Matthew Smith — How America Runs Out of Natural Gas by 2030 - [Invest Like the Best, EP.483]

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1:03 Visit workOS.com to skip the unglamorous infrastructure work and focus on your product. Welcome everyone, I'm Patrick O'Shaughnessy and this is Invest Like the Best. This show is an open ended exploration of markets, ideas, stories, and strategies that will help you better invest both your time and your money. If you enjoy these conversations and want to go deeper. Check out Colossus, our quarterly publication with in-depth profiles of the people shaping business and investing. You can find Colossus along with all of our podcasts at Colossus.com. Um

1:35 Patrick O'Shaughnessy is the CEO of Positive Sum. All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of Positive Sum. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of Positive Sum may maintain positions in the securities discussed in this podcast. To learn more, Visit PSUM dot V C Mm. My guest today is Matthew Smith.

2:04 He's been on the show before many years ago, and I always love talking to him about energy markets, where he's worked for twenty years. He's the founder and CIO of Chronometer Partners, which invests in energy, industrials, materials, power, and utilities, and related infrastructure. He and his team have modeled nearly every natural gas well, pipeline, and processing asset in the United States. He's reached a conclusion that most of the market does not share. Starting in two thousand twenty eight.

2:29 AI data centers and LNG exports will need more gas than the country can produce and deliver. By his math, the US could exhaust its working natural gas storage by twenty thirty. And could lead to a true energy crisis. In his words, the upside risk to prices becomes unbounded and convex. We talk about why this was set in motion long before AI arrived.

2:48 Why the US can't just turn off exports, who wins and loses among producers, nuclear, solar, and hyper scalers? And what he sees as the only long term solution. Please enjoy my great conversation with Matthew Smith. So Matt, the last time we did this was I think during COVID. Kind of 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 twenty years. You're about as encyclopedic on this stuff as anyone I've ever met.

3:15 But you've also been Acutely studying the current energy situation in the US. Rebuilding 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 eighteen months of concerted effort.

3:33 You've reached Uh fascinating and somewhat scary conclusion. I'd love you to just start with a conclusion and then we're gonna talk through how you came to this conclusion. 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 eighteen months of study.

3:51 We are headed into a place where we see an historic deficit in natural gas. Supply available in the United States, which does pretend some pretty serious consequences. Natural gas. Which is over forty percent of US Power generation.

4:05 Is imminently going to become the most important. fuel in the country. So we're taking petroleum given the amount that we use now for for generation. Our work suggests that Twenty six, twenty seven. Natural gas is appropriately supplied, but as we get into twenty eight.

4:21 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 L and G as we're planning to do with No project. We start to eat into our working gas storage.

4:37 Which is the nexus of supply and demand in the country. I think We will come to the conclusion that the Upside risk.

4:48 Confess. And so where you will feel it the most acutely will be electricity prices. in twenty eight, twenty nine, twenty thirty, 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.

5:04 Is it that simple or is there something else going on as well? The die was cast long before AI Compute came to the scene. If I may, set the stage a little bit. US gas was plentiful. Starting in about two thousand ten.

5:16 When shale started to really change. come to the scene and change things. We've been importing natural gas to satisfy consumption on top of what we produce domestically. Shall started to be Very productive. Surprise the upside.

5:29 This abundant. And As natural gas became more abundant. We started to export it. Starting with Shineer.

5:37 We've gone from that early shier exporting. Do today we're exporting about Fifteen BCF a day of nameplate. US export capacity now that fifteen billion cubic feet. is on a base of about a hundred and ten.

5:50 So if you think about it, it's it's become about twelve to fifteen percent 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. As of today, we're scheduled to export.

6:09 Up to thirty five BCF a day. By the end of twenty thirty. And in that case the die has been mostly cast. To build an LG project, you need various approvals. Their project financed?

6:20 Use site and permit many years in advance. Most of these projects that get you from fifteen or sixteen BC of day to day nameplate to thirty-five. Are well on their way. And so That's the primary incremental demand driver in the country. Over the last.

6:34 Ten years and will be at least for the next five. We had Moderate. Population growth during the Tens and teens into the two thousand twenties.

6:44 We went through a period of stagnating electricity demand. You had energy efficiency and some other things driving down electricity demand while you had more demand for gas driven generation. But it's really been in the recent past where Compute has started to pull incrementally. But before that. Yeah, LNG as the main driver of demand.

