Energy Roundup: US Natural Gas Fields Benefitting From Data Centers Strategic Positioning

In this episode of the WTR Small Cap Spotlight, WTR Natural Resources analyst Richard Tullis joins host Tim Gerdeman for an in-depth look at the U.S. data center buildout and the critical role natural gas is playing and is expected to continue to play in powering these energy-intensive facilities. The conversation examines supply and demand dynamics, infrastructure requirements, and the small and mid-cap names best positioned to benefit from this secular growth theme. 

Transcript

SPEAKER_01 0:00

Welcome to the WTR Small Cap Spotlight Podcast. I'm your host, Tim Gerdeman, Vice Chair and Co-Founder and Chief Marketing Officer of Water Tower Research. Today I'm joined by my Watertower Research colleague Richard Tullis from our natural resources team. One of the hotter topics in current U.S. business news of late is the recent phenomenal growth in artificial intelligence or AI and the associated data centers. Today, Richard will share his thoughts on the U.S. data center build-out and the important role natural gas is playing and is expected to continue to play in powering these energy-intensive facilities. Richard, thanks for joining me today.

SPEAKER_00 0:40

Thanks for having me, Tim. And that's a great place to start. This is an amazing topic to explore and one we likely would not even be discussing several years ago prior to the artificial intelligence boom. In its simplest form, a data center is a physical facility that houses and runs large computer systems. A data center typically contains multiple computer servers, data storage devices, network equipment that provide IT infrastructure service for organizations to store, manage, process, and transmit large amounts of data. Data centers have architectural configurations ranging from footprints as small as closets to larger rooms within a single enterprise, but then onto the hyperscale facilities that occupy buildings or groups of buildings. And that is where much of the focus is today. The increasing demand for data storage and processing capacities, especially for intensive computational tasks such as AI development and deployment, has led to construction and operation of the hyperscale data centers. According to industry analysts, to be considered a hyperscale data center, a facility needs to contain at least 5,000 computer servers and occupy at least 10,000 square feet of physical space with an electric power rating exceeding 100 megawatts. So for reference, roughly 100 megawatts of electrical power is sufficient to support the electricity needs of 75 to 80,000 U.S. households.

SPEAKER_01 2:10

Great. Can you please provide our listeners with an overview of the current U.S. data center build out and what we should expect over the next two to three years, Richard?

SPEAKER_00 2:19

Yeah, looking back, Tim, the initial data center located in the U.S. was a military facility in Pennsylvania, constructed all the way back in 1945. The first U.S. commercial data center was built by IBM Big Blue in 1960. Data centers initially took off in the U.S. during the 1990s.com boom to support the sudden explosion of internet traffic. A second massive surge occurred in the late 2020s and 2010s as cloud computing and smartphones took over. Today, the tech industry is experiencing unprecedented AI-driven boom with global spending on hyperscale facilities projected to top 7 trillion by 2030. According to the data center map and Pew Research, there are currently more than 3,000 operational data centers in the U.S. And that number is expected to grow substantially in the years ahead, with more than 1,500 new data centers in various stages of development nationwide. Virginia and Texas have the most currently operating data centers, 398 and 296, respectively. And that's followed by California, Ohio, and New York. Looking across the world, the U.S. dominates global digital infrastructure, accounting for 40 to 45% of all data centers worldwide. Data centers now consume 2% of the world's electricity up from 1.7% in 2024 and 1.9% in mid-year 2025. U.S. data centers consume 29 gigawatts of electricity. That translates to about 6% of the nation's current electricity usage.

SPEAKER_01 4:01

That last sentence you just uh gave us on the U.S. data centers consuming 6% of the nation's electricity is mind-numbing. Um, so please explain to our listeners why data centers are so energy intensive.

