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West Texas Natural Gas Prices Drop Below Zero

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Oil and gas processing plant | Image by Shutterstock

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Surging production drove natural gas prices in the Permian Basin of West Texas this week to below zero. Gas from the region, known as Waha, began the week trading as low as 20 cents per metric million British thermal units (MMBtu) before sliding to -$2.25 on Tuesday.

Negative prices effectively mean that energy producers have to pay to offload supply, a scenario that has not occurred for the past two years.

The immense downward pressure on natural gas prices was driven partly by growing production levels in the region.

On top of that, liquified natural gas export terminals have been experiencing outages, reducing the volume of gas delivered to Europe. One of the country’s largest export facilities, the Freeport LNG terminal in Texas, has been down since June after it sustained damage from a fire. The terminal was a significant outlet for U.S. gas exports.

According to industry analyst Stephen Schork, “Basically you have too much production [and] you don’t have enough avenues to get that production out… You have to pay people now to take this production away from you.”

Surprisingly, as West Texas gas prices dropped this week, benchmark U.S. gas futures climbed over 7% to almost $5.59 MMBtu. The stark contrast between prices highlights the regional segmentation of natural gas markets.

This week, scheduled maintenance on two regional pipelines also contributed to the energy glut. With the pipelines down, fewer avenues exist for Texas natural gas to leave the state.

By the end of November, natural gas volumes from Texas’ Permian Basin are expected to reach over 21 billion cubic feet a day. If the estimates materialize, it will represent a 9% jump in volume from last year and a new daily record for the region.

Pro-environmentalist groups like the Environmental Defense Fund are watching the scene in Texas carefully; operators concerned by prices could be motivated to flare the surplus gas. Gas flaring is a cost-effective method for producers to dispose of excess gas, though pro-environmentalists consider it wasteful and polluting.

However, flaring is also used for safety reasons. The technique provides operators with an effective way to manage pressure buildup during extraction and processing.

Negative prices at Waha are nothing new. The phenomenon occurred nine times in 2020 and 31 times in 2019. On this occasion, however, the drop happened amid European energy scrambles and fears of shortages.

Europe has also experienced a reprieve in natural gas prices, though nothing close to that seen in Texas. Warmer weather and nearly full reserves helped ease European benchmark Dutch TTF gas futures, retreating from the more than €300 (over $400) per MWh seen in August.

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