Natural gas: an unexpected bridge fuel

Simon Lack, Managing Partner at SL Advisors LLC and Co-Portfolio Manager of the Catalyst Energy Infrastructure Fund (MLXIX), talks us through natural gas’ emerging role as a bridge fuel that is powering two fast-growing industries: AI-driven data centres and US LNG exports.

We consider:

• Emerging US hotspots where natural gas supply, pipeline access, and data centre development align.
• How well-prepared the US power system is to support the AI data centre boom.
• The rising trend of onsite natural gas generation for AI loads.
• The connection between LNG expansion in the US and domestic gas demand.
• What the emerging triangle between gas supply, LNG terminals, and data centre hubs means for regulatory policy and investors.
• And much more.

Creators and Guests

Host

Jessica Casey

Jessica leads the editorial teams at LNG Industry, commissioning articles and features, and representing the magazine at industry events.

Guest

Simon Lack

Managing Partner at SL Advisors LLC

What is LNG Industry Podcast?

The LNG Industry Podcast: a podcast series for professionals in the natural gas and LNG industries.

Jessica Casey: 00:02

Hello and welcome to the LNG Industry Podcast. I'm Jessica Casey, editor of LNG Industry. Today, Callum O'Reilly, senior editor of our sister magazine Hydrocarbon Engineering, is joined by Simon Lack, managing partner at SL Advisers LLC and portfolio manager of the Catalyst Energy Infrastructure Fund, where they discuss an emerging new role for natural gas as a bridge fuel that is powering two fast growing industries: AI driven data centers and US LNG exports. The episode will explore how together they are creating a dual demand story for natural gas that could reshape investment flows, regional development and even regulatory policy. I hope you enjoyed the episode.

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Callum O'Reilly: 01:12

Hi, Simon. To start, can I ask you to introduce yourself to our listeners and tell us a little bit about yourself and SL Advisors?

Simon Lack: 01:20

Sure, Callum. Yeah. Thanks for having me on the show. SL Advisors was set up in 2009, and I set it up really to manage my money. I worked at Jacob Walker for twenty three years before that, I was in fixed income trading for about two thirds of that time, and then I ran a hedge fund business, and one of the things we did was invest in an energy hedge fund that invested in midstream and pipelines.

Simon Lack: 01:40

So I set up hotel advisers to do that, really focused on the energy sector, and the business has grown really from that. Originally friends of Simon were investors, but over the years we started a mutual fund and an ETF and and separately managed accounts.

Callum O'Reilly: 01:53

So Simon, you've described natural gas as an unexpected bridge fuel for both AI data centers and LNG exports. So what brought you to that conclusion and why now? Well, for a long

Simon Lack: 02:07

time, as energy investors, dealt with the energy transition, the fear of stranded assets, everything was going to go to renewables, and the more we read about that and thought about it, the clearer it became that was not going to be the case, that there were a lot of weaknesses in renewables just replacing hydrocarbons. Energy transitions historically have taken many decades, whether it was from to from wood to coal to oil, and I think the same thing here. And of course the Shell Revolution completely changed America's energy profile, giving us abundant gas and a lot of cheap oil as well, and so it just seemed so clear that renewables with their intermittency, you know, they're really not cheaper where used in any sort of size. You know, you might say, well, a solar panel is the cheapest form of power in isolation, but once you start to connect it to a grid and you need backup for when it's not sunny or not windy in the case of wind power, it seemed clear that cheap gas was going to do that. And so and that was already happening.

Simon Lack: 03:09

I mean, The US has a great story to tell on emissions reduction mostly through switching from coal to gas and because of cost. So all the facts really lined up for that and I think today many investors have come around to that view, but several years ago it was really a minority view.

Callum O'Reilly: 03:28

So are there certain regions of The US that are emerging as hot spots where natural gas supply, pipeline access and data center development are aligning?

Simon Lack: 03:38

The two big areas for gas in The US are in the Northeast, the Marcellus Shale centered around Pennsylvania and Ohio, West Virginia, and then the Permian in Texas. They're really quite different, Texas and New Mexico. In the Northeast Appalachia as it's called a lot of times you get what's called dry gas you get basically methane or methane as it would be called in England, which is what people use for natural gas. In the Southwest, in Texas, the gas often comes up as associated gas, so they're drilling for oil, but they get gas anyway sometimes they don't have the infrastructure to separate the two out. Those are the two regions.

