Editor’s Note: As a leading price reporting agency and business intelligence company, Natural Gas Intelligence is offering the following column by NGI Senior Vice President of Research & Analysis Patrick Rau. In this quarterly series, Rau utilizes his extensive background as a sell-side equity research analyst to drill down into the most important trends and issues discussed by natural gas executives during quarterly earnings, which are covered by NGI’s veteran roster of Thought Leaders. Each quarter, Rau focuses on the supply/demand fundamentals shaping the near-term outlook for the natural gas industry, important issues and trends in Mexico and key developments in the evolving LNG market.
Discussions of data centers once again took center stage during the recently completed the second quarter 2024 North American natural gas earnings season, and I’m trying to decide what is more fascinating – the potential increase in demand for natural gas to power new data centers in the United States, or the speed this topic has reached a critical mass among the industry. Barely anyone in the investment community was talking about this back in February, and now having a slide about data centers in investor relations presentations is seemingly becoming something of a requirement.
No. 1: Slipping Estimates For Incremental Lower 48 Gas Burns
Make no mistake, the industry is bullish on what data centers can do for Lower 48 natural gas demand, just maybe not quite as much as it was before. Following 1Q2024 earnings calls, I estimated the median consensus estimate for increased Lower 48 natural gas demand to serve data centers was an additional 6.5 Bcf/d by 2030. Today, I estimate that consensus to be more like 4.5 Bcf/d – down 31% from the initial consensus, but still very meaningful. That would lead to an annualized growth rate in gas-fired power demand of nearly 2% in the face of increased competition from renewables. Many industry pundits entered the year expecting that growth to be flat to slightly negative.
It takes several years on average to bring a new data center into service, and I can report initial talks are well underway. Alan Armstrong, CEO of Williams, remarked during the company’s 2Q2024 earnings call that “in terms of the data center load, we are right in the throes of that. I have a very long backlog of projects. And I will tell you that, particularly in the Southeast and the Mid-Atlantic, those expansion opportunities that I have, we, frankly, are kind of overwhelmed with the number of requests that we’re dealing with, and we are trying to make sense of those projects.”
It’s certainly not just Williams having the conversations:
- Kinder Morgan Inc. CEO Kim Dang during the 2Q2024 call noted that the company is “having commercial discussions on over 5 Bcf a day of opportunities related to power demand, and that includes the 1.6 of data center demand.”
- When asked about data centers on their 2Q2024 call, TC Energy Corp. Chief Operating Officer, Natural Gas Pipelines Stan Chapman, replied: “As we sit here today, there's around 300 or so data centers that are currently under construction or contemplated in the US. And when you look at where they're being built, more than 60% of them are being built within 15 miles of our pipes, which really uniquely situates us to compete for and win this load.” Of course, TC owns and operates Columbia Gas Transmission that serves the global data center capital of Virginia.
- Energy Transfer LP – “Yes, we’re in four or five different states in discussions with multiple data centers of different sizes. Some of them – or many of them – want to put generation on site and wanting as much as 200,000 or 300,000 Mcf for each one. So it’s an enormous opportunity for us,” said co-CEO Mackie McCrae.
- Oneok Inc. noted five potential artificial intelligence opportunities in its footprint for a combined 1 Bcf/d.
- DT Midstream Inc. is looking at six potential projects across its network, “all for data centers.”
- Enbridge Inc. is evaluating opportunities as well.
I also get the sense, having read more than forty earnings call transcripts this quarter, that large scale data center operators are becoming more willing to sacrifice a bit of latency, when possible, and bypass utility grids in order to source more data centers closer to natural gas supply centers, be they upstream or midstream. That includes direct interconnections into trunkline natural gas pipelines.
Let the great pipeline lateral grab begin.
No. 2: 2H2024 North American Upstream Activity Subdued?
There’s a good chance publicly traded gassier producers in the Lower 48 have reduced production guidance for the year. The current U.S. rig count stands at 583, down 7% from its recent peak of 629 on March 15, and is not likely to move much the rest of calendar year 2024. The latest from Nabors Industries Ltd. CEO Tony Petrello: “We surveyed the largest lower 48 clients at the end of the second quarter. Our survey covers 16 operators, which accounted for approximately 47% of the Lower 48 industry's working rigs at the end of the quarter. The latest survey indicates this group's year-end 2024 rig count will be modestly lower than the total at the end of the second quarter.”
NGI has found that while these Nabors surveys are not always good at predicting the absolute number of changes to the rig count, they are typically good at forecasting the direction of those changes.
As to the reason for Nabors’ pessimism? “Essentially, all of the projected decline relates to announced merger activity,” Petrello continued. “The operators not involved in mergers project activity to remain at current levels. Aside from the mergers, we believe that clients remain cautious about their plans for 2024, particularly in gas-focused spaces.”
It’s much the same story on the completions side. Liberty Energy CEO Chris Wright noted on the company’s 2Q24 earnings call that “industry-wide completions activity has declined to levels consistent with only roughly flat oil and gas production. For the US to deliver rising oil and gas production levels, completion activity would need to rise.”
Wright added, “Industry conditions moderated through the first half of this year. We now anticipate that total North American completions activity will be modestly softer in the second half of the year due to budget front-loading by some operators.”
As noted in early September by EIA, “developers expect to produce the first [liquefied natural gas] from Plaquemines LNG and Corpus Christi LNG Stage III and ship first cargoes from these projects by the end of 2024.” I estimate Phase 1 of Plaquemines and Corpus Christi LNG Stage III will create another 2.5 Bcf/d of demand for gas, an amount I believe can be covered largely by current producer curtailments and deferred turn-in-line (TIL) wells. However, Plaquemines Phase 2 and Golden Pass, which has been delayed until early 2026, will combine for another 3.0 Bcf/d. That will require additional wells, in our view.
