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Page added on June 7, 2018

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The Permian Has A Natural Gas Problem

Production

Analysts continue to focus on the surging oil production in the Permian and looming takeaway capacity bottlenecks that could slow down the oil growth in the biggest U.S. shale play.

But constraints have also emerged in natural gas takeaway infrastructure, with pipelines nearly full and natural gas prices in West Texas diving on oversupply.

Pipelines will not be able to handle all the excess associated gas from the soaring oil production, so the Railroad Commission of Texas is currently considering whether to keep the strict gas flaring limits or to loosen them.

The Commission issues flare permits for 45 days at a time, for a maximum limit of 180 days.

Currently, the natural gas pipelines in the Permian are 98 percent full, according to Bloomberg estimates.

The Commission that oversees Texas’s oil fields hopes to reach a decision on whether to loosen flaring regulations in six months when the bottlenecks may reach a critical point, Texas Railroad Commissioner Ryan Sitton told Bloomberg.

But the regulatory body faces a tough dilemma in tweaking gas flaring regulations.

On the one hand, if the Commission keeps the flaring limits in tact, some oil producers may be forced to shut wells because the limit for individual oil well flaring is a maximum of 45 days—after that drillers must either pipe the gas or shut the well. Shut wells in Texas would not only hurt the oil producers, but it will also result in lower revenues for the state of Texas.

On the other hand, if flaring limits were to be loosened, it may worsen air quality and increase environmental protests. Expanding flaring caps would pit the oil producers in the Permian who have paid in advance to secure natural gas takeaway capacity on pipelines against those who have not. Drillers who have not secured a spot on the last remaining pipeline capacity would have advantage over those who have, in case flaring is expanded.

The Railroad Commission of Texas is concerned that if it were to loosen flaring limits, it would punish the companies that have already paid for what little capacity is left on the existing pipelines, Sitton told Bloomberg.

“How do we do something that is fair and equitable for all producers so that we are not having an artificial market impact?” Sitton noted.

Centennial Resource Development, whose chairman and CEO is Mark Papa, has paid to secure pipeline takeaway capacity, for example.

“Since the beginning of last year it has been our goal that we ensure our crude oil production will not be curtailed or shut in due to potential gas constraints. Additionally, we are operating under the assumption that the Texas Railroad Commission will not allow us or the industry to flare gas for an extended period when takeaway capacity is full. Therefore, Centennial has put several transportation service agreements in place in order to ensure delivery of its natural gas to market,” Centennial’s chief operating officer Sean Smith said on the Q1 results conference call last month.

“With current Permian basin residue gas production at approximately 7.5 BCF a day and effective takeaway capacity closure to 8.5 BCF a day, we believe there is a significant risk of some operators would even need to flare their wet gas at the wellhead or curtail production at some point in the future,” Smith said.

Texas Railroad Commissioner Sitton also thinks that there is a possibility that oil producers could shut down wells because they would be unable to handle the gas.

“If I don’t have pipeline capacity and I can’t flare it, the only option is to shut in the well,” Sitton said in an interview with S&P Global Platts at the end of May. “And now I’m going to shut down oil production because I don’t have anything to do with my gas. That is a realistic scenario that could happen.”

The other issue with more flaring is the obvious environmental concern. According to a November 2017 report by the Environmental Defense Fund, Permian operators vary significantly in their flaring practices, with the low-performing companies wasting nearly 10 percent of the associated gas they produce. A Clean Air Task Force report has ranked seven Texas Permian counties in the top 10 worst U.S. counties for asthma attacks, EDF said in its report.

If flaring limits are loosened, it could get worse.

Meanwhile, the Permian natural gas glut is depressing prices at the Waha hub in West Texas, where spot prices have plunged 49 percent so far this year, to US$2.03/MMBtu on June 1, as per Bloomberg data, compared to the spot price of the U.S. benchmark—the Henry Hub in Louisiana—at US$2.93/MMBtu.

