Natural Gas Drives Permian Pipeline Growth | ETF Trends


  • As oil production in the Permian has increased, natural gas production has also seen significant growth, creating opportunities for midstream companies.
  • Permian pipeline operators are expanding existing natural gas pipes, while one new build pipeline is also under construction.
  • By expanding existing pipelines, companies can provide incremental capacity more quickly and cost effectively.

The Permian Basin, spanning West Texas and Southeast New Mexico, is the largest energy producing area in the US. While known for its oil production, with that oil comes a significant amount of natural gas. As gas production in the Permian continues to grow, additional gas pipeline capacity will be needed, and midstream companies are looking to add incremental capacity in a capital-efficient way. Today’s note examines how midstream companies are pursuing gas takeaway solutions in the Permian.

The Permian: An energy gift that keeps on giving.

The Permian is by far the largest oil producing basin in the US, but it is also the second-largest natural gas producing region. Between 2021 and 2022, gas production in the Permian grew faster than any other area in the US, and growth has only continued, according to Energy Information Administration (EIA). While oil pipeline capacity from the Permian has been ample, incremental natural gas capacity is needed.

Most of the natural gas produced out of the Permian is associated gas, meaning it is gas produced from oil wells, rather than dedicated gas wells. Since 2013, natural gas production in the Permian basin has more than quadrupled from 5 billion cubic feet per day (Bcf/d) on average to more than 20 Bcf/d today. Over time, production from the Permian is projected to get gassier. With gas production continuing to grow, midstream companies are focused on providing incremental capacity to move natural gas from the Permian to demand centers on the Gulf Coast.

Pipeline projects are underway.

To meet growing demand for transporting natural gas out of the Permian, companies can build new pipelines or expand existing pipelines. Building new pipelines can be capital intensive and take years to come into service – not to mention potential regulatory or permitting hurdles. Alternatively, expanding existing pipeline infrastructure can be quicker and more capital efficient. Gas pipelines can be expanded by adding compressor stations along their route, which increases the pressure in the pipe and thus allows more volume to flow. The ability to expand existing lines is a nice option value for pipeline owners and reinforces the value of having steel in the ground.

Additional takeaway capacity is currently being constructed, with approximately 3.5 Bcf/d in capacity from one new pipeline and expansion projects expected to come online between 2023 and 2024. The Matterhorn Express Pipeline, a joint venture between WhiteWater Midstream, EnLink Midstream (ENLC), Devon Energy (DVN), and MPLX (MPLX), is the only new gas pipeline being constructed in the Permian currently. Spanning 580 miles from the Permian to the Houston area, the new pipeline is designed to transport up to 2.5 Bcf/d and is expected to be in service by 3Q24.

Outside of Matterhorn, there are a couple expansion projects that are expected to be completed later this year. The Permian Highway Pipeline (PHP) is expanding by 0.55 Bcf/d to bring its total capacity to 2.65 Bcf/d. Kinder Morgan (KMI), which operates PHP, expects the expansion to be in-service by December 2023. In addition to KMI’s 26.7% interest, Kinetik Holdings (KNTK) and ExxonMobil (XOM) own 53.3% and 20%, respectively. The pipeline initially cost approximately $2 billion. Based on company filings, the expansion is estimated to cost approximately $450 million.

The Whistler Pipeline is also undergoing an expansion project that will increase its capacity from 2.0 to 2.5 Bcf/d. MPLX (MPLX), which owns a 38% interest in the pipeline, confirmed during its earnings call this month that the project is expected to be completed in September.

Beyond the projects already under construction, the Gulf Coast Express Pipeline (GCX) could be another candidate for expansion. Operator KMI announced an open season last year for 0.57 Bcf/d of incremental capacity, but expansion plans for the 2.0 Bcf/d line that terminates near Corpus Christi stalled. On their earnings call last month, KMI management discussed renewed interest in a GCX expansion. KNTK, which owns a 16% interest in GCX, pointed to the recent final investment decision for NextDecade LNG as potentially being supportive for increased interest in expanding GCX. Liquefied natural gas (LNG) export facilities on the Texas coast can be an incremental source of demand for Permian natural gas (read more).

Bottom Line

Midstream companies with natural gas pipelines out of the Permian basin are setting the stage for capital-efficient growth as growing production requires more capacity to move natural gas to end markets.

Related Research:

U.S. LNG Projects Advance Even as Global Prices Slump

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