Can US Permian gas grow independently of oil prices?

Permian Basin gas has added over 20 billion cubic feet per day (bcfd) of low-cost oil-associated supply to the US market over the past decade.  These volumes are key to meet ramping LNG and power demand but the trajectory of future growth is often a hotly debated topic within industry.  

The huge Permian resource base continues to grow and realised prices for the basin’s gas are improving. Greater midstream egress is available. However, all Permian wells produce a combination of gas and oil, and oil prices will continue to be the driving variable in Permian development going forward. Even with higher gas realizaitons, the opportunity costs of drilling gassier targets in earnest must be considered.

Why the industry expects more Permian gas 

Huge gas supply growth from the Permian is the source of much industry expectation, especially as West Texas Waha realizations improved in Q3. Several factors speak in favour of strong Permian gas expansion:

• Demand growth: We model the US gas market expanding by 40%, or more than 40 bcfd, over the next ten years. Much of this will occur in areas close to the Permian.
• A large and growing resource base: Increasing activity in deeper benches with higher gas-to-oil ratios (GOR) is derisking resource. Well results here are showcasing strong gas productivity and are set to benefit from the next set of recovery-factor improvements.
• Productivity gains: Better development techniques, including longer ‘super-lateral’ horizontal drilling and faster completion cycle times, are improving breakeven metrics and making higher-GOR wells more economic.
• Growing egress capacity: A series of new pipelines in service and under construction will provide access to wider markets at competitive basis. Waha’s discount to Henry Hub could normalise at just under US$1/mmbtu.

Given this combination of factors, the Permian gas growth story is real and durable. However, improving gas economics will always face one big hurdle before high-GOR wells are drilled in earnest. Oil-weighted wells produce meaningful volumes of gas as well, and their economics also improve with rising Waha prices. There is no clear “oil window” and “gas window” in the Permian. Gas-rich zones will have to outcompete oil-rich zones before they win a larger place in company budgets.

Get more insight 

This article is based on in-depth analysis by our US upstream team.

Subscribers to our Lens Lower 48 solution can access their full report. Other have the opportunity to fill out the form at the top of the page to download more of the article, which assesses the competitive economics of future gas supply growth in the basin. It also highlights the details of GOR by bench and geography, and the rate that IRR changes in each bench with stronger Waha realizations. Which companies are best placed to capitalize on stronger Permian gas prices and might they ever adjust their oil-weighted strategy and pose even more upside to West Texas gas volumes?