Justin Carlson, vice president and managing director for research, East Daley Capital Advisors spoke with Jessica Morales at Hart Energy’s recent DUG East conference and exhibition. Carlson shared his thoughts on where the market is for Marcellus gas.

Jessica Morales, Hart Energy:Where is the market for Marcellus gas and what is the future market?

Carlson: The market is the Gulf; the Marcellus gas has to get down to the Gulf. There are lines that carry [the gas]—Rover, Nexus and certainly within the northeast market itself—but the majority [of] the growth profile has to go to the Gulf. Particularly now, but also as you think of the future growth the Marcellus wants to achieve some of the objectives that producers have up there and would like to achieve. It has to go to the Gulf.

Morales: The next wave of infrastructure is expected to come online over the next couple years. What does that mean for gas prices?

Carlson: It’s a complicated question. You talk about gas prices and there is so much interplay that happens within other markets. When I see all that gas and there is 9.6 billion cubic feet of new capacity coming online before 2019 that is going to bring all of that gas supply down to the Gulf. The issue with that is it is also the most lucrative market.

All of those pipes should fill and the producers have a huge financial incentive meaning they pay take or pay contracts, which they have to pay for whether they move the molecule or not. It’s on their balance sheets, so they are going to have a high incentive to move it down. That means they are going to fill that capacity. The other piece of that is capacity that goes to other markets other than the Gulf is competing with the rest of the country. That is where it gets a little complicated because what you could see is that [initially] everything is good and everyone is very happy, but as that production starts to grow you fill that capacity very quickly. Especially since any capacity not going to the Gulf is competing with other supplies, so then there is an incentive to push it to the Gulf which fills that incremental capacity or allows producers in that capacity to resell it to somebody else. Grab those molecules that all of a sudden fills those pipes and now you are constrained again.

You could see a situation where prices in the northeast stay or get weaker pretty quickly, again, because the market for that is in the Gulf.

Morales: Tell us about any takeaway capacity issues you see.

Carlson: I think it will fill up and you could see pipes open, so the misleading part of this is that there will be other pipes that are empty while pipes to the Gulf will be full. So, when you look at it on a macro scale you’ll say, why aren’t prices better? We have open capacity out of Dominion and out of Ohio, why aren’t they better? Well it’s because you have filled all of the capacity down to the market and when you think about the squishiness of the gas market…molecules can push other molecules out.

Well, the remaining molecules in the Marcellus that aren’t going to the Gulf are fighting with the Permian, fighting with the DJ and fighting with Canada. They are fighting with every other basin that also doesn’t have more capacity into the Gulf.

Morales: How long do you think it will be before we see production growth and infrastructure development balance out?

Carlson: Well I hope never. As a market we want to continue to grow. We want to continue to produce; producers want to produce. This is going to be a cycle that continues to happen forever if we continue to develop our resources until at some point you probably see renewables take a bigger foothold and start to temper back, and then you do have a leveling out of production growth and then opening up of capacity.

I think that is a way off for us still in order to have a significant impact. I think you are going to need more capacity from the Marcellus. It may not come until the second wave of LNG, which is more slated toward the 2023 time frame. But, that first wave is probably not enough and we are going to need more capacity and more demand.

Morales:What is the buzz you hear around the Marcellus-Utica right now?

Carlson: This is where I always find the discussion about breakevens and IARs a little funny because every producer in there is doing things better, faster and stronger. I think there is a lot of optimism because they see the capacity coming online and they continue to get better at what they do. That is sort of the beauty of the model that we have here from a U.S. and resource perspective is the ability to optimize what you have and the drive to be better at what you do. Producers have really exemplified that over the last decade or so.