7:03 Yeah, let's put those together. I just shared that we're gonna go from About fifteen to thirty five BCF a day of incremental LNG exports. Every producing gas well and the entire

7:17 pipeline and processing and gathering system. We have the capacity to add about twenty B C F 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, Hainesville, Permian. And that which is supposed to leave the door through L and G

7:36 There's so many different power generating ideas in order to Power compute. Time to power that folks talk about so much. It sort of goes from the

7:44 The large scale most efficient assets, which are GE for Nova Combined Cycle. All the way down through the distributed generation assets, which we'll call fuel cells. We will add War search oise or caterpillar solar turbines, there are various local field level behind the meter assets, those assets are also relevant. We have had to assign With an outside partner.

8:05 Probabilities. And so what we've gone about doing is we we will start with our base case, which is we'll call it P fifty. Everything with a probability of fifty percent or more, fifty percent being they have some approvals. They have usually a PPA.

8:22 Someone planning to buy power from them under contract. You know, 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 P fifty level. And

8:36 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. Importantly.

8:46 There are multiples. of what we are considering serious in our base case. Та во консуль начогас, еврій солюші. Today.

8:57 A six series. Bloom energy. Latest gen feel cell. We'll take a hundred and fifty million cubic feet a day of gas per gigawatt. The market.

9:07 Has been assigning A high probability on them attaining two gigawatts a year of productivity or of manufacturing capacity. And that's likely to ramp to Five gigawatts. There isn't the gas for that unless you take it from something else.

9:20 In the extreme case, how high does that number get? If you start to move it down and say P thirty or P zero. That number can more than double and be you know twelve to fifteen BCF a day. By the early twenty thirties, if if I'm mitigated. One naive way to approach this is is to say, like, this doesn't sound like that big of a deal. Like twelve new in the extreme case.

9:39 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. Just use it for ourselves. Why is the solution not just like shut off exports? It's more complicated than that contract law.

9:57 There are rules. There are really good reasons why we're exporting and these projects have Yeah, there's tens of billions. Of project financing and contracts. Attached to or associated with these LNG projects. And

10:12 As the US will be about a third of global gas supply. In several years. our allies and other FTA and increasing non FTA countries are reliant on US um free trade agreement. So the answer is that it's both because it's a third of the global supply. That's really important for the rest of the world. And domestically there's just contracts and investments and

10:34 It could be stopped, but it'd be very complicated. Yeah. You have to have a starting place for a base case, which is typically starts with signed contracts. You know what are the words on the page say? What's allowed or what's not allowed. When we set out to build the firm, we've had about sixteen

10:50 Plus months. To start to model Almost every acid at a time at the atomic level. Along the way there are numerous constraints. And rules and regulations and contracts.

11:02 When we set out to build this It was about Acknowledging those. Constraints. For what they are, assuming that contract law would be followed.

11:11 And then as we go through and build all this. We can flex up and down based on the choice to. Send less LNG out of our Terminals for instance, or Slow AI compute growth, which is one other solution which

11:24 We're not really willing to propose because 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 reduce the pull or strain we expect in the system as the decade goes along. I'm just gonna try to ask really simple questions here because so as not to minimize it.

11:42 It's your view that In uh bad to worst case scenarios. Like this is like a full blown crisis. This is not like a small thing. This is like the story in the country. 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, really bad and it's It's really bad. Primarily, I guess, through prices.

12:00 But 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.

12:13 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, 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.

12:34 And so is any element of this problem like there's just literally not enough of it? Starting with the we'll call resource in the ground. There's tremendous data availability. We can measure Where we are in the exploitation.

12:47 Of most of the major Gas producing bases. Appalachia, which is primarily the Marcellus, plus the Utica. The Haynesville, which is a key swing basin. And then of course the Permian and what you sent the Eagle for Nisa, oil directed plays.

13:00 Where the decision to drill and produce is driven by oil and gas is a byproduct. In each of these plays. There are some stacked payer zones. Where uh well penetrations. How can you measure it?

13:14 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 Latin longs to Drop in and associate. A well with an area.

13:27 That's controlled. You can Figure out what's left. And the reality is There is gas.

13:33 And we've As a part of our analysis Продус та. That is logically captured and can be produced from wells. From existing acres positions of all these companies.

13:43 And so there is gas. We're assuming it gets developed here. That's how you get to our twenty B C F a day of growth. But there are other constraints. It's unbelievably cool that we can like literally know at this precision what is underneath the ground. Often deep underneath the ground and hard to reach places.

13:59 It's a technology story, right? 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 sounds like the problem is more

14:14 our ability to serve the demand in this kind of time frame, not that we're literally gonna like run out of the resource over the next twenty 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.

14:33 It has a decline rate. And each well as it's stacked on an existing company wide. portfolio decline and a lot of these companies decline curves are are maturing some and so they they they don't have pretty steep in natural gas, right? It's steep initially in natural gas, but you know expand and EQT and others have such mature portfolios. The replacement is less costly today than it would have been five years ago. So when you stack all of these wells based on existing acreage up on these companies, assuming they're gonna drill optimally based on the forward curve.

