Donald Raikes has some advice for anyone pondering the state of today’s oil and gas market. “If you think you’ve figured it out, you haven’t,” the senior vice president for customer service and business development at Virginia-based Dominion Energy told 1,200-plus attendees at Hart Energy’s Marcellus-Utica Midstream Con­ference & Exhibition in January.

The industry “is in tough times, but there will be a turnaround—and what a place to be when it happens,” he said during his keynote address.

The Marcellus-Utica region holds one of the largest gas resources in the world and sits a stone’s throw away from large East Coast markets. “The East Coast has a new thirst for natural gas,” he said. He illustrated his point with the lyrics of a hit song from the ’70s rockers, Little River Band: “Hang on, help is on the way.”

Help is arriving in the form of new pipelines and LNG exports, with the Marcellus-Utica at the forefront of both movements. “We need new markets to satisfy the oversupply,” Raikes said.

“Producers in this area have cracked the code,” he added, citing predictions from the Energy Information Administration of 37 billion cubic feet per day (Bcf/d) of gas from the Marcellus and 14 Bcf/d from the Utica by 2025. “The productivity of these wells is abso­lutely amazing.”

Despite the production backlog, markets are starting to catch up. From 2014 to 2016, the Northeast’s appetite for gas is expected to expand to 2.5 Bcf/d, with most of that supply slated for power generation. And, Raikes pointed out, there is a “dramatic effort to unburden the gas bubble in the Northeast.”

Pipeline projects and LNG exports stim­ulated about 3 Bcf of demand from projects put online last year. This year, another 4.7 Bcf in requirements is expected, and between now and 2018, there could be about 21 Bcf more.

The Atlantic Coast Pipeline Project, born about a year and a half ago, is one such effort. Dominion joined Duke Energy Corp. and Piedmont Natural Gas Co. Inc. in a 550-mile pipeline project out of the Marcellus-Utica’s heart to feed East Coast markets. The mostly 42-inch pipeline has already secured between $4 billion and $5 billion in investment. “The driver of the project is the need for diverse and low-cost natural gas in the Northeast,” Raikes said. “We hope to begin construction at the end of the year.”

Meanwhile, Dominion’s Cove Point LNG facility in Lusby, Maryland, will be a sig­nificant piece of infrastructure for the East Coast, particularly the Marcellus-Utica supply region. The project will cost $3.4 billion to $3.8 billion and is expected to be in service in late 2017. About 56% of the project is complete.

“A lot of people ask, ‘Is it worth it to export LNG?’ The answer is ‘yes,’” Raikes said. “Our customers told us that when they heard they could have LNG sourced from ‘Saudi America’ as they call us, it immediately helped their overall portfolios and gave them leverage in negotiating with other countries for contracts and renewals.”

In early February, Dominion Energy’s parent, Dominion Resources Inc., agreed to take over integrated natural gas holding company Questar Corp., including its pipeline company and E&P Wexpro, in an all-cash deal worth $4.4 billion. The deal would give Dominion additional infrastructure in Eastern and Western U.S. natural gas markets.

The big picture

When it comes to oil and natural gas supply and demand in today’s environment, Porter Bennett, president and CEO of Denver-based Ponderosa Advisors LLC, operates under one fundamental notion: the past is in the past.

“Abundance is replacing scarcity as the foundational principle” one must consider in terms of investment and any participation in the industry today, Bennett said at the conference.

Ponderosa expects oil, natural gas and NGL prices to be flat or decline. Specifically, crude prices in the U.S. and global markets will remain in the $30 to $40 range for at least another 12 to 18 months, rising slowly with each passing year.

“Oil prices are not going to rise particularly rapidly, barring some kind of black swan event,” and may hover below $60 for the rest of the decade, he said.

While gas prices will stay “about where they were last year,” Bennett said, they are more likely than oil to rise in the short term, con­sidering the vagaries of seasonal tem­peratures. By 2017 to 2018, natural gas prices could climb slightly, although they won’t surpass $4 through the decade, according to the firm’s data.

Bennett reviewed macro trends to underpin his forecast. In January 2014, global oil fundamentals began to buck the historical pattern of demand exceeding supply. By the second quarter of 2015, crude supply was outstripping demand by 2.3 million barrels a day (MMbbl/d). Since then, excess supply has increased by another 1.8 MMbbl/d.

Crude production’s projected decline from 2016 to 2017 isn’t severe enough to solve the imbalance, he added. Overall, the industry will lose 200,000 to 300,000 bbl/d. Once prices rebound to “north of $50,” production will again begin to swell, ramping up to 1.2 MMbbl/d more.

Drilling has dropped most dramatically in North America as a result of pronounced market sensitivity, according to Ponderosa’s research. The U.S. and Canadian rig counts have continually contracted, falling 63% and 75%, respectively, since their 2013 peak. Meanwhile, in countries where drilling is not primarily “a function of commodity price,” but driven by bigger projects with longer lead times and an array of political and economic factors, drilling is, on average, “down less than 20% to 30%,” he said.

