Page 11 - NorthAmOil Week 41

NorthAmOil COMMENTARY NorthAmOil

Options for Permian Basin gas

The region is set to experience a net decline in production this year and does

not need as much pipeline capacity as previously anticipated. Nevertheless,

it is exporting more gas to Mexico, and deliveries may continue to increase

TEXAS-MEXICO UNSURPRISINGLY, Permian Basin gas pro- some reprieve to Permian producers struggling
duction – largely a by-product of drilling for with excess gas volumes.
WHAT: oil in the region – took a severe hit earlier this Despite this, new takeaway capacity is still
Gas producers in the year after operators scrambled to scale back being added to the basin, allowing Permian gas
Permian Basin are activity and shut in output. Since May, though, to flow to the Gulf Coast, as well as across the
sending more gas to some recovery has taken place as crude prices border to Mexico. And flows to Mexico have
Mexico, even though they stabilised and demand improved. Even so, these recently been boosted by the start-up of the 388-
do not need as much gains are not expected to be enough to reverse km Villa de Reyes-Aguascalientes-Guadalajara
pipeline capacity as the overall decline in US gas production for 2020 (VAG) pipeline.
expected. compared with 2019. The VAG link, which has a capacity of 886mn
The US Energy Information Administra- cubic feet (25.09 mcm) per day, is the final leg
WHY: tion (EIA) noted in its most recent Short-Term of the Waha-to-Guadalajara (Wahalajara) sys-
Permian gas production Energy Outlook that the Permian was on track tem from the Permian Basin. It runs from West
has recovered since May, to experience larger gas production declines Texas to one of Mexico’s most economically
but not enough to reverse than any other region of the country this year. vital and heavily industrialised regions – the
overall declines in US This is hardly surprising. Gas yields are linked area known as Bajío, which includes the city of
output. much more closely to the performance of oil San Luis Potosí, as well as Aguascalientes and
prices in this region than they are in other shale Guadalajara.
WHAT NEXT: plays, and oil prices remain vulnerable to new
Deliveries to Mexico may waves of volatility. Mexico’s domestic gas market
continue to rise, thanks The EIA’s latest drilling productivity report The Wahalajara system is anticipated to help ease
to plans for LNG export projects that Permian gas output will fall slightly volumes and stabilise prices at the Waha hub in
terminals on the West on a monthly basis in both October and Novem- West Texas. Consultancy RBN Energy estimates
Coast. ber, having climbed to an estimated 16.79bn that exports to Mexico from Waha will average
cubic feet (475.5mn cubic metres) in September. 600 mmcf (17 mcm) per day this year, but it also
On a nationwide level, the agency expects US says that current flows have already climbed to
gas production to begin rising again from the 800 mmcf (23 mcm) per day and are set to rise
second quarter of 2021, in response to higher further in the future.
prices for both oil and gas. Meanwhile, Waha will not be the only bene-
ficiary of these shifts. Mexico’s national power
Permian turnaround provider CFE has already signed a long-term
This volatility marks something of a turnaround take-or-pay agreement that will make it the pri-
for the Permian, which was previously grappling mary buyer of gas flowing through the Waha-
with a glut of gas that had resulted in a scramble lajara network, and it intends to use the fuel to
to build new pipeline capacity, as well as record supply its own thermal power plants (TPPs) and
levels of flaring and venting. Indeed, in some to supply major industrial consumers.
ways, this year’s downturn is seen as providing CFE stands to boost its earnings by doing so.

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