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Why Natural Gas Will Be AI’s Next Great Shortage

Matt Smith joins us to explain why the United States may be approaching a historic natural gas shortage—and why the market is not yet pricing it in.

Matt SmithguestPatrick O'Shaughnessyhost
Jul 21, 202659mWatch on YouTube

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Transcript

  1. 0:00 – 1:30

    Intro

    1. MS

      Natural gas is well supplied today, '26 and '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 gonna 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.

    2. PO

      [upbeat music] So Matt, the last time we did this was, I think, during COVID. Kinda crazy that it's been six 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, uh, 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 centers, et cetera, 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 the conclusion, and then we're gonna 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

  2. 1:30 – 11:00

    What Drives the Deficit

    1. PO

      what you found after 18 months of study.

    2. MS

      We are headed into a place where we see an historic deficit in natural gas supply available in the United States, which, which does portend 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 LNG 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.

    3. PO

      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?

    4. MS

      The, the die 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 had, we had been importing natural gas to satisfy consumption on top of what we produced domestically. Shale, shale started to be very productive, surprised the upside, and became this, this abundant force. And as natural gas became more abundant, we started to export, starting with Cheniere. We've gone from that early Cheniere exporting to today we're exporting about 15 Bcf a day of nameplate 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, 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 t- 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 LNG 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 Bcf a day to nameplate 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 10s 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, 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 LNG as the main driver demand. Now let's put those together. I just shared that we're gonna 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, Haynesville, Permian, and that which is supposed to leave the door through LNG. Now in AI compute, so many different power generating ideas in order to power compute given this value of time to c- you know, time to power, 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, GE Vernova combined cycle, all the way down through the distributed generation assets, which we'll call fuel cells. We'll, we'll add Wartsila or Caterpillar solar turbines. There, 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-

    5. PO

      All that stuff

    6. MS

      ... all of this stuff. And so what we've gone about doing is w- 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 the 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 five 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. Six series Bloom Energy, you know, kinda latest gen fuel cell will take 150 million cubic feet a day of gas per gigawatt. The market has been assigning, you know, kind of a, a high probability on them obtaining two gigawatts a year of productivity or of manufacturing capacity, and that's likely to ramp to, you know, five gigawatts, which there isn't the gas for that unless you take it from something else.

    7. PO

      In the extreme case, how high does that number get?

    8. MS

      If you start to move it down, let's say P30 or P0, 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 unmitigated.

    9. PO

      One, one naive way to approach this is, is to say, like, "This doesn't sound like that big of a deal."

    10. MS

      Yeah.

    11. PO

      Like, 12, 12 new in the extreme case.

    12. MS

      Yeah.

    13. PO

      Just shut off the exports. Like, who cares? We didn't export natural gas for a long time. People domestically are not gonna 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?

    14. MS

      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 LNG 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-

    15. PO

      What's FTA?

    16. MS

      Um, free trade agreement.

    17. PO

      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.

    18. MS

      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.

    19. PO

      Yeah.

    20. MS

      You know, what do the words on the page say? What's, what's allowed or what's not allowed? When we set out to build the firm, we've had about 16 plus months to start to model at, you know, at 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 LNG 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.

    21. PO

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  3. 11:00 – 20:35

    Why Supply Can’t Catch Up

    1. PO

      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 wanna make sure, like the, 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 gonna 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, et cetera. 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?

    2. MS

      Starting with the, we'll call it resource in the ground.

    3. PO

      Yeah.

    4. MS

      There's tremendous data availability. We can measure where we are in the exploitation Of most of the major gas producing basins. That would be Appalachia, which is primarily the Marcellus plus the Utica. Haynesville, which is a key swing basin. Then of course the Permian and Eagle Ford. These are oil-directed plays where the decision to drill and produce is driven by oil, and gas is 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 digitize the acreage controlled by each one of these companies with polygon shapes that uses a bunch of lat and 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.

