By Tsvetana Paraskova
Analysts continue to focus on the surging oil production in the Permian and looming takeaway capacity bottlenecks that could slow down the oil growth in the biggest U.S. shale play.
But constraints have also emerged in natural gas takeaway infrastructure, with pipelines nearly full and natural gas prices in West Texas diving on oversupply.
Pipelines will not be able to handle all the excess associated gas from the soaring oil production, so the Railroad Commission of Texas is currently considering whether to keep the strict gas flaring limits or to loosen them.
The Commission issues flare permits for 45 days at a time, for a maximum limit of 180 days.
Currently, the natural gas pipelines in the Permian are 98 percent full, according to Bloomberg estimates.
The Commission that oversees Texas’s oil fields hopes to reach a decision on whether to loosen flaring regulations in six months when the bottlenecks may reach a critical point, Texas Railroad Commissioner Ryan Sitton told Bloomberg.
But the regulatory body faces a tough dilemma in tweaking gas flaring regulations.
On the one hand, if the Commission keeps the flaring limits in tact, some oil producers may be forced to shut wells because the limit for individual oil well flaring is a maximum of 45 days—after that drillers must either pipe the gas or shut the well. Shut wells in Texas would not only hurt the oil producers, but it will also result in lower revenues for the state of Texas. Related: OPEC’s Dilemma: Demand Destruction Or Production Boost
On the other hand, if flaring limits were to be loosened, it may worsen air quality and increase environmental protests. Expanding flaring caps would pit the oil producers in the Permian who have paid in advance to secure natural gas takeaway capacity on pipelines against those who have not. Drillers who have not secured a spot on the last remaining pipeline capacity would have advantage over those who have, in case flaring is expanded.
The Railroad Commission of Texas is concerned that if it were to loosen flaring limits, it would punish the companies that have already paid for what little capacity is left on the existing pipelines, Sitton told Bloomberg.
“How do we do something that is fair and equitable for all producers so that we are not having an artificial market impact?” Sitton noted.
Centennial Resource Development, whose chairman and CEO is Mark Papa, has paid to secure pipeline takeaway capacity, for example.
“Since the beginning of last year it has been our goal that we ensure our crude oil production will not be curtailed or shut in due to potential gas constraints. Additionally, we are operating under the assumption that the Texas Railroad Commission will not allow us or the industry to flare gas for an extended period when takeaway capacity is full. Therefore, Centennial has put several transportation service agreements in place in order to ensure delivery of its natural gas to market,” Centennial’s chief operating officer Sean Smith said on the Q1 results conference call last month.
“With current Permian basin residue gas production at approximately 7.5 BCF a day and effective takeaway capacity closure to 8.5 BCF a day, we believe there is a significant risk of some operators would even need to flare their wet gas at the wellhead or curtail production at some point in the future,” Smith said.
Texas Railroad Commissioner Sitton also thinks that there is a possibility that oil producers could shut down wells because they would be unable to handle the gas.
“If I don’t have pipeline capacity and I can’t flare it, the only option is to shut in the well,” Sitton said in an interview with S&P Global Platts at the end of May. “And now I’m going to shut down oil production because I don’t have anything to do with my gas. That is a realistic scenario that could happen.” Related: Elon Musk Survives Attempted Coup
The other issue with more flaring is the obvious environmental concern. According to a November 2017 report by the Environmental Defense Fund, Permian operators vary significantly in their flaring practices, with the low-performing companies wasting nearly 10 percent of the associated gas they produce. A Clean Air Task Force report has ranked seven Texas Permian counties in the top 10 worst U.S. counties for asthma attacks, EDF said in its report.
If flaring limits are loosened, it could get worse.
Meanwhile, the Permian natural gas glut is depressing prices at the Waha hub in West Texas, where spot prices have plunged 49 percent so far this year, to US$2.03/MMBtu on June 1, as per Bloomberg data, compared to the spot price of the U.S. benchmark—the Henry Hub in Louisiana—at US$2.93/MMBtu.