Simon Lack: 04:16

Texas is really well positioned to have more data centers because they need to add infrastructure, but it'll be within the state of Texas, so it's more easily done. Appalachia, because there's several states involved, it can be complicated to get the permits to build infrastructure to get gas from say Pennsylvania to Maryland, or to North Carolina where it has to cross several state lines, and if the politics don't align. But those are the two regions, and of course Virginia is sort of the data center hub in The US, very high concentration of data centers there, but you're going to see them built in many places across the country, but I think Texas will be an important new area.

Callum O'Reilly: 04:57

So let's drill down into data centers. Growth appears to be off the charts in The US, so how well prepared is the country's power system to support this boom? It's going to

Simon Lack: 05:08

be a big challenge. Most people, if you ask them, they'd assume that electricity demand had been growing steadily for years, just like the economy's been growing and the population's been growing, but in fact we've had annual growth in electricity consumption of very little, two tenths of 1% per annum, because even though the economy and the population grows, we get more energy efficient. Data centers are really accelerating that dramatically by by an order of magnitude. I mean you're looking at two, three, 4% per annum growth in electricity, and it may not sound a lot, but it's in a system that's used to very, very slow growth. So it's going to be a big challenge.

Simon Lack: 05:47

One of the challenges is that typically when a factory or a business is ready to connect to the grid, they tell the local utility, they plug in, they put a meter there, they just start using electricity, and the cost of the infrastructure to make that happen is typically spread over the whole rate base, over that whole community, and if you've got two tenths of a percent per annum growth, it's really not that big a deal. But when you've got a growth at 10 times that, it really does cause those costs to be sort of unevenly shared, and so it's become quite a political issue. Certainly in the Northeast, the PJM grid, which is the biggest grid in The United States, covers a big part of sort of the Atlantic States all the way as far west as Illinois. You've seen very high price increase. You know, we have a home in New Jersey, 18% increase in electricity prices, and this is caused in part by data centers.

Simon Lack: 06:38

So one of the solutions to that is what's called a behind the meter solution, and this is where a new data center contracts with a pipeline company to bring gas directly to a dedicated power plant right next to the data center, so it bypasses the grid. It doesn't create any of the sort of the political issues around that, And I think that's going to be increasingly common because data centres don't really create a lot of jobs. I mean, it's a huge warehouse, it's specialised, it has obviously a lot of cooling equipment relative to a warehouse, a lot more internal walls and cubicles and sort of closed off areas. But once it's built, you've got a room full of 10,000 computers and a few IT experts walking around checking on things. For the regular voter, they're going to see higher electricity prices and probably not any difference in employment opportunity.

Simon Lack: 07:34

And I think you're already starting to see something of a political backlash in the behind the meter solution, which is many discussions going on, I think you're starting to see that happen now particularly in Texas, I think that's going to be a pretty well used solution over time for data centers.

Callum O'Reilly: 07:49

Yeah, so Simon, we've been hearing a lot more about developers installing on-site natural gas generation for AI loads. So what do you think is driving that trend, and how significant could it become?

Simon Lack: 08:01

I mean, think it's it's gonna become very significant, because I think if a data center needs up, you know, they need uptime really all the time. There's a great statistic that the new data centers today need to run 99.99999% of the time, five nines after the decimal point, and that turns out to be about three seconds of your downtime. Three seconds, right? And so, solar and wind run 20 to 40% of the time, and so there's clearly not a good match there. If you use renewables, you've got to use a lot of battery backup as well.

Simon Lack: 08:35

And so gas is here, it's relatively quick to set up and install, and it avoids the sort of politics there. I don't think you're going to see you might see some coal plants that last a little longer than they should. I don't think anybody's going to build a new coal plant. Some people talk about nuclear as a solution, and it should be, but nuclear takes a very long time to build, and with data centers, the chips depreciate very quickly. So hyperscalers, the company is building these data centers, they care about time to market.