15:00 Which is depressed, and we'll talk about that. You get to this hundred and thirty two Hundred and twenty eight, hundred and thirty, hundred and thirty two PCF a day 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. That's a flow metric. What is possible

15:19 When you use known well Performance parameters. To Maximized production. Before you get to midstream and other

15:27 Surface level constraints, which we'll talk about. There's resource. 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're uneconomic.

15:47 And furthermore, there is an infrastructure. To really accelerate Drilling and activity in those basins. To solve this, the constraints are multiful. So the first constraint is the rock. We have the ability, we think, to get to a hundred and twenty eight to one hundred and thirty two BC. If I started in the most

16:02 In our highest estimate, which is one hundred thirty two B C F as a starting place'cause that's how you solve the L and G exports we've committed to. We will take the under on that, but that's that's where you can get to. A common pushback. As we have gone through this, is there's plenty of resource available to us in a permient.

16:19 There's plenty of resource in Appalachia. A number of companies Describe themselves as having a lot more inventory of wells to drill. And we can justify with the facts.

16:31 I'll just leave it at that. But when folks meet with companies, they should ask to understand exact engineered locations on a map. Where do they have not just the ability to produce, but plans to have infrastructure on the surface to allow it to flow. And the ability within financial parameters to invest and produce. The resource in the ground we're fairly far along in understanding it.

16:53 We've accounted for All of the major productive basins in the country. And I do not think we're likely to be surprised. At this point.

17:04 Knowledge of those things are pretty mature. To say it back. There's a lot of resource. But At this rate.

17:10 We're depleting the known resources quite quickly. We are advanced in depleting the known resources. Especially as we move to the next layer, which is infrastructure. Vanta automates security and compliance for over sixteen thousand fast moving companies like Ramp, Cursor, and Harvey.

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18:31 Which is why I believe that firms that come out ahead in the AI era will be the ones running on Ridgelines 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. There's a bigger longer term question about Is this just a parenthetical period of time between twenty ten and now?

18:54 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 processed and transmitted and used. What are the most important things?

19:08 Rate limiters. In That part of the equation. In some cases it's processing. The

19:14 Natural gas flows to the surface with natural gas liquids embedded there in In some cases there's sulfur or nitrogen 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 different. Gas primarily has to be produced into a pipeline system. And

19:31 There's a certain spec on regular pipelines that's Thousand ten, thousand thirty BTU is the spec. So you have to remove enough of these Other hydrocarbons. to get it to pipeline spec to be able to produce it into the system.

19:46 Folks downstream. So processing 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

19:56 Do not have processing yet to get to our Assume twenty 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

20:10 Investments are being made in projects have been announced by Permian processors or by appellation processors. We know where the materials and liquids handling throughput capacity will be in twenty seven, twenty eight at least. You really would need to in the near term. Even to get to our twenty B C I to think of our gas production, we're

20:27 Willing to Estimate you need to have more processing builds. Build up now. Point one. Gathering small diameter pipes gathering is what Takes it from the well head to Processing your pipeline system.

20:40 There is a fair amount of disclosure around processing systems being expanded and built. And we would posit, we have put all those on a map. On top of every one of these wells that they're Latin Longs. In order to grow Even a fraction of

20:53 Where we must have natural gas production go in the US. Gathering has to be invested in very materially over the imminently to get to the place where we can we can achieve you know 130 B some day of production in the US. The last one is interstate gas pipeline system, and this is where I come back to your answer on

21:10 L and G Lots of rules and regulations around these things. Pipelines are monopolies for the most part. Local distribution companies that deliver gas gear Your stove, those are monopolies.

21:21 In the last ten or twelve years, we've really built one interstate gas pipeline that was Mountain Valley Pipeline connecting Appalachian to mid Atlantic. The various environmental Permitting

21:34 The regime changes This administration this isn't a political economy, but this administration has been trying to reduce the barriers To Building interstate gas pipes. We've started to see some more progress to that end.

21:49 There is an urgency To build more connectivity to wheel gas around the country. To serve this incremental AI compute load. Before we keep going through that sequence here. Can you just say what you think the state

22:02 Will be Let's assume that like there's Roughly inertia in the system. And like nobody listens to this, nobody does anything. A lot of people listen to this and have ideas, but

22:12 What is gonna happen in the world? What will the state of the world be like in twenty thirty? 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

22:25 Natural gas being the primary fuel. to power AI. Semi analysis, for instance. Leader leader in many respects. They've done Excellent work on Everything up to the

22:36 Power source. And They're behind the meter BTM load forecasts. generation hand load forecasts where they match.

