US Permian pipe relaunch [NGW Magazine]
Natural gas pipeline capacity is being added to the Permian Basin. Kinder Morgan announced that its Permian Highway pipeline had begun full commercial service on January 1. Capacity out of the basin is set to grow further still later this year when the Whistler pipeline starts up.
These projects, as well as others, were originally envisioned when market conditions were different and takeaway capacity was struggling to keep up with production. But despite the downturn of 2020, which hit activity in the basin hard, the takeaway capacity crunch is only now being fully alleviated by the start-up of Permian Highway. The case for some of the other planned pipelines, however, looks increasingly hard to make.
An often-cited fact about the Permian is that gas from the basin is largely a by-product of drilling for oil, and producers thus focus on their oil operations but also have to deal with their booming gas output. Indeed, prior to the Covid-19 pandemic, rates of flaring of associated gas were reaching record highs, and pipeline operators were scrambling to propose easing the problem with new takeaway capacity.
This also makes Permian gas particularly vulnerable to oil price fluctuations, and indeed, as the collapse of crude prices that started in March 2020 prompted drillers in the basin to shut in production, gas output fell too. Consultancy RBN Energy estimates that at one point last year, Permian gas production declined by almost 2bn ft³/day. However, it was also quick to rebound as crude prices stabilised in the second half of 2020 and curtailments were eased.
RBN estimates that production is now around 11.7bn ft³/day – around 2% below what it was last year – but adds that it expects the Permian to be one of the few basins in the US that will see any growth in gas volumes this year at all.
This is attributed in part to the start-up of Permian Highway, which RBN believes ramps up competition for Permian supplies because it is now significantly easier to send growing gas volumes out of the basin. The consultancy noted that gas prices at the Waha hub in Texas were bolstered when the pipeline entered interim service in late 2020, having previously turned negative on occasion.
Permian Highway has a capacity of 2.1bn ft³/day and carries gas from Waha to Katy, Texas, from where it can be sent on to markets on the US Gulf Coast or in Mexico. It is the second major new gas pipeline out of the Permian to enter service following the start-up of Gulf Coast Express, which was also developed by Kinder Morgan, in 2019.
Kinder Morgan said in a statement that Permian Highway was fully subscribed under long-term contracts, also noting the project’s potential to reduce Permian flaring.
Gulf Coast demand
The Gulf Coast provides producers a nearby and growing market for their Permian gas. Particularly notable is the demand from LNG terminals on the Gulf Coast since 2016, when Cheniere Energy’s Sabine Pass facility became the first to export LNG from the Lower 48 states.
Cheniere has been saying that it is the largest gas consumer in the US since 2017, and its operations have only grown since then as it brought the Corpus Christi LNG terminal online and continued to expand capacity at Sabine Pass. It has been joined by privately owned Freeport LNG in Texas and the Sempra Energy-led Cameron LNG in Louisiana.
The US’ LNG exporters also took a battering during the worst of last year’s downturn, with numerous cargoes scheduled for loading over the summer cancelled by buyers. But – like Permian gas production – LNG trade is also picking up. The US Energy Information Administration (EIA) estimates that after falling to their lowest level in 26 months over the summer of 2020, US LNG exports subsequently rebounded to reach a new record high of 9.4bn ft3/day in November.
In the immediate term, US LNG exporters are benefiting from seasonal winter demand, with colder-than-expected weather helping to push up LNG spot prices, especially in Asia. There are also other trends at play, however, including outages at liquefaction facilities in other countries. Nonetheless, even if the current spike in LNG demand proves to be fleeting, demand for feedstock gas on the Gulf Coast could stay relatively strong as the year progresses.
“LNG terminals along the Gulf Coast are full right now,” an RBN analyst, Jason Ferguson, told NGW. “If they slow their intake this summer, that likely just depresses Henry Hub prices, as Permian gas will still flow out toward the Gulf Coast on the new pipelines.”
Permian takeaway capacity will keep growing this year, with the 2.0bn ft3/day Whistler pipeline, which is being built by MPLX, WhiteWater Midstream and a joint venture between Stonepeak Infrastructure Partners and West Texas Gas, set to enter service this summer. RBN believes that as there will not be enough near-term gas production growth to fill Whistler upon start-up, pipelines that now move gas north from the Permian to the Midcontinent region could opt to reverse flow to send their output to the Gulf Coast via Waha and Whistler instead.
“We think gas will flow south from the Midcontinent into the Permian this summer when Whistler comes online and Mexico exports are higher (due to summer power demand),” Ferguson said.
Indeed, RBN noted in early January that it was already seeing more demand for gas at Waha following the start-up of Permian Highway, with prices at the hub “routinely” trading above those in the Midcontinent.
Separately, Summit Midstream Partners asked federal regulators in early January for permission to start building its Double E pipeline to carry 1.35bn ft3/day of gas across the Permian to Waha, also suggesting that it sees demand at the hub growing. This permission has now been granted.
This does not mean that the other planned Permian pipelines will find market conditions favourable enough to proceed to construction, though. Kinder Morgan has a third pipeline proposed, Permian Pass, also with a capacity of 2.0bn ft3/day. But the company said in March 2020 that it was struggling to find customers to sign up as shippers for the pipeline. It is now not expected to be sanctioned until there are sufficient shipper commitments – with no new update from Kinder Morgan on the timing. However, the project has not been cancelled either.
“Permian Pass is still in the Kinder Morgan investor presentation,” said Ferguson. “We don’t see new pipelines driven by weak Waha prices over the near-term, though that doesn’t mean LNG customers might not back a project if capacity is available to their terminal.”
The Pecos Trail pipeline plan is on hold, and consultancy Rystad Energy noted in July 2020 that the Permian to Katy (P2K) pipeline “appears to be inactive”. Meanwhile, LNG developer Tellurian withdrew its application to build the Permian Global Access pipeline to its planned Driftwood LNG terminal in Louisiana in December, citing unfavourable market conditions. Subsequent videos by Tellurian’s co-founder Charif Souki broadcast this month however suggest that it is only a matter of time before the logic for such a terminal is restored.
Still, ongoing uncertainty over Driftwood’s fate, combined with the withdrawal of Permian Global Access, illustrates that while US LNG exports are recovering, there is still a challenging path ahead for new LNG export proposals. NextDecade is another would-be Permian gas-LNG export project operator, which was left jilted at the altar last year when Engie decided, perhaps under government pressure, not to import shale gas into France.
Short-term demand may have spiked, but questions remain over this translating into long-term supply deals. Permian gas pipeline developers may be waiting to see which new LNG plans are sanctioned before moving ahead with their own projects.