Usually when we write about natural gas markets in the Western third of the U.S., we spotlight the Permian Basin and its Waha gas hub. The focus on Waha has been for good reason, as the last three years have been nothing if not exciting in the Permian’s primary gas market. The basin’s huge volume of associated gas production and Waha’s volatility and deeply negative basis — even negative absolute prices — have made the West Texas market eminently watchable. Though a flurry of new pipelines out of the Permian have helped tame the market somewhat recently and driven Waha to the point of positive basis on its best days, the markets west of the Permian are a different story. They have seen very little in the way of new gas infrastructure, and the constrained inbound pipeline capacity has recently driven prices in the Desert Southwest to some incredible premiums. In today’s blog, we take a look at the gas markets there.
In the first part of this series, we looked at how the oft-neglected San Juan Basin in northwestern New Mexico has been impacted by recent changes at Waha, the latter of which we last covered in our Hold on Loosely blog back in May. The gist of those two blogs was that a combination of infrastructure enhancements in the Permian as well as strong basis in the Houston Ship Channel and Desert Southwest markets has helped underpin, to some extent, the futures curves in both the Permian and the San Juan.
Like hiking in — or even driving through — Death Valley this time of year, diving into the Desert Southwest natural gas market isn’t for the faint of heart. It’s an area that, in many ways, seems overlooked in today’s gas markets, though we know there is a small contingent that watches the region like a hawk. (If you are among them, go easy on us if we miss some of the finer details of the region, and feel free to send constructive comments, which are always welcome.) Figure 1 is a detailed schematic of major gas pipelines in the Permian, San Juan, and Desert Southwest markets. Note that we have labeled (with big circles) the three markets for which we can obtain a futures curve from Bloomberg: Waha, San Juan, and SoCal Border, the last of which is the primary basis futures market for gas traded in the Desert Southwest.
Figure 1. Desert Southwest Natural Gas Pipelines. Source: RBN
Before we go further, we should make a couple of clarifications. When we say “Desert Southwest” in today’s blog, we generally mean the gas market covering the area directly west of the Permian and south of the San Juan to the border between California and Arizona. This definition primarily includes the southern part of New Mexico and Arizona, as well as parts of Northwest Mexico served by the pipelines in the area. Second, while we have included most all of the relevant pipelines in and around the Desert Southwest, our focus here is the Permian and San Juan so we’re not showing pipelines serving other basins (like Kern River, which serves the Denver-Julesburg market) and we left off a few of them in the adjacent regions for simplicity.
Alright, back to the pipelines in Figure 1. The first we will discuss is a heavyweight of the Permian as well as the San Juan and Desert Southwest: Kinder Morgan’s El Paso Natural Gas (EPNG; medium purple lines) moves over 2 Bcf/d of natural gas from the Permian and another 1 Bcf/d or so from the San Juan area to markets in New Mexico, Arizona, California, and Northwest Mexico. EPNG makes various deliveries at the border in Arizona to power plants on the Mexico side. It also delivers gas to the Sierrita Pipeline (teal line), which then moves gas down to the Mexico border, where gas moves farther south on the Sasabe-Guaymas Pipeline (dark green line), which is owned by Sempra’s Mexico subsidiary, IEnova. In fact, most of the Northwest Mexico region shown in Figure 1 was almost exclusively served by gas that originated in the U.S. on EPNG, though that has changed slightly over the last few months with the start-up of various pipelines in Mexico. The most recent of these was the completion of the Samalayuca-Sasabe Pipeline (SAM-SAS; dark blue line), which runs from the Permian to where the Sierrita Pipeline intersects with the Sasabe-Guaymas Pipeline (dark green line) and which has the potential to serve as a sort of twin to the EPNG system in moving Permian gas to Northwest Mexico. (More on this in a moment.)
