paso San Juan hub are also expected to weaken relative to Waha. Through February, forwards markets are pricing in an average 11 cent premium at El Paso San Juan. From March to December, though, the hub dips to an average 3 cent/MMBtu discount to Waha.

Expansions

While lower anticipated production will be a key driver of the narrowing price spreads, a startup to service on the 2.1 Bcf/d Permian Highway Pipeline in April and the 2 Bcf/d Whistler Pipeline in third-quarter 2021 could also play a key role in shifting the regional market dynamics.

With another 4 Bcf/d in eastbound capacity, Permian producers should see significantly improved optionality for reaching premium markets on the Texas Gulf Coast.

While price spreads to hubs like Houston Ship Channel and Texas Eastern STX will see significant weakening beyond fourth-quarter 2020, both locations are priced at reasonably attractive premiums to Waha in 2021.

In the forward market, Houston Ship Channel is currently priced at an average 23 cent/MMBtu premium to Waha in 2021. At Texas Easter STX, the forward curve trading at a similar 24 cent/MMBtu premium, S&P Global Platts data shows.

All things considered, stronger pricing on the Texas Gulf Coast and increased optionality to reach end-user markets there could see Permian outflows shift considerably away from the Midcontinent and San Juan markets in favor of the eastbound corridor.