America’s most prolific oil field has a natural-gas problem

America’s most prolific drilling region finds itself on the brink of being trapped between an uptick in drilling in response to rising energy prices and not enough ways to get product to market.

Earlier this year as the conflict between Iran and the U.S. drove global oil prices up, energy producers in the West Texas region known as the Permian Basin extracted so much natural gas as a byproduct of the oil they pumped that they had to pay increasing sums to users to take it because there wasn’t enough pipeline capacity to get it to other customers.

In the first half of the year prices averaged negative $2.19 per million British thermal units at the region’s Waha trading hub. In late April, when oil prices were near $100 a barrel, the gas price dropped to a record low of negative $7.95. That compares with $2.72 the same day at Henry Hub, a Louisiana pipeline junction where the national benchmark is set.

This summer new pipeline capacity has opened and lifted Permian gas out of the red, but it is still about 40% below the national benchmark for the heating and power-generation fuel.

Analysts think the recent relief might be short-lived given how much drilling is planned in America’s premier oil patch before the next batch of pipelines comes online toward the end of the decade. The Permian could quickly become flooded with gas again if the Strait of Hormuz remains closed and high oil prices encourage producers to keep drilling. Producers could become hamstrung without somewhere to send the gas, which comes from the same wells as oil.

“The big question is how quickly gas production grows into the new capacity,” said Rob Wilson, president of energy data firm East Daley Analytics. “Gas tends to grow faster than crude in the Permian.”

The Permian gas predicament is one of the most glaring examples of how 15 years into the shale-drilling boom, the U.S. struggles to connect the drilling fields that remade the country into an energy powerhouse with the utilities and manufacturers eager to burn it.

The consequences of the congestion could be felt far beyond Texas. The Permian accounts for about 20% of the country’s gas production. It has been responsible in recent years for most of the growth that has kept domestic prices fairly low and stable.

That is despite huge volumes being shipped abroad—a key component of President Trump’s energy dominance agenda and trade deals. Meanwhile, more and more is burned at home to generate electricity. Ample natural gas underpins the artificial-intelligence boom.

“It’s arguably going to continue to get worse before it gets better as we think about the cadence of volume growth that we’re seeing on our system and that we’re seeing more broadly in the Permian and how that interplays with not enough takeaway capacity,” Jennifer Kneale, president of Permian pipeline operator Targa Resources, told investors this spring.

The Permian is unique in that producers typically underwrite drilling there based on oil prices, and not the gas that they unearth in the process. Being a costless byproduct has created a high tolerance for low prices and situations when gas is treated more like a nuisance than a coveted fuel.

Diamondback Energy, one of the Permian’s top producers, said last week that it sold oil for an average $96.82 a barrel during the quarter that ended June 30, the highest price in four years. But gas sales averaged negative $2.15 per thousand cubic feet, which is roughly equivalent to a million British thermal units. Even after accounting for its hedging, Diamondback said gas sales remained negative 34 cents, on average.

Some drillers flare or vent gas, meaning they burn it at the wellhead or simply release it into the atmosphere. There are regulatory limits to how much producers can do that, however.

This year’s negative prices were too much for some producers, who turned drilling rigs away from their gassier prospects. Others, including Devon Energy and APA, curtailed output.

Some producers are looking for ways to use more of their gas in basin rather than risk having to pay buyers to take it away. Matador Resources last month touted big savings achieved by using gas from its own wells, rather than purchased fuel, to run equipment at a drilling site. Chevron said it would build a gas-fueled power plant in Reeves County, Texas, and feed electricity to a huge data center that Microsoft has planned nearby.

Permian gas production increased during the first half of the year at less than half the rate it had been growing the past few years, according to Bank of America analysts.

Prices climbed last month when Kinder Morgan added capacity to the Gulf Coast Express pipeline, which stretches roughly 500 miles toward the South Texas shore. They got another boost when Energy Transfer’s 400-mile Hugh Brinson pipeline to the Dallas area began operating.

The larger Blackcomb pipeline, being built by a consortium of energy companies including Targa, will add egress when it opens later this year.

The curtailments suggest it won’t take long to fill the new pipelines, East Daley’s Wilson said.

“The gas is there,” he said. “It’s ready to hit the pipes.”

Write to Ryan Dezember at [email protected]