22:44 They do everything up to the point where they don't Where the gas would come from. The market has been focused on Understanding.

22:53 The power shortage. And trying to solve that. Generation generally. Power. solar and batteries, wind, nuclear, whether large scale or small module reactors SMRs or natural gas.

23:07 Natural gas is well supplied today. Twenty six, twenty seven. And the result is that Nobody is investing in gas. In fact, EQT is shutting in natural gas right now because they think it'll be more valuable later. The rig count.

23:18 The things that we can see real time to figure out if the market is on to this Tightness in twenty twenty thirty. It's not apparent today. And so It's perpetuating this view that most Americans have, which is there's plenty of natural gas. Because for fifteen years it's all we've been taught. Yeah.

23:35 And so there's a complacency that's developed. And we think that complacency is gonna take us right up to the point where it's too late. So we do think the die has been cast. Where gas which is currently Three dollars and fifty cents, three dollars and sixty cents going out to twenty

23:51 Six twenty seven. In twenty eight. The curve is flat. twenty nine, twenty thirty, the curve is flat because people believe the gas is abundant. That's despite all these AI computer announcements, despite

24:02 What all of the companies are doing for their investments. Gas has lulled everybody to sleep. But what happens is these structural things start to fall in place in twenty seven. Twenty eight. And we start to draw

24:13 Meaningfully in the middle of twenty eight. Early twenty eight. On the gas system like we've never drawn before. And as we look at twenty eight twenty and twenty thirty. We start to cut into

24:24 Mm. US working gas storage, which is about four 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 shorter months in the spring and fall.

24:38 When you get to the middle of twenty twenty eight. We start to break very materially below. In a historical way, where gas available in storage has ever been before. And by twenty twenty nine, we drop below

24:51 All known historical Storage. Evidence. And by twenty thirty We get pretty close to where we think

24:59 Center's Parabus. Gas storage looks very, very low. 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.

25:13 Yeah, it went to eight, nine, ten dollars in MCF. Because we send a lot more. Externally to Europe, we've seen various weather Аномаліс пола Вортекс і Форте. December of of twenty two.

25:25 And those prices have gone from you know to six or or eight or ten dollars, but those have been transitory. And what we're talking about are structural drivers of demand. Against A known Possible.

25:37 Production of gas. And They don't match up. You poll in a very historic way starting in twenty eight.

25:46 gets really convexed and unbounded as you mean that gas prices could be twenty or something like this? I would hesitate to even put a price target on it, but At eight or ten dollars. We think you potentially shut off some of the US exports. Their spot cargoes.

26:01 And they are leaving the border to Capture uplift in Europe or elsewhere. Those spa cargo. May not be lifted and that gas is left in the system, and we've tried to account for that. In our model.

26:13 But the spot cargoes alone can't solve this. You would have to get into Shutting off contracted cargoes leaving our border. via L and G to really start to mitigate some of this. And it's hard for us to count on.

26:26 The choice to shut off contracted cargoes that are where there's some Japanese utility counterparty who is counted on it for its provision of electricity. In crazy convex outcomes like this. Can you tick through who you think the biggest winners and losers are? There are some clear

26:45 Natural gas producer winners. Expand energy is probably at the top of that list. They probably control seventy percent of remaining core Hainesville Wells. the very closely known parameters of rock where we know it to be very productive. So expand We think it's far and away the biggest winner.

27:02 Uniquely expand. Is CEO list right now. There was some turnover early in the year they're going through a search. The stock has Plummeted. Over the last six months.

27:13 As a part of that search. And it's trading it. Four times even uh 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.

27:27 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 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

27:46 Natural gas sets as 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.

27:57 And so If you think about the dispatch curve of different generating assets in the country. There are some. Where the fuel is free.

28:05 Have you sovereign. Hydro. Well solar Assets which are growing meaningfully. They've been ninety percent of the interconnect key with batteries in the last ten years in terms of new assets coming on other than gas.

28:17 Solar. Access. Stand to benefit from a windfall. Where electricity prices are going up. Because the margin plant taking fuel where the price is increasing.

28:27 Is rising. Well Sun cost the same. We think there are some companies Position very well for margin expansion for no incremental capital costs. X P L R tickers XIFR. Formerly next era Yoko, which is an interesting set of assets.

28:44 They have a windfall coming in the latter part of the decade because they mark their PPAs to market at much higher values without any cappes. Clearway energy would be another one similar circumstance. And so solar assets at the utility scale especially stand to win. Maybe more interestingly as it relates to Some of our discussions in the past.

29:02 Residents of Solar, which has been Suffering from Really the first removal of tax incentives to install residential solar Since like the late seventies. Resident of solar assets.

