Surging U.S. oil production in the Permian basin has helped crash oil prices. But the Permian is also home to skyrocketing natural gas production, and output is growing so fast that drillers are trying to give it away for free. When they can’t, they just burn it off into the atmosphere.
Unlike in the Marcellus shale, where natural gas is the main target, drilling in the Permian is focused entirely on crude oil. Natural gas is a nice bonus that comes along with the oil. But the drilling frenzy in West Texas and New Mexico has resulted in a glut of this associated natural gas. There is a pipeline bottleneck for crude oil, but there is also a shortage of pipeline space for natural gas.
The glut has become so bad that next-day prices for gas at the Waha hub in the Permian have plunged to a record low, falling to as low as 25 cents per MMBtu. In some instances, producers have actually sold some gas at negative prices. That means that a company is paying someone else to take the gas off of their hands. On Tuesday, the lowest price recorded was -25 cents/MMBtu (to be clear, that is negative 25 cents), according to Natural Gas Intelligence(NGI). It was the second consecutive day that prices were in negative territory.
“That’s right, someone was paid to buy gas in the Permian on Monday,” RBN Energy LLC analyst Jason Ferguson said, referring to NGI’s pricing data.
“While we’d like to tell you this was some sort of transient, one-off event that led to a day of dramatically low gas prices, that isn’t likely the truth of the matter."
Ferguson went on to add that there is little prospect of a recovery until next year.
“The Permian gas market is flooded with associated gas and won’t see significant new takeaway capacity until the start-up of Kinder Morgan’s Gulf Coast Express pipeline in late 2019,” Ferguson said, according to NGI.
“The problem is here to stay, at least for a few months. Take a deep breath if you trade the Permian gas markets.”
The negative prices are down sharply from the average price this year at $2.16/MMBtu at the Waha hub.
The predicament also stands in sharp contrast to natural gas traded elsewhere. Nymex prices for December delivery are trading around $4.40/MMBtu, up sharply over the past month due to low inventories and cold weather.
Ironically, the inauguration of new oil pipelines is making the gas glut worse. According to RBN, the startup of the expansion of the Sunrise oil pipeline, owned by Plains All American Pipeline LP, added takeaway capacity for oil. That has allowed for more drilling and completions, which has led to more produced gas.
The supply glut has had other effects beyond low prices. Drillers often vent, flare or otherwise leak natural gas during their drilling operations, which has both environmental and fiscal consequences. A report from the Wilderness Society and Taxpayers for Common Sense, finds that between 2009 and 2015 drillers on public lands wasted 462 billion cubic feet (Bcf) of natural gas, or enough gas to meet the needs of 6.2 million households for a year. At an average price of $3.65/MMBtu over that time period, the wasted gas adds up to about $1.7 billion.
The federal government under President Obama tried to force drillers to capture this wasted gas. In 2016, the Bureau of Land Management (BLM) finalized regulations on venting, flaring and leaks at oil and gas facilities on public lands. However, BLM under Trump has rolled back these standards, relying instead on a patchwork of uneven regulations at the state level.
Some states do better than others on regulation. Colorado, for instance, “set the standard for reducing gas waste when it finalized first-in-the-nation methane capture requirements in 2014. The state has shown that there are easy and cost-effective ways to address methane pollution,” according to the report from the Wilderness Society and Taxpayers for Common Sense.
At the other end of the spectrum is New Mexico. New Mexico has wasted more natural gas than any other state, about 570,000 tons annually, according to the report. The state wastes about $182 to $244 million worth of gas each year, or enough gas to satisfy the needs of every resident in New Mexico each year. It is no surprise that New Mexico has some of the weakest standards on methane emissions, a problem now that BLM is removing the federal standards and leaving regulation up to the states.
Meanwhile, the problem is only getting worse with soaring production in the Permian. The rate of flaring in New Mexico climbed by 2,244 percent between 2009 and 2013.
Negative prices for natural gas offers very little incentive for drillers to capture that methane.