Producers of natural gas may be struggling with low prices, but for pipeline operators like Kinder Morgan Inc. (KMI), the outlook is anything but bearish.
The Houston-based midstreamer, which transports about 40% of the natural gas consumed in the United States, kicked off the first quarter earnings season with stellar results and a positive message for proponents of the fuel.
Executive Chairman Richard Kinder opened the earnings conference call Thursday by discussing the outlook for gas-fired electricity consumption to power artificial intelligence (AI) and data centers, a burgeoning demand segment that is dominating conversation in the gas industry.
“In past quarters, I've talked a lot about the demand for natural gas resulting from this country's LNG export facilities,” said Kinder. “Today, I want to speak briefly about what I and others in the industry now see as another source of increased demand for our commodity, the tremendous expected growth and the need for electric power.
“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.”
Kinder cited a recent survey projecting increased electric demand to power data centers of 13% to 15% compounded annually through 2030.
“Put another way, data centers used about 2.5% of U.S. electricity in 2022 and are projected to use about 20% by 2030,” said Kinder. “AI demand alone is projected at about 15% of demand in 2030.
“If just 40% of that AI demand is served by natural gas, that would result in an incremental demand of 7 Bcf to 10 Bcf a day.”
Kinder cited that one utility in the Southeast is forecasting winter power demand to rise 37% by 2031. PJM Interconnection LLC, which operates the wholesale power market across the Northeast and part of the Midwest, “has doubled its 15-year annual forecast for demand growth and estimates that demand in the region by 2029 will increase by about 10 GW,” said Kinder. “Now, to put that in perspective, 10 GW is about twice the power demand of New York City on a typical day.”
Citing the 24-hour/day, 365 day/year power needs of data centers, Kinder said renewables alone won’t be able to cut it.
“This is not a knock on renewables,” Kinder said. “But it's a reminder to all of us that natural gas and nuclear still have an extremely important role to play in order to provide the uninterrupted power that AI and the data centers will need.”
The executive chairman also weighed in on the broader macro outlook.
“The ongoing war in Ukraine and conflict in the Middle East have served to highlight to policymakers and the public at large the crucial role energy plays on the global stage,” said the 79-year-old executive, who co-founded KMI in 1997. “Clearly, the delivery of energy by companies located in stable countries that respect the rule of law is more important now than ever.”
Bright Future for Exports
NGI’s Henry Hub Bidweek price averaged $2.25/MMBtu in 1Q2024, versus $3.44 in 1Q2023. The forward strip offers a bit of relief – NGI’s Henry Hub forward fixed price for winter 2024/2025 delivery stood at $3.391 as of Thursday.
“Notwithstanding the current low natural gas price environment, the future looks very bright for our Natural Gas Pipelines business segment,” said CEO Kim Dang. “We expect demand for natural gas to grow substantially between now and 2030, led by more than a doubling of demand for liquefied natural gas (LNG) exports and a more than 50% increase in exports to Mexico.”
KMI is contracted to transport about 5.3 Bcf/d of U.S. gas to the Mexico border, according to a recent company presentation. The export growth projections are in addition to the forecast demand growth from AI and data centers, Dang noted.
Dang added,“It’s also important to note that the Biden administration’s pause in approving LNG exports to non-free trade agreement countries, while disappointing, will likely have no impact on our planned projects to support LNG exports.”
Projects Advancing
KMI’s project backlog at the end of the first quarter stood at $3.3 billion, up from $3 billion at the end of 2023, Dang said. “We are devoting nearly 80% of our project backlog to lower-carbon energy investments, including natural gas, renewable natural gas (RNG), renewable diesel (RD), feedstocks associated with RD and sustainable aviation fuel, as well as carbon capture and sequestration,” said the CEO.
Major natural gas projects underway include an expansion of the Markham Storage facility on the Texas coast. Partial commercial service began last November, with full commercial service slated to begin in June. The project adds a new cavern at Markham to provide more than 6 Bcf of incremental working gas storage capacity and 650 MMcf/d of additional withdrawal capacity on KMI’s Texas intrastate system.
Construction also has begun on both phases of the $673 million Evangeline Pass project, which is designed to supply about 2 Bcf/d of feed gas to Venture Global LNG Inc.’s proposed Plaquemines LNG facility in Louisiana. The first phase of Evangeline Pass is set to enter service in July, with the second in July 2025.
Margins, Volumes Up for Natural Gas Pipelines
Prices may have been down substantially during the first quarter, but KMI’s Natural Gas Pipelines unit improved its year/year financial performance.
This was “largely due to higher margins realized on our storage assets and higher volumes on our gathering systems, as well as additional contributions from our recent STX Midstream acquisition,” said President Tom Martin. “Natural gas transport volumes were up 2% compared to the first quarter of 2023. Natural gas gathering volumes were up 17% from the first quarter of 2023, primarily from our Haynesville and Eagle Ford gathering systems.”
Martin told analysts during the call that, “Given the low price environment, we are now expecting gathering volumes to average 5% below our 2024 plan, but still 7% over 2023, adjusting for asset sales in both cases.”
KMI’s Sital Mody, president, Natural Gas Pipelines, said the company has benefited from negative gas prices in West Texas induced by a regional supply glut, which has driven demand for increasingly scarce storage capacity. Longer term though, the company sees the need for additional natural gas pipeline capacity out of the Permian Basin.
KMI is “trying to commercialize another pipe,” Moody said, but there was nothing to report on that front during the call.
KMI reported net income of $746 million (33 cents/share) in the first quarter, versus $679 million (30 cents) in 1Q2023. Revenues totaled $3.84 billion, compared with $3.89 billion in the year-ago period.
