August 9, 2018 / 8:20 PM / 8 days ago

Texas natgas prices drop as production and pipeline constraints grow

(Reuters) - The natural gas price in the Permian Basin in west Texas has slumped so low this year that the annual average is on track for its lowest in 19 years, pummeled by record production and pipeline constraints that also have stymied crude transport out of the region.

Gas production, a byproduct of drilling in the nation’s largest oilfield, has hit record highs this year, filling available space on existing pipelines and forcing more companies to burn off, or flare, the fuel if they cannot find other ways to deal with it.

Prices at the Waha hub in the Permian averaged $2.31 per million British thermal units (mmBtu) so far in 2018, approaching 1999’s $2.19, the lowest in nearly two decades. The Waha price was $2.15/mmBtu on Thursday.

Since the start of the year, gas prices at Waha were 64 cents/mmBtu below the U.S. national benchmark Henry Hub, more than twice last year’s spread and the biggest discount since 2008 when Waha averaged $1.24/mmBtu below Henry Hub.

For a graphic on U.S. Waha vs Henry Hub natural gas price spread, see: tmsnrt.rs/2KAIdKZ

New gas pipelines are under construction or in development, but analysts said capacity will remain tight until late 2019 when Kinder Morgan Inc’s $1.75-billion Gulf Coast Express line is expected to enter service.

“For the Permian to continue to grow, you basically need to have a new pipeline being built every year,” said Charles Robertson, a managing director at Cowen & Co.

Permian gas production in Texas more than doubled in the last several years, rising from 3.1 billion cubic feet per day (bcfd) in 2011 to 6.6 bcfd in the first quarter this year, according to the Texas Railroad Commission, the state’s energy regulator. One billion cubic feet is enough to supply about 5 million U.S. homes for a day.

For a graphic on Texas Permian basin natural gas production, see: tmsnrt.rs/2KCMNIA

Production increases are expected to continue beyond the region’s current capacity of 8.1 bcfd, with takeaway needs projected to rise to 9.4 bcfd by the end of 2019 and 10.4 bcfd by the end of 2020, analysts at RBN Energy said in a report.

Companies without pipeline access are having to reinject gas underground, use it onsite, or flare it to avoid shutting in wells or slowing production.

Texas companies can flare gas for up to 10 days after completing a new well and for a maximum of 180 days through extensions. Some drillers have called on the state to change the flaring rules, which would enable them to produce more oil.

For a graphic on Texas natural gas production and flaring, see: tmsnrt.rs/2M5BCxV

Flaring in the Texas part of the Permian basin rose 39 percent from 2016 levels to 55.3 billion cubic feet in 2017, according to the Environmental Defense Fund (EDF), an environmental group that opposes loosening flaring regulations.

There are about a dozen pipelines under construction or in development to transport more gas from the Permian to the Gulf Coast or Mexico.

Additional reporting by Stephanie Kelly in New York; Editing by David Gregorio

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