The 2028 Natural Gas Crisis No One Sees Coming

Key Takeaway

The U.S. faces an unprecedented natural gas crisis by 2028-2030. We're committed to exporting 35 BCF/day through LNG terminals while AI data centers demand 5-12 BCF/day more—but infrastructure can only deliver 20 BCF/day of new production. By mid-2028, gas storage will drop below all historical levels. The solution requires immediate action: build interstate pipelines now, accelerate large-scale nuclear (AP-1000 reactors) for 2033-2034, and invest in residential solar with batteries to protect against skyrocketing electricity prices. Natural gas at $3.50 today could spike to $20+ as we enter the deficit zone.

Episode Overview

Energy market analyst Matt presents 18 months of detailed research revealing a looming natural gas crisis in the U.S. by 2028-2030. Despite current abundance, committed LNG exports and AI data center demand will create historic deficits, potentially driving natural gas prices from $3.50 to $20+ and causing electricity price spikes. The episode explores infrastructure constraints, investment opportunities in solar and nuclear, and the urgent need for large-scale solutions before it's too late.

Full Transcript

Transcript of The 2028 Natural Gas Crisis No One Sees Coming from Invest Like The Best. Auto-generated from episode audio; may contain minor errors.

Natural gas is well supplied today, 26 to 27. When you get to the middle of 2028, we start to break very materially below in a historical way where gas available in storage has ever been before. And by 2029, we drop below all known historical storage evidence. You're going to start to see a knife fight to secure natural gas physical in 28 like we really haven't seen before. And the biggest losers of this would be the US consumer. So Matt, the last time we did this was I think during co kind of crazy that it's been 6 years.

I've always loved talking to you about energy markets. You've been working in this space for 20 years. You're about as encyclopedic on this stuff as anyone I've ever met. But you've also been acutely studying the current energy situation in the US rebuilding sort of in a way that you'll describe from the well-level up a picture of what's happening especially as as AI is creating all this new demand through data setters etc of what is going on over the last 18 months of concerted effort. You've reached fascinating and somewhat uh scary conclusion.

I'd love you to just start with a conclusion and then we're going to talk through how you came to this conclusion, who the winners might be, the losers might be, what's to be done about it. But before we get deep into all the component parts, just tell us what you found after 18 months of study. We are headed into a place where we see an historic deficit in natural gas supply available in the United States, which which does pretend some pretty serious consequences. Natural gas which is over 40% of US power generation has become or is imminently going to become the most important fuel in the country.

It's overtaking petroleum given the amount that we use now for for generation. Our work suggests that 26 27 natural gas is is appropriately supplied. But as we get into 28 and you plug in this compute and you assign gas to very specific assets as they're plugged in as well and you continue to export LG as we're planning to do with known projects, we start to eat into our working gas storage which is the nexus of supply and demand in the country. I think we will come to the conclusion that the upside risk price of natural gas is both you know unbounded and convex where you will feel it the most acutely will be electricity prices in 28 29 2030 based on our work.

How much of this is just attributable to data centers like just purely we're building a lot more data centers that's just for AI like is is it that simple or is there something else going on as well? the the dye was cast long before AI compute came to the scene. Um, and if I may set the stage a little bit, US gas was plentiful starting in about 2010 when shale started to really change come to the scene and change things. We we had been importing natural gas to satisfy consumption on top of what we produced domestically.

domestically. domestically. Shale shale started to be very productive, surprised the upside and became this this abundant course. And as natural gas became more abundant, we started to export it. Starting with Shener, we've gone from that early Shener exporting to today we're exporting about 15 BCF a day of name plate US export capacity. Now that 15 billion cubic feet is on a base of about 110 to 112 BCF a day of natural gas production in the US. So if you think about it, it's it's become about 15 12 to 15% of the US daily ability to supply the market.

uh we're exporting as this abundance continued more and more facilities projects have been announced. So as of today we're scheduled to export uh up to 35 BCF a day by the end of 2030 and in that case the die has been mostly cast. To build an LMG project you need various approvals. Uh they're project financed you site and permit many many years in advance. Most of these projects that get you from 15 or 16 BC of day-to-day name plate to 35 are well on their way.

And so that's the that's the primary demand incremental demand driver in the country over the last 10 years and will be at least for the next five. We had moderate population growth during the 10ens and teens uh into the into the 2000s uh 2020s. We went through a period of stagnating electricity demand, energy efficiency and and some other things driving down electricity demand. While well while you you had more demand for gas driven generation, but it's really it's really been in the in the recent past where compute has started to pull incrementally.

But before that, you had LG as the main driver demand. Now let's put those together. I just shared that we're going to go from about 15 to 35 BCF a day of incremental LNG exports. After evaluating um every producing gas well and the entire pipeline and processing and gathering system, we have the capacity to add about 20 BCF a day of gas production. Even without AI compute, we had sources and uses matched between our ability to deliver new natural gas from Appalachia, Hannesville, Perium and that which is supposed to leave the door through LG now in AI compute.

