Key Takeaways
- S&P Global Ratings estimates that U.S. data centers' increasing energy demands will lead to additional gas demand of between 3 billion cubic feet per day (bcf/d) and 6 bcf/d by 2030, from a starting point of almost none today.
- Low-risk, manageable capital expenditure projects that expand capacity will likely meet demand, notably in natural gas fields near data center growth hubs in Texas and the Southeast.
- Modest benefits for midstream operators are unlikely to have a significant effect on sector credit quality or upside potential, particularly compared to the rising potential for the sector to be reshaped by consolidation and other demand factors.
Data centers' growing demand for electricity will require additional natural gas to support generation, necessitating a response from the North American midstream energy sector.
Why it matters: Data center expansion is central to cloud computing and AI. Sustained growth in data center capacity will require significant amounts of new energy that alone cannot be met by renewable sources.
What we think: North American midstream energy suppliers are already benefitting from increased revenues due to geopolitical energy security concerns. Additional demand from data centers should contribute to at least a decade of supply growth that should be supportive of midstream sector credit quality, though the benefits will accrue most to operators in gas fields near data center hotspots.
Gas Will Remain A Key Energy Source
Crude oil and natural gas are often maligned as outdated energy sources by a world increasingly focused on the harmful effects of carbon emissions and enamored with renewable alternatives. Yet, to paraphrase Mark Twain, S&P Global Ratings believes that reports of the decline of the North American midstream energy sector are exaggerated.
The sector, which ships hydrocarbons to domestic and international markets, benefits from a renewed focus on energy security, notably amid wars in Ukraine and the Middle East. And it is poised to profit from the emergence of a modern ally in data centers, whose voracious appetite for reliable energy needed to support operational continuity is creating new and increasing demand for gas.
We believe that combination of data center demand and ongoing security concerns will underpin hydrocarbon revenues, and particularly natural gas demand, for at least the next decade.
Data Center Demand Will Power Midstream Operators' Earnings
Just how significant the demand for gas will prove to be remains a subject of debate and widely varying forecasts. Much of that is due to the potential variation in data center demand, which is nascent and subject to diverse physical and logistical constraints, including economic incentives to promote new build generation and transmission infrastructure that will influence the extent of its growth.
Our model of data center energy demand growth (see "Data Centers: Surging Power Demand Will Benefit And Test The U.S. Power Sector," Oct. 22, 2024) concludes that if 50% of incremental capacity comes from natural-gas-fired units (including baseload and peak suppliers), the grid would require up to 50 gigawatts of incremental generation supply. Up to 3 billion cubic feet per day (bcf/d) of this demand could be met with natural gas. That estimate may change depending on the energy mix that serves data centers, with a greater share of natural gas potentially increasing incremental demand from data centers by as much as 6 bcf/d by 2030. Total natural gas demand in the U.S. in 2023 averaged about 89.1 bcf/d, of which the power sector was the largest consumer at about 35.4 bcf/d, according to the U.S. Energy Information Administration--a 7% increase over 2022.
Based on that forecast, we expect that data center demand will likely support (though not fundamentally alter) the credit quality of some of the largest natural gas logistics companies that we rate. The new demand should also generally support the performance of midstream companies focused on natural gas transportation and storage.
Midstream Expansion Is Likely The Fast, Easy, And Cheap Solution
Forecasts of increased gas demand can appear at odds with the declarations of the technology companies. Hyperscalers (large-scale cloud service providers such as Amazon, Google, Meta, and Microsoft), which are partly responsible for the increased number of data centers, have generally targeted substantive reductions in carbon emissions by 2030, with most also committing to increased use of renewable or carbon neutral energy.
We consider the higher end of our 3-6 bcf/d estimate could be realized, with natural gas assuming a role as a backup fuel due to renewable energy's intermittency issues. Gas demand should also benefit from generators' ease of access and cost advantages if new infrastructure is needed. Data center investment budgets may have to balance innovation on the energy generation side against gains on the IT side, where cash will be needed to invest in better inferencing, agent-based AI, and other AI-related innovations. We think building shorter laterals (pipes of less than 50 miles) from a long-haul pipeline to a generator will prove among the easiest, fastest, and least expensive options to meet emerging demand for energy. Companies we rate have supported this thesis with small projects in their backlogs that include manageable capital outlays in the $15 million-$50 million range to construct a brownfield pipeline lateral to a generator behind the meter (including their own generation assets) for data center demand.
