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Downsized: The Incredible, True Story of Shrinking Texas Production, Part 2

February 28, 2018 | Charles Nevle

In Part 1 of this two-part series, we discussed the numerous components of how wellhead natural gas production is downsized to a dry gas value that is suitable for transport across the pipeline grid. We noted that this downsizing, or ‘shrink’, in Texas has increased significantly over the past several years, rising from less than 15% in 2012 to over 21% by 2016. In this issue of Get the Point, we will discuss the implications of various shrink factors within the state of Texas and finally discuss how shrink in the Permian impacts assumed available pipeline takeaway capacity out of the region.

Ultimately, we would like to know where all this increased shrink is taking place within Texas and whether there is reason to believe that the shrink factor in the Permian is around 15%, a generally accepted factor across the industry. This is important because there is limited dry gas takeaway capacity from the Permian, and as Permian production grows it would be helpful to know when we could expect to bump into capacity limits. It is also why there are several competing projects proposed to help increase takeaway capacity from the Permian to allow associated gas production to continue to grow.

To determine available natural gas pipeline capacity out of the Permian, we need to know:

  1. How much gas is currently leaving the Permian?
  2. How much capacity is available to take Permian gas to viable markets?
  3. How do we expect the answers to the two questions above to evolve over time?

Most of our focus in this part of the series will be directed towards answering Question 1. On the surface, this question may seem easy to answer. However, like the geological makeup of the Permian, it can quickly become complex.

The Texas Railroad Commission produces useful, extremely detailed production data each month, but the problem is that the data is wellhead production. These reported volumes are not what will ultimately hit the gas transport system and be available for customers. In other words, the state reports detailed wellhead production, not dry production. The U.S. Energy Information Administration (EIA) reports dry production, but only at a state level. So, the challenge is to understand how much shrink is occurring within the Permian, and then shrink can be deducted from wellhead production to derive dry production.

In estimating shrink, analysts are estimating the collective components of shrink: namely, the quantities of gas being used in the Permian for repressuring, the volume being flared, the quantity of non-hydrocarbon gasses that are removed and the natural gas liquids (NGLs) removed at gas processing facilities. To help with this calculation, let’s revisit the EIA data from Part 1 of this series concerning the components of Texas shrink, but this time configured a bit differently:

Some important observations about the data above:

  1. Texas wellhead production for 2012 and 2016 were nearly identical. But EIA-reported dry production fell by more than 6% in 2016. This suggests that something is happening to shrink.
  2. Total shrink grew by just under 1.4 billion cubic feet per day (Bcf/d) between 2012 and 2016. To put it in other terms, although nearly the same amount of wellhead gas being produced in 2016 as 2012, 1.4 Bcf/d less of that gas was actually available as dry gas. Shrink, as a percent of wellhead production, grew from 14.9% of wellhead production to 21.2%. That is 6.3 percentage points of growth, and a very stout 41.9% growth in the shrink ratio.
  3. Based on these calculations, average Texas shrink is 21.2% for 2016. (On a monthly basis in December 2016, the latest month for which EIA data is available, shrink was just under 24%.)
  4. NGL production growth, followed by repressuring, were the largest drivers in the increase in the shrink ratio between 2012 and 2016.
  5. Note that PointLogic’s methodology is to “true up” to EIA dry production on a state-level basis. The PointLogic vs. EIA Wellhead adjustment captures the impact of the slightly different wellhead production numbers reported for Texas by the EIA and PointLogic Energy.

Rising NGLs Are Not All Created Equal

The numbers above show that Texas NGL production is on the rise. This is confirmed by PointLogic data, which shows total pre-rejection NGL production for the Texas Inland refining district, which encompasses all of Texas except the Gulf Coast, rising by 488,000 barrels per day (Mb/d), or just under 49% between 2012 and 2016. 

So we know NGL production is growing, but we don’t know where in Texas the growth is occurring. Since we do know where wellhead gas is being produced within the state (down to the individual well level), we can leverage off what the trends in regional wellhead production infer about where the growth in NGL production is occurring, and by extension, where the growth in shrink within Texas is occurring.

Revisiting our production chart for Texas by region from Part 1 of this series, we see that since 2012 the only areas of Texas showing growth are the Eagle Ford and Permian. So, it is likely that the increase in Texas NGL production is being driven by the increase in Permian and Eagle Ford gas production. (If that seems obvious, bear with us, we have some more leaps to make, making this leap particularly indispensable.)

Interior Framework

Now for the next leap, we know Texas shrink is increasing. We are pretty sure this is being driven by natural gas production growth in the Permian and Eagle Ford. That being the case, it would stand to reason that the average shrink rate of the Permian and Eagle Ford is greater than the average shrink rate for the state of Texas as a whole. (If the shrink rate for Permian and Eagle Ford were less than the average for the state of Texas, then increasing production in these basins would drop the average shrink rate for the state, not increase it.)