So many different power generating ideas in order to power compute given this value of time to you time to power that folks time to power that folks talk about so much. It sort of goes from the the large scale most efficient assets which are you know Geova combined cycle all the way down through the distributed generation assets which we'll call fuel cells we'll we'll addil oage or caterpillar solar turbines there are various local field level behind the meter assets that are also relevant we have had to assign with our an outside partner um probabilities to all that stuff all of this stuff and so what we've gone about doing is we we will start with our base case which is we'll call it P50 everything with a you know with a probability of 50% or more 50% being they have some approvals they have usually a PPA someone planning to buy power from them under contract they usually have some sort of interconnection agreement or they're in process with interconnection agreement those are the assets we've taken seriously in our base case and so we'll call that the P50 level and when you do that it's about 5 BCF a day we think of very credible Incremental natural gas demand associated with mostly AI compute.

Now importantly there are multiples of what we are considering seriously in our base case that have been proposed that will consume natural gas. Every solution today involve more natural gas. 6 series bloom energy you know kind of latest gen fuel cell will take 150 million cubic feet a day of gas per gawatt. the market has been assigning, you know, kind of a a high probability on them obtaining two gawatts a year of productivity or of manufacturing capacity and that's likely to ramp to, you know, 5 gawatt, which there isn't a gas for that unless you take it from something else.

In the extreme case, how high does that number get? number get? number get? If you start to move it down and say P30 or P 0, that number, you know, more can more than double and be, you know, 12 to 15 BCF a day by the early 2030s if if unmititigated. One naive way to approach this is is to say like this doesn't sound like that big of a deal. Like 12 12 new in the extreme case. Just shut off the exports. Like who cares? We didn't export natural gas for a long time.

People domestically are not going to tolerate skyrocketing energy prices. Especially when they think like the simple solution to this is just like stop shipping it out of the country and just use it for ourselves. Like why is the solution not just like shut off exports? exports? exports? It's more complicated than that contract law. There are rules. There are really good reasons why we're exporting and these these projects have you know there's tens of billions of project financing and contracts that are attached to or associated with these LG projects and as the US will be about a third of global gas supply in several years um our allies and other FTA and increasingly non FTA countries are reliant on reliant on reliant on what's FTA what's FTA what's FTA um free trade agreement so The answer is that it's both because it's a third of the of the global supply that's really important for the rest of the world and domestically there's just like you know contracts and investments and it it could be stopped but it'd be very complicated.

very complicated. very complicated. Yeah. Let's let's step back for a moment. So we you have to have a starting place for a base case which is typically starts with signed contracts. You know what do the words on the page say? What's what's allowed? What's not allowed? When we set out to build the firm, we've had about 16 plus months to start to model, you know, almost every asset at a time at the atomic level. Along the way, there are numerous constraints and rules and regulations and contracts.

And we we when we set out to build this, it was about acknowledging those constraints for what they are, assuming that contract law would be followed. And then as we go through and build all of this can flex up and down based on the choice to send less LG out the border or out out of our terminals for instance or slow AI compute growth which is one you know one other solution which we're not really willing to propose because we know that you know we know that there's insatiable demand and so it's not popular to say slow AI compute growth but to the extent that would happen that would be another lever to uh reduce the pull or strain we expect in the system as the decade goes along.

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Another I'm just going to try to ask really simple questions here because um I think just so as not to minimize it, it's your view that in the you know bad to worst case scenarios like this is like a full-blown crisis. This is not like a this is not like a small thing. this is like the story in the country and um so I want to make sure like the whole reason we're going into all this detail is like in this scenario it's it's really it's really really bad and it's it's really bad primarily I guess through prices maybe you can continue to articulate why we don't necessarily want this specific outcome and what we can do about it but help me understand like underneath the United States right now or North America there's a certain amount of gas just like objectively and I'm trying to understand like how much of this is that we are literally going to run out of the gas that's under the ground versus it's just a a problem of how quickly we can find out where it is, get it out economically, you know, process it, store it, transmit it, use it, etc.

Like those seem like two separate problems like literally just how much there is and then what we can do with it and about it and so is any element of this problem like there's just literally not enough of it. Starting with we'll call it resource in the ground. the ground. the ground. Yeah, Yeah, Yeah, there's tremendous data availability. We can measure where we are in the exploitation of most of the major gas producing basins. It would be Appalachia which is primarily the Marcelus plus the Udica Hannesville which is a key swing basin.

Then of course the Perian and to a less extent the Eagle for these are oil directed plays where the decision to drill and produce is driven by oil and gas as a byproduct. So in each of these plays there are some stacked pay or zones where uh well penetrations output can be measured with a lot of data. What that allows us to do when you digitized the acreage controlled by each one of these companies with polygon shapes that uses a bunch of Latin longs to drop in and associate a well with an area that's controlled.

You can figure out what's left. And the reality is there is gas and we've as a part of our analysis produced the gas that is logically captured and can be produced from wells from existing acreage positions of all these companies. And so there is gas. We're assuming it gets developed here. That's how you get to our 20 BCF a day of growth. But there are other constraints. It it's it's unbelievably cool that we can like literally know at this precision what is h what is underneath the ground often deep underneath the ground in hard-to-reach places.

It's a technology story, right? That that would be fun to tell sometime, but it doesn't sound like the actual problem is that we are literally running out of the stuff underneath the ground. We've also had a history of just finding new stuff that we didn't know existed before. So, it it sounds like the problem is more our ability to serve the demand in this kind of time frame, not that we're literally going to like run out of the resource over the next 20 years. years. years.

