Production of associated natural gas – fuel produced in concert with oil – surged in the prolific Permian Basin over the past five years, supporting strong total supplies and, for much of this year, helping to keep U.S. prices in check.
Associated gas produced from the top three oil plays in the Permian region – Wolfcamp, Spraberry and Bone Spring – has nearly tripled since 2018, from an annual average of 4.7 Bcf/d to 13.7 Bcf/d in the first seven months of 2023, according to Energy Information Administration (EIA) researchers. They said such gas output swelled because of both rising crude production amid steady global demand and an increasing gas-to-oil ratio (GOR) among wells in the three leading plays. The GOR measures the volume of natural gas per barrel of oil that a well produces.
The Permian region, covering swaths of western Texas and southeastern New Mexico, is the top crude-producing region in the United States, accounting for more than 40% of total U.S. output, according to EIA. It is the second-largest natural gas-producing region and accounts for about a quarter of total U.S. marketed natural gas production. A majority of what’s produced in the Permian is associated gas, the agency said. Average annual crude production in the Permian has more than tripled since 2018, from 1.3 million b/d to 4.1 million b/d last year, EIA said.
Natural gas rig counts have declined notably over the course of 2023 amid lower prices. The total of 118 natural gas-directed rigs active as of Nov. 3 was down from 155 a year earlier, according to the latest Baker Hughes Co. tally.
Yet, in large part because of strength in the Permian, total production reached record levels above 104 Bcf/d in October. It remains elevated and consistently near or atop 103 Bcf/d in early November, according to both Bloomberg and Wood Mackenzie estimates. Output so far this month has been at least 3 Bcf/d above year earlier levels.
Robust supplies enabled utilities to stockpile stout levels of gas in storage. At the end of October, gas stowed underground was 6% higher than the five-year average, EIA reported.
That has kept both natural gas futures and spot market prices relatively low this year, even as demand begins to build ahead of the winter heating season. For example, NGI’s November Bidweek National Avg. rose 85.5 cents month/month to $3.135/MMBtu, but it remained well below the year-earlier average of $4.950.
However, producers are looking beyond the winter season. On the whole, they have been active throughout 2023 in part to meet rising global demand. The first of several new export plants on the Gulf Coast are slated to begin operations next year, motivating producers to maintain lofty levels in anticipation of greater export capacity, more demand from Europe and Asia, and stronger prices ahead.
Additionally, global oil demand remains strong and U.S. supplies are needed to meet overseas energy needs. OPEC and allied nations have scaled back their production this year even as demand from major economies such as China holds at strong levels. U.S. producers have filled much of the void, holding petroleum output near pandemic-era highs and, over the past four weeks, about 10% above year-earlier levels, according to EIA. This is driven by the Permian.
Price Impacts
The intersection of solid oil output – and associated gas, by extension – combined with gas producers bracing for robust LNG calls in the years ahead has and likely will continue to keep gas output high through this year and into 2024, said Mike Matousek, head trader at U.S. Global Investors.
“Producers, particularly in the Permian, are bullish on fossil fuels,” Matousek told NGI.
Near-term price volatility, however, likely lies ahead. Much depends on the severity and duration of winter. But any short-term interruptions to Permian supply flows can have both bullish and bearish impacts on regional physical gas prices because of limited pipeline takeaway capacity in the region.
Maintenance projects along Kinder Morgan Inc.’s Permian Highway Pipeline (PHP), for instance, have at times this year significantly curtailed its 2.1 Bcf/d capacity for several days. With limited options to reroute gas to other conduits, supply gluts formed and Waha prices in West Texas flipped negative on multiple occasions this year. That happened again in October.
On the flipside, when PHP flows are scaled back, needed supplies do not get to the Southwest and Southern California – areas of the country that are dependent on Permian gas to meet heating and cooling needs. Prices at SoCal Citygate and other hubs have soared when repair projects impact flows out of the Permian.
“Natural gas transportation constraints and gas supply shortages” in the West, “particularly California, have made it the highest-priced gas market in the country,” RBN Energy LLC analyst Sheetal Nasta said Monday. “Without new westbound pipeline capacity, markets west of the Permian Basin have been hard-pressed to take advantage of the supply growth in West Texas and have struggled to consistently maintain adequate natural gas supplies.”
EIA researchers explained another important contributor to the gas increases in the Permian.
“The GOR of an oil well increases naturally over time,” they said. “Pressure within the reservoir declines progressively as more oil is brought to the surface, which allows more natural gas to be released from the geologic formation. As more oil and natural gas is released within a well, the GOR tends to progressively increase, increasing the volume of associated natural gas produced per every barrel of oil.”
Over the past decade, the combined GOR of the Spraberry, Wolfcamp and Bone Spring plays has increased from 2.0 thousand cubic feet of natural gas per bbl of oil produced (Mcf/b) in 2013 to 3.1 Mcf/b in the first seven months of 2023, the EIA researchers said.
“From 2013 to 2023, associated gas production from these three plays increased by 13.2 Bcf/d; about 4.7 Bcf/d of the increase came as a result of the increased GOR compared with 2013, while the other 9.0 Bcf/d of increased production came from increased crude oil production,” the government researchers said.