29:13 Are really one of the only ways to protect Yourself from What's gonna happen during the time of ten AM to six PM once gas gets really tight. In the electricity markets, what you pay for electricity at your house. So we think residential solar Gross.

29:30 Exponentially from here, even without tax incentives. For the first time, it's very economic with where electricity prices are likely to go. To install solar, especially when it accompanies batteries. Which make the electricity much more available round the clock. think it's important to say you're an investor, like 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 places like this? What we're talking about is a complex dynamic system where

29:59 There'll be choices to consume electricity or not at different times. 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 convex situation with Natural guessing there for electricity prices as the decade closes. And there's no bridge fuel other than

30:18 Solar And when because currently natural gas is the only flex fuel to get us to when we can bring on nuclear. We've spent a fair amount of time as well. And the nuclear ecosystem. to us

30:29 Large scale nukes are the only solution that makes sense. Which point us primarily to The AP one thousand Westinghouse units that That does take like five years to build or something like that. But at least i they have a story passed and Very brief history. We've built two nuclear reactor units in thirty years in the US, Vogel three and four.

30:48 Around that time we also tried to build one in South Carolina called uh V C Summer, another nuclear project time. Nearly branchrupted scanner. Which was later pushed into the arms and the project was shut down. The muscle memory. From

31:02 Trying to build large scale nuke. Especially in the back of Fukushima in twenty eleven. Chernobyl three mile island. For three decades. nuclear engineers and scientists and companies moved away from nuclear and then the Vogel three and four.

31:16 experiment where it costs, you know, three times as much and took Fifte I think from birth to commercial service. That's the recent memory of these nuclear units, but if you go out to the twenty thirties, what I'm describing in terms of gas deficit. Only gets worse in thirty one, thirty two and beyond. And so In our mind

31:33 The only viable solution. is to build large scale nuclear As fast as possible, which would mean it needs to come on in twenty thirty three or twenty thirty four, which is as soon as it can come on. Utilities, hyperscalers, regulators 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, they don't like the solution. So they need to be convinced of the problem.

32:00 And the country has a history of building Pipelines to solve. problems that exist today, not problems that will exist in five or ten years. And so we're trying to get out ahead. I see where the park's going and where it's going is we are gonna need large scale nuclear by twenty thirty three, twenty thirty four.

32:15 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 system? 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 and 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. for the solution that's needed to solve this problem, which is tens of gigawatts as you go into the twenty thirties.

32:46 That points us to these AP one thousand. So Since Vogel Four came on, and Vogel Four. experience very material improvements from Bogle three. And Georgia today China is building thirty nine. Plus or minus.

32:59 Nuclear reactors. Thirty four of them are one gigawatt plus. I think a third of those are modeled after the AP one thousand. We know a lot more today about building large scale nukes than we did when these mistakes were made. So large scale.

33:14 To us where it can be commercialized on a known timeline and where the costs are probably better. Then 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.

33:27 The two companies most celebrate to that would be Kamica, which owns forty nine percent, Brookfield fifty one percent. You'll probably find that. The US government I think agrees with what I'm describing. They seem to really be lining up and trying to facilitate Commitments and early procurement, which will de risk some of the supply chain, which will help put timelines on this.

33:46 And when the Western House comes public and it's not a little bit more than I've been Deeply undervalued within Camico. Today. So that's an interesting one. B WXT Which is a super interesting company. They're the primary supplier of nuclear for the US Navy.

33:57 They significantly benefit from the coming nuclear cycle as well and Lots of dollar content in the APM thousand is. We're the big losers, do you think in this future? Well sadly, the biggest losers of this would be the US consumer. The point where you take what I'm saying and if we're even partially right.

34:14 Electricity prices rise, which you can see some of on the forward curves in these different markets. As electricity prices rise. You start to think about the trade off, are we going to export natural gas to foreign buyers? Are we gonna use it for A I compute.

34:30 Or are we going to try to keep consumer electricity price bills? It's an awful Trade off. 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 think AI is tremendously transformational.

34:46 We're not anti AI. But it consumes a lot of power. And We need to really focus on the twenty thirty to twenty thirty five period. And the US consumer's probably gonna pay the bill in the meantime.

34:59 Please note that most of the solutions being proposed by the government are To consume more gas. Because everybody believes it's plentiful. Bring your own. Generator or generation.

35:09 BYOG is a thing today. That's what the hyper scalers are being asked to do. to site their data center in a certain button long. That means more gas, not less. So every time you read a press release from Bloom or from the think more gas. Think more gas. And you can use the energy efficiency of each one of those units and understand exactly how much more in common gas beyond the base case that I just shared is is dangerously tight.

