Declining ‘Associated Gas’ Signals Opportunity for Dry Gas Basins

By Jeff Awalt, Executive Editor

HOUSTON (P&GJ) – One of the side effects of the Permian Basin shale boom has been the tremendous volume of natural gas that accompanies its crude oil production.  Whether this is a blessing or a curse is mostly a matter of perspective.

For those oil producers with scarce natural gas pipeline capacity and processing capability available, it’s added value.  For others, transportation and flaring constraints have been problematic.  And for those whose fortunes are tied to the market value of natural gas, it’s been a nightmare, contributing to a supply glut and depressed prices.

As crude oil producers throttle back production in response to a sharply lower demand and disappearing storage, associated gas volumes will fall as well.  The phenomenon has already given natural gas markets a slightly stronger pulse. 

It also may signal growth opportunities for dry gas basins such as Haynesville and Marcellus/Utica.

“Over time, we're going to see some shifting from associated gas to dry gas," Kinder Morgan CEO Steven Kean said during a Wednesday conference call to discuss the Houston-based pipeline operator’s first-quarter results. “But we have assets that serve both.”

The shift won’t be immediate, however, and nobody is projecting that increased production in dry gas basins will quickly offset declining associated gas production.  Accordingly, front-month gas futures for May delivery on the New York Mercantile Exchange perked up to a nine-week high on Wednesday.

The U.S. Energy Information Administration (EIA) spoiled the fun a day later with a report that showed a larger-than-expected storage build.  That, combined with fresh predictions for milder weather and lower near-term heating demand pushed prices back down.  But prices still held on for a weekly gain, and the market factors that drove the increase are expected to persist.

Kinder Morgan, the first of numerous midstream companies to schedule quarterly earnings calls through mid-May, reported an 8% increase in natural gas transport volumes to 3.1 Bcfd for its latest quarter – a three-month period in which a Saudi-Russian oil price war and the COVID-19 pandemic turned the industry on its head.

As Kinder Morgan progressed through April, it continued to see strength in its natural gas transportation volumes, most of which are under take-or-pay contracts. Gathering volumes also increased slightly, but the gains came from associated gas, a worrisome sign for coming months.

“The decline in the dry gas basins were slightly more than offset by an increase in the volumes in the associated plays," Kinder Morgan’s president, Kimberly Dang, said Wednesday.  “However, we are seeing volume reductions in the associated plays in April and we expect more in May.”

Tom Martin, President of Kinder Morgan’s Natural Gas Pipelines group, agreed that the gathering and processing business will be impacted in the gas-rich crude oil basins, but shared an upbeat note on other regions.

“All the associated gas plays are going to be primarily where we see this. Some Permian volumes will be declining or coming off, and clearly the Bakken will be impacted as well. Those are probably the two biggest areas that we're seeing,” Martin said.

“On the other side of the coin, as we progress through the year, we're already getting some inbound inquiries about incremental activity in our dry gas space and part of the network, in Haynesville particularly,” he said.  “So I think you will see some potential offset in those areas, maybe late this year or early next year.”

Kean noted that the company has an ability to pivot to dry gas plays, if it chooses.

“If you think about our natural gas assets, we serve dry gas plays like the Marcellus/Utica from a transmission standpoint and storage standpoint with our Tennessee Gas Pipeline system. We serve the Haynesville … and we've got plenty of room to grow to the extent that the gas market comes back into balance with a reliance less on associated gas volumes and more on dry gas volume,” Kean said.

Kinder Morgan said this week it has cut its planned 2020 capital expenditures by about $700 million, or nearly 30%, as declines in both commodity prices and refined product demand have affected its business and will continue to do so in the near term.

“With the collapse of OPEC-plus on March 6 and the widespread shutdown of the U.S. economy beginning in mid-March, we immediately re-examined our capital spending, our expenses, and how we operate,” Executive Chairman Richard Kinder said.

“All of our businesses are running and we have modified our operations to keep our employees safe,” he added.

In its report that contributed to a reversal of natural gas futures gains this week, the EIA said natural gas in storage in the Lower 48 states totaled 2,008 Bcf as of March 31, 19% more than the previous five-year average for the end of the heating season.

Working U.S. natural gas stocks entered the heating season at 3,575 Bcf, nearly the same as the average over the previous five years, but this winter had periods of significantly warmer-than-normal temperature, and heating demand averaged 10% lower than the 30-year normal, EIA said.

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