    5. PO

      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 timeframe, not that we're literally gonna, like, run out of the resource over the next 20 years.

    6. MS

      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, um, it has a decline rate. Um, and each well, as it's stacked on an existing company-wide portfolio decline, and, and a lot of these companies' decline curves are, are maturing some, and so they, they, they're not-

    7. PO

      They're pretty steep in natural gas, right?

    8. MS

      It's steep initially in natural gas, but, you know, Expand and EQT and others have such mature portfolios, the replacement is, um, less costly today than it would've been five years ago. Uh, so when you stack all of these wells based on existing acreage in, up on these companies, assuming they're gonna drill optimally based on their forward curve, which is depressed, and we'll talk about that, um, you, you get to this 132, 128, 130, 132 BCF a day of, of maximum deliverability.

    9. PO

      Yeah.

    10. MS

      So we are assuming that all of these companies develop the rest of their acreage.

    11. PO

      But that's a flow metric, not a stock metric.

    12. MS

      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.

    13. PO

      Yeah.

    14. MS

      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-

    15. PO

      They're not economic

    16. MS

      ... they're not economic.

    17. PO

      Yeah.

    18. MS

      Um, and, and furthermore, there is an infrastructure to really accelerate drilling and activity in those basins.

    19. PO

      This isn't software. You don't just press a button [laughs] .

    20. MS

      To solve this. To solve this. This is... The, the, the constraints are multifold. 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 LNG exports we've committed to.

    21. PO

      Yeah.

    22. MS

      Um, we, we will take the under on that, but that's, that's where you can get to. A common pushback as we have, uh, gone through this is there's plenty of resource available to us in the Permian. 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 shale find. At this point, knowledge of, of, of those things are pretty mature.

    23. PO

      So to say it back, there's a lot of resource, but at this rate, we're depleting the known resources quite quickly.

    24. MS

      We are advanced in depleting the known resources, um, especially as we move to the next layer, which is infrastructure.

    25. PO

      Yeah. Okay. So, um, the, 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 awash 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 tran- processed and transmitted and used. What are the, what are the most important rate limiters in that part of the equation?

    26. MS

      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 1010, 1030 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-

    27. PO

      Yeah

    28. MS

      ... to be consumed by folks downstream. So processing, um, is the first major 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 Assume 20 BCF production target that's necessary, but processing would be something it takes, you know, two or three years to build at the midpoint. We generally know what processing investments are being made and projects have been announced by Permian processors or by Appalachian processors. We know what, where the, where the materials and liquids handling, um, throughput capacity will be in '27, '28 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

    29. PO

      Build stuff now

    30. MS

      ... point 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 on top of every one of these wells at their Latin longs in order to do, to grow even a fraction of where we must have natural gas production go in the US, gathering has to be, uh, invested in very materially over the next i-imminently-

  4. 20:35 – 25:05

    The 2030 Gas Crisis

    1. PO

      like, there's roughly inertia in the system, and, like, nobody listens to this, nobody does anything. Hopefully some people, a lot of people will listen to this and, and have ideas. But what is the n- what is gonna 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, what's your best guess as to what it looks like?

    2. MS

      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-

    3. PO

      Generators. Gen-generators

    4. MS

      ... gen-generation generally

    5. PO

      Yeah, yeah. Yeah

    6. MS

      ... 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, E-EQT 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 onto this tightness in 2030-

    7. PO

      No one's onto it

    8. MS

      ... it's not apparent today.

    9. PO

      Yeah.

    10. MS

      Um, and so it's perpetuating this, this view that most Americans have, which is there's plenty of natural gas, 'cause for 15 years, it's all we've been told.

    11. PO

      Been abundant, yeah.

