Source: Energy Intelligence, Tom Haywood, May 11, 2020
As Permian Basin companies shut in oil production 200,000 barrels per day and counting by some estimates associated gas volumes are plunging, too. But anyone expecting to see the region’s rampant gas flaring fall in tandem will be disappointed.
That is because gas which Permian producers don’t want anyway doesn’t register in their decisions to cap oil wells, which in turn has little if anything to do with environmental stewardship and almost everything to do with money.
Gabe Collins, a research fellow at Rice University’s Baker Institute, grew up in Midland, Texas, in the heart of the Permian and spent time in his youth working as a roustabout. Then, as now, he said attitudes about gas flaring in the upstream sector are conflicted.
“Nobody wants the negative attention, but no one wants to operate in the red and lose money,” he told Energy Intelligence. “People are responding to various market and regulatory consensus. If you see that you can basically get a flaring permit pretty easily and flare more or less indefinitely and just focus on producing liquids, you’re going to have a lot less incentive to find a way to put that gas to use.”
The energy equivalent of roughly 6 million cubic feet of gas to a barrel of oil made flaring the only logical decision for many producers, and will keep gas going up the stacks whenever the oil-togas value ratio is heavily skewed toward crude.
Waha Hub prices at 50¢ per million Btu, a common average in the past two years due to the gas glut, “means effectively that gas is $3 per barrel of oil equivalent, so if oil were at $35plus it makes the decision to flare a lot easier,” Collins explained.
But recently producers were netting around $14 for a barrel of crude in the field after transport, while Waha gas prices maintained a roughly $1.30$1.40/MMBtu range. “At least based on that relative movement it starts to make a lot more sense even for gas you might have flared before to put it in the pipe,” he said.
One deciding factor is what a producer’s gas midstream gathering contract looks like, according to Collins. “You can produce the gas cheaply at the wellhead but if you’re having to back out $1 per thousand cubic feet for the gathering costs, the economics are much less favorable and maybe you keep flaring it.”
Looking ahead to the second half of the year, West Texas Intermediate prices are set to recover to $35$40/bbl, according to Energy Intelligence’s Research & Advisory (R&A) unit. But that still barely covers lifting costs, so a quick resurgence in Permian drilling is not in the cards and hence gas output could continue to fall.
R&A estimates that associated gas production has dropped at least 1 billion cubic feet per day, with roughly 1.5 Bcf/d to follow, taking Permian output below 15 Bcf/d.
But most analysts agree that any decline in flaring won’t match the drop in gas production because the segments are tied to different economic drivers. Oil well shutins are unrelated to associated gas, while optional decisions on whether to flare hinge mainly on the price the gas will fetch at the wellhead.
While flared volumes in the Permian remain largely a mystery with estimates all over the map, it’s been impossible to avoid losing copious amounts of associated gas to the atmosphere while ramping up Permian oil output, Ramanan Krishnamoorti with the University of Houston’s Cullen College of Engineering told Energy Intelligence.
Unlike conventional oil plays, shale oil has cooked for a much longer time, forming a light crude that has a naturally higher percentage of dissolved gas than heavy crude, he explained. And unlike liquids that can be transported by any number of means from trucks to pipelines, gas separated at the wellhead has to be gathered using highquality pipe that can withstand higher pressures than liquids require.
“It can be commercially prohibitive to collect the small amount of gas you’re producing at each of those wellheads, gather it and send it to pipelines so people might use it,” Krishnamoorti said. “So you’re left with two options: release it into the air or combust it as CO2, which is less environmentally damaging.”
And when deciding which oil wells to shut in, gas hardly makes the list, he said. “If I have a prolific well with a decline curve on the better side than average then I am going to continue to produce that one.”
So it’s not surprising an enormous amount of Permian gas is going up in smoke or simply being vented at well pads across West Texas as much as 974 MMcf/d at its height, according to researchers at the University of Houston.
Based on data gleaned from the Texas Railroad Commission (RRC) as well as drones in the field, those researchers estimated flared and vented gas averaged 812 MMcf/d in 2019, which is considerably higher than the official RRC estimate of around 424 MMcf/d.
Flaring did begin to decline in January and February and plunged 25% in March from December levels as the oil price rout took hold, Krishnamoorti said. And R&A data show a dramatic plunge in April might have taken flaring well under 300 MMcf/d.
Waha Gas Price Is Key
It’s not clear just how much overall flaring has declined, but it’s substantial, Matthew Lewis, a senior director at East Daley Capital, told Energy Intelligence. The biggest telltale is the Waha Hub’s narrowing price basis with the Henry Hub.”
“Unfortunately, we can’t see exactly how much less gas is being flared, but given that in the middle of spring, when you would expect basis to be the weakest at Waha, we’re seeing the strongest print probably in the last 18 months,” Lewis said. “So I can tell you almost certainly that we’ve seen a huge reduction in associated gas coming from the shut-ins because the prices tell me that is happening.”
There are two categories of flared gas, however. Some wells are simply not hooked to the gas grid, so flaring will continue for now regardless. Then there’s gas that is connected to the grid but is flared because the pipes are constrained or the price at Waha is too low. That’s the flaring that will go away first.
“Any Permian producer who’s now staring at the $1.50/MMBtu that they can now get for their gas at Waha, most who have the choice will make the decision to not flare their gas,” Lewis said.
A rising forward curve at Waha is bolstering market confidence “that you are not going to spend a lot of money to connect into a gathering system just to get zero dollars at Waha,” Lewis said, adding that a $2 price on the forward curve “certainly could incentivize some of these guys to connect into a gathering system.”
In other words, the best way to stop flaring in the Permian is to make it economic to capture the gas, Lewis said, which can be accomplished through a combination of oil well shutins and the construction of ample gas takeaway capacity (NGW Apr.27’20).
“Are you completely in the clear as far as pipeline egress is concerned? No, but I would not expect unless oil prices
rebound significantly to see the kind of basis pressure that we’ve seen the last 18 months at Waha,” he said. “So I think there will be a substantial improvement in the flaring numbers over the next few months.”