So, it's a little more complicated than that. we get through most of the existing captured inventory of companies in the next four or five years. And so if you think about you bring on a new well well well um it has a decline rate and each well as it's stacked on an existing companywide portfolio decline and and a lot of these companies decline curves are maturing some and so that they they they're pretty steep in natural gas, right? It's steep initially in natural gas but you know expand and equity and others have such mature portfolios the replacement is um less costly today than it would have been 5 years ago.

Uh so when you stack all of these wells based on existing acreage in up on these companies assuming they're going to drill optimally based on their forward curve which is depressed and we'll talk about that. Um you you get to this 1328 130 132 BCF a day of of maximum deliverability. So we are assuming that all of these companies develop the rest of their acreage. But that's a flow metric, not a stock metric. metric. metric. It's a flow metric. What is possible when you use known well performance parameters to um maximize production before you get to midstream and other surface level constraints which we'll talk about.

So there's there's resource. Yeah. Yeah. Yeah. Um we are depleting the known resource. If you were to assume prices go up meaningfully, you may unlock additional basins that are legacy known basins. We know a lot about most of the rock in the US. There are other known gas basins, but they have been ineconomic. Um and and furthermore, there isn't infrastructure to really accelerate drilling and activity in those bases. This is software. You don't press a button to solve this. This is the the constraints are multiffold.

So the first constraint is the rock. We have the ability, we think, to get to 128 to 132 BCF. I started in the most in our highest estimate, which is 132 BCF as a starting place because that's how you solve the LG exports. We've committed to um we we will take the under on that, but that's that's where you can get to a common push back as we have uh gone through this is there's plenty of resource available to us in the Perian. There's plenty of resource in Appalachia.

A number of companies describe themselves as having a lot more inventory of wells to drill than we can justify with facts. And I'll just leave it at that. But uh when folks meet with companies, they should ask to understand exact engineered locations on a map where where do they have not just the ability to produce but plans to have infrastructure on the surface to allow it to flow for instance. um and the ability within, you know, financial parameters to to invest and produce the resource in the ground.

We're we're fairly far along in understanding it. We've accounted for all of the major productive basins in the country, and I do not think we're likely to be surprised by some new major shell find. At this point, knowledge of of of those things are pretty mature. So to say it back, there's a lot of resource, but at this rate, we're depleting the known resources quite quickly. We are advanced in depleting the known resources. Um especially as we move to the next layer, which is infrastructure. Yeah.

Okay. So um there's a bigger longer term question about, you know, is this just a parenthetical period of time between 2010 and now when we were a wash in gas? Prior to that, we really weren't and maybe after this, we really won't be. Let's talk now about okay, we get gas out of the ground. It still has to go get trans processed and transmitted and used. What are the what are the most important rate limiters in that part of the equation? the equation? the equation? In some cases, it's it's processing the natural gas flows to the surface with with uh natural gas liquids embedded therein.

In some cases, there's sulfur or nitrogen that that has to be dealt with. In some cases, it comes with oil and so you have to have surface level infrastructure to produce the oil which is which is different. Gas primarily has to be produced into a pipeline system and there's a certain spec on regulated pipelines that's kind of,10,30 BTU is the spec. So you have to remove enough of these uh other hydrocarbons to get it to pipeline spec to be able to produce it into the system to be consumed by folks downstream.

So processing um is the first major constraint. constraint. constraint. There are a couple of basins with a little bit of extra processing. We'll fill it up pretty quickly. We we do not have processing yet to get to our assumed 20 BCF production target that's necessary. But processing would be something it takes you know 2 or 3 years to build at the midpoint. We generally know what processing investments are being made and projects have been announced by Perian processors or by Appalachian processors. We know what where the where the materials and liquids handling liquids handling liquids handling um throughput capacity will be in 2728 at least.

You really would need to in the near term even to get to our 20 BCF of incremental gas production we're willing to estimate you need to have more processing built build stuff now one build it now imminently. um gathering uh small diameter pipes. Gathering is what takes it from the wellhead to you know processing or pipeline system. There is a fair amount of disclosure around processing systems being expanded and built and and we would posit we have put all those on a map map map on top of every one of these wells at their Latin longs in order to do to grow even a fraction of where we [snorts] must have natural gas production go in the US.

gathering has to be uh invested in very materially over the next imminently to uh to get to the place where we can we can achieve you know 130 bub day of production US and the last one is interstate gas pipeline system and this is where I come back to your answer on LNG lots of rules and regulations around these things pipelines are monopolies for the most part local distribution companies that deliver gas to your your stove those are monopolies or igopolies in the last 10 or 12 years we've really built one interstate a gas pipeline that was Mountain Valley pipeline connecting Appalachia to Mid-Atlantic.

The the various environmental permitting um the regime changes regime changes regime changes things are nightmare to build. Yeah. Um it's it's been made very difficult to build interstate gas pipelines. This administration has been trying to reduce the barriers to building interstate gas pipes. Uh we've started to see some more progress to that to that end. Um, but there there is an urgency to build more connectivity to to wield gas around the country to serve this incremental AI compute load if it's going to if it's going to happen.

That's that's necessary. Before we keep going through this this sequence here, can you just say like what you think the state will be? Let's assume that like there's roughly inertia in the system and like nobody listens to this. Nobody does it. I think hopefully some people a lot of people will listen to this and and have ideas. But what is the what is going to happen in the world? What will the state of the world be like in 2030 if none of this starts getting addressed sooner than later?