By Tsvetana Paraskova for Oilprice.com

 



8 Comments on "The Permian Has A Natural Gas Problem"

  1. Go Speed Racer on Thu, 7th Jun 2018 7:25 pm 

    Has got a natural gas problem?
    Then stop feeding it burritos.

  2. Go Speed Racer on Thu, 7th Jun 2018 7:28 pm 

    Slow down the production,
    or build a bigger pipeline,
    Or raise the pressure in the
    pipeline you got.

    Flare it off? Retards. Morons.

  3. Plantagenet on Thu, 7th Jun 2018 7:33 pm 

    And people wonder why the amount of greenhouse gas CH4 is increasing so rapidly in the atmosphere.

    Cheers!

  4. twocats on Thu, 7th Jun 2018 8:19 pm 

    If every Texan has to get asthma so that I can continue to drive and idle my car for an hour before work (like many people do in the Northeastern United States) then they can go suck on an inhaler.

  5. GregT on Thu, 7th Jun 2018 8:48 pm 

    “And people wonder why the amount of greenhouse gas CH4 is increasing so rapidly in the atmosphere.”

    I recently spoke with one of the rangers from Glacier Bay National Park planter. They are extremely concerned with the changes already occurring in Alaska.

  6. rockman on Thu, 7th Jun 2018 9:10 pm 

    twocats – Not enough Texans in west Texas to worry about. LOL. Obviously flaring is wasteful. But a business decision by both the TRRC and the companies. But while wasteful it’s not adding more GHG to the atmosphere then if it were pipelined to a power plant and burned there. Only one very minor silver lining: no methane leakage during transport(worse for the environment then CO2).

    But it does allow more oil production which to some degree will put downward pressure on refinery product prices and help our trade balance by importing less oil. Also adds a tad to employment in west Texas good paying jobs outside the oil patch are scarce.

    Also don’t forget that Texas citizens are collecting about $2.4 BILLION PER YEAR in oil severance tax on the current oil production in the Permian Basin. And letting you burn a tad cheaper gasoline as you sit at idle.

    Nothing personal…just business.

  7. deadly on Fri, 8th Jun 2018 4:29 am 

    It’s a lot of work to lift the pump handle from the gas pump and fill the tank with gas.

    Kind of like opening a box of Cheerios and ripping open the wax paper bag for your morning breakfast feast.

    Nobody really knows what it takes to pump a gallon of gas from the gas pumps and nobody really knows what it takes to fill a box of Cheerios with Cheerios. All they ever want is more and it better be there.

    All they ever want is more gas too. Life is a gas, so who doesn’t want more? They’re greedy pigs, so what does it matter?

    Laughing gas, the best kind.

    Laughter is the best medicine, even if you are living in a van down by the river.

    A hundred million barrels of oil every day to satisfy the gaping maws of civilization is required to prevent complete collapse.

    If you want to prevent complete collapse, you must go out and earn your bread and butter each and every day. There is no alternative.

    However, you don’t have to drill for oil until all of the infrastructure is in place.

    A pre-planning session to monitor and control oil exploration and well locations can prevent too much flaring.

    Didn’t Texas implement a flaring regulations many years ago in the 50s?

    Probably has an effect on the amount of drilling, but is also environmentally sound.

    No sense in doing that. Let the flaring continue unabated.

    Fill those tanks and drive around until you need some more.

    The volcano in Guatemala doesn’t care, it is emitting gases night and day.

    If you want your gas, you can have your gas.

    Another day of hundreds of millions of ice vehicles wreaking havoc across the globe.

    The oil bidness is booming every day.

    It better be, otherwise it is game over.

    Have a good day.

  8. Anonymous on Sat, 16th Jun 2018 9:12 am 

    Compared to ND, TX flaring is low.

    Personally, I see nothing wrong with flaring. It is just economics. If it makes more sense to shut the well in and wait for a gas pipe fine (e.g. if gas is most of the value). If it makes more sense to let the oil flow and burn the gas (gas is a minor part of overall value) than flare.

    It’s just math.

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