Moody’s: Ultra Low Permian Gas Prices Weigh On Oil Company Earnings

The very low natural gas prices in the Permian are dragging down exploration and production (E&P) investment returns in the most prolific U.S. shale oil basin, Moody’s Investors Service said in a new report on Thursday.

Pipeline constraints for the abundant oil and gas production in the Permian, coupled with gushing associated gas from oil drilling, keep natural gas prices in the region at very low levels. The midstream constraints for oil and gas transportation in West Texas and New Mexico have been limiting exploration and production volumes and weakening the realized oil and natural gas prices for producers, according to Moody’s.

“New natural gas pipelines will likely go into service in the second half of 2019 and 2020, alleviating the bottleneck, but natural gas prices in the Permian Basin will continue to suffer from high basis differentials as E&Ps pursue growth in oil production,” James Wilkins, a Moody’s VP-Senior Analyst, said.

Natural gas prices at the Waha hub in West Texas plummeted to record low negative levels last week, as pipeline constraints and problems at compressor stations at one pipeline stranded gas produced in the Permian.

Spot prices at the Waha hub plunged to a record low of minus $4.28 per million British thermal units (MMBtu) last week.

Real-time or next-day prices at the Waha hub have stayed at negative levels since March 22, so drillers have had to pay companies with capacity to ship the gas via pipeline.

Gas production in the Permian has been rising in lockstep with crude oil production, and even though gas takeaway capacity has attracted less media attention, pipeline constraints for natural gas are similar to those of crude oil pipeline capacity.

The natural gas takeaway capacity constraints have resulted in more gas flaring in the Permian on the one hand, and in a record-high spread between the Waha gas hub price and the U.S. benchmark Henry Hub in Louisiana, on the other hand.

 

 

 

By Tsvetana Paraskova