We view the risk of such projects as minimal given that they could use land already dedicated to pipelines (existing right-of-way), enabling them to avoid complicated permitting processes and community resistance, at least compared to large-scale builds. We expect most interconnections could be completed within 12 months, which is faster than the infrastructure constraints on the generation side.
Headwinds that could temper data center demand growth, and therefore the pace of growth for natural gas demand, include the lack of new interconnections for gas generation in PJM Interconnection (a regional transmission organization serving 13 mainly eastern states and the District of Columbia), weak economics, and long lead times for transmission infrastructure upgrades. We view these as limits to upside potential rather than downside credit risks.
Chart 1
Northern Virginia And Texas Are Poised To Benefit Most, For Now
It is not a coincidence that data center construction in the U.S. is focused on areas close to prolific natural gas production. For example, data centers in Northern Virginia are clustered near to the Marcellus shale production region, while construction in the Dallas-Fort Worth area has access to Permian Basin gas in West Texas. That proximity should facilitate supply by new merchant generators (as opposed to regulated utilities), though development of that capacity has not yet materialized.
We expect that natural gas generation from both regions will remain viable for data centers through 2030 and beyond. That view is generally supported by forecasts from S&P Global Market Intelligence. Production of Permian Basin gas will continue to increase through 2038, peaking at 11.9 bcf/d, according to S&P Commodity Insights. Output from the Marcellus region is, however, constrained by the inability to build new natural gas infrastructure beyond the recently completed (and long-delayed) Mountain Valley Pipeline (MVP), which will add 2.5 bcf/d of additional takeaway capacity to the region, which is producing about 34.1 bcf/d of natural gas, according to S&P Commodity Insights (see charts 1 and 2).
We expect renewables growth will displace natural gas through 2035 in PJM, while natural gas usage should remain steady in Texas (in the regions operated by the Electricity Reliability Council of Texas, or ERCOT). We think the combination of those trends in these power regions could increase natural gas production as much as 1 bcf/d attributable to data centers, based on our low-end estimate of 3 bcf/d.
Chart 2
Chart 3
Data Centers Will Be A Secondary Driver Of Midstream Credit Quality
Increased electricity demand from data centers should benefit the midstream industry and prove an additional source of growth capital and contracted cash flow. We expect most of the benefits from our estimate of a 3-6 bcf/d increase in demand due to data centers to accrue to a few of the largest natural gas transportation companies with assets in the Texas area, or the flexibility to move gas from the Marcellus shale region to the southeast U.S., to supply data center construction in Georgia, Alabama, and Tennessee (see table 1).
That said, data-center-driven demand is unlikely to provide material upside to our credit ratings or outlooks on these companies (despite our view that this growth is generally low risk). We continue to believe that the growth of liquefied natural gas and incremental residential and industrial demand for gas through 2030 will more meaningfully influence creditworthiness for the gas-focused midstream companies that we rate.
