East Daley Analytics anticipates a fundamental shift in producer behavior in the Permian Basin as rising LNG and data center demand expands the US natural gas market by 20% or more, calling on supply wherever it can be found. Historically only a byproduct of oil drilling, Permian gas could become a prime target once enough pipeline expansions debottleneck the basin.
Recent geopolitical volatility has prompted Permian producers to collectively reduce Capex guidance by nearly $2B. Since “Liberation Day” on April 2, we have dropped our Permian rig forecast by more than 30 by 2027, equating to almost 400 Mb/d less crude oil production and a nearly 1 Bcf/d reduction in residue gas. As a result, our latest Macro Supply & Demand Forecast leans heavily on Haynesville growth to meet new LNG demand. However, the largest Haynesville operators have reservations about burning through inventory too quickly, even if their gas is the cheapest to lift and most proximate to LNG projects.
More constructive Waha hub prices would rearrange this picture by enabling producers to diversify their drilling footprints, capturing profits from crude oil as well as natural gas. At a recent meeting of the Independent Petroleum Association of America (IPAA), Diamondback Energy (FANG) laid out the case for another “5 to 10 Bcf/d of gas out of the Permian,” contingent on supportive gas prices and more egress takeaway. This comes just months after FANG said $60/bbl WTI puts the basin into maintenance mode, with prices any lower leading to declines. And despite natural gas making up over 20% of FANG’s production output, the commodity’s minimal revenue contribution (<1%) at an average $2.11/Mcf price underscores how significant this shift would be.
The egress capacity is coming, as laid out in East Daley’s Permian Supply & Demand Report. WhiteWater Midstream’s Blackcomb Pipeline (+2.5 Bcf/d), Kinder Morgan’s (KMI) Gulf Coast Express expansion (+0.6 Bcf/d) and Energy Transfer’s (ET) Hugh Brinson Pipeline (+1.5 Bcf/d) are expected to begin service through 2027. Several other projects are in the works, like Tallgrass Energy’s recently announced Permian-to-REX connector, Targa Resource’s (TRGP) DeLA Express or KMI’s Bullet Pipeline. We are also confident that Waha prices will strengthen as LNG feedgas demand doubles on the Gulf Coast and egress constraints are resolved.
The easiest option would be to move rigs to gassier acreage in the southern Delaware Basin, where East Daley calculates just 5 additional rigs on Kinetik’s (KNTK) Alpine High system would add up to 1 Bcf/d through 2030. And Alpine High isn’t even the gassiest G&P system in the basin. Wells drilled on both XTO and MPLX’s systems top the 4 MMcf/d initial production rate on Alpine High, and Western Midstream’s (WES) DBM system is not far behind.
This redirection of capital spend would represent a continuation of a trend we’ve already observed. Over the last two years, as total Permian rigs have fallen by 100, a higher proportion have moved from the oilier Midland sub-basin to the Delaware (see blue line in graph above). We expect this trend will only accelerate as LNG tailwinds coalesce on the Gulf Coast. – Oren Pilant Tickers: ET, FANG, KMI, KNTK, MPLX, TRGP, WES.
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