35:33 Another loser and I wanna be Respectful, but Some of the biggest winners so far, at least in the stock market, have been The manufacturers of

35:44 Or distributed power gen sets. And when you think about those companies It's been somewhat boom and bust in the early two thousands there was a boom to build as many gas plants as we could. The capacity was overbuilt. And the industry really languished for a long time until now. And you've had just uh tremendous

36:00 Profitability and equity returns. come from these companies over the last two years, but as you look at twenty twenty eight, twenty twenty nine. Most of them are adding more capacity again, just like they did in the early two thousands. I think they're doubling their Solar turbine capacity between now and the end of twenty nine.

36:18 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 they've been topical recently because of other things that folks are Talk about it. the rare roofs they use in their manufacturer, for instance, but for us

36:35 We don't think that bloom energy is Asets at two gigawatts or more. We'll 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. So those are

36:50 to what call it manufacturers of distributed generation or BTM generation that we think are Probably more poorly positioned than investors appreciate. It really doesn't make sense to us. Beyond twenty twenty nine, twenty thirty. To build large scale natural gas generation.

37:06 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. We could see orders slow very meaningfully for National gas generating assets.

37:20 Even at large scale. As twenty six progresses and Those could be some of 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 seems like sort of like this whole memory shortage thing that we're going through right now, that hyperscalers might also be in trouble here.

37:37 If this is a key input to what they're doing. Do you think that's Big problem for them. So as we've been socializing this a little bit, trying to learn more and have people poke holes. I've shared this with one of your recent guests and he listened to Well this sounds like D Ram two years ago. Slowly at first and then all at once.

37:52 The lack of investment in capacity expansion. is gonna come up to bite us. And I think that's where the analogue starts. When we think about The way this plays out and and other analogs. That's probably the best one.

38:05 And when we think about the Cost of the hyperscalers. Right now energy's budgeted to be about ten percent of their cost. Depreciation's the highest. memory and other things factor into that as well. But energy is So cost energy is supposed to be about ten percent.

38:19 If you Plugging 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 twenty twenty nine.

38:34 We do think it becomes a much more material issue. The levelized cost of energy L L C O E 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.

38:48 For natural gas, which is flat. Little backwards mostly flat out to the twenty thirties. In the mid three. That is a very attractive Low cost fuel.

38:58 For the hyper scalers to commit to When they're focused on solving everything else. Like how do I get compute in place to Manifest in this revenue growth in the traffic or elsewhere. For us. We're just focused on modelling objectively.

39:11 When I when you plug in this computer, this compute, and this power gen source here and there. How exactly does it pull on the system of companies that we focus on? 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 twenty thirty and gas costs three bucks. What do you think is the most likely reason? Is it

39:34 data center power requirements are much lower because we make performance breakthroughs or AI demand isn't what we think it's gonna be like what is this most sensitive to such that might be wrong. So after we did most of our work. We went on a bit of a listening tour. Conversations with

39:50 Who we think are maybe the subject matter experts in that thing. So Energy storage or Hyperscaler. Compute deployment. And energy consumption.

40:00 And the common pushbacks. Which we've spent a lot of time understanding are Permian oil play. Oil's high. Crimean has lots of gas.

40:09 In the ground associated with it. Why can't Permian? Productivity just for strong. So our base case model Already accounts for the seven plus

40:19 billion cubic feet a day of pipelines that are already being Built or developed. That come on between twenty six and twenty thirty. If there were a new gas pipeline that would come on between now and then twenty thirty, we would know about it.

40:31 Because of the regulatory. Processes and the time it takes to build these pipes. So we've mitigated the risk of being surprised by the Permian. By moving into the midstream. To understand the bottlenecks constraints.

40:44 So beyond the deliverability of the resource or the gas in the ground itself. How much can actually get to market. I need to leave via L and G export terminals or be consumed in Texas or nearby. We've already included that in our base case model. And so that will be one of the pushbacks is there's plenty of gas in the Permian.

41:00 But I would pause it. This may be Controversial. There was plenty of oil. In the world.

41:07 Before the Iran conflict surfaced. Eventually there will be. Well A plenty again. That's why it was at fifty five dollars a barrel before the Iran conflict.

41:17 In order to make more permian natural gas. You also have to be incentivized to make more permanent oil. And those incentives incentives didn't exist until Iran. In order to produce a lot more permanent gas than even these Seven plus B C F a pipelines being built that we're already

41:32 Modeling. You need much, much higher oil. For longer. Which Only exacerbates this.

41:39 Consumer crisis that we are concerned about. So we don't think the Permian. Solves. The problem. And then the other one is well you can locate a bunch of

41:47 behind the meter. local Permian power generation, which is w which is happening. We are modelling. What has been announced. And proposed.

