What’s Really Going on in the Permian?

It is an unfortunate fact that our nation’s most prolific production region also happens to be our most opaque. The Permian, responsible for ~18bcf/d of gas and ~5.6mb/d of oil production has an abysmally low sample of near-term gas production data. Daily pipeline flows, commonly called ‘pipe scrapes’, sample just over half of total production in the New Mexico Permian and an even more disappointing 25% of production on the Texas side. With state data months behind, this sets the stage for material misunderstandings.

The low sample, due to the disproportionate lack of visible interstate pipelines compared to their invisible intrastate counterparts, is likely to get worse. As the legal misfortunes of the Mountain Valley Pipeline remind us, the federal government is far less friendly to pipelines than the state governments of Texas and New Mexico. The inevitable result continues to be intrastate infrastructure growth attempting to compensate for a lack of interstate gas movements.

So what then is the poor natural gas analyst to make of the July first surge in Permian pipe scrapes, which seemed to show a dramatic climb of ~1.3bcf/d for just 10 days before retreating right back to where it started in June? The following is our best guess based on what we can observe from satellites, publicly available data and recent producer daily wellhead production data which was generously shared with us.

Processing Plants

Up to eight new gas processing plants are expected to enter service in the Texas Permian this year. Using thermal satellite images SynMax has detected heat anomalies at five of these plants around July first. We believe, at a minimum, three of these have entered service. While the Permian is not processing constrained, rich NGL margins have attracted new capacity.

Interestingly, all of these plants are located on interstate pipelines. So while production between 6/30 and 7/1 may not materially differ, the amount of gas flowing on visible interstate pipelines could. Said another way, the visible growth in interstate flows could be offset by invisible intrastate declines, all while production remains unchanged.

Daily Well Production Data

A more accurate way to measure production is aggregating measurements directly from wellhead sensors. This is how data is eventually reported to the state, which is considered the best and final measurement of production. This data is not commonly available outside of producers and mineral owners but has been generously shared with SynMax for a sample of wells exceeding the pipeline scrape samples in both Permian regions.

In Permian NM we have received the daily production records for a sample of wells representing 60% of all production, exceeding the pipe scrape sample of 50%. We have not been given enough history to establish a relationship to final production, however the sample data supports our thesis and shows no increase from June to July.

On the Texas side of the Permian our well sample reaches nearly 40% of all production compared to pipe scrapes around just 25%. Again, the conclusion is the same as what we say in New Mexico with well data showing little change between June and July.

Summary

Although it is impossible to know until state data becomes available in 4-6 months our working theory is that Permian gas supply has not grown significantly from June to July. The misunderstanding in pipe scrapes probably comes from poor samples combined with a changing interstate balance post new processing capacity. Our theory is supported by the observed timing of new processing plants and an alternative method for measuring daily gas production via well head data sampling.