Oily US E&Ps Do What They Can to Limit Gas Price Pain

When Diamondback Energy embarked on the string of acquisitions that would ultimately make it one of the top oil producers in the Permian Basin, it gave little thought to the accompanying associated gas production.

But President and CFO Kaes Van’t Hof says the company has gradually addressed that growing gas glut by signing marketing and pipeline capacity deals that move more of its gas away from the oversupplied basin and its rock-bottom prices.

“We need to start making more money on our gas in the Permian,” Van’t Hof told analysts on Diamondback’s most recent earnings call, referring both to the industry in general and his company in particular. “It’s a shame that we continue to sell gas near zero or below zero.”

The dilemma is not unique to Diamondback. After years of shrugging off the money-losing gas component of their portfolios, many oil-focused E&Ps are now taking steps to monetize the commodity, which comprises a growing share of their output in the Permian and Bakken Shale.

For example, Van’t Hof said Diamondback’s acquisitions often came with marketing contracts that gave it little control over where its gas went, but now it has sought to correct that as old contracts rolled off and new ones replaced them.

To give itself greater optionality in the marketing of its gas, the company has supported projects that will increase pipeline capacity to export supply out of the Permian to markets where it will benefit from higher prices.

It signed a firm transportation agreement for capacity on the Whistler Pipeline, which connects the Permian to the Texas Gulf Coast, and it recently secured capacity on the new Blackcomb Pipeline, which will link the Permian to the Agua Dulce hub in South Texas starting in the second half of 2026.

“About a third of our gas production exits the basin on our pipeline space, and we will continue to find ways to increase this percentage as our contracts allow,” Diamondback CEO Travis Stice said in May.

While Diamondback is primarily focused on oil, it produced just over 560 million cubic feet per day of gas in the second quarter of this year, about 20% of its overall output of 475,000 barrels of oil equivalent per day, with natural gas liquids accounting for another 22%. Its oil and gas volumes are both set to rise as a result of its acquisition of Endeavor Energy Resources, which it expects to close later this year.

Impending Demand Surge

EOG Resources has also been focusing on its oil operations in the Permian and the Eagle Ford Shale, given the much stronger pricing for oil than gas. However, CEO Ezra Yacob says the company is optimistic about the longer-term outlook for gas demand “as a result of additional LNG capacity coming on line and continuing increases in demand from electricity generation.”

“When we see the emerging demand hit, which is coming in the next few years… we’ll be in a position to be able to bring to market low-cost gas reserves,” Yacob said on the company’s Aug. 2 earnings call.

EOG has put upstream activity at its Dorado gas project in South Texas on the back burner, but it has forged ahead with work on its Verde pipeline project, which will move Dorado gas to Agua Dulce.

From there, EEA has various options, including providing feed gas to Cheniere’s Corpus Christi LNG export terminal and supplying gas to power plants in the US Southeast via Williams’ planned Texas-to-Louisiana Energy Pathway Pipeline.

EOG has also lined up capacity on the Matterhorn Express pipeline, which is scheduled to start transporting gas from the Permian to the Katy gas hub near Houston later this year.

Lance Terveen, EOG’s head of marketing and midstream, said that starting in 2025, only about 5% of the company’s gas production will be exposed to the exceptionally weak pricing at the Permian Waha hub, where values ​​regularly plunge well into negative territory.

Pivot to Gas?

ConocoPhillips CFO Bill Bullock said some of his company’s Permian gas production is shipped to the West Coast and Gulf Coast markets but that a “sizable portion” of it is exposed to dismal in-basin prices. But he said the start-up of the Matterhorn Express should bring some relief and be “really helpful for Permian Basin pricing.”

Zooming out for the big-picture view, Andy O’Brien, ConocoPhillips’ senior vice president of strategy, said the company has “a lot of gas opportunities” in its portfolio that it is not actively developing under current market conditions.

However, the company sees “tailwinds” for future demand in the form of planned expansions of LNG export capacity and growing consumption of gas for power generation. “If the demand is there, and the support is there,” O’Brien said, “we can pivot very quickly to the gas in our portfolio.”