    12. MS

      And so there's a complacency that's developed, and we, we think that complacency is gonna 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, $3.60, going out to '26, '27. In '28, the curve is flat. 2029 to 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, '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 '28, '29, 2030, we start to cut into the US working gas storage, which is about 4 TCF 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 2020, '30, we get pretty close to where w-we think, ceteris paribus, 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? Well, we can look at Russia/Ukraine, gas went to 8, 8, $9, $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 for, you know, to 6 or, or 8 or $10. Um, but those have been transitory, and what we're talking about are structural drivers of demand against a 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, I think.

    13. PO

      M-Meaning that gas prices could be 20 or something like this?

    14. MS

      I, I would hesitate to even put a price target on it, but at, uh, 8 or $10 We think you, you potentially shut off some of the US exports where there are- there's spot cargoes, and they are leaving the border to capture uplift in Europe or, or elsewhere. Um, now those, those spot cargoes, 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 cargoes alone can't solve this. You would have to get into, um, shutting off contracted cargoes leaving, leaving our border, uh, via LNG 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

  5. 25:05 – 29:00

    Winners and Losers

    1. MS

      cargoes that are-- where there's some Japanese utility, uh, counterparty who has counted on it for its, you know, for its, uh, provision of electricity.

    2. PO

      In, in crazy convex outcomes like this, can you tick through who you think the biggest winners and losers are?

    3. MS

      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 Haynesville wells out 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-less right now. There was some turnover earlier 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 EBITDA on a 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 gonna 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'd be solar, um, to a lesser extent wind, uh, hydro. Well, solar assets, which are growing meaningfully, they've been 90% of the interconnect queue 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 marginal plant taking fuel where the price is increasing is rising, while the sun costs the same. And so, um, we, we think there are some companies positioned very well for margin expansion for no incremental capital costs. XPLR, ticker's XIFR, formerly NextEra Yield, YieldCo, which is an interesting, interesting set of assets, they have a, a windfall coming in the latter part of the decade in early 2030s, ceteris paribus, because they mark their PPAs to market at much higher values without any CapEx. Clearway 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 in 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 late '70s. Residential solar assets are really one of the only ways to protect yourself from what's gonna 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 accompanies batteries-

    4. PO

      Yeah

    5. MS

      ... which make it much more, uh, make the electricity much more available around the clock.

    6. PO

      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?

    7. MS

      What we're talking about is a complex dynamic system where, um, there will be

  6. 29:00 – 33:30

    Nuclear and Solar

    1. MS

      choices to consume electricity or not at different times. And, and as I go through this, I wanna 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, yeah, primarily to the AP1000 Westinghouse units that, uh, that have, um-

    2. PO

      Don't those take, like, five years to build or something like that?

    3. MS

      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, Vogtle 3 and 4. 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 down. 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, they're, they're for three decades, nuclear engineers and scientists and companies-

    4. PO

      Gone to do other stuff, yeah

    5. MS

      ... and then, and then the Vogtle 3 and 4 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, 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-

    6. PO

      They don't believe in the problem, they don't like the solution

    7. MS

      ... and we don't, y- y- so they need to be convinced of the problem, and the country has a history of building pipelines to solve problems that exist today, not problems that will ex- 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 gonna need large-scale nuclear by 2033, 2034.

    8. PO

      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?

    9. MS

      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-

    10. PO

      It just takes time. Yeah. It's done

    11. MS

      ... 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 AP1000s. So since, since, uh, Vogtle 4 came on, and Vogtle 4 experienced very material improvements from Vogtle 3, um, in Georgia, today China is building 39 plus or minus nuclear reactors. 34 of them are 1 gigawatt plus. Um, I think a third of those are modeled after the AP1000. 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 and 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 levered to that would be Cameco, which owns 49%, 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 on early procurement, which will de-risk some of, some of the supply chain, which will help put timelines on this. You know, when the Westinghouse comes public and it's deeply undervalued within Cameco 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,

  7. 33:30 – 37:20

    Consumers Pay the Bill

    1. MS

      they significantly benefit from, you know, the coming nuclear cycle as well, and, um, lots of dollar content in the AP1000s.