What's your best guess as to what it looks like? There is a tremendous inertia around natural gas being the primary fuel to power AI. The market has been focused on understanding the the the power shortage and trying to solve that and and and generators generator generators generator generators generator generation generally um power generation which could be solar and batteries wind nuclear whether large scale or or small modular reactors SMRs or natural gas natural gas is well supplied today 26 and 27 and the result is that nobody is investing in gas in fact EKT is shutting in natural gas right now because they think it'll be more valuable later.

The rig count, the the things that we can see real time to figure out if the market is on to this tightness in 20 or 30, 30, 30, no one's on it. It's not apparent today. Um and so it's perpetuating this this view that most Americans have, which is there's plenty of natural gas because for 15 years it's all we've been abundant. Yeah. And so there's a complacency that's developed and we we think that complacency is going to take us right up to the point where it's too late.

So we we do think the die has been cast where uh gas which is currently at $3.50 $3.50 $3.50 $3.60 going out to 206 27 in 28 the curve is flat. 20 29th 2030 the curve is flat because people believe the gas is abundant. That's despite all these AI compute announcements, despite what all of the companies are doing to for their investments, gas has lulled everybody to sleep. But what happens is these structural things start to fall in place in 27, in 27, in 27, 28, and we start to draw meaningfully in the middle of 28, as early as early 28 on the gas system like we've never drawn before.

And as we look at 208 29 2030, we start to cut into the US working gas storage, which is about 4TCF total gas storage. There's kind of a range of high and low for that storage seasonally as we draw in summer and winter and then build in the in the in the shorter months in the spring and fall. When you get to the middle of 2028, we start to break very materially below in a historical way where gas available in storage has ever been before. And by 2029 we drop below all known historical storage evidence and by 2030 we get pretty close to where we think set parabus gas storage looks very very low and and at that point in time because it's not happened before we're forced to look at where has gas price gone during shortages.

We can look at Russia, Ukraine, gas went to 89 $10 in MCF because we send a lot more externally to Europe. We've seen various weather anomalies, polar vortex in 14 um December of of 22 and those prices have gone from, you know, to six or or eight or $10. Um but those have been transitory. transitory. transitory. And what we're talking about are structural drivers of demand against a known possible known possible known possible production of gas and they don't match up. You pull in a very historic way starting in 28 to the point where the deficit gets gets really convex and unbounded.

unbounded. unbounded. Meaning the gas prices could be 20 or something like this. I I would hesitate to even put a price target on it, but at uh8 or $10, we think you you potentially shut off some of the US exports where there are their spot cargos and they are leaving the border to capture uplift in Europe or or elsewhere. Um now those those spot cargos uh you know may not be lifted and that then that gas is left in the system and we've tried to account for that in our in our model.

Um but spot caros alone can't solve this. You would have to get into u shutting off contracted cargos leaving leaving our border uh via LG to really start to mitigate some of this. And it's it's hard for us to count on the choice to shut off contracted cargos that where there's some Japanese utility uh counterparty who has counted on it for its you know for its uh provision electricity electricity electricity in crazy convex outcomes like this. Can you tick through who you think the biggest winners and losers are?

There are some clear natural gas producer winners. Expand Energy is probably at the top of that list. They probably control 70% of remaining core Hanesville wells of the very closely known parameters of rock where we know it to be very productive and so expand we think is far and away the biggest winner uniquely expand is CEO list right now there was some turnover in the year they're going through a search the stock has plummeted over the last six months as a part of that search and it's trading at uh four times Ebita on a forward curve forward curve forward curve where no one believes what I'm telling you to be the case.

Even though we think modeling the facts gets you to a much higher gas price, the stock has dropped. The assets have not changed. It has some of the highest quality rock in the country. Highest quality upstream company in Appalachia is probably Range. Range has significant room to grow production and um and materially grow returns to investors. So, those would be the upstream companies. It's not going to be obvious in the first pass through this equation for most, but natural gas sets the marginal fuel for the next in line power generating asset in each power market.

As natural gas goes, power prices go in the country. And so if you think about the the dispatch curve of different generating assets in the country, there are some where the fuel is free. That would be solar um to a lesser extent wind hydro well solar assets which are growing meaningfully they've been 90% of the interconnect key with batteries in the last 10 years in terms of new assets coming on other than gas. Solar assets stand to benefit from a windfall where electricity prices are going up because gas is setting the margin of plant taking fuel where the price is increasing is rising while sun costs the same.

And so um we we think there are some companies positioned very well for margin expansion for no incremental capital cost. XPLR tickers X IFR formerly Nextera Yield Co which is an interesting interesting set of assets they have a a windfall coming in the latter part of the decade in early 2030s Cedus Parabus because they mark their PPAs to market at much higher values without any capex. Split away energy would be another one similar circumstance. And so solar assets at the utility scale especially stand to win.

Um maybe more interestingly as it relates to some of our discussions of the past um residential solar which has been suffering from uh really the first removal of tax incentives to install residential solar since like the late7s. Residential solar assets are really one of the only ways to protect yourself from what's going to happen during the time of 10:00 a.m. to 6:00 p.m. once gas gets really tight in the electricity markets. What you pay for electricity at your house. We think residential solar grows exponentially from here.

