El Paso Force Majeure Cuts West Permian Flows

Forecasts call for heat in late August in the southwest

Regional prices are under upward pressure on supply, heat

Spot gas prices in the southwestern United States could see a sharp increase by the end of the week as a force majeure event on El Paso natural gas continues to squeeze supply to the region against a backdrop of expected rising temperatures.

Earlier in August, El Paso declared a force majeure event on its 2000 line near Coolidge, Ariz., After a segment of the pipeline failed. As El Paso carries out repairs on the line, the capacity of the Cimarron compressor station has been reduced to zero – down from its fully operational 567 MMcf / d, according to a critical notice posted on the bulletin board of Cimarron. the operator on August 15.

The reduction in westerly capacity on El Paso had a fleeting effect on Permian Basin gas production and spot prices, both of which fell immediately after the incident. In the southwest, the reduction in Permian supply has yet to show a clearly noticeable impact on prices in destination markets such as the border hub of SoCal Gas or PG&E South, which have recently fallen in due to cooler weather.

Forecasters are now calling for another heatwave in the southwest later this week, however, the Permian’s supply reduction will likely be hit hardest – potentially fueling a disproportionate rally in spot markets as the region is grappling with additional demand from power producers.

Market outlook

After dropping to an average of 73 degrees Fahrenheit over the past week, population-weighted temperatures in the southwest are expected to reach 76 degrees later this week.

Rising mercury is expected to increase demand for gas from generators in the southwest, with electricity consumption expected to increase by more than 1 Bcf / d from its current level, reaching around 4.7 Bcf / d at the end of August, according to the most recent forecast from S&P Global Platts Analytics.

The gas futures markets are already preparing for a sharp rise in spot prices.

At the border hub of SoCal Gas, the contract for the remainder of August most recently settled at $ 6.31 / MMBtu – a premium of nearly $ 2 over the preliminary cash market settlement price on 23 August. The market was less bullish about the potential impact on pricing at PG&E South, where the one-month-off contract most recently settled at $ 3.75 / MMBtu, roughly flat against at current spot price, based on data from S&P Global Platts.

Flows

Since El Paso’s announcement of a force majeure event on its 2000 line, westbound flows of the Permian Basin have averaged only 3 billion cubic feet per day, dipping slightly below that level at weekend course. In the 30 days leading up to the incident, westbound flows from the Permian Basin averaged nearly 3.45 Bcf / d, according to data from Platts Analytics.

While some of the displaced production has been redirected to the Transwestern pipeline, which also flows west, the majority has been diverted to flow north.

Over the past week, northbound Permian volumes jumped to an average of 430 MMcf / d, up sharply from about 240 MMcf / d in the 30 days leading up to the force majeure event.

With the Transwestern currently operating just below its 1 Gcf / d capacity, the expected peak in Southwestern demand later this week is unlikely to significantly increase Permian supply in the region before repairs to the pipeline on the affected segment of El Paso have not been completed.