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Nick Cunningham

Nick Cunningham

Nick Cunningham is a freelance writer on oil and gas, renewable energy, climate change, energy policy and geopolitics. He is based in Pittsburgh, PA.

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The World’s Cheapest Natural Gas

Natural gas prices fell into record negative territory in the Permian basin, dragged down by booming oil production and a limited ability to move gas out of the region.

Unlike in other places, such as the Marcellus and Utica shales, natural gas in West Texas is produced as a byproduct. This “associated gas” is essentially an afterthought, a surplus and almost irrelevant product that comes out of the ground due to the relentless pursuit of crude oil. Precisely because the natural gas is not the target is exactly why more gas continues to be produced regardless of what prices do.

This dynamic helps explain how natural gas prices at the Waha hub in West Texas can fall to -$3.38/MMBtu – yes, negative $3.38 – as they did on Wednesday, which means that producers are paying others to take their gas. Javier Blas of Bloomberg News tweeted that prices may have reached as low as -$6/MMBtu.

While there has been a critical bottleneck for oil – a lack of pipelines from the Permian to the Gulf Coast led to steep discounts last year – the constraint on gas is even more pronounced. Waha prices near El Paso have been low for months, but the most recent plunge has been exacerbated by equipment problems at two compressor stations in New Mexico, according to Reuters. Waha prices have been in negative territory since March 22. Reuters notes that the spread between Waha and Henry Hub – which has been trading at around $2.70/MMBtu – reached a record high of $6.14/MMBtu on April 3.

The situation should clear up a bit when one of the compressors comes back online, expected on April 5. The other returned to service on March 31, Reuters reports. Seasonal lulls in heating demand are also weighing on gas prices.

There are pipelines in the works, but the first projects won’t be completed until later this year. “We foresee the pricing issue directly tied to takeaway constraints lasting at least until October 2019, when Kinder Morgan's Gulf Coast Express pipeline is slated to start-up,” Wood Mackenzie said in a commentary on April 3. “Today, the bottleneck is so tight that even slight hiccups can cause massive price swings.” Related: Shale Is In A Deep State Of Flux

WoodMac said there are some gas pipelines from Texas to Mexico that are scheduled to come online in the second quarter, which could ease the bottleneck, while stronger domestic demand in the summer months may also help.

A glut of gas may not affect oil operations because “flaring regulations allow for enough wiggle room for producers to meet output targets,” Barclays wrote in a note. Texas regulators issue permits that allow companies to flare gas for up to 180 days, and the Texas Railroad Commission “rarely denies these,” the investment bank noted. Beyond that, drillers can obtain extensions.

The 180-day grace period could be long enough for companies to bide their time until new pipelines come online. “With the Gulf Coast Express in-service target roughly six months away, new wells brought online today might not even need to go through this extension process,” Barclays concluded.

It may seem absurd to produce gas and then pay someone to take the gas off your hands, but Permian drillers continue anyway because they are really after the oil. The cost of offloading natural gas at a loss does not necessarily scramble the economics of drilling. “Even with negative gas prices, the vast majority of Permian wells remain profitable to operate. Their economics are driven almost entirely by oil prices, not natural gas,” Barclays said. “With current operating margins of about $30/b, Permian gas prices would have to drop to -$20/MMBtu or so before the typical well would be shut in for economic reasons.”

It should be noted that while individual wells may be profitable, small and medium-sized shale companies are largely still posting losses. For instance, a Reuters analysis found that all but seven of 29 shale companies spent more than they earned last year.

Ultimately, drillers will press forward on drilling in order to hit their oil production targets. That means that gas output could continue to climb, which means gas prices will likely remain depressed.

By Nick Cunningham of Oilprice.com

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  • Ronald Wagner on April 05 2019 said:
    Great story! This flaring must be reduced greatly. All of the technology is available to use this natural gas on site! Or the natural gas can be processed and shipped by truck as CNG or LNG. The federal government needs to demand this. The oil majors can do this. Let the little dogs sell out if they are not able to function without wasting a key natural gas asset.
  • Jacques Lefave on April 07 2019 said:
    I agree in principle with RW, but CNG can and should be used to fuel local utility and delivery trucks. The gas can be used to fuel the compressors to compress the CNG for the vehicles on a very economical basis. The propane and butane components of the gas can be separated out with a little more sophisticated equipment if there's enough of a regional market for it. - JL

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