The Permian basin continues to add new oil production, but shale drillers in West Texas could face an unexpected problem: too much natural gas.
Natural gas is produced as a byproduct when drilling for oil. Oil tends to be more lucrative, so shale companies typically target oil in places like the Permian, and the gas is considered an added benefit. However, the Wall Street Journal reports that shale drillers in the Permian are struggling with too much gas and not enough places to put it.
The gas pipelines from the West Texas shale fields are at capacity. To the north, the market is saturated with gas from the Rockies and Canada, the WSJ says. And while there are several natural gas pipelines under construction that would carry gas from Texas to Mexico, those projects are not yet online. One key pipeline, the Gulf Coast Express, won’t come online until 2019, and several other projects have similar timelines.
While Permian producers really want to continue to ramp up oil production, they are extracting more gas than they know what to do with. The result is plunging spot prices for gas. According to the WSJ, the Waha trading hub in West Texas has gas selling for 57 cents/MMBtu below Henry Hub prices. With Henry Hub at roughly $3/MMBtu, that puts West Texas gas at something like $2.50/MMBtu.
But gas output is expected to continue to climb. With no space left on any pipelines, prices will continue to crater. Analysts, according to the WSJ, see gas prices in the region dropping further, potentially trading for a $1/MMBtu discount relative to Henry Hub.
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