Recent production data from the Energy Information Administration (“EIA”) confirms the Permian basin’s dominance in the U.S. oil production landscape. Oil production in the Permian continues to set new records, with June 2023 oil production reported at a new high of ~5.8 Million barrels per day (MMBPD). This growth is staggering when compared with lows seen during Covid-19 of 3.8 MMBPD during June 2020. In the Permian, with oil, comes a significant amount of natural gas that is associated with oil production. Consequently, in lockstep with growth in oil production, natural gas production has also seen new highs. Since June 2020, gas production in the Permian has grown from ~15 Billion cubic feet per day (Bcf/d) to a whopping 23 Bcf/d – an incremental growth of 8 Bcf/d in just under 3 years! All this gas needs to reach the market in a timely fashion if oil production is to stay on track in the Permian. Needless to say, midstream companies have had their hands full over the past few years expanding existing pipelines and building new mega-pipelines to ensure gas reaches LNG and Mexico markets in the U.S. Gulf Coast – the sort after markets in the U.S.

A few hundred miles east of Dallas Forth Worth metropolis, another basin has had a revival of sorts – the Haynesville basin in northeastern Texas and northwestern Louisiana reached new highs with gas production reaching ~16.8 Bcf/d in June 2023 making it the third-largest shale gas-producing play in the United States just behind the Marcellus/Utica play in the Appalachian Basin and associated gas from the Permian Basin. Like Permian, Haynesville gas also targets growing LNG and Mexico markets in the U.S. Gulf Coast.

Competition between these basins is inevitable as both compete for the same premium growth markets – global gas exports via LNG terminals in SW LA and SE TX, pipeline exports to Mexico, and growing industrial demand along the U.S. Gulf Coast. So, what makes Permian such a dangerous competition? For starters, the Permian is an oil-producing basin where the economics for drilling wells is dictated by oil prices. Natural gas is truly a by-product of producing oil and therefore Permian producers tend to be “price takers” with the ultimate objective of flowing natural gas flows to markets so that oil can be produced without constraints. Since natural gas prices do not impact investment decisions in Permian, natural gas can be sold at the prevailing market price – regardless of natural gas price levels. Lastly, since Permian producers are not timing gas production growth with growth in gas markets – dumping gas in the market is acceptable. Unfortunately, Haynesville producers do not have this luxury as Haynesville is a dry gas production basin with no oil production to speak of; investment decisions are largely based on gas prices. It is in their interest to time production to growth in gas markets to protect price levels from catering below investment thresholds and production break-even economics. 

To us, it appears that the Permian Basin is the Haynesville Shale gas producer’s worst nightmare. There is compelling evidence that suggests a worrying trend for Haynesville. To understand this further, one needs to understand pipeline development in the Permian. Over the past 5 years, Permian has seen significant natural gas pipeline capacity additions to ensure natural gas flows to markets (remember, for Permian to continue growing oil, associated natural gas needs to move to markets). As depicted in the figure below, Permian gas flows to the west (California/Arizona), north (to Midcontinent/Midwest), Mexico (via West Texas), and to the east (towards U.S. Gulf Coast and Northern Louisiana).

The “East Corridor” from the Permian is of keen interest in assessing current and future competitive risks for Haynesville as it directly competes for the growing LNG export markets and other industrial demand located along the U.S. Gulf Coast in Texas. Of the total ~18.3 Bcf/d of aggregate takeaway capacity across the multiple pipeline corridors, ~10 Bcf/d pipeline capacity is currently bound for the U.S. Gulf Coast on the East corridor. Since U.S. Gulf Coast offers the best netback for Permian producers, the East corridor is highly utilized and as of June 2023, was operating at or above capacity.

The southeast Texas market (in and around Houston Ship Channel) however, has not been able to absorb this flood of natural gas from Permian; that is not a Permian producer problem! They are not in the business of timing gas supply growth to growth in gas markets. Digging deeper, a detailed pipeline-by-pipeline analysis reveals that the Permian gas flood into SE Texas is having a larger impact in the region. As seen from the graphic below, increased flows from Permian to the U.S. Gulf Coast on the East Corridor have resulted in flow reversal on various pipelines traversing between Texas and Louisiana with aggregate flows now towards Louisiana on the WLA-SE TX corridor. This means that the Permian gas flood is already pushing gas eastbound and encroaching on Haynesville’s prime gas markets. 

Of particular concern for Haynesville is the continued development of pipeline capacity on the Eastern Corridor in anticipation of increased oil production from the Permian. As of June 2023, ~5 Bcf/d of pipeline capacity addition on the Eastern corridor is under construction or in advance development and scheduled to come online by 2024/25, bringing additional gas to the Katy-Houston Ship Channel market. LNG export demand is expected to rise in South Texas and around Houston Ship Channel, but not by 5 Bcf/d by 2024/25, which means the gas push towards the east will intensify. 

While Hayesville is advantageously situated closer to U.S. Gulf Coast gas markets (read lower pipeline fees), will it be enough to overcome the adverse impacts of the Permian gas flood? A Haynesville producer we spoke to has been preparing for the impact by selling gas in the Southeast markets. There are multiple upcoming LNG terminals planned for the region, which may absorb this west-to-east gas migration – timing mismatch remains the biggest risk. How much of this new demand will be met by Haynesville and what impact would this have on the gas supply and take-away capacity balance? Enkon routinely analyses natural gas supply and pipeline takeaway capacity issues in Permian and Haynesville to advise clients on gas marketing strategies. For a deeper dive into gas pipeline takeaway assessments, drop us a line at info@enkonenergy.com.