Hyperscalers May Reevaluate Natural Gas Usage in Light of New Forecasts

Following significant investments in renewable energy, leading tech giants like Amazon, Google, Meta, and Microsoft are increasingly turning to natural gas to fuel their data centers that underpin extensive AI operations. However, a recently published research report raises alarm over the potential downsides of this growing dependence on fossil fuels by these tech companies.

Noreva, a research organization focused on energy, suggests that natural gas prices in various regions of the U.S. could rise threefold in the coming years. This anticipated price hike is likely due to increased demand from hyperscalers, stagnant supply expansion, and soaring liquefied natural gas exports, which may leave hyperscalers vulnerable to sudden price fluctuations.

“Many in the energy sector have been misguided regarding future gas prices,” remarked Peter Gardett, CEO of Noreva, in an interview with TechCrunch. “A straightforward calculation reveals that the gas market is significantly tighter than it was a few years ago.”

Key Investments by Hyperscalers

The low cost of natural gas is motivating hyperscalers to solidify substantial positions in the market. In March, Meta announced plans to develop a large 7.5-gigawatt natural gas facility in Louisiana to support its Hyperion data center. Shortly thereafter, Microsoft and Google disclosed their intentions to build gigawatt-scale gas plants in Texas. Additionally, Amazon announced plans for a 7.6-gigawatt gas plant in Texas.

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

According to Gardett, at least one investor was taken aback by the level of risk regarding natural gas prices that hyperscalers are willing to take. “They are behaving in ways that are atypical for an off-taker,” he noted.

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

With fuel costs accounting for nearly half of the electricity expenses for large power plants, a doubling or tripling of natural gas prices could significantly escalate operational costs for AI data centers that “generate their own power.” This situation may drive token prices upward or force hyperscalers to rely more on the grid, further increasing their electricity expenditures.

In the near term, natural gas prices appear stable, as futures contracts show no indication of significant volatility. “It’s a reasonable assumption,” Gardett remarked, although he expresses skepticism about its long-term reliability.

Increasing Demand

Natural gas prices have largely stabilized due to a prolonged period of steady demand and limited supply growth, which offsets declining output from aging wells, according to Gardett’s analysis. He believes energy companies will manage to ramp up supplies, though not to prior levels, and that opening new wells is becoming increasingly costly.

“This alone wouldn’t drastically alter the economics. The pivotal factor is that we are finally linking the domestic gas market with the global market,” he clarified. “Furthermore, there’s a surge in demand propelled by AI.”

Hyperscalers have gravitated toward Texas and Louisiana due to lower natural gas prices. For instance, many gas wells in West Texas focus on oil extraction, producing natural gas as a secondary product with limited market access. Historically, insufficient pipeline infrastructure has hindered the transportation of this gas, forcing producers to sell it at depressed prices. However, significant infrastructure upgrades are currently underway.

“Recently constructed pipelines are predominantly targeting export markets,” Gardett explained.

As West Texas enhances its connection with both national and global natural gas markets, local demand will start to impact prices elsewhere, and vice versa. Even slight price fluctuations near hyperscaler data centers could have substantial implications in different regions.

“There will be areas with an abundance of gas and others where it is limited, leading to significant price disparities,” Gardett observed. Such differences could push prices in specific regions above $10 per million BTUs for extended periods.

In this scenario, even if hyperscalers can manage increasing costs, their heightened consumption of natural gas could provoke growing public backlash against data centers. Currently, 80% of consumers express concerns about the impact of data centers on their utility bills, especially concerning electricity costs. This concern may extend to natural gas prices as well.

By rapidly electrifying their AI data centers, hyperscalers are becoming increasingly entangled with the fossil fuel industry—an area where they have relatively limited experience, yet one that could significantly influence their operations.

“In future earnings calls for Alphabet, you might hear discussions about the connection between natural gas prices and Google’s performance, which is unusual yet reflective of the reality we face today,” Gardett concluded.

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