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The Permian Flaring Game

Natural gas in the Permian Basin typically is a secondary product associated with oil production but faces similar long-haul pipeline constraints. Since gas cannot be moved by alternative methods like truck or rail, the bottlenecks result in even more severe price discounts than on the oil side.

Current crude oil economics are strong enough to support Permian drilling, even at negative Waha gas prices (Figure 1). If there isn’t enough pipeline capacity to move gas out of the basin, flaring excess gas becomes a possible save for producers in order to continue producing oil, although flaring gas means giving up some natural gas liquids (NGL).

FIGURE 1 | Key Permian Basin Historical Natural Gas Prices


Texas and New Mexico flaring volumes, specifically from wells located in the Permian Basin, increased in the past year as natural gas production grew, but remained below 5% of total gas volumes produced (Figure 2). Public data indicates flaring volumes exceeded 550 MMcf/d in early 2019, more than historical levels but consistent with a growth play where regulators allow operates to flare while testing new wells. We expect, based on current activity levels, and wider-than-normal differentials at Waha, that flaring volumes will remain elevated, at least until Kinder Morgan’s 2 Bcf/d Gulf Coast Express Pipeline comes online at the end of 2019 and its 2 Bcf/d Permian Highway Pipeline is in-service in late 2020. It is unclear to us how much current flaring is caused by well tests compared to low gas prices and infrastructure constraints.

FIGURE 2 | Flared and Vented Volumes in Texas and New Mexico Permian Areas


Assuming a flat rig count, we expect Permian natural gas production to exit this year at 11.6 Bcf/d and 14.3 Bcf/d in 2020. Next year natural gas production could once again exceed available long-haul pipeline capacity, possibly leading to wider-than-normal Waha price discounts and an increase in flared volumes.


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