The buzz around artificial intelligence continues unabated heading into the second half of 2024. A potentially overlooked area of opportunity to harness the impact and increased adoption of AI lies within midstream.
AI is arguably one of the most prominent investment themes to emerge in the last year. Heralded as a significant technological innovation, AI forecasts call for broad-reaching disruption and adoption in the coming years. Alongside increased adoption lies an equal rise in power demand to fuel the data centers necessary for AI.
Renewable energies will likely account for a fair amount of the power required by the proliferation of AI data centers. However, the technological capabilities of renewable energies and grid capacities remain limited for now.
“When you see more deployment of solar and wind, you also typically need more natural gas with that as well, just to deal with intermittency issues,” explained Stacey Morris, CFA, Head of Energy Research at VettaFi.
This is due to a number of factors, including an inability to efficiently and reliably store renewable energy over a sustained period of time in the current grid. That coupled with the sometimes-sporadic nature of solar or wind power underscores the need for a reliable back-up fuel supply. Natural gas, with its reduced emissions output compared to coal, oil, and other sources, makes it an obvious choice in this interim energy transition period.
Source: Goldman Sachs Global Investment Research, as of 4/28/2024
An Overlooked Opportunity Emerges
The AI boom creates a surge in data center energy demand, upwards of 160% rise in power consumption according to Goldman Sachs research. Goldman Sachs currently estimates natural gas will make up 60% of the incremental power demand from data centers through 2030. It’s the equivalent of a 3.3 billion cubic feet per day (Bcf/d) increase in natural gas demand. For reference, current daily demand sits around 90 Bcf/d.
“People hadn’t really been dialing in natural gas demand from artificial intelligence in their models,” said Morris.
The ramp up in natural gas demand on the back of AI data center proliferation creates a rise in demand for related industries as well. For midstream, it equates to further growth avenues given the need for increased pipeline capacity. Goldman Sachs estimated that a the increase in natural gas demand from AI equates to an extra 6 Bcf/d needed pipeline capacity , as shown in the chart.
Midstream companies process, transport, and store natural gas and oil. Midstream Master Limited Partnerships (MLPs) rely on a fee-based business model which creates a potential buffer to commodity price volatility.
“With midstream, you get exposure to the demand trend without all the heartburn from commodity price volatility,” Morris elaborated.
The Alerian MLP ETF (AMLP) seeks to track the performance of the Alerian MLP Infrastructure Index (AMZI). The index contains MLPs that derive most of their cash flow from midstream activities.
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