Texas Gas Drillers Shut Out of Oil Price Rally Turn to Shutting Off Wells

qxuk7b09intfeqiifn94sb9s_media_dl_1.png Bloomberg, Nymex

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(Bloomberg) — Two extremes are currently playing out in the Permian Basin. Drillers are reaping the benefits of a historic price rally due to the Iran war. But when it comes to natural gas, they’re having to pay customers to take it away.

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It’s now been 124 days of negative gas prices at the Waha Hub, a key indicator for Permian gas prices, and some producers have thrown in the towel, shutting in some wells to limit their losses. Their number includes large Permian operators such as Permian Resources Corp. and Devon Energy Corp., both of which have shut wells with high gas-to-oil ratios.

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“It seemed to us like the biggest no-brainer to shut in and curtail gas wells that were losing money,” Permian Resources Co-Chief Executive Officer James Walter said on an earnings call last month.

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The plight of gas output in the largest US shale field stands in stark contrast to oil. Permian crude production continues to reach new highs, with some drillers expanding in response to surging prices triggered by the conflict in the Middle East.

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Even as oil prices remain 50% higher than before the war, a chronic shortage of gas pipelines in the Permian Basin, which spreads over West Texas and southeast New Mexico, has kept regional gas prices at subzero levels. As producers there drill for oil they also unearth natural gas, which comes out of wells alongside crude. The so-called associated gas output has flooded the region, filling pipelines hauling gas out of the basin to capacity.

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Jennifer Kneale, president of pipeline operator Targa Resources Corp., said on a recent earnings call that there was between 200 and 400 million cubic feet per day of Permian gas being shut in “on any given day, depending on what is happening with gas prices.” Permian dry gas production is typically about 23 billion cubic feet per day.

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While some gas curtailments in the Permian were already taking place, supply disruptions from the war spurred more drilling, adding strain on the pipeline system. “Uptick in new, oil-weighted activity adds pressure to already constrained takeaway capacity,” said Matt Bernstein, vice president of North America oil and gas at Rystad. 

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Some producers are reluctant to ramp up output — despite high oil prices — in order to avoid losses on associated gas, Bernstein added.

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Other drillers, such as closely held producer Elevation Resources LLC, are flaring the excess gas. Flaring, a process in which operators simply burn off gas before it’s sold into the pipeline system, frees space on local infrastructure and allows for more crude production.

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“We’re losing money hand over fist on gas,” Elevation Chief Executive Officer Steve Pruett said in an interview. “Gas is half our product, so it’s really maddening,” he said.

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The shut-ins and curtailmaents appear to be having the desired effect. Prices at Waha hub have surged in recent weeks, from a record low of -$9.60 per million British thermal units on April 24 to -33 cents per million British thermal units on Thursday, the highest price since February.