Ongoing pipeline maintenance on El Paso Natural Gas, now extended indefinitely, promises to weigh on Permian Basin gas prices this winter as it limits egress capacity from West Texas. The continuing maintenance could also magnify emerging supply pressure in the Permian that has come amid a recent surge in production and drilling activity there.
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Register NowIn a critical notice published Nov. 30, El Paso told shippers that it does not yet have a definitive timeline for returning its Line 2000 back to full commercial service. The pipeline's westbound mainline, a critical transmission corridor for Permian Basin gas flowing into Southern California, is now expected to remain out of service for several months, El Paso said.
The critical notice updates El Paso's original force majeure declaration posted Aug. 15 when the pipeline failure on Line 2000 first occurred near Coolidge, Arizona. El Paso advised that repair work and diagnostic inspections continue and that the incident remains under investigation by the NTSB.
SoCal, West Texas impacts
Since its announcement in August, the force majeure and subsequent maintenance on El Paso has mostly affected the southern California gas market by limiting its access to Permian Basin supply.
Following the announcement of El Paso's Line 2000 maintenance in August, westbound flows from the Permian immediately dropped by some 500 to 600 MMcf/d in response to the new capacity restrictions.
In part, the force majeure helped to fuel a spectacular rise winter gas prices at the SoCal Gas city-gate to over $13/MMBtu as traders became increasingly concerned over the restrictions on West Texas supply. Following a subsequent move by the California Public Utilities Commission, though, temporarily expanding the region's storage capacity at Aliso Canyon, the SoCal Gas market has since cooled.
In the Permian Basin, meanwhile, ample transmission capacity to the Texas Gulf Coast, the US Midcontinent and to Mexico allowed production and prices in West Texas to remain relatively unscathed by the reduction in westbound capacity on El Paso.
More recently though, an uptick in production and drilling activity in the Permian has raised doubts over the basin's capacity to simply absorb more supply without no, or only limited, impact on prices.
Permian production, prices
Since mid-October, Permian Basin gas production has surged, rising to an average 13.6 Bcf/d – up from late-summer levels around 13.3 Bcf/d. In December, output has taken another leg up, averaging 13.8 Bcf/d so far this month – just 200 MMcf/d shy of the basin's single-day record high in June at over 14 Bcf/d, Platts Analytics data shows.
The surge in production has already begun weighing on sentiment in the forward basis market.
Over the past month, winter-season forwards at Waha have fallen into discounted territory. At market settlement Dec. 2, the January 2022 contract settled at a 2 cents discount to Henry Hub – down from a 43 cents premium at the start of November. Basis prices for February have followed a similar trajectory, most recently settling 2 cents behind Henry Hub, S&P Global Platts' most recently published M2MS forwards data shows.
With Permian drilling activity continuing to accelerate, and the basin's rig count now just below a 19-month high recorded in late November, it seems likely that West Texas production would continue rising this winter. With westbound egress capacity on El Paso to remain restricted, it's possible that the additional supply could have an outsized impact on West Texas gas prices.