    2. PO

      Who are the big losers, do you think, in this future?

    3. MS

      Well s- 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, 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 gonna use it for AI compute? Or are we going to try to keep consumer electricity price bills? It's an awful-

    4. PO

      Trade-off

    5. MS

      ... it's an awful trade-off, and I think, I think it will probably start to contribute more to the public dialogue, the NIMBYism 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 gonna 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 profitable. 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 lat and long. That means more gas, not less, and so every time you read a press release from Bloom or from GE Vernova-

    6. PO

      Yeah. Th- think, think more gas [laughs]

    7. MS

      ... 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 wanna 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.

    8. PO

      What kinds of companies are these, just like examples?

    9. MS

      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 planned. Bloom Energy had been topical recently because of other, other things that folks are talking about, the rare earths they use in their manufacture, for instance. But for us, um, we don't think that Bloom Energy's assets at two gigawatts 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 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

  8. 37:20 – 45:25

    AI’s Next Shortage

    1. MS

      just may not make sense to use gas for power generation for new or incremental assets after a certain point.

    2. PO

      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?

    3. MS

      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, uh, one of your recent guests. He listened to this, he said, "Well, this sounds like DRAM two years ago." Slowly at first, and then, and then all at once. The lack of investment in capacity expansion is gonna 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 analogs, that's probably the best one. And, um, when we think about the cost of the hyperscalers, right now energy's about budgeted to be about ten percent of their cost. Depreciation's the highest, you know. Certainly me-memory and other things factor into that as well, but energy's total cost energy is supposed to be about ten percent. If you plug in all of this compute and it's gas-powered, and we think gas could double or triple structurally even without weather, it could end up being twenty or thirty percent 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 curves for natural gas, which is flat, a little backward, a little contango, mostly flat out to the 2030s in the mid threes. Um, that is a very attractive low-cost 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, 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?

    4. PO

      If you were forced to play devil's advocate in all of this and come up with the set of circumstances such that this is all much ado 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 gonna be? Like, what, what is this most sensitive to such that it might be wrong?

    5. MS

      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, the common pushbacks, which we've spent a lot of time understanding are, um, Permian oil play. Oil is high. Um, Permian has lots of gas, um, in the ground associated with it. You know, why can't Permian productivity just fix problems? So, um, our base case model already accounts for the seven-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 Permian. 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 Permian 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 LNG 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 pushbacks, is there's plenty of gas in the Permian. 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 aplenty again. That's why it was at fifty-five dollars a barrel before the Iran conflict. Um, in order to make more Permian natural gas, you also have to be incentivized to make more Permian oil, and those incentives, incentives didn't exist until Iran. In order to produce a lot more Permian gas than even these seven-plus BCF of pipelines being built that we're already modeling, you'd need much, much higher oil for longer, which only exacerbates this consumer crisis that we're concerned about. So we, we don't think the Permian, uh, solves the problem. And, uh, and then the other one is, well, you can locate a bunch of behind the meter local Permian power generation, which is, which is happening, but we are modeling what has been announced and proposed. And, um, if it's gonna consume local Permian gas, that means it's not gonna 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, 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, pe- people are 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 fuel types. Step function battery, battery technology change could be something that would, 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.

    6. PO

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  9. 45:25 – 51:15

    Solutions and Global Stakes

    1. PO

      and you had to just 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?

    2. MS

      If I were the US government, I would find a way to build entirely from beginning to end two to four AP one thousand nuclear plants, uh, nuclear reactors. Um, that would de-risk the supply chain. It would, um, invite in and really, um, o- open, open up doors to folks who want to see somebody do it first before they do it.

    3. PO

      With the hopes that, like, we get more China-like and build thirty-

    4. MS

      Well, well-

    5. PO

      Build thirty of them.

