Hyperscalers Reevaluate Natural Gas Consumption in Light of Updated Forecasts

With substantial investments flowing into renewable energy, leading tech giants like Amazon, Google, Meta, and Microsoft are increasingly relying on natural gas as a key energy source for their data centers, which are vital for AI operations. However, a recent study has raised concerns about the risks associated with this growing reliance on fossil fuels by these tech giants.

Noreva, a research firm specializing in energy, warns that natural gas prices in several U.S. regions could potentially soar to three times their current levels. This anticipated increase is mainly driven by heightened demand from hyperscalers, stagnant supply growth, and rising liquefied natural gas (LNG) exports, all of which could expose hyperscalers to unpredictable price changes.

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

Major Investments by Hyperscalers

The current low natural gas prices are incentivizing hyperscalers to broaden their market footprint. In March, Meta announced plans to construct a 7.5-gigawatt natural gas facility in Louisiana to support its Hyperion data center. Shortly after, Microsoft and Google revealed their intentions to establish gigawatt-scale gas facilities in Texas. Additionally, Amazon has disclosed plans for a 7.6-gigawatt gas facility in the same state.

Historically cautious regarding their expenditures, these companies now find it necessary to make substantial investments in physical infrastructure amidst challenging energy market dynamics.

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

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

Given that fuel costs account for nearly half of the electricity expenses for large power plants, a doubling or tripling of natural gas prices could significantly increase operational costs for AI data centers that generate their own energy. This scenario could elevate token prices or necessitate greater reliance on the power grid, ultimately raising their electricity expenses.

In the immediate term, natural gas prices appear stable, with futures contracts exhibiting minimal volatility. “It’s a reasonable assumption,” noted Gardett, although he voiced concerns regarding long-term stability.

Rising Demand

The current stability of natural gas prices can be largely attributed to a sustained period of steady demand coupled with limited supply growth, balancing out declines from aging wells, as per Gardett’s analysis. He argues that while energy companies can ramp up supply, it’s unlikely to return to historical levels, and drilling new wells has become more costly.

“This alone wouldn’t drastically alter the economic landscape. The key factor is that we are now connecting the domestic gas market to international markets,” he emphasized. “Additionally, there is an uptick in demand driven by AI.”

Hyperscalers are concentrating their efforts in Texas and Louisiana, where natural gas prices are more favorable. Many gas wells in West Texas primarily target oil extraction, with natural gas being a byproduct that struggles with limited market demand. Historically, inadequate pipeline infrastructure has hindered the transportation of this gas, forcing producers to sell at lower prices. However, significant infrastructure upgrades are in progress.

“Recent pipeline developments are mainly focused on 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 regions and vice versa. Minor price fluctuations near hyperscaler data centers could lead to substantial cost impacts in surrounding areas.

“Some regions will experience gas surpluses, while others will face shortages, resulting in significant price discrepancies,” Gardett reiterated. Such discrepancies could lead to prices in certain areas soaring above $10 per million BTUs for extended periods.

In this evolving landscape, even if hyperscalers adapt to higher costs, their increasing reliance on natural gas might trigger public concerns regarding data centers. Currently, 80% of consumers are worried about how data centers affect their utility bills, particularly in relation to electricity costs. This concern is likely to extend to natural gas pricing as well.

By rapidly electrifying their AI data centers, hyperscalers are becoming more interconnected with the fossil fuel sector—an area where they possess relatively limited expertise, yet which could significantly influence their operational dynamics.

“In upcoming earnings reports from Alphabet, we might see discussions about the correlation between natural gas prices and Google’s performance, which would be uncommon yet indicative of the situation we are facing,” Gardett concluded.

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