West Texas cash basis at risk this summer as El Paso maintenance continues

Ongoing maintenance on El Paso Natural Gas' Line 2000 promises to keep downward pressure on West Texas cash basis this summer as the outlook for Permian Basin gas production turns increasingly bullish.

In a critical notice published April 19, El Paso told shippers that the timeline for returning its Line 2000 back to full commercial service remains uncertain. The pipeline's westbound mainline, which is a critical transmission corridor for Permian Basin gas flowing into Southern California, is expected to remain out of service for at least another several months, El Paso said.

The critical notice updates El Paso's original force majeure declaration posted Aug. 15 when the pipeline failure on Line 2000 first occurred near Coolidge, Arizona. El Paso advised that its Line 2000 remains under a PHMSA order with reduced operating pressure effectively removing the pipeline from service from the Black River compressor station to the California border.

In the months immediately following El Paso's force majeure declaration, westbound gas transmissions from the Permian dipped about 400-500 MMcf/d, falling below 3 Bcf/d from mid-August through late October 2021. This winter, westbound flows rebounded trending close to 3.2 Bcf/d from Nov. 1 to date. Despite the rebound, the ongoing force majeure still appears to be limiting westbound capacity by some 200-300 MMcf/d, compared with pre-incident levels, S&P Global Commodity Insights data shows.

As drilling activity across the Permian Basin continues to accelerate this spring, a likely increase in gas production by this summer could bring additional, renewed pressure on basis prices at Waha as available transmission capacity from West Texas continues to dwindle.

Drilling, production

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 are also on the rise, reaching 433 in March to hit their highest in 12 months, the EIA's latest drilling productivity report showed.

Growth in Permian Basin gas production has already begun putting basis pressure on West Texas gas prices this year. In February, as Permian output topped 14 Bcf/d, cash prices at Waha tumbled to as much as a 65-cent discount to Henry Hub. Following a freeze-off and subsequent drop in production in early March, Permian output again rebounded to over 14 Bcf/d, pushing basis prices at Waha to even steeper discounts of more than $1 below the US benchmark, S&P Global data shows.

Outlook

This summer, as Permian gas production continues to grow – potentially reaching new record highs – basis prices are likely to face more pressure amid dwindling spare pipeline capacity.

According to modeled data compiled by S&P Global, capacity utilization along the Permian's eastbound corridor to the Gulf Coast is averaging about 79-80% this year. As Whistler Pipeline, Permian Highway Pipeline and Gulf Coast Express – among the newest long-haul projects – continue to fill, analysts now expect a new ceiling on Permian production could emerge as early as late 2023.

This summer, regional gas production should have plenty of room to grow – but potentially at a cost. For the balance-of-summer strip, May to October 2022, Waha forwards are currently pricing at an average $1/MMBtu discount to Henry Hub – down from just 58 cents discount priced in for the summer strip as recently as December, Platts M2MS forward data shows.