    6. MS

      Currently, there are ten, ten to twenty envisioned by the, by the US government through different, different groups to, to, uh, uh, in terms of nuc- 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 just said, "Hey, we have two hundred and sixty billion dollars to spend at the loan program office now, the EDF." It's two hundred and sixty billion, I think, to spend by the end of 'twenty-eight. We, we need to build four nukes with this. That would de-risk this materially, and I think you would see it jumpstart the, uh, the nuclear equation. Energy and resource availability, um, egress and, um, and knowledge, we think are the biggest bottlenecks to, you know, productivity and deploying all this-

    7. PO

      Prosperity, yeah

    8. MS

      ... 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, uh, 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 in their houses. It won't be perfect. It will deliver electricity when there's sun out. Uh, they may be, may not deliver electricity when it's cloudy, but it's a way to protect yourself from very high peak power prices from ten AM until six 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 residential solar faster than what's been kind of a stagnating industry the last year after, after some incentives were removed. Um, and so that, that would be one place to be reinvigorating solar incentives because they're gonna be needed in a few years.

    9. PO

      Can we build like a giant pipeline from Canada or something, try to tap our neighbors to help us solve this problem?

    10. MS

      Canada is an interesting, uh, partner of ours. They have the capability of j-- of delivering about eleven or twelve BCF, usually in January, periodically, and there are meaningful pipelines from Canada to the US. Larg- largely, it's seasonal, and, uh, it helps us solve winter, but otherwise... A- and you know, and they're, 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. O- one is Canada has limited storage. It's about just over TCF, about a, a fourth of the US storage. If I think about, yeah, if I think about this on a three to five-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 one to two BCF a day at least pipe into the US Midwest, the MISO power market, and then wheel it around, you know, MISO, PJM, SPP, ERCOT, uh, and, and try to satisfy this demand because I really don't wanna see demand slow. Um, I, I really don't wanna see consumers bills go up.

    11. PO

      We've really focused on the US here. What, what about-- what are the implications of this for the rest of the world?

    12. MS

      Uh, well, the US has become the leading provider of natural gas, uh, with our exports going from virtually zero to starting in the teens, and now, now we're at fifteen BCF a day. That'll be thirty-five. 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-- lots of political conflict-related, uh, tensions or, or bottlenecks today, or Russia-Ukraine. Russia used to be one of the biggest deliverers of gas to Europe, for instance, and then we, we filled the gap. Um, to the extent we cannot deliver our thirty to thirty-five 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 US-- or, or, or much, much higher cost US gas 'cause 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 at some point the largest, uh, 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 curtail 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.

    13. PO

      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

  10. 51:15 – 59:42

    The Coming Gas Knife Fight

    1. PO

      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?

    2. MS

      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, 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 illiquid, which is why we re-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 gonna see-- you're gonna 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 '28, '29, the physical market tightens materially, uh, depending w-where you are. And, and, and the amount of money that's gone into unproven, untested, uh, and the amount of capital being raised for things that really may not happen until 2035, maybe, that's been surprising, especially w-as it relates to you got expand trading four times EBITDA, a low to mid-teens free cash yield on a gas forward curve that is complacent to all of the objective things that we already know are likely to get plugged in. People are not willi-really willing to look past summer heat or a slight outage in an LNG facility right now, but in six months, we start, we start to see these companies roll forward to look at '28. In six months, you can 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 fo-we follow.

    3. PO

      So maybe in, 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 those CEOs to... What question should they ask of themselves or their business?

    4. MS

      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 E&C 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 2028, '29, 2030 because gas is much more expensive than you may have regulators, uh, asking questions. The, the focus for you should be on how do you do accretive 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, um, I know memory has been a pain point. Natural gas could be 20, 30, or 40% of 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.

    5. PO

      Per- performance per watt, uh, is, is probably a compute metric that we're gonna care more and more about.

    6. MS

      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?

    7. PO

      Yeah.

    8. MS

      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?"

    9. PO

      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.

    10. MS

      Thank you again for having me.

    11. PO

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Episode duration: 59:44

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