Um even without tax incentives for the first time it's very economic with where electricity prices are likely to go uh to install. solar especially when it companies batteries which make it much more uh make the electricity much more available round the clock. I think it's important to say you're an investor like you have you have money behind this work beyond those two categories. Are there any other like surprising winners do you think in all of this? Like what about nuclear? What about like Westinghouse or like places like this?

What we're talking about is a complex dynamic system where um there will be choices to consume electricity or not at different times. And and as I go through this, I want to make sure I acknowledge that there's no silver bullet solution for what I described as a um a convex situation with natural gas and therefore electricity prices as the decade closes. And there's no bridge fuel other than solar and wind because currently natural gas is the only flex fuel to get us to when we can bring on nuclear.

We have spent a fair amount of time as well in the nuclear ecosystem. And uh to us large scale nukes are the only solution that makes sense. uh which point us primarily to we have primarily to the AP 1000 Westinghouse units that uh that have um don't those take like 5 years to build or something that more than that but at least they have a story past and very brief history we've built two nuclear reactor units in 30 years in the US Vogle three and four around that time we also tried to build one in South Carolina called VC summer another uh kind of nuclear project at the time nearly bankrupted SCANA which was later pushed into the arms and the project was shut Yeah, the muscle memory from trying to build large scale nuke um especially in the back of Fukushima in in in 2011 um Chernobyl, Three-Mile Island, there there for three decades nuclear engineers and scientists and companies companies companies gone to do other stuff.

Yeah. And then and then the Vogal three and four experiment where it costs you know three times as much and took I don't know 15 years I think from from birth to uh commercial commercial service that that that's the recent memory of these building these nuclear units. But if you go out to the 2030s what I'm describing in terms of gas deficit only gets worse in 31 32 and beyond. And so in our mind, the only viable solution is to build large-scale nuclear um as fast as possible, which would mean it needs to come on in 2033 or 2034, which is as soon as it can come on.

Regular utilities, hyperscalers, utilities, hyperscalers, utilities, hyperscalers, um regulators, you know, should all align around that goal. But because people don't really believe that gas is in short supply as the decade goes along, they don't believe in the problem. and they don't like the solution. So they need to be convinced of the problem. And the country has a history of building of building of building pipelines to solve problems that exist today, not problems that will exist in 5 or 10 years. And so we're trying to get out ahead and see where the puck's going.

And where it's going is we are going to need large scale nuclear by 2033, 2034. 2033, 2034. 2033, 2034. You don't think SMRs can be a solution where you use smaller reactors to power individual data centers behind the meter and this just never touches the the system? Uh many of the SMRs are still science experiments. The NRC and the US government are actually doing a fair number of things to break down the barriers to bringing those, you know, fruition to see if they they work or not and and what the cost will be and whether they can be scaled or not.

But many of these SMR companies are not set up to manufacture and truly scale uh for the solution that's needed to to solve this problem, which is tens of gigawatts as you go into the 2030s. And so that that points us to these AP. So since since uh Vogle 4 came on and Vogle 4 experienced very material improvements from Vogle 3 um in Georgia today China is building 39 plus or minus nuclear reactors. 34 of them are 1 gawatt plus um I think a third of those are modeled after the AP 1000.

We know a lot more today about building large scale nukes than we did when these mistakes were made. large scale to us where it can be commercialized on a known timeline where the costs are probably better um than where we don't even know if we can scale the businesses yet in terms of SMRs large scale versus small probably wins in our mind. Two companies most lover to that would be Kamico which owns 49% Brookfield 51%. Brookfield 51%. Brookfield 51%. You'll probably find that the US government I think agrees with what I'm describing.

they they seem to really be lining up and trying to facilitate commitments and early procurement which will derisk some of some of the supply chain which will help put timelines on this when the Westinghouse comes public and it's deeply undervalued within Camo today. So that's an interesting one. BWXT which is a super interesting company with um they're the primary supplier of nuclear for the US Navy. they they significantly benefit from you know the coming nuclear cycle as well and um lots of dollar content in the Apoon thousands.

Apoon thousands. Apoon thousands. Who are the big losers do you think in this future? Well, well, sadly, and the biggest losers of this would be the US consumer and um to the point where you take what I'm saying and if we're even partially right, partially right, partially right, electricity prices rise um which you can see some of on the forward curves in these different markets. Um as electricity prices rise, you know, you start to think about the trade-off. Are we going to export natural gas to foreign buyers?

Are we going to use it for AI compute? or are we going to try to keep consumer electricity price bills? It's an awful trade-off and I think I think it will probably start to contribute more to the public dialogue, the nimism that we're seeing already pop up in some places. We we think AI is is tremendously transformational. Uh we're not anti-AI, but um it consumes a lot of power. We need to really focus on the 2030 to 2035 period. the US consumer is probably going to pay the bill in the meantime.

Please note that most of the solutions being proposed by the government are to consume more gas because everybody believes it's enough. Bring your own generator or generation BYOG is a is a thing today. That's what the hyperscalers are being asked to do to site their data center in a certain Latin long. Well, that means more gas not less. And so every time you read a press release from Bloom or from Genev, think more gas. Just think more gas. And you can use the energy efficiency of each one of those units and understand exactly how much more incremental gas beyond the base case that I just shared is is dangerously tight.

