• 4 minutes Trump will meet with executives in the energy industry to discuss the impact of COVID-19
  • 8 minutes Charts of COVID-19 Fatality Rate by Age and Sex
  • 11 minutes Why Trump Is Right to Re-Open the Economy
  • 13 minutes Its going to be an oil bloodbath
  • 6 hours While China was covering up Covid-19 it went on an international buying spree for ventilators and masks. From Jan 7th until the end of February China bought 2.2 Billion masks !
  • 54 mins Ten days ago Trump sent New York Hydroxychloroquine. Being administered to infected. Covid deaths dropped last few days. Fewer on ventilators. Hydroxychloroquine "Cause and Effect" ?
  • 26 mins US Shale Resilience: Oil Industry Experts Say Shale Will Rise Again
  • 11 hours China Takes Axe To Alternative Energy Funding, Slashing Subsidies For Solar And Wind
  • 8 hours Real Death Toll In CCP Virus May Be 12X Official Toll
  • 1 hour Which producers will shut in first?
  • 8 hours Marine based energy generation
  • 13 hours Today 127 new cases in US, 99 in China, 778 in Italy
  • 8 hours What If ‘We’d Adopted A More Conventional Response To This Epidemic?’
  • 9 hours How to Create a Pandemic
  • 10 hours Apple to Bypass Internet and Beam Directly to Phones
  • 1 day TRUMP pushing Hydroxychloroquine + Zpak therapy forward despite FDA conservative approach. As he reasons, "What have we got to lose ?"
Alt Text

Why Civil Rights Activists Are Backing Natural Gas

Top American civil rights activists…

Alt Text

Giant LNG Projects Face Coronavirus Death Or Delay

The coronavirus crisis is now…

Nick Cunningham

Nick Cunningham

Nick Cunningham is an independent journalist, covering oil and gas, energy and environmental policy, and international politics. He is based in Portland, Oregon. 

More Info

Premium Content

The Permian Faces A Long Term Natural Gas Crisis

The bottlenecks in the Permian have created a widening chasm between not just Brent and WTI, but also WTI in Cushing or Houston and prices fetched for oil in the Permian basin.

Oil output continues to soar in West Texas, despite the fact that the region’s takeaway capacity is tapped out. The discount for Midland WTI relative to Houston has surpassed $10 per barrel. “We see further potential downside risks for Midland prices and differentials versus the [U.S. Gulf Coast] and Brent,” Bank of America Merrill Lynch said in a note.

The crude bottleneck could be temporary, however, with a series of new pipelines set to come online next year. That could narrow the discount and perhaps even eliminate it. Bank of America Merrill Lynch goes further, arguing that the export push could open up a premium for Permian oil. “Beyond 2019, excess Permian takeaway capacity could push the Midland-Cushing differential positive as take-or-pay commitments pull barrels directly to the USGC for export,” the bank said.

With more pipelines, the flood of oil will continue to expand, which could depress WTI even as the regional gap with Midland is eliminated. “Rising production in the Midwest (PADD 2), the Rockies (PADD 4), and Canada, and new inbound pipelines from the Permian could overwhelm Cushing once again, weakening WTI curve structure,” BofA Merrill Lynch wrote. “In turn, this shift could lead to a wider Brent-WTI spread in 2019 than the $6/bbl we are currently projecting.” Related: Is Russia Bailing On The OPEC Deal?

However, even as the oil bottleneck looks set to be resolved in the next 12 to 18 months, there is still the matter of finding an escape route for all of the natural gas produced in the Permian. Gas production has skyrocketed in tandem with oil – with output up more than 60 percent over the past decade – which is creating a new set of problems.

(Click to enlarge)

Just as with crude oil, producers are struggling to find capacity on the region’s gas pipelines to ship gas out of West Texas. “The ball has got to get rolling on these gas pipelines because my biggest worry is that gas can strain some of the other production if we are not careful,” Bill Ordemann, executive vice president at Enterprise Products Partners, said at the Hart Energy Midstream Texas Conference last week.

New pipeline capacity is needed, and ultimately, the volumes of gas coming out of the Permian will probably need to be exported, Ordemann said. “All and all, our view is it all has to be exported or the vast majority has got to be exported,” he said.

That means shipping natural gas to Mexico or through the Gulf of Mexico via LNG export terminals. But those projects are also facing some obstacles, including adequate capacity to distribute gas on Mexico’s side of the border, as well as the lengthy time it takes to build LNG export terminals.

As a result, the gas glut could crimp oil production. “[A] lack of takeaway capacity has also severely depressed spot prices for Permian gas, and expectations for continued production growth depressed 2019 prices to levels as low as $1.00 per MMBtu during May,” Bank of America Merrill Lynch wrote. “Collectively, these steeply discounted prices have caused some producers to question whether it makes sense to throttle back their drilling and completion (D&C) plans until sufficient takeaway capacity is in place and netbacks improve.”

LNG developers are building and expanding facilities on the Gulf Coast to ship out more gas. Related: China Plans To Create A $78 Billion Natural Gas Giant

Export infrastructure will also need to grow to handle more crude oil exports. As Bloomberg notes, that isn’t a problem right now. There is some 2 million barrels per day (mb/d) of export capacity, and expansions are on the way, with a high-profile buildup at Corpus Christi. There is room to ratchet up exports, particularly as new facilities come online, but the timing of such things is not always seamless.

In the interim, both oil and gas prices in Midland will continue to suffer from bottlenecks. Oil is starting to be shipped via truck from West Texas to the Gulf Coast, a costly and inefficient mode of transport. Still, it makes some sense, if the producer can still make a profit after covering for the additional transport cost. But even there, bottlenecks could emerge. “Producers are said to be paying $15/bbl to ship oil by truck from the Permian to the U.S. Gulf Coast. However, this cost is not static. A shortage of truckers and trucks, coupled with accelerating 2H18 production, suggests that truck transport will get even tighter and become more expensive in the coming months, weighing on Midland pricing,” BofA Merrill Lynch said.

The bottom line is that the region will suffer from growing pains and discounts for the next year or so, dividing up the industry between the “Haves” and “Have Nots.” Those companies with contracts to ship their oil and gas on pipelines are doing well, while smaller E&Ps scrambling to secure pipeline space or lining up convoys of trucks are going to take a big financial hit.

By Nick Cunningham of Oilprice.com

More Top Reads From Oilprice.com:

Download The Free Oilprice App Today

Back to homepage

Leave a comment
  • Ronald C Wagner on June 14 2018 said:
    Great article NIck! My takeaway is that natural gas is gradually becoming more of a threat to oil and renewables prices and will gradually increase its share. That may be wishful thinking though since I am a natural gas advocate. I am looking for China to lead the way. What do you think?

Leave a comment

Oilprice - The No. 1 Source for Oil & Energy News