Turning to the SoCal Border area, we can see that EPNG makes deliveries of its Permian and San Juan natural gas at various interconnects here. One of the primary pipelines EPNG delivers into is Sempra’s Southern California Gas grid (yellow lines). EPNG also supplies TC Energy’s Baja North Pipeline (short magenta pipeline), as well as the Pacific Gas & Electric pipeline system (aqua lines). EPNG’s Desert Southwest deliveries also include numerous power plants in Arizona and New Mexico. While EPNG is the most significant major player in the area, it isn’t alone. Energy Transfer’s Transwestern Pipeline (red line) competes to supply some of the same markets: the long-haul pipe originates in the Permian and transverses the San Juan before terminating at the California border. That pretty much covers the major pipelines in the region, though we’ve included a few others for completeness.
If you’ve made it this far, then perhaps you have at least some vested interest in the Desert Southwest gas market and that is likely for good reason. Basis, which is just the differential between a gas hub’s price and the Henry Hub benchmark in Louisiana, has been sizzling in the Desert Southwest, for which we use the SoCal Border basis market as a proxy. Figure 2 below shows the forward basis curves for the Waha, San Juan, and SoCal Border markets. Though Waha (red line) and the San Juan (gray line) both have some positive months, SoCal Border (blue line) really stands out. While SoCal Border has a few negative months on its futures curve in the spring of next year, some of the peak demand months during the summer and winter this year and next are between $0.50/MMBtu and $1.50/MMBtu over Henry Hub. That’s a dramatic premium to Waha and the San Juan, which are only just slightly premium — if that — during the peak demand months, meaning the spread from these two basins to the SoCal border is well over $1.00/MMBtu for many months from now through the end of next year. Though the basis curve for SoCal Border slopes downward over the course of this year and next, prices for next summer and early in the winter of 2022-23 remain solidly between $0.50/MMBtu and $1.00/MMBtu over Henry Hub.
Figure 2. Waha, San Juan, and SoCal Border Forward Basis Curves. Source: Bloomberg
Why should natural gas prices be so strong in a market feeding Southern California, a region that many folks associate with solar power, electric cars, and a general disdain for fossil fuels? Well, there is no simple answer to that question, but California and many of its neighbors remain heavy consumers of natural gas, despite their focus on renewable generation. [On the subject of renewables, the desire to move toward a “green” hydrogen-oriented fuel mix in the California market is notable but is complicated by the dearth of gas pipeline capacity into the region, which is a topic we touched on recently in our It’s a Gas: Hydrogen webinar.] What’s more, given the extreme drought in many western states, hydroelectric generation is lower than this time last year, which has driven up demand for natural gas as well as coal in the region’s electric power sector. However, it’s clear that, given the price spreads between the Permian and California, every molecule of gas that can leave the Permian and head west on EPNG and Transwestern is doing just that. Unfortunately, those pipelines have made almost no capacity expansions over the years, in stark contrast to various brownfield and greenfield pipeline projects that have been constructed to points north and east from the Permian. So, when SoCal Border prices spike, there’s simply not much the Permian can do to help out.
One source of potential assistance out west — ironically perhaps— could come from the new SAM-SAS pipeline corridor in Mexico that we mentioned earlier. When the Samalayuca-Sasabe Pipeline started up earlier this year, it was moving around 100 MMcf/d of gas that previously flowed west on EPNG and then south into Mexico. While that is far below SAM-SAS’s capacity of 472 MMcf/d, it did help more Permian gas get into the Arizona and California markets via EPNG. That said, the new pipeline hasn’t been very reliable so far and a recent outage occurred during one of the latest heat waves, exacerbating the SoCal Border gas price spikes.
Those are just a few of the issues impacting this region, but there are others, ranging from possible additional power plant retirements and expanded intermittent renewable generation, as we covered in California Dreamin’, to a steady fall in natural gas production from the San Juan and traditional Rockies basins that help supply western gas markets. Making the SoCal Border market even more interesting will be the addition of a significant amount of gas demand when Sempra’s LNG export facility starts up at Costa Azul (just south of Tijuana in Northwest Mexico’s Baja California region), which we wrote about recently in Closer. How all this plays out is up for debate, but we think markets in the Desert Southwest are likely to stay volatile in the months ahead. Sadly, without more pipeline capacity across New Mexico and Arizona, there’s not likely much that resurging Permian Basin natural gas production will be able to do to help the situation.
https://rbnenergy.com/a-thousand-miles-from-henry-part-2-desert-southwest-natural-gas-basis-is-sizzling
