Hyperscalers May Reevaluate Natural Gas Consumption in Light of Revised Forecasts
After making significant investments in renewable energy, prominent tech companies such as Amazon, Google, Meta, and Microsoft are increasingly turning to natural gas to power their data centers that facilitate vast AI operations. However, a recent research report has brought to light potential concerns about the risks tied to this growing dependence on fossil fuels by these tech giants.
Noreva, an energy research firm, has issued a warning that natural gas prices in various U.S. regions could potentially triple in the near future. This anticipated price hike is primarily due to rising demand from hyperscalers, limited supply growth, and increasing liquefied natural gas (LNG) exports, which might expose hyperscalers to sudden price fluctuations.
“Many in the energy sector have underestimated future gas prices,” remarked Peter Gardett, CEO of Noreva, in an interview with TechCrunch. “A simple calculation reveals that the gas market is much tighter than it was a few years back.”
Major Investments by Hyperscalers
The low cost of natural gas is prompting hyperscalers to strengthen their market presence. In March, Meta announced plans to build a 7.5-gigawatt natural gas facility in Louisiana to support its Hyperion data center. Shortly after, both Microsoft and Google declared their intentions to construct gigawatt-scale gas plants in Texas. Furthermore, Amazon introduced plans for a 7.6-gigawatt gas plant in Texas.
These typically cautious companies, known for their conservative capital investments, are now forced 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 regarding natural gas prices. “They are acting in ways that are uncommon for an off-taker,” he noted.
Noreva forecasts that natural gas prices could exceed $10 per million BTUs at certain delivery points, contrasting sharply with current prices, which range between $2 and $4.50 per million BTUs, with the widely referenced Henry Hub in Louisiana priced just below $3.
As fuel costs account for nearly half of the electricity expenses for large power plants, a doubling or tripling of natural gas prices could considerably increase operational costs for AI data centers that “generate their own power.” This scenario might lead to higher token prices or force hyperscalers to rely more on the grid, further elevating their electricity expenditures.
In the short term, natural gas prices appear stable, as futures contracts do not suggest significant volatility. “It’s a reasonable assumption,” Gardett commented, while expressing skepticism regarding its long-term stability.
Growing Demand
Natural gas prices have stabilized due to a prolonged period of steady demand and limited supply growth, offsetting declines stemming from aging wells, according to Gardett’s analysis. He asserts that energy companies can boost supply, although not to previous levels, and the development of new wells has become more costly.
“This alone wouldn’t drastically alter the economics. The critical factor is that we are finally linking the domestic gas market with the global market,” he highlighted. “Additionally, there’s a rise in demand fueled by AI.”
Hyperscalers are attracted to Texas and Louisiana for their lower natural gas prices. For instance, many gas wells in West Texas primarily target oil extraction, with natural gas being a byproduct that faces limited access to the market. Historically, insufficient pipeline infrastructure has restricted the transportation of this gas, forcing producers to sell it at diminished prices. However, significant infrastructural upgrades are currently underway.
“Recently built pipelines are mainly intended for export markets,” Gardett elucidated.
As West Texas enhances its connections with regional and global natural gas markets, local demand will start to affect prices in other areas, and vice versa. Even minor price shifts near hyperscaler data centers could have considerable repercussions in different regions.
“Certain regions will have abundant gas, while others will face scarcity, leading to significant price discrepancies,” Gardett pointed out. Such variations could push prices in specific areas above $10 per million BTUs for extended periods.
In this context, even if hyperscalers manage to cope with rising costs, their increasing consumption of natural gas could provoke growing public backlash against data centers. Presently, 80% of consumers express concerns about the impact of data centers on their utility bills, particularly in relation to electricity costs. This concern is likely to encompass natural gas prices as well.
By quickly electrifying their AI data centers, hyperscalers are becoming more interlinked with the fossil fuel industry—an area where they have relatively little experience, yet one that could significantly affect their operations.
“In future earnings calls for Alphabet, conversations about the relationship between natural gas prices and Google’s performance may arise, which is unusual but reflects the current reality we are facing,” Gardett concluded.
Please note that clicking on links in our articles may result in us earning a small commission. This does not affect our editorial independence.