SPEAKER_00 4:13

So roughly half the electrical power demand of data centers stems directly from the daily operation of the electronic IT equipment. And then much of the rest is for cooling that same equipment. The core hardware components of data centers include computer servers, which contain the computing chips, memory chips, data storage drives, and network routers and switches. The computer chips typically consume the most electrical power inside a server. And computing power and server systems account for roughly 40% of electricity consumption in a data center, while network and data storage equipment use about 10%. So that leaves the water-intensive cooling for much of the remaining 50%. And this is driven by the thousands of servers that are densely packed into tight spaces generating intense heat. To prevent equipment from failing, facilities must run a massive industrial air conditioners, fans, and liquid pumps continuously.

SPEAKER_01 5:11

I am most curious to uh understand how dominant natural gas is in the current U.S. data center power mix.

SPEAKER_00 5:19

Natural gas currently meets about 40% of U.S. data center electricity demand followed by renewables at 24%, then nuclear at 20%, then lastly coal at 15%. On the broader grid, gas remains the single largest source of U.S. power generation at roughly 41% of the mix in 2026. Natural gas is one of the most reliable energy sources, as it is consistently available and can be transported on an existing network of over 2 million miles of underground pipeline throughout the country. In addition, 98% of the natural gas used in the U.S. is domestically produced, reducing fluctuations associated with geopolitical events. Natural gas delivery also provides substantial flexibility as it can be ramped up and down as demand changes, unlike the more intermittent wind and solar resources. Ease of storage is another positive feature of natural gas as it can be injected into storage facilities during off-peak periods and withdrawing during peak periods of peak demand to help ensure reliability. When I worked for Texaco, we used a massive underground salt dome near Baton Rouge, Louisiana to store natural gas that was accessed to serve the local utility energy along with numerous refinery and chemical plant customers.

SPEAKER_01 6:42

So I've been reading a fair bit recently in the last three or four weeks, Richard, on the topic of these data centers moving into rural areas has become quite a polarizing issue in a lot of communities. What's driving that movement of data centers going more rural and closer to energy sources?

SPEAKER_00 7:00

Yeah, a really good point, Tim. To date, most data centers have been powered by the electric grid, but that is changing fast. Facing pressure from policymakers to supply their own power as well as multi-year delays, getting permission to connect to the grid. New data centers projects increasingly plan to build their own on-site generation capacity. And most of that is going to be powered by natural gas. It appears the big new thing in data centers is the move to accessing behind-the-meter power. The vast majority, nearly 90% of U.S. data centers currently operating, are located in urban areas, but that is quickly shifting with close to 70% of planned U.S. data centers to be located in rural areas close to where the power is being produced. A behind-the-meter data center generates its own electricity on site or adjacent to the facility, bypassing their traditional public utility grid altogether. By placing power generation assets such as natural gas turbines or solar plus storage behind the utility meter, operators achieve unmatched speed to market and energy security, completely avoiding multi-year grid interconnection delays. According to Enverus and Intelligence Research, queue to commercial operation timelines have grown roughly 60% since 2017, now averaging over 2,100 days for projects with the first power year in 2025. Getting a new data center connected to the grid now routinely takes five or more years in constrained markets. Importantly, a growing number of projects advancing toward completion or seeing a notable geographic overlap between the data center locations in the nation's gasiest energy grids and most prolific natural gas basins. Data center developers have announced approximately 101 gigawatts of on-site natural gas generation to bypass interconnection bottlenecks and secure reliable baseload power. Here are two high-profile examples. The project Kilby in the Texas Permian Basin is a Microsoft and Chevron project, and they're developing an estimated 2.7 gigawatt gas power plant and AI dentist data centers that will be fed directly by Permian Basin hydrocarbon wells. It'll be one of the largest co-located power and computing sites in the U.S. Then in my neck of the woods, there's the Hyperion Data Center. That's Meta's project where they're constructing a massive multi-billion dollar data center in rural northern Louisiana near the Hainesville Shale Play. It is designed to be directly supported by multiple dedicated gas-fired powered plants. This will be Meta's largest data center in the world. And the company very recently bumped up the expected project development cost of $50 billion plus for this five gigawatt data center that will be located on more than 2,000 acres.

