The Permian Natural Gas Conundrum

Evaluating Domestic Natural Gas Supply and Demand Volatility

While international and geopolitical factors are causing volatility in the oil market, the natural gas markets are also experiencing some unique domestic instability. Earlier this year, amid record low natural gas prices, reports emerged of pure natural gas players sharply reducing activity, and some Permian operators have started to pull back on development of oil plays due to a lack of marketability of associated gas production. However, natural gas spot prices have regained strength in recent months and there are some promising indicators for future growth. According to TGS Well Performance Data, over the last 3 years, Permian-associated gas production has increased at twice the rate of oil production, making the natural gas market of growing importance to players working in the Permian Basin. In this article we’ll take a look at some of the factors affecting the supply and demand side of the natural gas market before doing a quick benchmarking assessment of oil and associated gas plays in the Permian to evaluate what potential reserves could become profitable enough to develop if demand were to rise.

On the demand side of the equation, a couple of signs point towards increased domestic consumption. Goldman Sachs estimates that AI used for large language models like ChatGPT will increase data center power demands by 160% in the near future. And per the EIA Natural Gas Consumption by End Use report, natural gas consumption for electric power generation reached it’s highest ever monthly total in July of this year, increasing by 73% over the previous 3 months (Figure 1). While there is a cyclical nature to this market segment, the year-over-year demand continues to consistently grow at around 5% annually. This increased demand was echoed by Colin Parfitt, Chevron’s president of Midstream, in a recent interview with Hart Energy. Colin noted that short-term domestic demand for natural gas appears to be flat and that LNG exports are currently a favorable option, but he believes long-term trends towards “electrification” of the grid will lead to an increase in overall energy demand, which will be supplied by a mixture of renewables and natural gas.

Figure 1.  Natural Gas Utilization by Sector & Henry Hub Historical Gas Prices

On the supply side of the equation, there are also a few factors that are making things interesting. Earlier this year we wrote about a trend of increasing gas/oil ratio from associated gas across the Permian Basin. This increase in gas production in the Permian has led to significant discrepancies between natural gas spot prices in the Henry Hub and Waha Hub located in West Texas, with the Waha Hub consistently trading at more than $2 below Henry Hub in 2024. However, additional pipeline capacity is set to come online to help transport additional gas from the Permian Basin to broader markets, with the EIA reporting that the recently completed Matterhorn pipeline is now adding 2.5 Bcf/d capacity and 3 other Permian pipeline projects in various phases of development could add an additional 7.3 bcf/d of capacity. These new pipelines should go a long way towards normalizing Waha Hub spot price discrepancies and making additional natural gas available to the broader market. One important thing to note here is that the short-term outlook over the next two years is positive, but the market still currently sees a backwardation over the long term, with a downward sloping futures curve beyond 2 years.

With that context out of the way, let’s benchmark some of the primary landing zones in the Permian with regards to liquid volumes and associated gas production. Figure 2 shows a dashboard from TGS Well Data Analytics of Permian Basin wells drilled in the last decade. Wolfcamp A and Midland Wolfcamp B are the dominant oil zones among recent vintage wells, both having middle of the pack GOR’s. The next largest cumulative liquid producing zones are the Wolfcamp Shale and Delaware Wolfcamp B, both of which have higher than average GOR’s. If we look at sample wells for both zones using the TGS Well Economics model and run a sensitivity analysis, we see that wells that are on the margins of economic feasibility under current spot prices ($2.67) increase NPV by ~10% under Oct 2026 natural gas futures price assumptions ($3.57).

Figure 2.  Well Data Analytics Dashboard: Recent Permian Basin Wells

For more information about TGS Well Data Analytics or to schedule a demo, contact us at WDPSales@tgs.com.