In its latest earnings conference call, the midstream giant Children Morgane (NYSE:KMI) discussed the benefits that artificial intelligence (AI) will bring to his business. This is perhaps not surprising, as companies across all types of different industries have been vocal about how AI could help their businesses. Some of the uses of AI in non-tech sectors have been quite creative; Wendy’sfor example, announced it would use AI to dynamically change menu prices throughout the day to help drive sales.
In the future, Kinder Morgan may use AI to monitor the safety of its pipelines. Or perhaps it will use technology for arbitrage opportunities, using AI to help better direct hydrocarbons through its system to get the best prices. But the big opportunity the company currently sees in AI is very different.
AI applications consume a lot of energy
Kinder Morgan believes it benefits from AI because it consumes a lot of energy. Generative AI, in particular, requires a lot of computing power, leading to the creation of increasingly larger data centers.
The company noted that a recent survey predicted that electricity demand for data centers would grow at a compound annual rate of 13 to 15 percent through 2030. By 2022, data centers accounted for about 2.5 percent. of U.S. electricity consumption, but this figure is expected to represent 20% of total U.S. electricity consumption by 2030. Most of this electricity demand will be driven by AI, which is then expected to represent approximately 15% of total electricity demand in the United States. Although Kinder does not cite its source, its projections appear to be supported by a report from the Boston Consulting Group, which predicts that U.S. data center power consumption will triple by 2030 and be the equivalent of 40 million homes.
During the earnings conference call, Kinder Morgan said that while renewable energy will play an important role in meeting future energy needs, it will not be enough. He argues that using batteries to plug the renewable energy gap is not economically feasible, while building transmission lines to connect renewables to the grid takes years. He believes that natural gas will play a major role in meeting future electricity needs.
How Kinder Morgan and others could benefit
Kinder Morgan said on its conference call that if just 40% of AI’s future electricity demand came from natural gas, it would increase natural gas demand by 7 billion cubic feet (Bcf) per day to reach 10 Bcf. In 2022, the United States used 12.12 trillion cubic feet (Tcf) of natural gas for electricity, or 32.31 Tcf in total. An addition of 2.5 to 3.7 tcf per year would not be trivial.
Kinder Morgan, one of the largest gas pipeline operators in the United States, would benefit. With approximately 70,000 miles of pipelines, the company’s network transports approximately 40% of the natural gas produced in the United States. Kinder Morgan’s pipeline network is like a toll road, and 89% of its pipeline contracts are take-or-pay. “. This means that customers pay Kinder Morgan for the right to use its pipelines, so it gets paid whether they do or not.
Increased use of natural gas resulting from the construction of data centers for AI will lead to increased volumes and the need to build more pipelines. Given that its network touches more than 40% of the natural gas produced in the United States, Kinder should be well positioned because it is easier to expand and connect pipelines as part of an integrated system than to build a autonomous pipeline. Meanwhile, pipeline construction in the Northeast has proven difficult, as evidenced by problems completing the Mountain Valley pipeline owned by Equitrans Midstream. Kinder’s system, meanwhile, is well positioned for data center hot spots in Texas and the Southeast. New data centers being built will need to be close to cheap energy sources, which is expected to drive future growth for the company.
Now Kinder Morgan won’t be the only one pipeline company benefit. Energy transfer (NYSE:ET) is one of the nation’s largest natural gas transporters, with approximately 90,000 miles of pipeline. Another great option is Williams Enterprises (NYSE:WMB), which manages about a third of the country’s natural gas production and owns one of the largest long-distance natural gas pipelines in the United States, Transco. This pipeline transports natural gas from the prolific Appalachian natural gas basins to markets in the southeastern United States. Since these companies have some of the largest integrated natural gas pipeline systems in the country, they will be best positioned to make the necessary connections through growth. projects to manage increasing natural gas volumes.
Overall, buying one of these companies is a great way to ride the trend of increasing AI power consumption. The assets of all three companies are well positioned and their shares should benefit from this growth over the coming years. As a bonus, all three also offer good dividend yields, so investors can get paid to wait as this trend grows.
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Geoffrey Seiler holds positions in energy transfer. The Motley Fool holds positions with and recommends Kinder Morgan. The Motley Fool has a disclosure policy.
Kinder Morgan sees artificial intelligence (AI) as a driver of growth, but not in the way you think was originally published by The Motley Fool