SPEAKER_01 10:05

50 billion. That's a staggering number. Kind of a natural extension of what we're talking about is curiosity on what are the largest, most economical natural gas fields in the U.S. and where are they located?

SPEAKER_00 10:18

So the big three U.S. natural gas fields ranked by production are the Marcellus slash Utica, located in Appalachia. And this is mainly Pennsylvania and Ohio. And that's followed by the Permian Basin that we're also familiar with in Texas and New Mexico, and then on to the Hainesville in North Louisiana and East Texas. So these three combined account for nearly 70% of the total natural gas produced daily in the U.S. Appalachia is by far the largest natural gas producing region in the U.S., but has historically been pipeline constrained moving to the gas to the demand centers. Now you're seeing data center campuses proposed right next to the wellhead in Appalachia, such as the 2250-acre Monarch Compute mega project in West Virginia, and then Keystone Connect multi-gigawatt natural gas powered campus being developed by Tech Fusions outside Pittsburgh. These type projects sidestep the pipeline bottleneck entirely. You don't need new interstate pipe if the power plant and the data center are built where the gas is already located. Texas and Louisiana are especially well positioned because they generate more electricity than they consume, have deregulated or flexible power markets, mature pipeline networks, and state governments actively courting this investment. For example, Louisiana, where I reside, has streamlined its data center development process and fast tracks, utility permitting and approvals for major projects. Natural gas producers in the Hainesville and Permian benefit from the gas demand from LNG exporters as well and the growing demand from the data center footprint. Midstream companies at the same time benefit from new contracted pipeline and gathering volumes, especially moving gas within and out of the Permian Basin. As far as well economics, in the core of the Hainesville, breake-even gas prices for new wells run about $2.40, $2.75 per MMBTU. While some pockets in the Marcellus and Appalachia have breakevens as low as $2 per MMBTU. So to put it in perspective, these breake-even prices are far below the $10 plus per mm BTU that electricity consumers, including data centers, have been paying. And it illustrates why new data centers are looking to capitalize on these natural gas field economics by building facilities near the gas fields.

SPEAKER_01 12:52

That strategy certainly makes a lot of sense. So in wrapping up, I'd be remiss if I didn't ask you, Richard, what are some of the risks and challenges associated with natural gas-powered data center infrastructure?

SPEAKER_00 13:04

Yeah, and there are risks there. Mounting voter concerns over land use and resources have made data centers a national issue. A Gallup poll conducted in March of this year revealed that seven in 10 Americans oppose constructing data centers for artificial intelligence in their local area, including nearly half at 48%, who are strongly opposed. Half of the opponents in the poll mentioned data centers' excessive use of resources, including 18% each, mentioning their use of water and energy. The natural gas powered data centers could incur additional legislative pushback since these facilities will essentially be competing for natural gas at the wellhead with utilities that serve residential customers. March 2026 analysis by Bloomberg New Energy Finance finds 100 gigawatts of on-site gas burning capacity is planned to power data centers across the U.S. That's equivalent to 18% of the total existing capacity of all natural gas power plants in the U.S. A study released in mid-July highlighted that the cost of generated grid electricity from natural gas powered plants in the United States has climbed to its highest level in at least 17 years and is up more than 10% compared to last year. So these projects also potentially face project delays, securing local air quality permits or approval for dedicated gas pipelines that can still stall development, potentially causing projects to miss operational deadlines.

SPEAKER_01 14:43

Great. Well, thanks so much, Richard, for joining me today. Always fun catching up. And it was particularly interesting to have this very timely and topical discussion on natural gas and data centers.

SPEAKER_00 14:54

Thank you, Tim.

SPEAKER_01 14:55

Thank you for listening. And don't forget to subscribe, as well as visiting WW Watertower Research.com to stay up to speed on the company's small cap written research reports, podcasts, fireside chats, industry specific symposiums, and conference schedules. We will see you next time for another edition of the WTR Small Cap Spotlight Podcast. Finally, a special thanks to the producer and editor of the podcast, Krista Fitzpatrick.