As Permian Basin oil production grows, producers must find outlets for the associated natural gas. Once pipeline capacity is fully used, choices are limited, so the widening price differential between Waha and Henry Hub indicates pipeline capacity is already somewhat constrained.
Based on estimates in EIA’s most recent Drilling Productivity Report, gas production in the Permian Basin averaged 10.4 billion cubic feet per day (Bcf/d) in June 2018, which was 2.1 Bcf/d more than in June 2017. Much of this increase in production is associated natural gas, produced as a byproduct of rising output from oil-directed rigs. Crude oil production in the Permian Basin averaged 3.3 million barrels per day (b/d) in June 2018, up 0.9 million b/d year-on-year.
Gas flaring allowed for limited time
In Texas and New Mexico, shale oil producers may flare or vent natural gas from wells during drilling and immediately after completion but only for a limited amount of time. Thereafter, producers can only flare natural gas after receiving exemptions from a state agency.
“If natural gas production continues to grow, and natural gas prices continue to fall, some producers in the area may cease oil production to avoid producing associated natural gas,” EIA analysts cautioned.
New pipelines to Mexico and the U.S. Gulf Coast
To monetize the rising volumes of associated gas production, two pipelines – Comanche Trail and Trans-Pecos – were completed in 2017 to export Permian gas to Mexico. Although these pipelines have a combined takeaway capacity of 2.6 Bcf/d, they are not expected to see significant flows until late 2018 or early 2019 when downstream pipeline infrastructure in Mexico enters service.