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Feature: Permian gas production surge sinks East Texas basis as market connectivity grows

Highlights

January 2022 forward basis at HSC, Katy down 50 cents

Whistler adds to West, East Texas market connectivity

Permian output nearing prior record high in December

Winter forward basis at East Texas natural gas hubs is down sharply since the start of November as rising Permian Basin gas production promises to keep the Texas Gulf Coast market well supplied.

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Over the past month, January 2022 forwards prices at Houston Ship Channel and Katy hub have fallen from a more-than-70 cents premium to Henry Hub to just 20 cents premium as of Dec. 2. Prices for the December 2021 and February 2022 contracts have followed a similar trajectory at both locations.

The rise and fall of winter basis prices in the East Texas gas market has closely tracked the surge and subsequent decline in forward basis prices at the West Texas Waha hub where surging production from the nearby Permian Basin has begun pressuring both the West and East Texas gas markets.

Over the past month, January forwards at Waha have fallen into discounted territory. At market settlement Dec. 1, Waha January 2022 forward basis settled about 2 cents below Henry Hub – down from a 43 cents premium at the start of November. Prices for February are now also trading in discounted territory, S&P Global Platts' most recently published M2MS forwards data shows.

Market connectivity

Increasing connectivity between the West and East Texas gas markets this winter comes following the July 1 commercial startup of the 2 Bcf/d Whistler Pipeline, a 450-mile, 42-inch intrastate line that delivers gas from the Permian Basin to a terminus near Agua Dulce on the South Texas Gulf Coast.

While the pipeline does not publicly report flows, its supply has likely helped to meet demand in the South Texas market for pipeline export to Mexico. The additional gas arriving in South Texas has likely also left available more Permian gas delivered from Kinder Morgan's 2 Bcf/d Gulf Coast Express and 2.1 Bcf/d Permian Highway Pipelines for consumption in the East Texas gas market.

Permian production

Cooling expectations for Waha and East Texas winter basis prices come as output from the Permian nears prior record highs. On Dec. 2, gas production from the basin topped 13.8 Bcf/d, just 200 MMcf/d, or about 1.4%, shy of its previous record high in June 2021, Platts Analytics data shows.

Analytics forecasts calling for steady growth in the Permian into 2022 and beyond now looking increasingly convincing.

With outright cash and forwards prices still near historic highs, drilling incentives in the Permian Basin are only growing. In a recently published internal rate of return or IRR analysis for the month of November, Platts Analytics estimated half-cycle, post-tax returns in the Delaware Basin at nearly 60% with the Midland Basin estimated in the upper 40% range. Returns for both sub-basins are up sharply from year-ago levels.

Permian producers have already begun responding to the uptick. In the week ended Dec. 1, rig count in West Texas was estimated 290 – just 4 rigs below a 19-month high in the prior week, data published by Enverus shows.