AUSTIN, Texas—The upstream and midstream sometimes “pass like two ships in the night” and miss each other—but both must navigate the same sea change occurring now in the oil and gas business.

That was the view of Imre Kugler, associate director at IHS Markit, in an April 16 presentation on short-term crude oil and natural gas fundamentals at the 97th annual convention of GPA Midstream here.

Noting his audience focuses mostly on gas, Kugler began by projecting that U.S. gas production will rise another 5.3 billion cubic feet per day (Bcf/d) in 2018, up from an already impressive 74.6 Bcf/d in 2017. Virtually all of the increase will come from two sources: Appalachia and associated gas from surging crude production, primarily in the Permian Basin.

“Appalachia and associated production remain the twin drivers of U.S. supply growth,” he said. Increases from those two sources will more than offset declines from other basins. He mentioned the Mississippi Lime and Granite Wash in particular as two plays that will see production declines in the short term due to comparatively weaker drilling economics.

That rising gas flow will continue to challenge prices. Kugler said his calculations assume Henry Hub gas prices will average $2.89 per million British Thermal Units (MMBtu) this year but will drop to $2.73 and $2.50, respectively, in 2019 and 2020 as the midstream struggles to find markets for all that gas.

Oil production also will grow this year—up another 1 million barrels per day (MMbbl/d) to around 11 MMbbl/d “as the industry continues to be more productive,” Kugler added, noting that the increase will come on a comparatively modest capex investment as producers emphasize cost containment and returns to investors.

Kugler estimated 80% of the growth in oil output will come from the Permian’s unconventional plays while around 60% of the increase in gas output will be associated gas as Permian crude output continues to rise.

His projections for oil prices are more optimistic than those for gas because “we think OPEC and Russia will be fairly compliant” with their production cuts. They will do so because current world prices, running in the $60-$70/bbl range for both West Texas Intermediate (WTI) and Brent, allow those producers to fund social programs designed to maintain peace with restive populations.

Kugler projected WTI will average $59.52/bbl in 2018 before rising to $68 in 2019, then settling back to $62 in 2020.

He noted many producers worry because much of the rising crude production will be light oil that does not match well with U.S. refining capacity, which generally favors heavier and higher-sulfur feedstocks—most of which come from abroad.

But for the midstream, “there will be no problem absorbing all this light oil through exports,” he said, noting much of the refining capacity outside the U.S. runs best on the very light, sweet oils typically produced by the unconventional shales.

“The Permian is the primary driver of growth” in oil output due to the basin’s size and multiple horizons, he said. Kugler added other plays, primarily the Midcontinent’s Stack and Scoop, offer excellent producing zones but do not have the scale of the Permian, which sprawls across much of West Texas and into southeastern New Mexico.

“The best of the Stack is limited to Kingfisher County [Okla.] and the same goes for the Scoop. There is just a lot less territory there” even if the rock is good, he added. “We haven’t figured out what the Scoop will be.”

Improvements in technology and operating techniques allow most domestic producers to break even at $50/bbl so near-term prices around $60 are profitable and will sustain the domestic upstream in the near term.

Thanks to both its economics and its near-Gulf Coast location, “the Haynesville will be the swing [gas] producer, it is very responsive,” he said. But like the Stack, the Haynesville is comparatively small geographically against the Permian. Kugler noted the play’s best rock is in DeSoto Parish, La., and then drops off in quality.

Continued indexing LNG prices against world prices “challenges North American gas,” Kugler said. If oil prices were to float upward to the $75/bbl mark in the next two years, that will encourage an even greater increase in U.S. crude production—and still more associated gas will hit the market. That could force the Henry Hub benchmark down to around $2/MMBtu, he cautioned.

“That probably seems pretty unlikely, but then no one expected $30 oil four years ago,” he said. Gas-on-gas competition will remain an issue but “the export potential is big.”

Paul Hart can be reached at pdhart@hartenergy.com.