Simon Lack: 09:09

Mean, if it takes them three months longer than they thought to build it, those chips have already lost value. The chips have been replaced every eighteen months, and so I think gas is the go to. Gas is 43% of America's electricity generation anyway, and I think data centers are going to be much more than 43%, so you'll see gas's share go up of all of our electricity generation in America, and so it's really going to be the key solution I think to power generation.

Callum O'Reilly: 09:38

So in light of that Simon, how's the LNG market looking in The US? Are you able to set the scene for us and tell us a little bit about the status of projects that could significantly increase export capacity in the coming years?

Simon Lack: 09:52

Yes, I mean it's been just an amazing story many years ago Cheniere was started by a fellow called Sharif Suki and it was designed to bring in LNG, believe it or not, to import LNG to The United States because we thought it would be low on gas, and then the Shell Revolution happened, and there's this infrastructure being built, and of course gas is cheaper here than overseas, and so they spend billions of dollars setting up to import gas, and then more billions of dollars when they realize they need to export it. Engineer is essentially best in class today doing that. And so LNG export terminals take three to five years to build, so you have pretty good visibility on how much capacity we're going to have going forward. And we currently export about 15,000,000,000 cubic feet per day of liquefied natural gas. We could export more, but that's what the export capacity is of the total.

Simon Lack: 10:43

So there's more being built, and it's likely that 15,000,000,000 cubic feet a day is going to double to 30 by 2030, so in just five years. And that's out of a total production we probably produce about 100 and nine-one and 10 BCF a day. So we're currently exporting around 13 or 14%, and that's gonna go up. And it's a great story. I mean, we've even for obviously the current administration is a huge fan of hydrocarbons, but honestly, gas has been how we've brought emissions down in America, and if we can sell gas to countries in Asia to allow them to use less coal, they can also reduce their emissions, at least from what they would otherwise be.

Simon Lack: 11:24

So I think LNG is a great story. It's one of the two demand drivers for gas with data centers being the other, and so there's a very strong growth outlook for domestic US gas production I think.

Callum O'Reilly: 11:37

Yeah, and talking about domestic gas production, Simon, can you tell us a little bit about the connection between LNG expansion in The US and domestic gas demand, and which regions are looking like they will benefit most?

Simon Lack: 11:51

Well clearly, mean the LNG export terminals are mostly in the Gulf Of Mexico and the Southeast U. S, so Texas is an obvious place that's going to benefit. But gas is also sent from the Northeast, from the Marcellus in Pennsylvania, and the interesting thing here is that there's a pipeline network called Transco, which is owned by Williams Companies, and some of that pipeline dates back to the 1950s, that's how old it is, and it was originally built to take gas from Texas up to New York, through the Eastern states, up through Tennessee and Virginia and so on. And they've now reversed the direction on parts of that pipeline to bring gas from Pennsylvania down to the Southeast, down to Louisiana, and to Texas on the Gulf Coast for export. And so the regions that will benefit are all the way along there.

Simon Lack: 12:41

It certainly is going be a benefit in the Northeast, but most clearly in Texas, which is where most of the export capacity exists.

Callum O'Reilly: 12:49

And what does this emerging triangle between gas supply, LNG terminals, and data center hubs mean for regulatory policy and investors, Simon?

Simon Lack: 12:59

I think it's an issue to watch. Several years ago in Australia, which is one of the three biggest LNG exporters in the world, the share of domestic gas that was going in the form of exports was pushing up domestic gas prices for Australian consumers, and that became a political issue. And gas in The US recently reached $5 a million BTUs, which is still very cheap by global standards. The LNG benchmark in Northwest Europe, the TTF in Northwest Europe, US $10.11 dollars and it's around the same in Asia, the JKM benchmark. So it's still a big gap between the two, but it's narrowing, and we've had gas prices for a long time of $3 Now it's the winter, so there's seasonality and the price has recently dropped from 5 down to $4 But I think there's a risk that if prices go up and that feeds through to higher electricity prices, you may get some consumers saying, boy, maybe all these exports are not such a great thing.

