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US Waha hub forward gas basis discounts widen as Permian output pushes capacity

Forward gas traders are bracing for the return of steep basis discounts at the West Texas Waha Hub by early fourth quarter as anticipated gains in Permian Basin production hit the spot market before a series of recently announced brownfield pipeline expansions can enter service.

Over the past six months, Waha’s October and November 2022 forwards have experimented with steep, and previously unanticipated, basis discounts. In early May and again in mid-June, the hub’s two autumn contracts briefly traded at more than $1.80/MMBtu below the Henry Hub.
A recent, and sharp. devaluation in the benchmark US gas price has allowed Waha to close the gap slightly. According to Platts’ latest M2MS forwards assessments, October and November are now pricing at a discount of about $1.30-$1.40/MMBtu—still well below the 80-90 cents range seen in January.

Weaker shoulder-season prices at Waha, which have hit the spring 2023 contracts as well, come as Permian Basin production shows signs of upward momentum. Since February, output there has climbed by a brow-raising 700 MMcf/d, or about 5%, to average 14.5 Bcf/d last month. In May, production averaged its highest on record at nearly 14.7 Bcf/d, S&P Global Commodity Insights data showed.

Production gains this year come as operators in the basin continue to step up drilling activity.

In early June, the Permian Basin rig count edged up to a more than-two-year high at 340, according to data from Enverus. In the week ended June 29, the basin’s rig total was down slightly to 331, but still near its highest since the basin was first hit by fallout in demand caused by the coronavirus pandemic.

Rigs and frac crews recently added to the basin have been staying busy. In May, the number of new wells drilled in the Permian jumped to 399 for the month, marking a 26-month high. Well completions totaled 436—a seven-month high that registers about 90% of the pre-pandemic pace from Q1 2020, US Energy Information Administration data showed.

On recent quarterly earnings calls, most Permian operators promised maintenance-level production this year, while a handful of the largest—including Chevron and Exxon-Mobil—pledged double-digit growth in 2022, pointing to the potential for further gains in drilling activity and production this summer.

Burgeoning production in the Permian Basin has been top of mind for both producers and midstream developers in the region, recently prompting moves by Kinder Morgan and the Whitewater Midstream consortium to announce brownfield expansion plans for several of their newest intrastate Permian pipelines.

In the most recent announcement, Kinder Morgan June 29 said that it had reached a final investment decision on a 550 MMcf/d expansion of its existing 2.1 Bcf/d Permian Highway Pipeline. The decision caps off a two-month binding open season for the previously announced project. In mid-May, Kinder Morgan announced another binding open season for expanded capacity on its existing 2 Bcf/d Gulf Coast Express Pipeline with the 570 MMcf/d expansion yet to reach FID. The two projects are expected to enter service successively in November 2023 and December 2023, according to the operator.

A third brownfield project—a 500 MMcf/d expansion to the Whitewater Midstream consortium’s 2 Bcf/d Whistler Pipeline—reached a final investment decision in early May and is expected by the developer to enter service as soon as September 2023.

Combined, the more than 1.6 Bcf/d in additional midstream takeaway capacity from the Permian could offer some uplift to Waha basis prices by late Q4 2023. Currently, the October 2023 contract is priced at a comparatively steep $2.10/MMBtu discount to the Henry Hub, while November 2023 is priced slightly higher at roughly $1.50/MMBtu below the benchmark, Platts data shows.

By autumn 2024, the startup of the Whitewater Midstream consortium’s separately announced Matterhorn Express Project—a 2.5 Bcf/d greenfield Permian production takeaway pipeline expected to enter service in Q3 2024—could help to fuel a sharper rise in Waha’s shoulder-season basis prices. For 2024, Waha’s October and November forward contracts are currently priced at just 70-80 cents below Henry Hub, Platts most recent M2MS forwards assessments show.
Source: Platts

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