Denver (Platts)--21 May 2018 425 pm EDT/2025 GM

As oil and natural gas production continues to boom in the Permian Basin, producers such as WPX and Laredo Energy are pursuing efforts to develop infrastructure in an effort to avoid low basin differentials.

WPX Energy, like so many other exploration-and-production companies lately, have shifted the bulk of their capital expenditures to the Permian, prompting prolific growth in the basin. The Tulsa-based company increased its oil and gas production a staggering 149% from a year ago.

But it doesn't come without some growing pains as Permian Basin crude and gas price discounts will likely remain steep through the rest of the year as midstream projects are dwarfed by rising output, particularly in the prolific Permian Delaware Basin.

"The market is seeing just how much infrastructure matters in the Permian," said WPX CEO Rick Muncrief.

In early 2016, sample gas pipeline flows out of the Permian registered at 3.6 Bcf/d, according to S&P Global Platts Analytics. Cash basis at the nearby Waha Hub was at a mere 8 cent lower differential from Henry Hub at the time. Outflows have since risen to 6.3 Bcf/d as of May, prompting Waha cash basis to dip to an about $1/MMBtu discount to Henry Hub earlier this month.


HIGH VOLUMES PROMPT FURTHER FLARING


Gas production in the basin is so high that many producers are flaring to continue producing crude at the same volumes. A report by the Environmental Defense Fund found that the top 15 producers in the Permian were flaring up to 10% of their produced gas.

In its latest Drilling Productivity Report, the US Energy Information Administration reported Permian gas production is expected to increase from about 10.27 Bcf/d in May to about 10.50 Bcf/d in June. EIA gas production figures are higher than Platts Analytics because the EIA includes natural gas liquids in its total.

The month-on-month growth in production is expected to be driven by the basin's rig count, which has been climbing since May 2017. In the early months of 2018 there were 448 rigs drilling for oil and gas in the basin in April, 10 more rigs than the previous month, and 39 more rigs than were drilling in January, EIA found. The region also holds the nation's largest inventory, by far, of drilled but uncompleted wells. Gas flows from the Permian have increased in every direction over the past two years, pushing takeaway capacity to the brink, which is about 7.3 Bcf/d, according to Platts Analytics.


PIPELINE ALLOWS ADDITIONAL FLOWS TO MEXICO


But at least some help to ease constraints in the basin is occurring incrementally on the Tarahumara (Chihuahua Corridor) pipeline on flow leaving south to Mexico.

The Permian basin has new access to demand in the El Encino area, which has increased Waha cash basis as incremental flows move across the border. The Tarahumara pipeline, owned and operated by Fermaca, had a ramp up in flows starting May 14, which is likely a result of a previously announced project that involved changing power plant delivery meters off of the SISTRANGAS, Mexico's national interconnected pipeline grid, to Tarahumara.

In early February, Fermaca's commercial director Rodrigo Bernal said the Tarahumara pipeline would be connected to the CFE's 459-MW Norte II and 614-MW Chihauhua II (Encino) power plants by the end of March. The 850 MMcf/d Tarahumara is supplied by the 570 MMcf/d Roadrunner Pipeline.

Pipeline flow nominations on SISTRANGAS showed deliveries to the CFE Encino (E103) meter dropped to zero May 12 after averaging roughly 60 MMcf/d the seven days prior, according to Platts Analytics.

Tarahumara flow data shows that receipts from Roadrunner rose to 173 MMcf/d May 14 to 16, an increase of 103 MMcf/d from the prior week average. Waha cash jumped to $1.77/MMBtu for May 15 and peaked at $1.84/MMBtu May 16-17 after trading $1.64/MMBtu over the weekend, 15 cents/MMBtu, or 9%, above the 30-day average.

Mexico will be a crucial outlet for West Texas natural gas, although infrastructure delays continue to provide uncertainty to planned project in-service dates. Midstream projects currently under construction have an average delay of more than 400 days from original time lines.

--Brandon Evans, bevans@spglobal.com

--Edited by Brandon Evans, newsdesk@spglobal.com