The Oil Play That Could Flood the Natural-Gas Market
May 30 2017 - 2:15PM
Dow Jones News
By Timothy Puko and Christopher M. Matthews
The oil-rich Permian Basin is emerging as a major source of new
natural gas, a development that could deepen an existing glut and
pressure gas prices for years.
The West Texas region has become the most prolific spot for
horizontal oil drilling and fracking. The new oil wells also
produce natural gas, making it a nearly free byproduct that energy
companies can then sell on top of the more-sought-after crude.
Gas production in the Permian basin is likely to triple by 2020
from its 2010 levels, analysts say. The region is poised to rival
new gas output from the Appalachian Marcellus, the country's
biggest gas producing region.
Businesses and investment firms are earmarking billions for new
pipeline connections to take away gas so drillers can keep pumping
oil.
Blackstone Group LP last month agreed to pay $2 billion for
EagleClaw Midstream Ventures LLC, a gas-focused pipeline company in
the region. Kinder Morgan Inc. and at least two others have
announced plans to spend billions of dollars on new pipelines.
The rapid growth among oil drillers and the support for pipeline
projects both in Texas and from President Donald Trump's
administration is helping make those investment decisions
easier.
Gas prices are down 13% year to date, with near-record
production and tepid winter-heating demand leaving storage levels
11% higher than the five-year average.
Gas production in the Permian is expected to increase by 5.5
billion cubic feet a day from the end of last year to reach 12.5
bcf by the end of 2020, according to energy investment bank Tudor,
Pickering, Holt & Co. in Houston.
The Marcellus, which has long been the fastest-growing gas
field, is likely to add 6.1 bcf during the same period, not much
more than the Permian, though its total production will be two
times more than Permian by 2020.
All that fresh output could send gas prices back down to
historic lows next year, said Brandon Blossman, analyst at
Tudor.
Permian "producers are concerned they can't get rid of it," he
said. "They're not really concerned what they're going to get for
it."
Six months ago, many analysts and executives thought a slowdown
in drilling nationwide and increasing export demand could reverse
the oversupply of natural gas. Some producers expected a shortage
of pipelines to ship gas out of the oil patch might hamper their
rush back into the Permian.
But that picture has changed with the wave of new, cheap gas
from the Permian and pipeline companies willing to spend on new
connections.
New long-haul pipelines also are slated to unlock Marcellus
supply for the Midwest and Southeast. Resurgent Haynesville-shale
drilling is likely to boost output from Louisiana. All that
potential supply is helping keep prices in the futures market at
the lower end of their range from the last two decades.
Oil wells nationwide are expected to generate another 9 bcf a
day of natural gas over the next several years, nearly covering for
all new demand, according to estimates from Tudor, Pickering and
Macquarie Group.
Many analysts expect the growing supply to keep international
prices, low, too, as the U.S. becomes more of a global supplier.
U.S. producers are shipping vast new amounts of gas to Mexico and
several export terminals are set to open that will ship gas by
sea.
But because Permian drillers are after oil, gas prices could hit
historic lows, probably as little as $1.50 a million British
thermal units, before it stopped them from drilling, according to
energy consulting firm Wood Mackenzie.
Anywhere from a fifth to a half of what comes up from a Permian
oil well is actually natural gas, or ethane, propane and other
fuels called natural-gas liquids. Producers in the region are
starting to concentrate in a part of the Permian called the
Delaware, where volumes of everything are higher.
Oil companies want to move gas as quickly as possible so they
can produce more oil, said Duane Kokinda, Kinder Morgan president.
His firm held talks with customers this year and received bids in
excess of the capacity on Kinder's natural-gas pipeline, Mr.
Kokinda said.
"Based on the demand we got," he said "We're looking at making
it bigger."
Write to Timothy Puko at Tim.Puko@wsj.com and Christopher M.
Matthews at christopher.matthews@wsj.com
(END) Dow Jones Newswires
May 30, 2017 14:00 ET (18:00 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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