Another loser, I want to be respectful. Some of the biggest winners so far, at least in the stock market, have been the manufacturers of gas turbines uh or distributed power gen sets. Uh and when you think about those companies, it's been somewhat boom and bust. In the early 2000s, there was a boom to build as many gas plants as we could. Um the capacity was overbuilt and um and the industry really languished for a long time until until now. And you've had just a tremendous profitability and equity returns come from these companies over the last two years.

But as you look at 2028, 2029, most of them are adding more capacity again just like they did in the early 2000s. 2000s. 2000s. Companies are these just like exactly Caterpillar. Um, Caterpillar is I think they're doubling their uh, solar turbine capacity between now and the end of 29, which I would judge is just at the exact wrong time when people may be questioning whether they even want to deploy those assets because the gas is much more expensive than they plant. Bloom energy have been topical recently because of other other things that folks are talking about the rarest they use in their manufacturer for instance.

for us. Um, we don't think that Bloom Energy's assets at 2 gawatt or more will be able to get natural gas in competition with all of the other assets that are being deployed that will consume gas given the scarcity that we see. Those are sort of two two we'll call manufacturers of distributed generation or BTM generation that we think are you know probably more poorly positioned than investors appreciate. Uh and then really doesn't make sense to us beyond 2029 2030 to build large scale natural gas generation until we until we until we ramp up production meaningfully and you can make sure we have the security of deliverability of supply of gas that's consistent with our model.

And so we we could see orders slow very meaningfully for natural gas generating assets even at large scale as 26 progresses. And those could be some of the the losers would be it just may not make sense to use gas for power generation for new or incremental assets after a certain point. It point. It point. It it seems like sort of like this whole memory shortage thing that we're going through right now that hyperscalers might also be people that are in trouble here if this is a key input to what they're doing.

Do you think that's a big problem for them? So as we've been socializing this a little bit trying to learn more and have people poke holes, you know, shared this with with one of your recent guests. He listened. They said, "Well, this sounds like DRAM 2 years ago." Slowly at first and then and then all at once. The lack of investment in capacity expansion is going to come up to bite us. And I think that's where the analog starts. When we think about the the way this plays out and and other analoges, that's probably the best one.

And um when we think about the cost of the hyperscalers right now, energy is about budgeted to be about 10% of their cost. Depreciation's the highest. You know, certainly me memory and other things factor into that as well, but energy is total cost of energy is supposed to be about 10%. If you plug in all of this compute and it's gas powered and we think gas could double or triple structurally triple structurally triple structurally even without weather, it could end up being 20 or 30% of the cost of compute by 2029.

So we we do think it becomes a much more material issue. Now the levelized cost of energy LCOE as it's referred to takes into account capex. It takes into account cost of fuel. Everybody who are making decisions in this moment are using the forward curve for natural gas which is flat a little backward mostly flat out to the 2030s in the mid30s. the mid30s. the mid30s. um that is a very attractive lowcost fuel for the hyperscalers to commit to when they're focused on solving everything else like how do I get compute in place to you know manifest in this this revenue growth in anthropic or elsewhere for us we're just focused on modeling objectively when I when you plug in this computer or this compute and this power gen source here and there what does how exactly does it pull on the system of companies that we focus on if you're forced to play devil's advocate in all of and come up with the set of circumstances such that this is all much to do about nothing and we're sitting here in 2030 and gas costs three bucks.

What do you think is the most likely reason? Is it is it data center power requirements are much lower because we make performance breakthroughs or AI demand isn't what it what we think it's going to be? Like what what is this most sensitive to such that they might be wrong? So after we did most of our work, we went on a bit of a listening tour to target conversations with who we think are maybe the subject matter experts in that thing. So energy storage or um hyperscaler compute deployment and energy consumption.

The common push backs which we've spent a lot of time understanding are um perian oil play. Oil is high. um perian has lots of gas um in the ground associated with it. You know why can't perian productivity just fix problems. So um our base case model already accounts for the 7 plus billion cubic feet a day of pipelines that are already being built or developed that come on between 26 and 2030 and in the perine. If there were a new gas pipeline that would come on between now and 2030, we would know about it because of the regulatory processes and and the way the time it takes to build these pipes.

So we've we have um mitigated the risk of being surprised by the perian by moving into the midstream uh to understand the bottlenecks constraints and um and so beyond the deliverability of the the resource or the gas in the ground itself how much can actually get to market and either leave via LG export terminals or be consumed in Texas or nearby. We've already included that in our base case model and so we but that will be that will be one of the push backs is there's plenty of gas in the perian but um I would posit this may be controversial um there was plenty of oil in the world before the Iran conflict surfaced um eventually there will be oil of plenty again.

It's why it was at $55 a barrel before the Iran conflict. Um, in order to make more per natural gas, you also have to be incentivized to make more peril. And those incentives incentives didn't exist until Iran. In order to produce a lot more perian gas than even these seven plus BCF pipelines being built that were already modeling, you'd need much much higher oil for longer, which only exacerbates this consumer crisis that we are concerned about. So we we don't think the perian uh solves the problem and uh and then the other one is well you can locate a bunch of behind the meter local perian power generation which is which is happening but we are modeling what has been announced and proposed and um if it's going to consume local perian gas that means it's not going to make it into the pipeline downstream and so um we can accommodate that with our model.