Simon Lack: 14:01

I think the solution is to add more infrastructure. We're not short of gas in this country. The Northeast in the Marcellus definitely needs more takeaway capacity, and that's also true for different reasons in the Permian and Texas. In the Northeast, it could be regulatory challenges, particularly in states like Virginia, which tend to be more blue or Democrat. The challenge in the Permian and Texas has been that gas comes up, they really don't want the gas, they want the oil, but the gas is associated gas that comes up, so sometimes they flare the gas if they don't have the capacity to capture it, but as they get more infrastructure to capture the associated gas, they can use that as well.

Simon Lack: 14:42

So adding gas infrastructure will certainly mean that more gas that's available in The US gets to US consumers and will help to keep prices low here for a very long time I think.

Callum O'Reilly: 14:54

So as things move forward how do you see the two demand drivers that we've been discussing interacting over the next five to ten years?

Simon Lack: 15:03

Well I think every developed country and a lot of emerging economies are going to want to have their own data centers, and there's two reasons for that. One is that there is this issue of latency, like even in The United States if you're sitting on the East Coast let's say you're in Washington DC and you're working real time with a data center that's in California over that 3,000 or so miles, you'll notice some latency just as the signals go back and forth, even if they're going close to light speed. So data centers need to be built reasonably close to the users. So that's one issue. And then the other issue is for national security.

Simon Lack: 15:40

Every big country is thinking of the data center race, the competition, and they're going to want to keep what could in some cases be proprietary technology within their home country. So I think this need for electricity to power data centers is a global challenge, not just in The US, and so LNG can certainly go towards meeting some of that need as well. So that's a little bit complementary. Think that probably the biggest story in the energy markets in the last ten years has been the emergence of The US as the world's biggest exporter of hydrocarbons, which was definitely not the case fifteen years ago.

Callum O'Reilly: 16:16

So finally, what do you see as the biggest risks and conversely the opportunities for investors going forward?

Simon Lack: 16:24

I think the energy sector is still really underappreciated. This year it's all been about growth stocks and owning Nvidia and anything that's related to AI, and of course there is an AI angle with energy, particularly on the gas side, but the market knew that a year ago, and the sector had a great 2024. There hasn't been anything new here, but in the meantime, valuations have improved in the course of the year because the stock prices have gone sideways to down a little bit, cash flows have really grown, so it's a cheap sector. The worst time I had in this business was during the pandemic, even worse than the great financial crisis, because for a while there, crude oil prices were negative. Mean, had to pay somebody to take oil off your hands because because we couldn't go anywhere.

Simon Lack: 17:10

Transportation demand, which is a big source of demand for oil. And so, I guess if another pandemic, and I hope we never have one of those again in our lifetimes, but that would be a downside risk. That's the only big one. I don't really see there's going to be any sort of new source of energy technology that's going to show up, that's going to destabilize things. It's possible that you'll see more innovation in AI that may in turn make it so much more efficient and therefore have less need for quite such compute intensive structures as they're currently developing.

Simon Lack: 17:47

And I don't know, I'm close enough to that to really be able to say. But I think the energy sector starts out at a pretty cheap place. It's certainly the cheapest of the 11 S and P sectors broadly, and we invest in lithium energy, but it's the cheapest of the 11 S and P sectors today, so it's the least correlated with AI. You could almost look at it as a nice offset, almost like a diversifier from what's been driving equity prices generally. You know, for the most part, energy moves with the economy, and energy consumption doesn't vary too much with the economic cycle, but it does a little bit.

Simon Lack: 18:27

So in a recession, we probably drive a little less, fly a little less, so maybe you see a little bit less energy consumption. Prices drop much faster. Oil and gas go down much more in a recession, but the volumes don't change so much, not a little bit. A recession is never good, but I think the sector is in great shape, strong balance sheets, good cash flow, and well positioned for that.

Callum O'Reilly: 18:49

Great. Simon, thanks so much. We've covered a lot of ground today. I really appreciate you joining us to share your insights into this fascinating and really obviously fast moving area of the industry. So thank you.

Simon Lack: 19:01

My pleasure, Callum. Thanks for having me on the show. Enjoying it.

Jessica Casey: 19:06

Many thanks again to Callum and Simon for sharing their insights on the growing role of natural gas at the intersection of AI data centers and US LNG exports. And thank you to our listeners tuning in to the LNG Industry Podcast. Be sure to like, subscribe and follow for more expert perspectives on the trends shaping the LNG industry. Until next time.

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