DALLAS—Bringing new U.S. oil and gas supply online continues to be constrained by takeaway operators who are trying to catch up on an estimated $1 trillion of needed buildout.

“Midstream is huge,” Bill Marko said at Hart Energy’s A&D Strategies and Opportunities conference in Dallas last week. Marko is a managing director for investment bank Jefferies LLC, which has brokered many of the upstream shale play mergers and acquisitions (M&A) deals, particularly for Chesapeake Energy Corp. (NYSE: CHK) and, now, for Aubrey McClendon’s American Energy Partners LP.

Marko estimates that the remaining upstream spend needed to develop U.S. resource plays is between $2 trillion and $2.5 trillion. The corresponding midstream spend, he estimates, is about $1 trillion. “We’re in the early stage in the boom in midstream. Midstream will be the key to controlling the pace of upstream development.”

The ongoing lack of infrastructure to keep up with growing oil, NGL and gas production has resulted in recent blowouts in the differential price for Permian Basin oil and Marcellus gas, he noted. WTI-Midland fell $21 below WTI-Cushing the week of Aug. 18. It was improved to $85.15 on Sept. 10 while Cushing was $92.75, according to a Simmons & Co. International Inc. Sept. 10 report. As for Marcellus gas, it was $2.87 at the New York City Gate (Tetco M3) on Sept. 9--improved from $2.0922 on Sept. 5--while Henry Hub was $3.94 on Sept. 9, Simmons reported.

Tudor, Pickering, Holt & Co. (TPH) analysts reported Sept. 10, “The outlook for 2015 realizations on intrabasin production are looking worse for operators in the southwestern Marcellus and Utica, in our opinion. This is a marginally negative change to our view from just a few months ago, as we see upside bias to production following our recent update to basin models and a downgrade to takeaway capacity, given pipeline startup delays.”

The TPH analysts are optimistic, however. “Indications increasingly point towards an all-clear date in 2017 for both northern and southern [Appalachian] producers.”

Marko said at the conference, “Infrastructure is real interesting to talk about…You have blowouts, such as a $21 differential in the Permian, which I think surprised a lot of people, and then, last winter, you had the $2-plus differential in the Northeast in the Marcellus. If you’re thinking about where it will happen next, just think about where there is high growth—not from 10,000 to 20,000 barrels a day (bbl/d) but where production is growing from 200,000 to 400,000 bbl/d, where infrastructure is not keeping up.

“…We’re running as fast as we can.”

Deborah Byers, U.S. oil- and gas-practice leader for Ernst & Young, said in the conference that midstream M&A activity in the past 10 quarters has totaled some $100 billion. As for newbuild, the firm forecasts—based on data from IHS and the American Petroleum Institute—that U.S. infrastructure investment that is needed into 2025 is between $900 billion and $1.1 trillion. The figure includes common infrastructure, refining, rail and marine, gas and NGL processing, and oil and gas gathering, pipelines and storage.

Capital is responding, however. Jason McMahon, a partner with private-equity investment firm EnCap Investments LP, noted at the conference that the firm, which had traditionally invested in only upstream exploration and production, just raised its third midstream investment fund for its EnCap Flatrock Midstream LP partnership with Flatrock Energy Advisors. The newest fund is $3 billion. The second, raised in 2012, was $1.75 billion. The first, raised in 2010, was $792 million.

McMahon said, “We think about it in terms of that, for every dollar spent on the upstream side, there is a corresponding metric per dollar that needs to be spent on the midstream side in terms of bringing hydrocarbons to market.” The firm estimates the figure is some $0.25 to $0.35 per upstream dollar.

Mit Mehta, managing director and head of U.S. oil and gas for Macquarie Capital, said the potential prize from midstream investment has been noted by capital markets. “We’re seeing a lot of capital chasing [midstream]. And, in the next few years, as the midstream sector develops, there is an end market—not just with [selling to] the midstream MLPs out there.

“A lot of these private-equity investors that are going in right now and underwriting the equivalent of 20-year deals…[They] look at the return profile over 20 years and they can earn, on a risk-adjusted basis, in the teens or even more aggressive than that.”

Thus, investment is likely to continue. “You’re seeing a real home for [yield investors] and these private funds chasing this the last five years…I think it’s a natural feeder for a lot of guys saying, ‘Let’s invest in the midstream and we’re going to flip out [of it] in a few years.’”

McMahon said, “When you think about midstream and the way we go about [investing in] the business, the model is very simple…but, as for returns, we advertise the exact same return expectations from the midstream [as from upstream investments]. And I do think there is a lot of opportunity there, but there are a lot of people in the space.”

Ernst & Young’s Byers noted that midstream M&A deal makers and newbuild developers have generally lacked foreign buyers and investors to date, while upstream investors have attracted many buyers and operators from abroad.

“Midstream is a huge opportunity,” Byers said. “But when you have a midstream auction, you have 20 people showing up. And those 20 people--most of them really know what they’re doing. Why don’t you see more foreign investors coming into midstream?

“One, some of the smartest folks who know how to do this are here in the U.S. The foreign players don’t know the market as well and it’s not really where the different categories of foreign investors are interested.”

Upstream, foreign companies bought into the U.S. oil and gas renaissance primarily to learn about unconventional resource plays, she said. “They would bring in 20 or 30 people. They wanted to understand how to do that and bring that back to their company. They are interested in creating a security of [oil and gas reserves] supply and that is not a midstream base.

“They weren’t even interested in getting a dynamic return on their investment. They were looking at it as more of a strategic [tack].”