Midstream energy to fuel growth in AI

Artificial intelligence (AI) and the demand for data center computing which enables these programs have supercharged expectations for a number of tech companies this year. However, more recently, investors have begun to consider how this explosion in data center capacity is going to be powered.

While data center computing capacity has been growing for decades, the steep change in the power required for AI enabling computers has upended previous power demand expectations. It is now expected that domestic power demand is likely to grow at a healthy pace for the foreseeable future after more than a decade of very little growth.

Further, data centers are required to operate reliably 24 hours a day, seven days a week.¹ This must-run requirement means that for data center operators, the reliability of power is paramount even relative to cost or the carbon intensity of the power.² As a result, we believe natural gas demand and the midstream assets required to deliver this fuel will benefit.

Natural gas generation likely to benefit

While domestic solar and wind power generation capacity should continue to grow, neither produces power reliably or continuously. Therefore, dispatchable energy (coal, natural gas, nuclear) will likely play a significant role in meeting this power demand. More precisely, natural-gas powered generation will likely be called upon the most. Coal power generation is significantly more C02 intense, and the cost and lead-time required for new nuclear power remain as limiting factors.

While estimates vary, according to Goldman Sachs, data center market share of U.S. power demand may grow from 3% to 8% by 2030, resulting in 47 GW of incremental power generation. Incremental natural gas demand required to deliver this power could range from 3.3 billion cubic feet per day (bcf/d) (assuming natural gas-powered generation meets 60% of this demand) to 6.1 bcf/d (assuming demand is fully met by natural gas-powered generation).³

Power demand growth is already here

According to the Energy Information Agency, electricity generation rose by 20.2 gigawatts (GW) between January and June of this year. This pace of growth is the highest recorded for this period since 2003 and was 21% higher than the same period for 2023.

The PJM Interconnection (PJM), an organization that coordinates wholesale electricity across the mid-Atlantic and Midwest, recently doubled its ten-year peak demand growth forecast from its 2023 forecast. As a result, PJM no longer expects to retire its coal plants and now plans to supplement its planned renewable additions with a substantial increase in natural gas-fired power generation (76 million megawatt-hours (MWh), or about half of the annual energy demand of the New York Independent System Operator).^4,5

While PJM hosts over half the data center capacity in the U.S. today, most power companies have also increased their demand forecasts over the past year.⁶ As a result, of the 547 fossil-fuel-powered generators that were scheduled for retirement at the beginning of 2022, 36% have already had their retirement dates pushed back.⁶ A majority of these extended generators were natural-gas powered.⁶ In addition, as of May, there were 133 natural-gas-fired power plants under development.⁶

Natural gas exports also set to grow meaningfully

The trend towards greater power demand is not isolated to the U.S. Again, renewable energy will continue to grow globally, but to achieve grid reliability and to displace C02 intense coal fired generation, global natural gas-powered generation will likely continue to expand as well. While the U.S. can utilize domestic natural gas production, much of the world will need to import more and more LNG (liquified natural gas), including U.S. LNG.

Approximately 11 – 12 bcf/d of new LNG export capacity is already expected to enter service in the U.S. between now and 2030.⁷ For context, this new LNG export capacity represents a near doubling of current export capacity.

Therefore, it is reasonable to assume that between now and 2030, domestic natural gas demand will be buoyed by 3.3 – 6.1 bcf/d of incremental demand from domestic power generation and a 11 – 12 bcf/d increase from LNG export demand representing a combined 14 – 18 bcf/d increase, which represents an approximate 14% to 18% increase in total U.S. demand today. Further, both trends are likely to continue beyond 2030.

Midstream is in the position to deliver

Critical to delivering this demand surge are the midstream assets through which it must flow. Growth in well-head gathering, treating and processing, long haul transportation, and storage will all be required.

In fact, midstream companies are already announcing projects to supply natural gas to meet the demand growth. Kinder Morgan (NYSE: KMI) will spend $3 billion to increase the capacity of its Southern Natural Gas pipelines that runs along the Gulf Coast from Louisiana to Georgia to meet power generation demand in the region.⁸

Enbridge’s (NYSE: ENB) gas utility business in Utah recently added capacity to generate 50 megawatts of power and has inquires for up to an additional 1,500 megawatts of power. The company’s customers in the Southeast have expressed interest in securing 700 million cubic feet per day (MMcf/d) of natural gas transmission to power up to 5,000 megawatts of new gas power demand.⁹

Importantly, midstream companies earning a majority of their margin from natural gas centric services account for roughly 75% of midstream sector market capitalization. Therefore, we believe this impending surge in demand for natural gas represents a material catalyst for much of the sector and we believe these trends are likely to remain in place for a significant period of time.