As stated earlier, the average shrink rate for the state of Texas was 21.2% in 2016, and it was on an upward trajectory that reached nearly 24% in December 2016. Therefore, the current average shrink rate for the state of Texas, as a whole, should be at least 24%, and the average shrink rates for the Permian and Eagle Ford should be at least 24%.

However, we know that there are substantial quantities of dry production in the Texas with a shrink rate significantly lower than 24%. Take the Barnett for example. The Barnett is a largely dry gas basin which currently yields about 3.5 Bcf/d on a wellhead basis. The Haynesville in Texas produces about 2.1 Bcf/d on a wellhead basis. The point is, there are substantial quantities of low-shrink-rate gas production in the state.

To put shrink rates in perspective, on a state-level average basis, only North Dakota has a higher shrink rate than Texas. In 2016, North Dakota’s shrink rate was 33% compared to 21% for Texas. This is due to the extremely wet gas from the Bakken shale formation. The next highest state on a shrink per-state-level basis is Wyoming at 14%. The average shrink rate for the entire Lower 48 is 11%. After, Texas and North Dakota are backed out, the average shrink rate for the remainder of the Lower 48 becomes just 5%.

Below, we apply shrink to Permian Texas production while maintaining the shrink integrity of the state overall under different scenarios.

First, let’s identify the moving pieces:

Flat Rate

Now, let’s apply the shrink evenly across the state:

This isn’t reality, of course, but it will help shed some light on some points made at the end of this posting.

Scenario A

We know from the earlier discussion that the trend in Texas is of growing NGL production and growing shrink. Combine that knowledge with the dynamic of growing Eagle Ford and Permian production while the rest of the state’s production declines, and the conclusion is that Eagle Ford and Permian have a higher shrink ratio than production in the rest of the state. For argument’s sake, let’s set all regions in Texas except Eagle Ford and Permian at the U.S. average of 11% and see what shrink rate is needed in Eagle Ford and Permian to balance the state (Scenario A):

To get to the overall 2016 shrink of 4.6 Bcf/d in Scenario A, a 30.6% shrink rate is necessary for the Permian and Eagle Ford.

Scenario B

Now let’s assume that the production in non-Eagle Ford and Permian production areas in Texas is less than the overall U.S. average — remember that Texas has some very dry production in areas like the Barnett and Haynesville. For Scenario B, we will set non-Eagle Ford and non-Permian shrink at 7% and solve what rate these two regions need to be in order to balance the state.

In Scenario B, a shrink rate in the Permian and Eagle Ford of over 34% is needed.

Scenario Impacts to Permian Production

Why does all of this matter? Well, let’s combine the above views of Permian shrink and dry production to work it out.

The table below tells us that, depending on the shrink rate used for Permian production in Texas, compared to the widely used 15%, over 1 Bcf/d less dry gas production is imputed. This is important not just because of the volume itself, but also for assessing the utilization of dry gas pipelines leaving the Permian. Of course, ultimately, production from both Texas and New Mexico must be combined to get the full picture of Permian production.

Layering the Grey Areas

Takeaway capacity utilization from the Permian is a critically important topic right now given the growing hydrocarbon production from the basin. Unfortunately, much of that takeaway is on intrastate pipelines for which there is no publicly available data from which to discern utilization. The way the market currently assumes utilization on these pipes is to start with wellhead production from the Permian, and then deduct production losses to arrive at dry production. From this volume, some known quantities such as gas exiting the region on interstate pipelines is deducted, then an estimated localized demand volume is deducted, along with a limited sample of regional storage activity. Everything else is assumed to be moving on intrastate pipelines.

Why does this matter? The lower the assumed dry gas production volume, the lower the assumed quantity moving on intrastate pipelines, and thus the lower utilization of these pipelines and the more room for growth the Permian can handle before new takeaway capacity is needed.

PointLogic calculates shrink at a Producing Area level while truing-up to overall EIA dry production by state. We believe this gives us a much better view of what is happening in terms of dry production within the state of Texas. All of this data is available through current day production on our website and client platform.

PointLogic will soon be releasing a Texas and Southeast Regional Report which will bring all of this together and provide our answer for how much dry gas is being produced in the Permian (including both Texas and New Mexico Permian production) and how much capacity is being moved out by interstate and intrastate pipelines. In anticipation of this report, we’ll be releasing further Get the Point articles which examine current Permian takeaway capacity and utilization along with a list of currently proposed projects to move more gas out of the region. Stay tuned.