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Natural gas prices fall to negative in the Permian Basin

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Some producers in the prolific Permian Basin are so deluged with natural gas that they are having to pay companies to take it away.

Several planned and under-construction pipeline projects promise to return the basin to a more normal situation where buyers pay to take the product instead of the other way around. But that's not much help today for squeezed producers in southeast New Mexico and west Texas, the country's most active oil and natural gas field.

Natural gas prices for same-day or next-day delivery have been negative since March 22 and on Wednesday tumbled to a new low of negative $3.38 per million British thermal units at the Waha hub, which is on the southern edge of the basin.

"You have an area where the economics are being driven by oil and gas is truly a byproduct," said Eric Fell, senior natural gas analyst at Genscape.

Natural gas in the Permian typically sells at a discount to the rest of the country because there is a large amount of production, limited pipeline capacity and very little storage or on-site demand. The problem has been heightened in recent weeks because of a combination of seasonally low demand and a series of pipeline and storage maintenance issues.

"A negative price situation is not unheard of here, but it's generally not something we see in the U.S.," Fell said. "We saw the Waha go negative briefly last fall, but not to this extent."

In other areas of the country where companies are focusing on natural gas, they can restrict production when prices fall to make sure they don't lose money. In other cases, companies can burn off — or flare — the excess natural gas. But in the Permian, producers have few options other than to produce and sell because the oil and natural gas liquids are selling for strong prices, Fell said.

"Because oil is driving the production, they don't want to stop producing oil under any circumstance," he said.

Low spot prices don't affect all companies equally. Many producers in the area have locked in prices and pipeline capacity with long-term contracts that provide protection from tumbling spot prices.

Oklahoma City-based Devon Energy Corp. has a contract to sell 80% to 90% of its 2019 natural gas production in the area at an average price of $1.46 less than the Henry Hub benchmark price, according to the company's fourth quarter 2018 news release published Feb. 19.

At that rate, the company's Permian natural gas this week would sell for about $1.22 per thousand cubic feet, far better than the negative prices for companies forced to use the spot market.

Devon's contracts include both price and physical space on existing pipelines, ensuring the natural gas can leave the basin and that the company gets paid.

The Permian's bottleneck developed as booming production outpaced pipeline capacity. While production is not new in the area, relatively few pipelines extended into the isolated basin.

Seven natural gas pipeline projects are under construction or planned in the Permian, with at least two scheduled online later this year.

Such a bottleneck is possible, but much less likely in Oklahoma, Fell said.

"Production in Oklahoma isn't growing as quickly as the Permian, and there's more storage and demand in Oklahoma," he said. "It can happen in any oil- or liquids-rich environment if production gets close to takeaway capacity, but it's not likely in Oklahoma because it's better connected."

Pipeline companies are working to stay ahead of Oklahoma production. Cheniere earlier this year began construction on its Midship Pipeline designed to carry natural gas from Oklahoma's STACK and SCOOP fields to the Gulf Coast. Enable Midstream Partners and other companies also have announced projects to move natural gas from Oklahoma fields to market.

"These projects are happening in reaction to production growth," Fell said. "Those are important. They're helping to lessen the odds of Oklahoma ending up in a situation like the Permian is in now."

Adam Wilmoth

Adam Wilmoth returned to The Oklahoman as energy editor in 2012 after working for four years in public relations. He previously spent seven years as a business reporter at The Oklahoman, including five years covering the state's energy sector.... Read more ›

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