Hyperscalers May Reevaluate Natural Gas Usage If Recent Forecasts Are Accurate

Following substantial investments in renewable energy initiatives, leading tech giants such as Amazon, Google, Meta, and Microsoft are increasingly relying on natural gas to fuel the data centers that facilitate their expansive AI projects. However, a recent research report raises concerns that this growing dependence on fossil fuels could have adverse effects on these companies.

Noreva, an energy research firm, reports that natural gas prices in various U.S. regions could potentially triple in the coming years. This surge is expected to result from increased demand from hyperscalers, stagnant supply growth, and rising liquefied natural gas exports, potentially leaving hyperscalers vulnerable to sudden price increases.

“I believe many within the energy sector have been misled regarding the future of gas prices,” stated Peter Gardett, CEO of Noreva, to TechCrunch. “A simple calculation reveals that the gas market is much tighter than it was a few years ago.”

Major Investments by Hyperscalers

The availability of affordable gas has encouraged hyperscalers to secure significant market positions. In March, Meta announced plans for a major 7.5-gigawatt natural gas facility in Louisiana to support its Hyperion data center. Shortly thereafter, Microsoft and Google unveiled their intentions to construct gigawatt-scale gas plants in Texas. Amazon also revealed plans for a 7.6-gigawatt gas plant situated in Texas.

These companies, usually cautious about hefty capital investments, now find themselves under pressure to invest heavily in physical infrastructure while navigating complex energy markets.

Gardett noted that at least one investor was taken aback by the level of risk concerning natural gas prices that hyperscalers are willing to undertake. “They are engaging in behaviors that are atypical for an off-taker,” he remarked.

Noreva forecasts that natural gas prices could exceed $10 per million BTUs at certain delivery points, in stark contrast to current prices ranging from $2 to $4.50 per million BTUs, with the widely acknowledged Henry Hub in Louisiana priced just below $3.

Since fuel costs account for nearly half of the electricity expenses associated with large power plants, a doubling or tripling of natural gas prices could significantly increase operational costs for AI data centers that “bring their own power.” This situation may lead to higher token prices or force hyperscalers to connect to the grid, further raising their electricity costs.

In the short term, natural gas prices appear stable, as futures contracts indicate no significant fluctuations. “It’s a reasonable bet,” said Gardett, although he harbors ongoing doubts about its accuracy.

Rising Demand

Natural gas prices have remained stable mainly due to years of consistent demand coupled with a slow increase in supply, counteracting declining production from aging wells, according to Gardett’s analysis. He believes energy companies will be able to boost supplies, though not at previous rates. Additionally, drilling new wells is becoming increasingly expensive.

“This alone wouldn’t dramatically change the economics. The pivotal factor is that we are finally linking the domestic gas market with the global market,” he detailed. “Moreover, there’s increasing demand driven by AI.”

Hyperscalers have been drawn to Texas and Louisiana because of their low natural gas prices. In West Texas, for instance, numerous wells focus on oil extraction, with natural gas produced as a byproduct that has limited access to markets. Historically, the lack of significant pipelines limited the transportation of this gas, forcing producers to sell it at lower prices. However, improvements are finally in progress.

“New pipelines have recently been built, with a substantial portion designated for export markets,” Gardett clarified.

As West Texas becomes more integrated with both national and international natural gas markets, local demand will begin to influence prices elsewhere, and vice versa. Even minor price adjustments near hyperscaler data centers could have widespread effects in other regions.

“There will be areas where gas is plentiful compared to others where it is scarce, leading to notable price disparities,” Gardett pointed out. Such differences could push prices in some regions above $10 per million BTUs for extended periods.

In this scenario, even if hyperscalers can manage rising prices, their increasing consumption of natural gas might provoke growing public opposition to data centers. Currently, 80% of consumers express concerns about the effect of data centers on their utility bills, particularly regarding electricity costs. This concern may also extend to natural gas expenses.

By rapidly powering their AI data centers, hyperscalers are becoming more intertwined with the fossil fuel industry—a sector where they possess relatively limited expertise, yet which could exert significant influence over their operations.

“In future earnings calls for Alphabet, you may hear discussions about the connection between natural gas prices and Google’s performance, which is unusual, but it reflects the reality we are currently facing,” Gardett concluded.

When you purchase through links in our articles, we may earn a small commission. This doesn’t affect our editorial independence.