Why is Gas a Problem for the Permian Basin?

Over the past decade, American energy companies have spent billions of dollars funding natural gas exploration projects. However, in the Permian Basin natural gas has emerged as a readily available by-product that could threaten the economic health of the industry.

With output expected to surge to 5.4 million barrels a day by 2023, the Permian Basin is on-track to maintain its status as one of the world's most productive oil fields. Though as the shale boom continues the natural gas industry is facing the risk of market saturation. The Permian Basin simply isn't equipped with enough pipelines to transport natural gas to market, which has landlocked huge supplies and sent local prices plummeting.

Shale drilling boom sparks natural gas surplus

Oversupply of the naturally occurring hydrocarbon gas mixture is a by-product of shale drilling, an industrial process that sees heavy machinery used to fracture shale formations and extract oil. While this provided a major lift to the industry, the surplus has since created serious bottlenecks that forced some Permian Basin producers to give away gas in a bid to ease oversupply. In some cases, desperate companies have resorted to paying former buyers to take it off their hands.

Gas prices in parts of the oil-rich region plunged to around zero last November, with some trades even sliding into negative figures, according to S&P Global Platts. While prices have since crept back up, the Permian Basin bottleneck still poses a major threat to the natural gas industry.

Experts predict "worse and worse" scenario

Energy companies predict the trend could be a sign of things to come, especially with more oil pipelines and ramped up shale production set to define 2019. The US Energy Information Administration warns that the boom is unlikely to lose momentum until well into 2019, which means natural gas providers can expect ongoing pricing issues.

"You'll see things get worse and worse and worse as oil production grows and gas production grows alongside it," says an analyst for Raymond James & Associates Inc.

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