The only other one and this is hard to handicap for. In any case, we always try to think about technologies that can disrupt and and change the change structurally structurally structurally um the need and consumption of natural gas. And so it often leads us to focus on battery technologies. There's sodium and other you know battery technologies that are uh currently not commercial but folks are working on people getting a bit more enthusiastic about. Um the the vast majority of economic battery deployment today is lithium ion.

It has a fairly fast discharge cycle and um those are being deployed in earnest across across the system. And yes, we are also modeling known battery deployments as a part of modeling this this uh generating system across all field types. step function battery battery technology change could be something that would would affect you but it would affect you know some of these pieces that I described winners and losers in in meaningful ways and it would be um it would be a watershed moment that I would welcome because it would solve a problem that we're pretty concerned about.

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I've been hearing from a lot of investment managers about AI and they fall roughly into two camps with some unsure of where to even start and others convinced they can build their own order management system over a weekend. The reality is that running an investment firm will always require governance, controls, and a single source of truth for your data. And no amount of AI enthusiasm changes that requirement. Ridgeline is built on exactly that foundation, which is why I believe that firms that come out ahead in the AI era will be the ones running on Ridgeline's unified platform.

If you're serious about your firm's AI strategy, Ridgeline should be part of that conversation. You can request a demo at ridgeline.ai. If you were Zar for a day and you had to decide everything that gets started and to solve this problem, what are all the things that you would do to most solve and mitigate this? If I were the US government, government, government, I would find a way to build entirely from beginning to end two to four AP-1000 nuclear plants, uh, nuclear reactors. Um, that would derisk the supply chain.

It would um invite in and really um o open up doors to folks who want to see somebody do it first before they do it with the hopes that like we get more Chinaike and build 30 build 30 of them. Currently there are 10 10 to 20 envisioned by the by the US government through different different groups to to in terms of nuclear reactors come on but no one wants to be first. I think we're close to a few stepping forward. But if the US has said, "Hey, we have $260 billion to spend at the loan program office." Now, the EDF, it's $ 260 billion, I think, to spend by the end of 2018.

2018. 2018. We we need to build four nukes with this. that would derisk this materially and I think you would see it jumpst start the uh the nuclear equation. energy and resource availability um egress um egress um egress and um and knowledge we think are the biggest bottlenecks to you know productivity and deployment all this this this all this incredible technology that America has really been been the leader of uh developing and so that's why we you know when we when we set up our firm and started building a team you know things are happening pretty quickly in AI and especially with regard to power and so we didn't set out to understand the now.

It's important to understand now, but we set out to understand where the puck is going and where it's going looks like it will meaningfully diminish growth if not dealt with. And so that's why it brings me to the nuclear solution as the maybe the most viable uh long term. My comments on solar are probably the the most important thing that I would do. Um I think everybody should get a solar system on their houses. It won't be perfect. It will deliver electricity when there's sun out.

uh they maybe may not deliver electricity when it's cloudy, but it's a way to protect yourself from very high peak power prices from 10 a.m. until 6 pm, which are the biggest part of your bill. You know, I would incentivize people to study your state's rules and and try to put incentives in place to really really start to grow resident solar faster than what's been kind of a stagnating industry the last year after after some incentives are removed. Um and so that that would be one place to be reinvigorating solar incentives because they're going to be needed in a few years.

Could we build like a giant pipeline from Canada or something? Try to tap our neighbors to help us solve this problem. this problem. this problem. Canada is an interesting uh partner of ours. They have the capability of of delivering about 11 or 12 BCF usually in January periodically and there are meaningful pipelines from Canada to the US. LA largely it's seasonal and uh it helps us solve winter but otherwise and you know they're net imports most of the year. Uh we're not really set up to take from Canada year round.

There are a few reasons for that. One is Canada has limited storage. It's about silver TCF about a fourth of the US storage. If I think about Yeah. If I think about this on a 3 to 5 year plus basis, Canada by far has the deepest and richest resource of economic gas in the ground, but it's been trapped behind pipe. Um, and so we would we would I would build a 1 to 2 BCF a day at least pipe into the US Midwest, the MYSO power market and then wheel it around, you know, MYSO, PJM, SPROT, SPROT, SPROT, uh, and and try to satisfy this demand because I really don't want to see demand slow.

Um, I I really don't want to see consumers bills go up. We've really focused on the US here. What what about what are the implications of this for the rest of the world? Uh well the US has become the leading provider of natural gas uh with our exports going from virtually zero to starting in the mid teens and now now we're 15 BCF day that'll be 35. Many countries in the in the world are uh building gas generating assets that are dependent on our delivery of that gas to them.

And so um now there are other there are lots of political conflict related uh tensions or or bottlenecks today or Russian Ukraine. Russia used to be one of the biggest delivers of gas to Europe for instance and that we we fill the gap. Um to the extent we cannot deliver our 30 to 35 or more BCF a day of gas to the global uh consumer um rebalancing will be required. um you you probably impact Europe meaningfully and they're left with a trade-off of taking Russian gas or or or U or or or much much higher cost US gas because they can't produce it there domestically themselves enough to satisfy their need.

