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Explainer: Why are U.S. natural gas prices in Texas below zero?


(Reuters) – In an unusual event, U.S. natural gas prices in West Texas have been trading in negative territory for more than two weeks, largely due to a lack of pipeline space, forcing some drillers to pay those with spare pipeline capacity to take unwanted gas.

Spot prices at the Waha hub – where prices for gas in the Permian basin are set – fell to a record low of minus $4.28 per million British thermal units last week. Prices have been negative in the real-time or next-day markets since March 22.

WHY IS THERE SO MUCH NATURAL GAS SUPPLY?

The Permian is the nation’s largest shale oil field, where production now exceeds more than 4 million barrels per day (bpd). But oil output also produces what is known as associated gas, seen by crude drillers as a waste product to be burned off or “flared” because there are not enough pipelines to remove it.

Construction of new oil and gas pipelines in the Permian has not kept up with output, which has more than doubled over the past three years as the United States has risen to become the world’s largest oil producer.

But while oil can be stored in tanks and transported by truck or train, gas can only be transported by pipe, burned, or if special equipment is available, re-injected into the ground.

Recently, compressor problems on a pipeline in New Mexico exacerbated the problem, as it closed off a key artery for the gas.

(GRAPHIC: Texas natural gas prices turn negative: tmsnrt.rs/2HV1CJY)

HOW MUCH GAS IS BEING FLARED?

It depends on who you ask. Permian drillers flared a record 0.4 billion cubic feet per day (bcfd) in the third quarter of 2018 and are expected to flare at least 0.6 bcfd by mid-2019, according to Oslo-based energy data provider Rystad Energy.

One billion cubic feet of gas is enough to fuel about 5 million U.S. homes for a day.

Permian flaring came to 0.15 bcfd and 0.11 bcfd in 2017 and 2016, respectively, according to Texas Railroad Commission data interpreted by the Environmental Defense Fund (EDF), an environmental group.

EDF, however, believes drillers are burning more than the official figures. It used U.S. National Oceanic and Atmospheric Administration satellite data to estimate that Permian drillers burned twice as much gas in 2017 – about 0.28 bcfd – than reported.

Officials at the Texas Railroad Commission were not immediately available for comment.

CAN DRILLERS BURN GAS FOR AS LONG AS THEY WANT?

Texas drillers can burn gas for 45 days under an initial flaring permit and get extensions for up to six months. In Texas, Rystad said it “observed an increased tendency” where gas is flared on new wells for four to six months.

Oil drillers that can no longer flare gas must ship it out or shut wells, but with crude prices at their highest levels in five months, drillers do not want to shut wells.

DOES THAT MEAN EVERYONE WHO DRILLS IS PAYING SHIPPERS TO TAKE THEIR GAS AWAY?

Anyone who ships gas on a pipe must pay the pipeline company for use of the space. Normally, gas producers or their customers pay this fee, but can then sell the gas at the end of the line for a profit. And shippers with long-term deals aren’t affected.

Those that are paying negative prices are the drillers who did not in the past commit to shipments already. Because they don’t have the space on the pipeline, they are paying others who already have it to take that gas, effectively losing money despite producing the gas.

Several new pipelines are in the works to alleviate the constraints, but those projects will not enter service until late 2019 and later.

Reporting by Scott DiSavino; Editing by Susan Thomas



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