Table 1
| Midstream companies best positioned to benefit from data center energy demands | ||||
|---|---|---|---|---|
| Company | Opportunities | |||
| Enbridge Inc. | ENB's scale and extensive natural gas pipeline footprint make it too big to ignore. The company's U.S. asset base is highly contracted and well positioned to capitalize on data center growth near the Marcellus Shale region and possibly Texas and the U.S. Southeast. Its focus has been on the larger opportunities coming from liquefied natural gas (LNG) buildout. | |||
|
Kinder Morgan Inc. |
KMI's transportation assets move about 40% of total U.S. gas production. The company's strong competitive position in Texas should help it capture data center growth in that area. The company also has meaningful assets in the Rockies, Southwest, Mid-Continent Region, and Southeastern U.S.--which is among the fastest growth areas for natural gas demand. | |||
| TC Energy Corp. | Like ENB, TC Energy's vast pipeline network gives it size and scale advantages. Its Columbia Gas Transmission system covers the Marcellus and Utica shale of Western Pennsylvania and Eastern Ohio, as well as West Virginia and areas east toward the main data center corridor of Northern Virginia. However, the company's projects are slated toward LNG demand in Canada and the U.S., and demand growth in Mexico. | |||
|
The Williams Cos. Inc. |
WMB's natural gas logistics assets serve 12 key supply areas and move about 33% of the U.S. gas supply. The company's premier natural gas asset, the Transcontinental Gas Pipe Line Co. (Transco), provides significant interconnections from the Texas Gulf Coast area to the New York Harbor. It is in the process of completing about 2.8 billion cubic feet per day (bcf/d) of expansion projects through 2027, excluding data centers. We believe Transco will provide a significant opportunity to capitalize on data center growth. Opportunities could also develop in the Rockies and Northwestern U.S., sites of the MountainWest and Northwest pipelines. | |||
|
Sources: Company filings, S&P Global Ratings. |
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While we expect larger midstream operators will reap the bulk of the benefits, we have also identified a handful of other operators, including midsize and smaller companies, that could secure gains. We consider them companies to keep an eye on, though we acknowledge that multiple factors constrain their opportunities (see table 2).
Table 2
| Midstream companies that could benefit from data center energy demand | ||||
|---|---|---|---|---|
| Company | Opportunities and limitations | |||
|
Boardwalk Pipelines L.P. |
Boardwalk's Texas Gas Transmission and Gulf South Pipeline assets are connected to 43 natural-gas-fired power plants. About 28% of the remaining coal fired power generation capacity in the U.S. is within a 50-mile radius. | |||
|
DT Midstream Inc. |
DTM generates 65% of its EBITDA from natural gas pipeline assets in the heart of the Marcellus and Utica Shale plays and Haynesville Shale. It owns pipeline assets with larger partners Enbridge and TC Energy, which could provide access to their opportunities. DTM's Vector Pipeline, Nexus system, and Millenium Pipeline cross the PJM and Midcontinent Independent System Operator service territories are near data center development hot spots. | |||
|
EQT Corp./Equitrans Midstream Corp. |
EQT's acquisition of Equitrans Midstream, its previously owned midstream business, will give it a logistical advantage in the Marcellus Shale region, where data centers could increase natural gas demand (despite infrastructure constraints). The ability to expand the MVP to up to 2.5 bcf/d could facilitate supply to the Virginia data center corridor. EQT's production of about 6 bcf equivalent per day and a newly acquired midstream network provide a competitive advantage. | |||
| Sources: Company filings, S&P Global Ratings. | ||||
Consolidation Could Be The Midstream Game Changer
The promise of data center energy demand is sparking interest among investors in midstream companies and the industry itself. Yet we expect the new demand will have more significant credit implications for the power and regulated utility sectors than for midstream companies. Nonetheless, this new source of demand, reinforces our view that natural gas and its related infrastructure will remain a vital part of the energy demand equation for at least the next decade, if not longer.
That demand longevity, and indeed expected growth, coupled with constraints on pipeline development, also support our expectation that assets in the ground will become more valuable and that securing access to them will prove a spur to more industry consolidation. History has shown that such assets are always for sale, for the right price, and companies could increasingly conclude that the risk-reward balance weighs in favor of buying rather than building. If that happens, it will likely have more influence on midstream credit quality than the data centers' increasing energy demand.
Related Research
- Data Centers: Surging Demand Will Benefit And Test The U.S. Power Sector, Oct. 22, 2024
- Data Centers: Computing Risks And Opportunities For U.S. Real Estate, Oct. 22, 2024
- Data Centers: Welcome Electricity Growth Will Fall Short Of U.S. Data Center Demand, Oct. 22, 2024
- Industry Credit Outlook Update North America: Midstream Energy, July 18, 2024
- Key Credit Drivers For North American Midstream Energy Companies In Q2 2024, March 20, 2024
This report does not constitute a rating action.
| Primary Credit Analyst: | Michael V Grande, New York + 1 (212) 438 2242; michael.grande@spglobal.com |
| Secondary Contacts: | Pierre Georges, Paris + 33 14 420 6735; pierre.georges@spglobal.com |
| Sudeep K Kesh, New York + 1 (212) 438 7982; sudeep.kesh@spglobal.com |
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