Surging U.S. oil production in the Permian basin has helped crash oil prices. But the Permian is also home to skyrocketing natural gas production, and output is growing so fast that drillers are trying to give it away for free. When they can’t, they just burn it off into the atmosphere.
Unlike in the Marcellus shale, where natural gas is the main target, drilling in the Permian is focused entirely on crude oil. Natural gas is a nice bonus that comes along with the oil. But the drilling frenzy in West Texas and New Mexico has resulted in a glut of this associated natural gas. There is a pipeline bottleneck for crude oil, but there is also a shortage of pipeline space for natural gas.
The glut has become so bad that next-day prices for gas at the Waha hub in the Permian have plunged to a record low, falling to as low as 25 cents per MMBtu. In some instances, producers have actually sold some gas at negative prices. That means that a company is paying someone else to take the gas off of their hands. On Tuesday, the lowest price recorded was -25 cents/MMBtu (to be clear, that is negative 25 cents), according to Natural Gas Intelligence (NGI). It was the second consecutive day that prices were in negative territory.
“That’s right, someone was paid to buy gas in the Permian on Monday,” RBN Energy LLC analyst Jason Ferguson said, referring to NGI’s pricing data. “While we’d like to tell you this was some sort of transient, one-off event that led to a day of dramatically low gas prices, that isn’t likely the truth of the matter.
Ferguson went on to add that there is little prospect of a recovery until next year. “The Permian gas market is flooded with associated gas and won’t see significant new takeaway capacity until the start-up of Kinder Morgan’s Gulf Coast Express pipeline in late 2019,” Ferguson said, according to NGI. “The problem is here to stay, at least for a few months. Take a deep breath if you trade the Permian gas markets.”
The negative prices are down sharply from the average price this year at $2.16/MMBtu at the Waha hub.Related: Natural Gas Drives Saudi Geopolitical Pivot
The predicament also stands in sharp contrast to natural gas traded elsewhere. Nymex prices for December delivery are trading around $4.40/MMBtu, up sharply over the past month due to low inventories and cold weather.
Ironically, the inauguration of new oil pipelines is making the gas glut worse. According to RBN, the startup of the expansion of the Sunrise oil pipeline, owned by Plains All American Pipeline LP, added takeaway capacity for oil. That has allowed for more drilling and completions, which has led to more produced gas.