Forecasters anticipate the U.S. will see a surge in electricity demand over the coming years. The industry already expected exports (liquified natural gas and to Mexico), the onshoring of manufacturing, and the electrification of everything to fuel a significant rise in natural gas demand for gas-fired power plants. Its already optimistic expectations are growing even more bullish on the anticipation that artificial intelligence (AI) data centers will fuel even more natural gas demand in the future.
This outlook has many companies in the energy sector looking at how best to capitalize on the expected surge in gas demand. It was a topic of conversation on the fourth-quarter conference call of oil and gas giant ConocoPhillips (NYSE: COP). Here's a look at how it sees the power boom playing out.
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Bullish and bearish at the same time
Bob Bracket, an analyst on ConocoPhillips' call, asked the company about its strategy to play the anticipated natural gas boom. He noted, "Some of your peers have talked about opportunities in U.S. data center power demand, either supplying feedstock gas or, in fact, setting up power demand via CCGTs [combined-cycle gas turbines]." He noted that this approach differs from ConocoPhillips' strategy, which "clearly has been a more global LNG approach." That led him to ask management to "talk about comparing and contrasting those strategies and maybe highlight anything interesting you might be doing on the domestic power demand side."
CEO Ryan Lance addressed this question, stating, "We, like a lot of people, have been studying it." He noted that the company is getting calls from end users because it produces a lot of natural gas and has a commercial power desk that buys and sells power all over the country. The company also has a large land position in the country to potentially produce more natural gas. "So, there's some natural advantages that we have in that space," Lance said, "and we're looking at them and trying to assess some of those inbounds as another way to potentially monetize a lot of gas that maybe would get a lower Waha kind of wellhead price." Waha is a key gas trading market in Texas.
However, the reason ConocoPhillips has been more focused on LNG is its somewhat mixed outlook for gas. Lance stated, "The way I would describe that is we're bullish on gas volumes in North America, but were bearish on price."
Always looking to maximize the value of its gas
Given the company's tepid view on gas prices, ConocoPhillips wants to ensure it can get the most value out of its future gas production. Lance noted that LNG is "a great way to take advantage of those molecules and move them to higher valued markets through that LNG channel." That has led the company to advance its global LNG strategy. For example, last year, it signed a long-term regasification agreement with the Zeebrugge LNG terminal in Belgium and a long-term LNG sales agreement in Asia. That's allowing it to maximize the value of the gas it produces and sells through LNG export terminals like Port Arthur LNG, where it was an early investor to help get that project off the ground.
The company is also looking to provide gas to data center operators needing fast and cheap power. It has low-cost gas supplies in the Permian and could follow in the footsteps of others in the industry and build out gas-fired power capacity. However, the question Lance has pondered was, "Can it scale to a really big business in the company?" to which he replied, "I don't know."
He noted that those power projects would need to fit into its financial framework and be competitive for capital compared to other investment opportunities in its global portfolio. "But it certainly looks like some growth opportunities are potentially coming, and we're assessing some of those opportunities right now."
It's not the only one. For example, Chevron partnered with investment firm Engine No. 1 and gas turbine leader GE Vernova to jointly develop up to 4 gigawatts of gas-fired power generation capacity to support AI data centers by the end of 2027. Its partnership has the potential to expand beyond that initial capacity. It's also exploring the possibility of adding carbon capture and storage capabilities to lower the carbon footprint of this additional gas power demand. Meanwhile, leading utility NextEra Energy is also exploring the potential of building additional gas-fired power capacity. It has also partnered with GE Vernova to explore potential projects. It's already a leader in building and operating gas-fired power generation facilities, which gives it a competitive advantage. NextEra is also a leader in renewable energy, which it intends to pair with this gas-fired capacity. ConocoPhillips would be competing against companies with notable lower carbon competitive advantages for these opportunities.
Focused on demand, not supply
While ConocoPhillips believes gas demand will rise in the future, it doesn't anticipate that it will boost pricing. Because of that, its focus is on LNG and potentially building gas-fired power plants to maximize the value of its growing production. It's a win-win strategy because it will still come out ahead even if it's wrong (and gas prices rise).
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Matt DiLallo has positions in Chevron, ConocoPhillips, and NextEra Energy. The Motley Fool has positions in and recommends Chevron and NextEra Energy. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
