Is a Gas Bottleneck Looming in the Permian?

Oil production is reaching new levels in the Permian Basin and it has created some uncertainty about where all the associated gas will go.

Source: Getty Images.

Record oil output in the Permian Basin is driving what midstream operators and energy analysts see as an increased need for additional associated gas processing and takeaway capacity in the region.

Analysts at IHS Markit said earlier this month that Permian oil production reached a new high of 5.28 million B/D in December while gas output stood at 19.8 Bcf/D.

The energy consultancy is expecting processed gas flows in the Permian to touch 24.65 Bcf/D by 2026, which means the region may need by then 5.2 Bcf/D in new processing capacity.

IHS noted that its new estimate is 1 Bcf/D more than what it projected in October and “is above and beyond the new capacity additions that have been announced, including recent plant relocations.”

Meeting the swelling processing demand will represent about $6 billion in spending, according to IHS.

To avoid the costs of newbuilds, some companies are planning to relocate gas plants from Oklahoma and North Texas to the once again booming Permian. Three of the announced projects would add about 500 MMcf/D to the Permian’s processing supply.

In terms of adding new takeaway capacity, Dallas-based Energy Transfer said on its latest earnings call this week that it is considering building a new gas pipeline that will stretch about 260 miles from the Permian to Fort Worth, Texas. From there, the company said the gas would be able to flow toward major sales points in the Houston area, East Texas, and the Henry Hub in neighboring Louisiana.

Tom Long, vice president and CFO at Energy Transfer, described the project on the earnings call as “an ideal solution for natural gas growth out of the Permian Basin” and added that the firm can complete the pipeline faster than competing projects thanks in part to an existing right-of-way it owns for most of the proposed route.

The pending decision comes less than 6 months after Energy Transfer commissioned its Permian Bridge project that involved converting a 55-mile-long natural gas liquids pipeline to instead move 115,000 Mcf/D of gas from the Midland Basin to the firm’s processing facilities and takeaway points within the Delaware Basin. The Permian Bridge project is currently being upgraded to handle 200,000 Mcf/D.

In addition to soaring Permian production, US natural gas prices have also doubled over the past year which has made getting Permian gas to market a higher priority for operators.

On top of this, the US onshore sector’s new emphasis on reducing emissions has made producers less eager to flare associated gas. This factor was raised during this month’s earnings call with executives from Houston-based midstream operator Plains All American.

“People are not going to flare. So, there's going to be pressure on gas takeaway,” Willie Chiang, CEO of Plains All American, said on the call with investors. He suggested, though, that the industry has time to respond as the transportation supply might not tighten up for 2 or 3 years.

As companies evaluate how to address a looming gas bottleneck, they will be facing new scrutiny if they need to move gas between New Mexico and Texas and other states as well.

This comes after the US Federal Energy Regulatory Commission (FERC) approved new environmental standards for intrastate pipelines along with liquefied natural gas export facilities on 17 February. They are considered to be the biggest changes made to the federal pipeline regulator’s approval process in more than 20 years.

One of the policies pushed forward calls on FERC to adopt a new framework to evaluate the emissions intensity and potential contributions each proposed pipeline will have to the effects of climate change.

A separate rule on how to establish the “public need” criteria for a new pipeline will give added weight to the projected utilization of the natural gas and considerations of alternative solutions to a pipeline. This policy change also deemphasizes whether a pipeline operator has secured firm contracts for a proposed pipeline.