No. 3: Lower 48 Storage Higher Than It Seems
Several producers expressed optimism for an improved supply picture by noting Lower 48 storage surpluses have been shrinking this summer, which by straight math is certainly true. On April 5, Lower 48 working gas in storage was 2,283 Bcf, up 435 Bcf year/year and 633 Bcf higher than the previous five-year average. Those figures stood at 3,334 Bcf, 228 Bcf and 361 Bcf as of August 23.
As Williams noted on its 2Q2024 earnings call, producers are making a month-by-month decision on gas volumes that they might shut in, a sentiment that was confirmed by a number of gassier producers in recent weeks. Based on comments from other producers, I conservatively estimate there is at least 1.8 Bcf/d of production in the Lower 48 that either has been curtailed or is in the form of TIL that can be brought online in within a few weeks, the idea being for producers to do so when prices are higher. I’ve seen estimates that there are more than 3 Bcf/d of voluntary cuts in the Marcellus and Haynesville alone, but for the sake of conservatism, let’s stick with that more muted 1.8 Bcf/d figure.
I believe producers will be more amenable to restoring curtailed production and hooking up delayed TILs when prices approach $3.00/MMBtu, something NGI’s forward curves suggest could happen as soon as December.
It would take several weeks for producers to restore all curtailed production and work through their inventory of deferred TILs, but if they start in November, I believe most, if not all, of that production could be restored by December. That means 1.8 x 121 days = 218 Bcf of additional “virtual storage” would be available through the end of winter.
Adding that to the current storage excess yields year/year and difference to five-year figures that are in line with what they were back in May, a good deal higher from what the latest absolute storage numbers suggest. These estimates also do not incorporate any curtailments from private operators, nor do they take into account any additional curtailments/deferrals Chesapeake Energy Corp. may make once they take over Southwestern Energy Co.’s assets, something Chesapeake expects to happen by the end of 2024. They also don’t include any additional production gains that result from continued efficiency gains from producers. Ultimately, I believe it will take a colder-than-normal winter to justify the current winter strip, especially given the push out of Golden Pass LNG until 2026.
No. 4: The Power Of Four
For takeaway #4, I focus on the number four. As in, four-mile laterals and quad-fracs. Several producers have begun testing 20,000+ foot laterals and are generally pleased with the results. I certainly expect more of these to hit the drilling queue in 2025, especially as a few of these high profile mergers, particularly involving companies operating in the Permian Basin, are finally approved.
2Q2024 marks the first quarter I heard of quad-fracs. From Liberty Energy Inc. President Ron Gusek: “You’ve seen what started out as zipper-frac, then simul-frac, then trimul-frac, now we're on our way to quad-frac.” Quite frankly, I was surprised none of the sell-side analysts on the call asked more about this. Efficiency gains are like the Moore’s Law of the energy industry, the net result allowing producers to lower unit costs and drain more of a reservoir. Producers can say what they want about being able to switch among various different oil and gas basins to take advantage of better pricing in different parts of the country, but they are still price takers by nature. Coming up with new ways to lower costs by driving scale continues to be both the goal and the challenge.
Before quad-fracs ever become more of the norm, however, first there must be a proliferation of trimul-fracs. Those will continue to progress, but only to an extent, since the economics don’t always favor such a move. From Kaes Van’t Hof, CFO of Diamondback Energy Inc.: “We’ve looked a lot at trimul-frac and the struggle for us is the infrastructure spend we’d have to do -- to implement to get to trimul-frac across our portfolio. And does that additional infrastructure spend, do I recognize the return on that from the efficiency gains from moving from simul-frac to trimul-frac?”
Still, producers and oilfield service companies continue to strive for new and more efficient ways of doing things. Perhaps one day soon we’ll be writing about five-mile wells and penta-fracs.
No. 5: The Road To More Gas Storage Remains Slow Going
Midstream companies have been indicating that Lower 48 storage rates and contract terms are on the rise, but maybe not to the point of a mass wave of expansions just yet. Chad Zamarin, Executive Vice President, Corporate Strategic Development for Williams, told investors in August that “I’d say that we’re still climbing the curve towards what I think makes sense from an expansion perspective. I think approaching the rates that are required for both brownfield and potentially greenfield expansion. But we’re still needing to see a bit more depth in the terms of contracts for us to put large capital to work in expanding those facilities.”
The massive expected growth of data centers, which must operate 24/7, should be a source of incremental demand for storage. As I noted earlier, that’s a potential for another 4.5 Bcf/d of demand by 2030 spread among the country. But LNG should have an even bigger and earlier impact. I estimate the next wave of Lower 48 LNG buildout will bring another 11 Bcf/d of feed gas demand by 2028, and all 11 Bcf/d of that demand will be in Texas and Louisiana.
Surely, more LNG players will be interested in storage to backstop that 11 Bcf/d of demand, if for no other reason than to be able to handle large swaths of gas that can suddenly hit the market when liquefaction trains experience unplanned downtime. Some may even be interested in adding more storage simply to serve current needs. None of the major LNG trading houses, portfolio players or liquefaction companies I reviewed have capacity at all six of the key Gulf Coast salt dome facilities listed in the chart below, and several have none at all.
For an overview of the U.S. natural gas storage industry, please review our podcast: U.S. Underground Natural Gas Storage Capacity - Much More is Needed, But Will it Happen?
