Hyperscalers May Reevaluate Natural Gas Consumption in Light of New Forecasts

Following significant investments in renewable energy, major tech companies such as Amazon, Google, Meta, and Microsoft are increasingly depending on natural gas to fuel their data centers that underpin extensive AI operations. However, a recent research report has raised concerns about the potential risks tied to this growing dependence on fossil fuels by these technology giants.

Noreva, a research firm focused on energy, alerts that natural gas prices in various regions across the U.S. could potentially triple in the near future. This anticipated price increase is likely due to heightened demand from hyperscalers, constrained supply growth, and rising liquefied natural gas exports, which could expose hyperscalers to sudden price fluctuations.

“Many in the energy sector have miscalculated future gas prices,” stated Peter Gardett, CEO of Noreva, in an interview with TechCrunch. “A straightforward calculation reveals that the gas market is considerably tighter than it was a few years back.”

Major Investments by Hyperscalers

The low cost of natural gas is driving hyperscalers to fortify their foothold in the market. In March, Meta announced plans to build a 7.5-gigawatt natural gas plant in Louisiana to support its Hyperion data center. Shortly after, Microsoft and Google expressed intentions to establish gigawatt-scale gas plants in Texas. Furthermore, Amazon revealed initiatives to develop a 7.6-gigawatt gas facility in Texas.

These companies, usually cautious about making large capital investments, are now pressured to invest heavily in physical infrastructure while navigating complex energy markets.

According to Gardett, at least one investor was taken aback by the level of risk hyperscalers are willing to take on regarding natural gas prices. “They are acting in ways that are not typical for an off-taker,” he commented.

Noreva predicts that natural gas prices could exceed $10 per million BTUs at certain delivery points, in stark contrast to current prices, which range from $2 to $4.50 per million BTUs, with the well-known Henry Hub in Louisiana priced just below $3.

Considering that fuel costs account for nearly half of the electricity expenses for large power plants, a doubling or tripling of natural gas prices could greatly inflate operational costs for AI data centers that “generate their own power.” This situation may drive token prices up or force hyperscalers to depend more on the grid, further increasing their electricity expenses.

In the short term, natural gas prices appear stable, as futures contracts show no signs of significant volatility. “It’s a reasonable assumption,” Gardett remarked, while casting doubt on its long-term stability.

Rising Demand

Natural gas prices have stabilized due to an extended period of steady demand and limited supply growth, compensating for declines from aging wells, according to Gardett’s analysis. He believes energy companies can enhance supplies, albeit not to previous levels, and that developing new wells is becoming costlier.

“This alone wouldn’t drastically modify the economics. The crucial factor is that we are finally linking the domestic gas market with the global market,” he clarified. “Additionally, there’s an increase in demand driven by AI.”

Hyperscalers are attracted to Texas and Louisiana because of their lower natural gas prices. For instance, many gas wells in West Texas focus predominantly on oil extraction, with natural gas being a byproduct facing limited market access. Historically, a lack of pipeline infrastructure has impeded the transportation of this gas, forcing producers to sell it at lower prices. However, significant infrastructure upgrades are currently underway.

“Recently built pipelines are mainly targeted at export markets,” Gardett explained.

As West Texas enhances its connection with both national and global natural gas markets, local demand will start to influence prices in other regions, and vice versa. Even minor price adjustments near hyperscaler data centers could have considerable ramifications in different areas.

“There will be regions with plentiful gas and others where it’s scarce, leading to considerable price discrepancies,” Gardett noted. Such differences could push prices in certain regions above $10 per million BTUs for extended periods.

In this scenario, even if hyperscalers can absorb rising costs, their increased consumption of natural gas could trigger a growing public backlash against data centers. Currently, 80% of consumers express concerns regarding the impact of data centers on their utility bills, especially in relation to electricity costs. This concern is likely to extend to natural gas prices as well.

By rapidly electrifying their AI data centers, hyperscalers are becoming increasingly intertwined with the fossil fuel industry—an area where they possess relatively little experience, yet one that could significantly affect their operations.

“In future earnings calls for Alphabet, you might hear discussions regarding the relationship between natural gas prices and Google’s performance, which is unusual yet a reflection of the reality we encounter today,” Gardett concluded.

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