41:56 And if it's gonna consume local permian gas, that means it's not gonna make it into the pipeline downstream. We can accommodate that with our model. In any case, we always try to think about technologies that can disrupt. Change. Structurally.

42:08 the need and consumption of natural gas. And so it often leads us to focus on battery technologies. There's sodium. And other battery technologies that are currently not commercial, but folks developing on people getting a bit more enthusiastic about.

42:22 The vast majority of Economic battery deployment today is lithium ion. It has a fairly fast discharge cycle. Those are being deployed. In earnest across the system. And yes, we are also modeling known battery deployments as a part of modeling this.

42:38 generating system across all fuel types. A function battery technology change could be something that would would affect you, but that would affect some of these pieces that I described, winners and losers, in meaningful ways. It would be a watershed moment that I would welcome. Because it would solve a problem that we're pretty concerned about. Your finance team isn't losing money on big mistakes, it's leaking through a thousand tiny decisions nobody's watching.

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43:33 Ridgeline offers one unified platform that automates away the complexity across portfolio accounting, reconciliation, reporting, trading, compliance, and more all at scale. Schedule a demo at ridgeline dot ai Every investment firm is unique and generic AI doesn't understand your process. Rogo does. It's an AI platform built specifically for Wall Street, connected to your data, understanding your process, and producing real outputs. Check them out at rogo.ai slash invest. If you were Csar for a day. And you guys just decide everything that gets started and

44:05 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 I would Find a way to build.

44:15 Entirely. From beginning to end. Two to four. AP one thousand nuclear reactors. That would

44:22 D risk the Supply chain. It would. Invite in the And really

44:28 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 China like Currently there are ten to twenty envisioned

44:40 By the US government through different Different groups. In terms of nuclear reactions come on. But no one wants to be first. I think we're close to a few stepping forward.

44:50 But if the US just said, Hey, we have two hundred sixty billion dollars to spend at the Lone Programme Office now, the EDF. Two and sixty billion, I think, to spend by the end of twenty eight. We need to build four nukes with this. That would de-risk this materially, and I think you'd see a jump start. The nuclear equation. Energy

45:07 And resource availability. Egress. And knowledge we think are the biggest bottlenecks too. Productivity and deploying all this. Incredible technology that America has

45:19 Really been a been the leader of developing. When we set up our firm and started building a team. Things are happening pretty quickly in AI. And especially with regard to power. So we didn't set out to understand the now. It's important to understand now, but we still have to understand where the puck is going.

45:34 And Where it's going looks like it will meaningfully diminished growth if not dealt with. And so that's why it brings me to the nuclear solution. As the

45:44 Maybe the most viable long term. My comments on solar are probably the Most important thing that I would Do I think everybody should get a solar system in their houses. It won't be perfect. It will deliver electricity.

45:56 When there's sun out. 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. I would incentivise people to study your states.

46:09 Rules and try to put incentives in place to really, really start to grow residents of solar faster. than what's been kind of a stagnating industry the last year after Soon as then is removed. That would be one place to be.

46:22 Reinvigorating solar incentives because they're going to be needed in a few years. Can we build like a giant pipeline from Canada or something, try to tap our neighbors to help us solve this problem? Can is an interesting thing. partner of ours. They have the capability of delivering about eleven or twelve BCF usually in January periodically. And there are meaningful pipelines from Canada to the US.

46:41 But largely it's seasonal and it helps us solve winter, but otherwise Their net imports most of the year. But 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 T C F

46:55 About a a fourth of the US storage. If I think about this on a three to five year plus basis Canada. By far.

47:05 Resource of Economic gas in the ground. But it's been trapped behind pipe. I would build a one to two BCF a day at least pipe. into the US Midwest the Myso power market.

47:16 And then Wheel it around. My so P J M S P or Cot. And try to satisfy this demand because I really don't want to see demand slow.

47:26 I really don't want to see consumers' bills go up. What are the implications of this for the rest of the world? Well the US has become the leading provider of natural gas with our exports going from virtually zero

47:38 to starting in the teens and now now we're fifteen BC of a day, that'll be thirty five. Many countries in the world are Building gas, generating assets. That are dependent. On our

47:50 delivery of that gas to them. And so Lots of political conflict related tensions or Bottlenecks. Today or Russia Ukraine.

47:59 Russia used to be one of the biggest deliverers of gas to Europe, for instance, and then we filled the gap. To the extent we cannot. Deliver our thirty to thirty five or more B C F a day of gas to the global Consumer.

48:12 Rebalancing will be required. You probably impact Europe meaningfully. And they're left with a trade off of taking Russian gas 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

48:28 The largest consumer until Russia Ukraine. of US natural gas and they probably will be Some point of largest. We potentially

48:39 For Important allies at a time where we really want them to be allies. If we can't send them the gas they need. And so it is pretty important that we Don't curtail L and G although that will certainly be one of the levers.

