Permian Global Access Pipeline (PGAP) Natural Gas Market Analysis
Permian Global Access Pipeline (PGAP)» Natural gas production growth in the Permian will continue to accelerate, resulting in outbound transportation capacity/market constraints in 2019. Waha basis could experience dramatic negative consequences. New Mexico Texas» At least two major Permian pipeline projects will be needed to relieve these constraints; to move the supply to the only U.S. natural gas markets enjoying demand growth: Gulf Coast LNG and Mexico export markets (one pipe in 2019, another in 2022-23).» The Texas Gulf Coast will only have enough incremental export demand to absorb supplies from one Permian pipeline without significant downward pressure on basis at Houston Ship Channel and Agua Dulce.» PGAP will move Permian supplies to South Louisiana where greater LNG export demand and connectivity to nearby Henry Hub will avert downward basis pressure and provide a Permian-to-market price differential uplift of 36% above a Texas Gulf Coast alternative. Waha PGAP and Other Permian Gas Pipeline Projects NAmerico Pecos Trail Pipeline 2 Bcf/d Boardwalk/Sempra Permian-Katy (P2K) 1.75 2.25 Bcf/d Kinder Morgan Gulf Coast Express 1.98 Bcf/d Agua Dulce Gulf South Coastal Bend Header Tellurian Permian Global Access Pipeline (PGAP) Bcf/d Katy/Ship Gillis 2
TX/NM Dry Gas Production Forecast Growth Scenario Bcf/d 12 10 8 6 4 2 0 Permian-TX Permian-NM» Permian natural gas production is projected to grow from about 7.5 Bcf/d in 2018 to more than 12 Bcf/d by 2023, with increases coming from both Texas and New Mexico.» Most of this production growth is from associated gas, where producer returns are driven primarily by crude oil and NGL pricing. Permian oil production is expected to increase from 3.2 MMb/d in 2018 to 4.8 MMb/d in 2023.» Lower gas prices will have little impact on the rate of Permian drilling. Consequently, Permian gas production growth will be relatively insensitive to the level of natural gas prices. 3
Permian Natural Gas Takeaway Capacity» Permian natural gas production will exceed pipeline takeaway capacity out of the region by 2019, if not sooner.» In 2018, there is about 7.25 Bcf/d of capacity out of the region from corridors that move gas West, North and East. 2.9 Bcf/d West on El Paso and TransWestern 0.95 Bcf/d North on NGPL, Northern and a small amount on El Paso 3.4 Bcf/d East on Texas Intrastate pipes» Although there is 3.1 Bcf/d of capacity on pipelines to Mexico (Roadrunner, Comanche Trail, Trans-Pecos), less that 0.25 Bcf/d is moving on than capacity due to pipeline and demand constraints in Mexico.» Permian flows to Mexico are expected to remain below about 1.0 Bcf/d until 2021. El Paso Trans- Western ETC & Oneok to Mexico WAHA NGPL Northern Oasis, Enterprise, Kinder ET Fuel, Atmos 4
Permian Basin Natural Gas Pipeline Utilization» Increasing Permian natural gas production will exceed pipeline takeaway capacity (limited by flow constraints to Mexico) by mid-2019.» This analysis assumes that a pipeline from the Permian to the Gulf Coast will be completed in 2019, most likely the 1.98 Bcf/d Gulf Coast Express Pipeline to Corpus Christi.» This pipeline will relieve capacity constraints for about three years, when another pipeline out of the Permian will be needed. Bcf/d 14.0 1 1 8.0 6.0 4.0 Pipeline #2 Pipeline #1 Flows to Mexico Enterprise/DCP ET Fuel/Enterprise Oasis Atmos KM Texas Transwestern EPNG NGPL NNG Demand History Forecast 5