Asia is a large consumer the largest consumer until Russia Ukraine of US natural gas and they probably will be some point the largest consumer again with some of the outages in the Middle East. we potentially uh hurt important allies at a time where we really want them to be allies um if we can't send them the gas they need. And so it is it is pretty important that we uh we don't cretail LNG although that will certainly be one of the levers uh as we go out to the late late decade um that we will be forced to think about to deal with rising electricity prices in the country.

anything that we haven't talked about that has surprised you in this you know year and a half long analysis of trying to understand state of things and and where we're going obviously we've covered the big conclusion which is scary and hard to deal with even if we start acting now anything else that surprised you either in your work or in people's reaction to it as you've started to share it really for the last two or three years the phenomenon where um CEOs CFOs of companies um all of whom have really been asked by their investors or or their products lend themselves well to deploying products to capture AI compute rent.

What CEOs have said versus what is possible from the system um I think is an interesting study that will happen over time. the amount of capital made available to companies to make investments that are really shortsighted in the context of our work. Um like the incremental distributed natural gas gen set. It's an inefficient high heat rate or high-cost um inefficient asset that really should only serve as backup generation in any context outside of this fast time to power setting where AI compute needs the power. Now, over four or five years, those assets may not even run.

Um, and so you've had tens of billions flow into these distributed power assets, all of which are short and will consume natural gas. We really haven't seen anybody, including firms we really respect, question at any point whether there will be enough gas and what the cost will be when the time comes. It's been surprising. Enough folks haven't put pen to paper to then start contracting gas uh to make sure they have supply certainty. We haven't seen more financial contracting. 28 is somewhat illquid, which is why we really haven't seen the forward curve move.

And we think that's where the action starts. As soon as utilities turn the page and start to really hedge or buy gas in 28 and we start to see all these natural gas generating companies start to think about securing supply, you're going to see you're going to start to see a knife fight to secure natural gas physical in 28 like we really haven't seen before. And it's been surprising we haven't really seen any of this yet because 2829 the physical market tightens materially uh depending where you are and and and the amount of money that's gone into unproven untested unproven untested unproven untested uh the amount of capital being raised for things that really may not happen until 2035.

until 2035. until 2035. Maybe that's been surprising especially as it relates to you got expand trading at four times IBIDA a low to mid- teens free cash yield on a gas for curve that is complacent is complacent is complacent to all of the objective things that we already know are likely to get plugged in. People are not will really willing to look past summer heat or a slight outage in an LG facility right now. But in six months, we start we start to see these companies roll forward to look at 28.

In 6 months, you could start to see the forward curves really move up materially. And investors are not willing to look past near-term appropriate appropriately supplied gas market, but they're willing to pay for something in 2035 that is totally untested or unproven. And that that's it's been surprising at the assumptions and the inconsistency across sectors and industries that we even the among the four sectors we we follow. So maybe in closing, what would be like the healthy challenge to pose to anyone out there whose business has as an input directly or indirectly energy prices?

Like how how would you encourage the CEOs to what question should they ask of themselves or their business? Make sure when your assets are deployed that you understand exactly what the source of your natural gas will be. Make sure you have physical supply locked up and that you understand your counterparties and what will likely be very meaningful counterparty risk in two or three years. And counterparty risk isn't something we've really talked about during the last couple of years in the AI boom. But when it comes to parties being long and short, something that is moving a lot, um, imagine being short memory a year ago or or 18 months ago and finding out all of a sudden you're short memory.

That is what this natural gas market looks like to us, not two years out, but six plus months out. And making sure you understand the physical provisioning of gas for your assets is important for the hyperscalers and for the you know the buyers of simple cycle and CCGT large scale plants but especially for you know fuel cells. We are very cynical whether you can deploy fuel cells at scale um because there isn't the gas in the system to power those you know 24/7 365 and so therefore we treat them in our base case that I described as backup gen um to the extent you were to deploy fuel cells as base load gen that's only pulls forward and is additive to the convexity that I described CEOs and um partners on projects whether you are the ENC company you know trading at 25 times cash flow which is a historically high multiple for a engineering construction firm and your main business is building natural gas plants and we may not be able to build or deploy more gas plants at a certain point in 2029 2030 because gas is much more expensive and you may have regulators regulators regulators uh asking questions.

The the focus for you should be on how do you do a creative M&A to backfill your and diversify your business so that you're not entirely beholden to natural gas generating asset build. Um for hyperscalers hyperscalers hyperscalers um I know memory has been a pain point. natural gas could be 20, 30, or 40% of their cost of doing their cost of of their cost of doing business at a time when, you know, they're supposed to be reaching escape velocity with profitability. Performance per watt uh is is probably a compute metric that we're going to care more and more about.

I would I would say that the the questions or the challenges for each pocket of or industry of companies is is a little bit different, but it all it's all focused on um making sure you're managing risk and you understand exactly uh when your plans play out, how it can go wrong, which in this case means what if gas is not 350 but 10 or more. What happens if physical gas is questioned? What happens when consumers and reg therefore regulators start to ask questions? Do you have a backup plan?

What's your backup plan? Matt, I love talking about the energy system with you. This was an especially fun one on the back of so much of your work. Um, so fascinating and interesting. I hope as the US has been very good at doing historically that lots of people listen and start to imagine solutions and also create the right amount of urgency to get those solutions in place and that we emerge from this more resilient, more capable, more efficient, all these things. Thanks so much for your time.

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