NEW YORK, Sept 26 (Reuters) - A new $1.75 billion natural gas pipeline went into service in Texas on Wednesday with enough capacity to supply 10 million U.S. homes per day. Analysts say the region now needs four or more just like it.
Kinder Morgan Inc started commercial service on its 2 billion cubic feet per day (bcfd) Gulf Coast Express natural gas pipeline slightly ahead of schedule, providing much-needed takeaway capacity from the Permian region in West Texas and eastern New Mexico.
The Permian is the biggest U.S. production area for crude and the second biggest for natural gas. Output in the basin is at record highs and is growing.
Oil drilling produces a lot of associated gas in the Permian, some of which drillers have been burning off or flaring at record rates because there was not enough space on existing pipes to move it to market.
That lack of pipeline capacity caused gas prices in the Permian to turn negative earlier this year, forcing some producers to pay others to take their gas.
Apache Corp, one of the pipeline's customers, said it already started using the Gulf Coast Express, which was originally expected to enter service in October. Earlier in the year, the company said it decided to leave some gas in the ground rather than flare or sell it at an uneconomic price.
The Gulf Coast Express should alleviate the region's pipeline constraints, until the pipe fills up, which analysts expect will happen fairly quickly. That will leave the market waiting for the next big pipeline, also Kinder Morgan's, due to enter service in late 2020.
"We have long expected a quick fill of Gulf Coast Express from three sources - new production, existing production that is currently being flared and rerouting gas that is now flowing in directions that are not as economically alluring as sending it to the Gulf Coast," said Rich Redash, head of global gas planning at S&P Global Platts Analytics.
Redash said the Permian still needs four more pipes like Gulf Coast Express to transport about 10 bcfd of additional gas that is expected to be produced in the region between 2018 and 2030. The Permian currently produces about 15 bcfd.
Drillers flared a record 0.663 bcfd of gas in the Permian in the second quarter as both oil and gas production in the basin rose to all-time highs, according to data from Rystad Energy.
Analysts said that flaring in the basin will likely decline at least temporarily now that Gulf Coast Express is in service.
The pipeline will provide shippers with access to numerous customers along the Gulf Coast, including industrial users like refineries and petrochemical facilities, utilities, liquefied natural gas export terminals and Mexican markets.
When Kinder Morgan started filling Gulf Coast Express in August, gas prices at the Waha hub NG-WAH-WTX-SNL in West Texas rose to their highest since March, cutting the premium of the U.S. Henry Hub NG-W-HH-SNL benchmark in Louisiana over Waha to its lowest since January.
So far in September, Henry Hub's premium over Waha averaged just $1.04 per million British thermal units, its lowest since January when the average was 92 cents. That premium reached $2.70 in April, its highest since November 2005.
Analysts said Henry Hub's premium over Waha could fall further as more Permian pipes are built, including Kinder Morgan's 2.1-bcfd Permian Highway in 2020 and MPLX LP's 2.0-bcfd Whistler in 2021.
"We need at least four more pipes in addition to the three that are already going forward (Gulf Coast Express, Permian Highway and Whistler) to meet growing output in the Permian and help reduce flaring," said Charif Souki, chairman of U.S. LNG company Tellurian Inc, which is developing an LNG facility in Louisiana and a few pipelines, including one in the Permian.
Reporting by Scott DiSavino Editing by Marguerita Choy