Permian a Dangerous Competitor, But Haynesville Is Resilient

Copyright © 2022 Energy Intelligence Group  Published: Fri, Oct 7, 2022 

On the face of it, the Permian Basin is a Haynesville Shale gas producer’s worst nightmare.

Already producing 20 billion cubic feet of gas per day on its doorstep, the Permian should add another 4 Bcf/d by 2024 in line with expanding takeaway capacity, encroaching on prime Haynesville gas markets and limiting the basin's growth to roughly 1 Bcf/d over the same period, the Energy Intelligence Research & Advisory unit predicts.

Haynesville producers insist they're up to the challenge. But what makes Permian producers such dangerous competitors is they’re not competing directly with Haynesville E&Ps, but inadvertently as “price takers” in saturated East Texas and Louisiana markets, East Daley analyst Zack Van Everen told Energy Intelligence.

Permian gas also flows to the western US and into Mexico, he notes, but producers also need markets to the east to absorb associated gas volumes — and the pipes that send it there are chock full. “We assume they've been flowing at contracted capacity for a while, so when the Permian gets tight you don't really see more gas flowing that direction,” he said on the sidelines of Hart Energy's recent America's Natural Gas Conference in Houston.

But that will change beginning a year from now as expansion projects begin rolling out, adding 1.7 Bcf/d to the mix, followed by a 2.5 Bcf/d slug in 2024 with the opening of Matterhorn Pipeline that will flow directly into the Katy-Houston Ship Channel market.

Yet regional demand won’t have risen 4.2 Bcf/d by the time Matterhorn starts operations. In fact, it could be 2026 before enough gas liquefaction capacity is on line to begin absorbing the Permian flood.

But that’s not a problem for Permian operators, who are not timing gas growth to growing market demand. Far from it. “There's a timing mismatch between new LNG capacity coming on line and [Permian gas] hitting the markets,” Van Everen said. “When that happens, you could see a brutal effect …  as gas is pushed from the Houston Ship Channel eastward."

Haynesville E&Ps Prepared

But Haynesville producers won’t be blindsided, said Gordon Huddleston, co-president of Aethon Energy, the Haynesville's largest private producer at 2.4 Bcf/d.

“We actually anticipated it a little sooner, because prior to oil prices dropping and Covid we were concerned about the amount of gas that was going to be moved out of the Permian,” he told Energy Intelligence on the conference sidelines. “What we expect to see is more pressure on the Houston Ship Channel and in East Texas as [Permian] gas moves toward Henry Hub.”

But farsighted Haynesville E&Ps have also been preparing for the impact. “As more gas moves over to the Ship Channel, it's going to continue to flow east, so we have entered into agreements to sell our gas into Southeast markets," he said.

Selling a portion of Aethon’s production to large utility customers in the Southeast mainly involves securing firm transport, which is also the best way to maintain market share as Permian supply rises, Huddleston said.

“I would say we're in a better position [to take advantage of the Southeast market] but it's not one we take for granted because it would be really sad if you're the closest to the demand centers, but it's incredibly expensive to get your gas 100 miles, and that's possible.”

Why? Because in a tightening capacity market, the availability and cost for interruptible transport becomes a bottom-line issue.

“The days of being able to take advantage of interruptible transport in the Haynesville is kind of over and I think certain producers in the Haynesville have been spoiled because there was so much pipe built back in 2009-12 when the whole thing was getting developed,” Huddleston explained.

Notable Resilience

Both Huddleston and Van Everen say the Haynesville is in a good position to weather rising Permian supply in the east Texas Gulf Coast region before the build-out of LNG capacity that can absorb it.

Two sanctioned projects — Corpus Christi Stage 3 and Golden Pass LNG — could liquefy almost 4 Bcf/d of gas between them. And the initial phase of Rio Grande LNG in Brownsville is looking more certain, which would add 1.5 Bcf/d to the tally. But the bulk of this capacity is likely to become operational in 2027-28.

“I think the Haynesville will be more resilient than other basins and will continue growing, but probably level off a little more,” Huddleston said. “My bigger concern is what if LNG demand doesn't materialize, and what does that do?”

Nonetheless, the Haynesville has an advantage over the Permian when it comes to its ability to move gas out of the basin, Van Everen said. "You could say it has a leg up because it can, depending on basis, deliver its gas for cheaper and build projects at a faster rate,” he observed. "In the Permian, you're building along a massive pipeline, right? Matterhorn has to go around Austin and down to Katy. So that's also a barrier of entry.”

It also takes a long time for a midstream operator to sanction takeaway gas capacity out of the Permian for good reason — the risk.

“They're still drilling for oil in the Permian,” he said. Gas may have recently risen in price and getting it to market more profitable for producers, but it's still a byproduct and the volumes that have to exit the play can vary widely depending on the price and demand for oil.  

“That’s why it takes a while for someone to step up in the Permian to build a big takeaway pipe,” Van Everen said. “Historically, the midstream overbuilds and then someone gets left holding the bag.”

Author Tom Haywood, Houston

Editor Mark Davidson