Hyperscalers Reevaluate Natural Gas Consumption in Light of Updated Forecasts

As substantial investments flow into renewable energy, leading tech companies like Amazon, Google, Meta, and Microsoft are increasingly relying on natural gas as a vital energy source for their data centers, which are crucial for AI functionalities. Recently, a study has raised concerns about the growing reliance on fossil fuels by these tech giants.

Noreva, an energy research firm, warns that natural gas prices in various regions of the U.S. could soar to three times their current levels. This anticipated increase is largely due to heightened demand from hyperscalers, stagnant supply growth, and rising liquefied natural gas (LNG) exports, potentially exposing hyperscalers to unpredictable price swings.

“Many in the energy sector are underestimating future gas prices,” noted Peter Gardett, CEO of Noreva, in an interview with TechCrunch. “Basic calculations show that the gas market is significantly tighter than it was just a few years ago.”

Major Investments from Hyperscalers

The currently low natural gas prices are prompting hyperscalers to enhance their market footprint. In March, Meta announced its intention to construct a 7.5-gigawatt natural gas facility in Louisiana to support its Hyperion data center. Shortly thereafter, Microsoft and Google revealed plans to establish gigawatt-scale gas facilities in Texas. Furthermore, Amazon unveiled plans for a 7.6-gigawatt gas facility in the same area.

Traditionally cautious with their expenditures, these companies now feel pressured to invest significantly in physical infrastructure due to challenging conditions in the energy sector.

According to Gardett, at least one investor expressed astonishment at the level of risk hyperscalers are willing to accept concerning natural gas pricing. “Their actions are notably atypical for an off-taker,” he remarked.

Noreva forecasts that natural gas prices could rise above $10 per million BTUs at specific delivery points, contrasting sharply with the current rates, which range from $2 to $4.50 per million BTUs, with the renowned 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 drastically elevate operational costs for AI data centers generating their own power. This scenario could lead to higher token prices or increased reliance on the power grid, ultimately resulting in higher electricity costs.

In the near term, natural gas prices appear stable, with futures contracts showing minimal volatility. “It’s a reasonable expectation,” observed Gardett, although he expressed apprehensions about long-term stability.

Rising Demand

The present stability in natural gas prices is largely the result of an extended period of steady demand coupled with limited supply growth, balancing declines from aging wells, according to Gardett’s analysis. He contends that while energy companies can increase supply, it is unlikely to return to historical levels, and drilling new wells has become costlier.

“This alone wouldn’t significantly shift the economic landscape. The key point is that we are now connecting the domestic gas market with international markets,” he stressed. “Moreover, there is a burgeoning demand driven by AI.”

Hyperscalers are concentrating their efforts in Texas and Louisiana, where natural gas prices are more advantageous. Numerous gas wells in West Texas primarily focus on oil extraction, with natural gas as a byproduct that has faced limited market demand. Traditionally, insufficient pipeline infrastructure has hindered the transportation of this gas, forcing producers to sell at lower prices. However, substantial upgrades to infrastructure are currently in progress.

“Recent pipeline enhancements are primarily aimed at export markets,” clarified Gardett.

As West Texas strengthens its connections to both regional and global natural gas markets, local demand will increasingly influence prices in various areas and vice versa. Minor price variations near hyperscaler data centers could lead to significant cost impacts in surrounding regions.

“Some areas will experience gas surpluses, while others will face shortages, resulting in considerable price disparities,” Gardett reiterated. These differences could push prices in certain locales to surpass $10 per million BTUs for extended periods.

In this evolving landscape, even if hyperscalers adapt to rising costs, their increasing dependence on natural gas may trigger public concerns regarding data centers. Presently, 80% of consumers are anxious about how data centers affect their utility bills, especially regarding electricity costs. This concern is likely to extend to natural gas prices as well.

By rapidly electrifying their AI data centers, hyperscalers are becoming more intertwined with the fossil fuel sector—an area where they lack substantial expertise but which could greatly impact their operational dynamics.

“In upcoming earnings reports from Alphabet, we might see discussions about the link between natural gas prices and Google’s performance, which would be unusual but reflective of the current situation,” Gardett concluded.

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