48:52 As we go out to the late decade that we will be forced to think about. to deal with rising electricity price in the country. Anything that we haven't talked about that has surprised you in this year and a half long analysis of Trying to understand state of things 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.

49:14 Anything else that surprised you either in your work or in people's reaction to it as you started to share it? Really for the last two or three years. The phenomenon Where CEOs.

49:26 CFOs of companies. 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

49:41 versus what is possible from the system. I think it's an interesting Study that will Happen over time. The amount of capital made available.

49:52 to Companies to make investments that are really short sighted in the context of our work. Like the Incremental distributed Natural gas gen set.

50:03 It's an inefficient High heat rate or high cost. 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.

50:17 Those assets may not even run. And so you've had Tens of billions flow into these distributed Power assets. All of which are short and will consume natural gas.

50:30 And We really haven't sine 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.

50:44 That Enough folks haven't put pen to paper. to Then start contracting gas. To make sure they have supply certainty.

50:52 We haven't seen more financial contracting. Twenty eight is somewhat illiquid, this 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 twenty eight. And We start to see all these natural gas generating companies.

51:10 Start to think about securing supply. You're gonna start to see a knife fight. to secure natural gas фізику In twenty eight, like we really haven't seen before, and it's been surprising we haven't really seen any of this yet. Because twenty eight twenty nine the physical market tightens materially, depending on where you are.

51:27 And the amount of money That's gone into Unproven. Untested. I mean the amount of capital being raised for

51:35 Things that really may not happen until twenty thirty five. Maybe. That's been surprising. Especially as it relates to you got expand trading at four times EBDA. Low to mid teens free cash field on

51:48 A gas four curve. That is complacent. to all of the objective things that we already know are likely to get plugged in. People are not really willing to look past summer heat. Or a slight outage in an L and G facility right now.

52:02 But in six months. We start to see these companies roll forward to look at twenty eight. You could start to see the forward curve. Really move up materially. And investors are not willing to look past

52:14 Near term. appropriately supplied gas market, but they're willing to pay for something in twenty thirty five. That is totally untested or unproven. It's been surprising the assumptions and the inconsistency. Across

52:28 Sectors and industries we follow. 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. How would you encourage the CEOs? What question should they ask of themselves or their business?

52:46 Make sure when your assets are deployed that you understand exactly What the source of the yeah. Of your natural gas will be. Make sure you have physical supply locked up.

52:59 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.

53:09 But when it comes to parties being long and short, something that is moving a lot. Imagine being short memory. A year ago, or eighteen months ago, and finding out all of a sudden your short memory. That is what this natural gas market looks like to us. Not two years out, but six

53:26 Plus months out. And making sure you understand the physical Provisioning of gas for your Assets is important for the hyperscalers and for the Buyers of the

53:37 Simple cycle and C C G T large scale plants, but especially for We are very cynical whether You can deploy fuel cells at scale. Because there isn't the gas in the system to

53:50 Power those twenty four seven three sixty five. And so therefore we treat them in our base case that I described as backup gen. To the extent you were to deploy fuel cells. As Baselo Jen. That's only Pulls forward and is additive to the convexity that I described.

54:08 CEOs. And Whether you are the E and C company. Trading it twenty five times.

54:16 cash flow, which is a historically high multiple for a Engineer 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 twenty twenty nine, twenty thirty, because gas is much more expensive and you may have regulators.

54:35 Asking questions. The focus for you should be on how do you do a creative M and A. to backfill your And diversify your business. So that you're not entirely beholden to natural gas generating asset built.

54:48 For hyperscalers. I know memory has been a pain point. Natural gas could be twenty, thirty, or forty percent 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 is probably a compute metric that we're gonna care more and more about.

55:06 I would say that the questions or the challenges for each industry of companies is is a little bit different. But it's all focused on the Making sure you're managing risk. And you understand exactly when your plans play out. How it can go wrong.

55:19 Which in this case means What if gas is Not three fifty, but ten. Or more. What happens if physical gas is questioned?

55:29 What happens when you're consumers and therefore regulators. Start to ask questions. 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. 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.

55:50 And that we emerge from this more resilient, more capable, more efficient, all these things. Thanks so much for your time. If you enjoyed this episode, visit Colossus.com. You'll find every episode of this podcast complete with hand edited transcripts. You can also subscribe to Colossus, our quarterly print, digital, and private audio publication featuring in-depth profiles of the founders, investors, and companies that we admire most. Learn more at Colossus.com slash subscribe. You know how small advantages compound over time, that's true in investing and just as true in how you run your company.

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