AI is one of the many drivers powering demand for natural gas over the coming years.
Demand for natural gas is strong and growing. Natural gas pipeline giant Kinder Morgan (KMI 3.46%) expects natural gas demand in the country to grow substantially between now and 2030. Exports are a major catalyst. The company anticipates demand for liquified natural gas (LNG) to more than double, while shipments to Mexico will grow by over 50%.
On top of that, the company now sees additional demand catalysts, including artificial intelligence (AI) operations, cryptocurrency mining, and data centers, powering incremental demand for natural gas. Here’s a look at why it expects the fossil fuel to be crucial to supporting AI and how that should benefit the pipeline stock.
AI-powered demand
Kinder Morgan’s co-founder and Executive Chairman, Richard Kinder, discussed the company’s outlook for natural gas during its recent first-quarter conference call. He began by stating that he had “talked a lot about the demand for natural gas resulting from this country’s LNG export facilities.” However, this time he wanted to speak about another power source driving increased demand for the fuel: “[T]he tremendous expected growth in the need for electric power.”
He noted, “This growth is being driven by a number of factors, most prominently by the increasing demand of new and expanding data centers, especially those required to support AI.” He pointed out that a recent survey projected that electric demand from data centers will grow at a 13% to 15% compound annual rate through 2030. “Put another way,” stated Kinder, “data centers used about 2.5% of U.S. electricity in 2022 and are projected to use about 20% by 2030.” He noted that AI demand for electricity alone would be about 15% by 2030. Kinder highlighted the rough math that if AI data centers use natural gas to supply just 40% of their power, it would drive an incremental 7 billion to 10 billion cubic feet of demand per day (Bcf/d). That’s in addition to the 20 Bcf/d of incremental demand expected through 2030, potentially pushing the country’s total to well over 130 Bcf/d.
While renewable energy will play a key role in powering AI data centers, it can’t meet the need alone. Data centers require uninterrupted power 24 hours per day, 365 days per year. Technology companies would prefer to use renewables to power all their data centers. But, stated Kinder, “They, like the rest of us, realize that the wind doesn’t blow all the time. The sun doesn’t shine all the time, that the use of batteries to overcome the shortfall is not practically or economically feasible.”
Because of that and the time needed to build new nuclear energy capacity and energy transmission lines to connect renewables to the grid, there’s not enough time to build the emissions-free energy needed to power AI, given its voracious energy demand. Kinder concluded, “All this means that natural gas must play an important role in power generation for years to come.”
How AI could benefit Kinder Morgan
Rising power demand from AI data centers will drive the need for more natural gas power plants. That should boost volumes across Kinder Morgan’s existing pipelines, enabling it to secure higher rates as legacy contracts expire. It should also provide the company with new expansion opportunities. Those catalysts should grow its cash flow.
The company already has a meaningful and growing backlog of capital projects. It ended the first quarter with $3.3 billion of projects in its backlog, a $300 million increase from the end of 2023. Roughly 80% of its projects support lower-carbon fuels, like natural gas.
The company expects to invest $1 billion to $2 billion annually into growth-capital projects over the long term. However, it has high confidence that it will spend toward the high end of that range in the near term. Driving that view is the forecast for robust natural gas demand growth and growing demand for other lower-carbon energy infrastructure to support renewable fuels, renewable natural gas, and carbon capture and storage.
Kinder Morgan will likely be able to build more natural gas pipelines to move the lower-carbon fuel from production basins to rising demand areas, including new natural gas power plants to support AI data centers. It could also participate in opportunities to transport carbon dioxide captured at power plants and other emission sources to sequestration sites, helping further lower their carbon footprint. These and other growth projects would increase Kinder Morgan’s cash flow, giving it more fuel to raise its already attractive dividend (currently yielding 6.1%).
Your potential pipeline to AI-powered profits
AI data centers require a tremendous amount of electricity to power the specialized chips that run AI programs. Because of that, the AI megatrend should fuel significant electricity demand, which will likely require natural gas to help carry the load.
That should provide Kinder Morgan with new opportunities to expand its leading pipeline infrastructure. This growth should give the company more fuel to increase its already attractive dividend. That makes Kinder Morgan a potentially compelling way to cash in on the AI megatrend.
