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Analysis: Permian gas production surge faces looming market, infrastructure constraints

Denver — An unrelenting surge in Permian Basin drilling, which is driving record gas production growth there this year, now appears to be facing market and infrastructure constraints that could come as early as the second quarter.

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On Friday, rig count in the West Texas-New Mexico play edged up to 437 and is now at its highest point since early 2015, data published by Baker Hughes shows.

The addition of nearly 60 rigs to the basin since mid-October has boosted dry gas production there by more than 1 Bcf/d, or about 20% over the same period. Earlier this month, that buildup helped to lift Permian gas production to its highest level on record at an estimated 7.2 Bcf/d, S&P Global Platts Analytics data shows.

But Permian production growth could soon be the victim of its own success.



Just since January, the summer 2018 forward basis strip at the West Texas Waha hub has lost about 25 cents, recently falling to a $1/MMBtu discount to Henry Hub. By summer 2019, forward markets are betting on basis prices there at more than $1.30/MMBtu discount to the benchmark.

While the Permian Basin's mostly associated gas production is unlikely to slow in response to weaker prices, looming demand and pipeline capacity constraints could pose more serious challenges. DOWNSTREAM DEMAND CONSTRAINTS TO APPEAR FIRST

Currently, Permian Basin production takeaway capacity is estimated at just over 8.5 Bcf/d, with approximately 73% of that volume being utilized.

According to Platts Analytics, though, downstream demand for that gas, most notably in the Midwest and the Southwest, has become increasingly saturated by growing production from the Anadarko and San Juan Basins. Taking those "market" constraints into account, means that effective capacity utilization is actually closer to about 86%.

As weaker shoulder season and summer demand takes hold, those market constraints are likely to continue tightening this year. EASTBOUND CAPACITY CONSTRAINTS TO EMERGE BY SUMMER

With limited optionality for Permian gas to tap demand in the Midwest, the Southwest or Mexico in the coming months, growing associated volumes from the play are likely to target markets to the east.

In mid-March, about 30% of the 2.8 Bcf/d in eastbound pipeline capacity exiting the Permian Basin still remains unutilized.

Last summer, though, eastbound flows from the Permian saw peak, single-day transmission highs at 2.7 Bcf/d, with a seasonal average flow of 2.2 Bcf/d.

By summer 2018, though, Permian Basin gas production will have grown by an estimated 1.2 Bcf/d, meaning that eastbound capacity is likely to see much higher utilization rates this year compared to last.

Looking beyond 2018, limited Permian Basin production takeaway capacity is likely to emerge as the most challenging constraint for producers. Through 2020, just a single capacity expansion project -- Kinder Morgan's 1.98 Bcf/d Gulf Coast Express Pipeline -- has reached FID status.

At least four other projects, with a combined capacity of more than 5.7 Bcf/d, are still awaiting a final investment decision. --J. Robinson, jrobinson@spglobal.com

--Edited by Jim Magill, newsdesk@spglobal.com