Permian gas production at risk by late 2023 as midstream capacity dwindles

Long-haul natural gas pipelines from the Permian Basin could reach maximum capacity as early as late 2023, potentially posing downside risk to basis prices and production across West Texas and New Mexico, a recent analysis published by S&P Global Commodity Insights shows.

According to industry analysts and observers, the Permian Basin already has sufficient pipeline capacity in place to support near-term production growth for crude and NGLs. Despite that, the runway for gas looks increasingly less certain. Discussion and debate over the potential need for additional gas transmission capacity from the Permian took off even before the MPLX consortium announced the startup of commercial service last summer on the basin's most recent expansion: the 2 Bcf/d Whistler Pipeline.

More recently, though, gas production from the Permian Basin has shown little propensity for growth, potentially even calling into question the immediate need for additional egress capacity.

Through mid-April, gas production has averaged just under 13.8 Bcf/d, which is down about 140 MMcf/d from its fourth-quarter 2021 average, S&P Global data shows. Earlier this winter, Permian production suffered a series of disappointing setbacks prompted by wellhead freeze-offs that were especially hard-hitting in Texas and the Midcontinent this year. After rebounding to a record-high 14.3 Bcf/d in mid-February, Permian gas production again sputtered.

That seemingly directionless trend for Permian production could be nearing its end, though, thanks to a recent and steady acceleration in drilling and upstream activity across West Texas and New Mexico.

Drilling

In 2022, operators across the Permian have continued to expand their drilling footprint with the addition of nearly 40 rigs since early January. As of the week ended April 13, Permian rig count is now estimated at 337, marking its highest since April 2020, data published by Enverus shows.

In March, an estimated 362 new wells were drilled in the Permian – also the most numerous since first-quarter 2020, new data published April 18 by the US Energy Information Administration showed. Over the past four months, well completions, too, are on the rise, reaching 433 in March to hit their highest in 12 months, the EIA's latest drilling productivity report showed.

Egress capacity

Based on recent activity, S&P Global's Permian production forecast now shows output growing as much as 2 Bcf/d this year, potentially approaching 16 Bcf/d by early 2023. While production is expected to grow more slowly next year, it could still reach 17 Bcf/d by the fourth quarter, current projections show.

With midstream capacity currently estimated at 17 Bcf/d – including northbound, westbound, eastbound and Mexico-bound transmission capacity – analysts predict that basis price dislocations, flaring and other downside pressures on gas production could begin as early as winter 2023-2024.

Over the past several months, the forward gas market has already begun pricing Waha basis accordingly. While forward basis is down across the board, fourth-quarter 2023 has taken the biggest hit. As of mid-April, Waha Q4-2023 basis is now priced at a $1.70/MMBtu discount to Henry Hub – down from just a 62 cents discount in mid-December, Platts M2MS forward gas data shows.