The decline in oil production has far-reaching consequences for natural gas production. “Oil and gas are connected at the drillbit” in the U.S. in new ways, Bennett said. The commodities participate in a vicious cycle. Low oil prices stimulate demand for natural gas. But, “when you reduce your drilling activity for oil, you’re going to end up with less gas,” Bennett noted. When you then increase production of gas, you increase oil production, “making the oil problem worse.”

Bennett dubbed the dip in gas production resulting from low oil prices “problematic,” because Ponderosa’s forecast calls for 14 Bcf/d of incremental U.S. demand by 2020. In the case of a demand deficit, Bennett cautioned that the price forecast may not be “high enough to elicit the kind of gas that we need in order to offset demand.”

The natural gas demand situation in the Northeast appears promising. Ponderosa data shows that 4.1 Bcf/d of new export capacity came online in fourth-quarter 2015 or will come online during first-quarter 2016. This improved capacity to export gas “is the equivalent of the Henry Hub price hub for producers in the Marcellus and the Utica,” and greatly reduces volatility, Bennett said. The new Northeastern pipelines “brought the basis down from $1.50 last year to something less than $1 so far this year.” Driven by this lower basis, incremental production in the Utica and Marcellus will close the supply gap.

These shifting dynamics are transforming the industry. By 2020, the metamorphosis will be complete: The industry will be “smaller, less susceptible to price spikes,” with “lower but adequate returns” and “even more technology-driven,” Bennett said.

How will we survive until then? It’s unclear. “We have to have more demand for all of these commodities in order to keep prices higher,” Bennett concluded. “When you look at the world and at economic activity, that’s a tough challenge.”

As a result of new export and pipeline capacity, basis in the Northeast is shrinking and becoming less volatile.

Battling basis degradation

Current oversupply conditions pose sig­nificant challenges for midstream operators, said Mark Mitchell, senior vice president with Crestwood Equity Partners LP.

Crestwood operates several storage and transportation assets in the northeast Marcellus, including the Stagecoach storage facility, which sits “right on top of the core of the dry Mar­cellus,” Mitchell said. The facility can store 21.4 Bcf of working gas and interconnects with Millennium Pipeline, Tennessee Gas Pipeline and Transco Pipeline. Other storage assets include Crestwood’s Steuben and Thomas Corners facilities.

Working with its Stagecoach facility, Crest­wood has over the last five years developed a significant transportation business focused on providing delivery alternatives for Marcellus producers. Today, it has four major receipt points on its system that are directly connected to upstream gathering facilities. Until recently, this resulted in 1.1 to 1.4 Bcf/d of direct supply feeding into the system and then moving to the downstream pipelines.

Those volumes have dropped off over the last few months, as E&P companies have cut back production and shut in gas as they await new takeaway and a recovery in gas prices. In addition, the warm winter and full storage have exacerbated the supply overhang, causing seasonal spreads to narrow. For example, October-January spreads were recently at 36 cents/Mcf and have hovered between the high 20 to low 40 cents/Mcf—for a storage operator, “not the greatest news you want to hear,” Mitchell said.

“The tremendous growth in production together with a lack of takeaway capacity has led to significant basis degradation,” he said. “Over the last five years we’ve seen a pretty steady degradation of the pricing spread on the summer-winter strip.”

Part of the problem is the time lag needed for demand to catch up with supply. “Today we’re facing some pretty significant headwinds,” he said. “We’ve got this tremendous growth taking place. The demand always takes longer. The supply can react so fast.”

Marcellus reserves continue to increase—by enough to meet market needs for “the next 20 to 30 years”—but Mitchell cited a variety of reasons why the northeast Marcellus gas market would in time find greater balance. For example, gas-fired power projects planned within 60 miles of the Stagecoach facility amount to almost 2 Bcf/d of incremental demand.

“We’ve seen an influx of projects in the Northeast. Maybe not all of these will get built, but we be­lieve that a significant portion of them will be built over the next five years,” said Mitchell. “When you’re talking about 2 Bcf/d of incremental power generation demand in the basin, that’s good news for producers; it’s good news for the market. It is one of the factors, in addition to pipeline projects, that will address the overhang of supply we’re currently seeing in the northeast Marcellus.”

In addition, Mitchell pointed to over 5 Bcf/d of takeaway projects, involving seven pipelines that are forecast to come online in the next three to four years. Regional utilities are also sourcing more system supply from both the northeast and southwest parts of the Marcellus, he added.

In a move to incentivize buyers and sellers to transact more in the basin, Crestwood launched a brand new contract on the Intercontinental Exchange in fourth-quarter 2015. One feature: Access to the Stagecoach Marcellus Hub is available at no cost.

Crestwood also plans two pipeline expan­sions. To the north, where its system connects with Millennium Pipeline, it expects to repurpose an intrastate line to provide an additional outlet to Dominion Transmission. The other expansion is at the southern end of its system, between the Tennessee and Transco lines, where the new Marc II Pipeline is to be built. Both expansions are expected to have a 2018 in-service date.