Curtailments, Flaring Spike in Permian as Output Overwhelms Pipe Capacity

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Gas pipeline developers are on track to roll out 8 billion cubic feet per day of capacity in the glutted Permian Basin over the next few years. But even at that breakneck pace, takeaway capacity will barely keep up with production growth. In the near term, forced flaring and the periodic bouts of negative pricing that have roiled the basin will likely continue, with only a modicum of relief on the other side of summer. For Apache, one of the region's biggest gas producers, it is time to say "Uncle." The company last week said it has been slashing wet-gas production at its Alpine High play in West Texas since March "in response to extremely low prices at Waha Hub." Curtailed volumes have reached 250 million cubic feet per day -- supply that would otherwise have to be flared or sold at a big loss, said Apache President and CEO John Christmann. "This is the proper approach from both an environmental and economic perspective relative to other industry practices such as flaring or selling associated gas at a negative or unprofitable price," Christmann said. When Apache launched its effort to exploit the gassy Alpine High, it offered assurances that the play could be monetized due to the high liquids content of the gas (NGW May21'18). But it has to deal with getting processed gas to market once it stripps out the liquids. Christmann said Apache "foresaw the potential for gas takeaway constraints" when it launched the Alpine High project in 2017 and took steps then to ensure an exit strategy for its reserves. But it turned out that the volumes of produced gas finally overwhelmed the region more than six months before the first major takeaway pipe begins operations (NGW Apr.8'19). Apache insists the production deferrals will not harm the integrity of its wellbores or the reservoir's productivity. "We will closely monitor daily pricing and return our gas to sales when it is profitable to do so," the CEO said. It appears that will be in October, when the next slug of significant capacity out of the Permian opens to drillers. Apache has contracted more than 1 Bcf/d of firm capacity on two pipelines that Kinder Morgan is building out of the region. The first to open, Gulf Coast Express (GCX), will ferry 2 Bcf/d from the Waha Hub to Agua Dulce in South Texas, where it will find several interconnected pipelines that can take the gas east to the Texas Gulf Coast or south into Mexico. Other major shippers on the fully subscribed line include DCP Midstream, Targa Resources, Pioneer Natural Resources and Exxon Mobil subsidiary XTO. But while these shippers will see their gas constraints ease, other producers will see only limited benefits, as production is on track to grow another 0.8 Bcf/d, to 13.4 Bcf/d, by the time GCX opens, according to Energy Intelligence Research & Advisory data. Also, the 12.6 Bcf/d of gas now being produced has more than overwhelmed existing takeaway capacity. As a result, the Texas Railroad Commission has largely turned a blind eye to indiscriminate gas flaring -- estimated by R&A data at roughly 1 Bcf/d -- reasoning that the situation will correct itself as four key pipelines come on line. Steve Everley, a managing director with FTI Consulting and spokesman for producer-backed Texans for Natural Gas, argues that flaring estimates vary widely and could be much smaller than the R&A estimate. But he also emphasized that the "industry and market are already responding to that need." He cited estimates that gas pipeline capacity out of the Permian could reach 20 Bcf/d by 2025 as new projects are unveiled almost monthly. "Is the market responding to the need for takeaway capacity in the Permian? The answer is an unqualified yes," Everley told Energy Intelligence. Proposed Capacity Already Being Snapped Up The second major Kinder Morgan gas line is the Permian Highway Pipeline, a 2.1 Bcf/d project running from Waha to Colorado County in Southeast Texas. The original 2 Bcf/d of capacity is fully subscribed by anchor shippers including Apache, EagleClaw and XTO. By the time it comes on line in late 2020, associated gas production will have pushed output up another 2 Bcf/d, analysts estimate, so this pipeline, like GCX, might largely benefit its firm shippers. There is another pipeline awaiting final investment decision (FID) from developers lead by Targa and NextEra Energy Resources. The 450 mile Whistler Pipeline would carry 2 Bcf/d of gas from Waha to Aqua Dulce with a 170 mile extension taking gas on to Wharton County near Houston. If it gets approved, the developers target a fourth-quarter 2020 start. Another active project is NAmerico Energy's Pecos Trail, a 445 mile pipe that would also deliver 2 Bcf/d of supply from Waha to the Agua Dulce market. The project is still being permitted and construction would begin on FID, expected in the third quarter of this year. That would put the start of operation in the second quarter of 2021, when gas growth will have increased almost as much to 18 Bcf/d, R&A estimates. And associated gas output will not stop there, potentially reaching 20.9 Bcf/d by 2023. So it's a good thing for producers that further pipeline projects are being mulled, including Tellurian's Permian Global Access Pipeline (PGAP), which would be a prime supply source for its 27.6 million ton per year (3.8 Bcf/d) Driftwood LNG export project approved last week by the Federal Energy Regulatory Commission. Tellurian subsidiary PGAP is holding a binding open season to gauge interest in the 2 Bcf/d project through May 24. The 42 inch diameter interstate system would originate at Waha and terminate at Gillis, Louisiana, north of Lake Charles. Construction could begin as early as 2021, with operations starting as early as 2023. Meanwhile, another exit avenue for Permian gas supply is to Mexico, although those pipeline projects have been hampered by infrastructure delays south of the border. Comanche Trail, for instance, went into service in early 2017, but the 1.1 Bcf/d pipe was only flowing an average of 124 MMcf/d into Mexico last week, according to Reuters data. Energy Transfer Partners built the 194 mile line from Waha to a border crossing just south of El Paso as part of an agreement with the Comision Federal de Electricidad, Mexico's state power utility. Oneok Partners has been building the Roadrunner Gas Transmission Pipeline in a joint venture with Fermaca, a Mexico City-based gas infrastructure company. The three-phase, 200 mile project started in 2015 and is to wrap up this year. It is designed to carry 640 MMcf/d, with 570 MMcf/d slated for Mexican markets. But when infrastructure to take that gas chiefly into the CFE system will be completed is not clear. Tom Haywood, Houston

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