Waha Basis Declines Until New Pipeline Starts In Late 2019» With pipeline takeaway capacity constrained, Waha basis will remain under pressure during 2018. $- $(0.20)» By early 2019, Waha takeaway will be fully utilized, resulting in a dramatic widening of basis.» Although models indicates that basis will reach $(1.70) - $(0)/MMbtu under Henry Hub, because producer returns are driven by oil prices rather than gas prices, there are no economic limits on the magnitude of Waha basis. $/MMBtu $(0.40) $(0.60) $(0.80) $(1.00) $(1.20) Assuming new Bcf/d Pipeline» Basis will remain very wide until new pipeline capacity becomes available sometime during 2019.» Basis relief will be temporary, with wide basis returning as Permian gas production continues to grow.» Another pipeline will be required by 2022-23. $(1.40) $(1.60) $(1.80) $(0) 6
LNG Timing: Buildup of Export Capacity (2018-23) Bcf/d 1 1 8.0 6.0 4.0 Tellurian Corpus (1-2) Freeport (1-3) Elba Island (1-6, 7-10) Cameron (1-3) Cove Pt Sabine (1-5)» Most of the incremental Permian natural gas production must target the only significant natural gas growth market in the U.S. LNG exports.» 2018 LNG export capacity of about 3.0 Bcf/d will increase to 12 Bcf/d by 2023 with all but about 6% (Cove Point) along the Gulf Coast.» Terminals in Freeport and Corpus Christi are planned for 2019, before a new pipeline from the Permian is completed, which is likely to temporarily boost the price (basis) of gas in the Gulf Coast region.» However, new pipeline capacity from the Permian into the Texas Gulf Coast in 2019 will put downward pressure on Gulf Coast basis. 7
Impact of Permian Flows on Gulf Coast Balances 1. Increasing Permian gas production will require at least two new large, long line pipelines within the next five years. 2. This pipeline capacity could move Permian gas to either the Texas Gulf Coast (GC Express, P2K), or the Louisiana Gulf Coast (PGAP). 3. Two new pipelines out of the Permian to the Gulf Coast will add to the volume already moving to the East on Intrastate 1 pipes, increasing flows from about 3.2 Bcf/d in 2017 to 7.3 Bcf/d in 2023 (two pipelines, 2 Bcf/d each). 5.0 This volume would exceed the incremental Texas Gulf Coast LNG export capacity by about 0.5 Bcf/d, putting downward pressure on basis along the Gulf Coast. 4. About 8 Bcf/d of LNG export capacity will be available along the Louisiana Gulf Coast, providing an ample market for Permian production growth. Waha Hub 1 8.0 6.0 4.0 Agua Dulce 2 Corpus Pipe 1 Pipe 2 Katy/Ship Haynesville Perryville South LA Sabine Pass 8.0 Cameron Driftwood 6.0 Freeport 4.0 4.0 3 4 Transco St 85 8
Impact of Permian Flows on Regional Basis Relationships - 2023» By 2023, even with an additional 4.0 Bcf/d of pipeline capacity out of the basin, Permian basis will remain at $(0.60)/MMbtu below Henry Hub due to continuing production growth and tight capacity out of the West Texas region.» Two pipelines to the Texas Gulf Coast will bring more gas to the region than new LNG export capacity will absorb, pushing basis to about $(0.25)/MMbtu at both the Houston Ship Channel and Agua Dulce (Corpus Christi).» The PGAP pipeline to Gills, LA will have a negligible impact on Gillis basis, providing the opportunity for shippers to capture a wider spread between Waha and the destination market.» Texas Gulf: $(0.60)/MMbtu versus $(0.25)/MMbtu = $0.35/MMbtu spread» Louisiana Gulf: $(0.60)/MMbtu versus $(5)/MMbtu = $0.55/MMbtu spread» Consequently, PGAP will enjoy a 36% price spread advantage versus a Gulf Coast alternative pipeline ($0.55 versus $0.35). Waha Hub -$0.60 Agua Dulce -$0.26 Corpus -$0.25 Katy/Ship Sabine Pass Cameron Driftwood Freeport Haynesville $-.05* -$0.34 Perryville South LA Transco St 85 * Basis at Gillis, the primary delivery point for PGAP. will be about $5 depending primarily on connectivity between Henry Hub and pipes connected at Gillis. 9