Associated Natural Gas in the Permian – Friend or Frenemy?

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For years associated natural gas from oil production in the Permian Basin has been viewed as a byproduct with little monetary value. Infrastructure constraints and challenged pricing caused many operators to flare produced gas rather than capture and sell it. With significant egress capacity additions out of the Permian and gas prices expected to stay above $3/MMBtu for the next couple of years, many producers and investors are wondering if they should pay attention to associated gas.

Figure 1 shows how well-level economics are impacted by different gas and oil prices in the prolific Stateline region of the Delaware Basin in Texas and New Mexico. As gas prices increase, the value of wells in gas-prone regions improve. Despite this increase, oil-rich areas generally screen as generating higher returns. We believe that operators are more likely to target assets with higher oil cuts even as gas prices rise; if operators are unable to do this, they will benefit from their former frenemy.

FIGURE 1 |  Well-Level Net Present Value (NPV-10) at Different Gas and Oil Prices*

Associated Natural Gas in the Permian – Friend or Frenemy?

*Vertically and horizontally co-completed, horizontal wells targeting the Upper Wolfcamp intervals. Assumes $800/ft drill, completion and equipment costs and 7,500-foot laterals.

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