New Hopes for the Energy Industry in Texas

Texas's Energy Sector: Contraction and Innovative Solutions

Texas has long maintained its position as America's energy production hub, but recently, a slowdown has been observed in the shale gas industry. According to data released by the Federal Reserve Bank of Dallas in September, oil and gas production activities in the region showed contraction in the third quarter. This marks the second consecutive quarter of contraction. According to Baker Hughes data, the number of oil rigs in the U.S. fell to nearly a four-year low in August.

Diamondback Energy CEO Kaes Van't Hof shared a pessimistic picture of the American oil industry's future in a letter to shareholders in August. He stated that if oil prices remain at this level nationwide, U.S. shale oil production has peaked and activity levels in the Lower 48 states will continue to remain low.

However, new economic opportunities present a chance for a revival in a declining sector. Texas is the largest energy-producing state in the country in terms of annual production capacity, and demand is increasing every day. The Electric Reliability Council forecasts that energy demand in Texas could rise to 148 gigawatts by the end of 2024, with this estimate being raised to 208 gigawatts.

A significant portion of this new demand is expected to come from data centers that will support the AI revolution. Analysts noted that oil and gas exploration companies in the Permian Basin are well-positioned to transition their existing energy assets, particularly natural gas turbines, to new economic applications. Welligence energy transition analyst Markus Mowatt-Larssen emphasized that West Texas has ample land suitable for data centers and new energy production assets.

Developers can build new data centers in areas where their existing hierarchy assets are located to take advantage of lost natural gas resources due to insufficient infrastructure. Production water, a by-product obtained during the extraction of oil and gas assets, can be used for the significant cooling requirements of data centers. The gas lighting up the night sky can be directed to customers demanding new energy.

Data center developer Vantage announced a $25 billion data center campus project in West Texas with a capacity of 1.4 gigawatts at the end of August. Skybox Datacenters has begun site work on a 300-megawatt data center project outside Dallas. A joint venture agreement between New Era Energy & Digital and Sharon AI proposes to build a data center in the area where Permian operations are located. One of the most significant agreements in Texas to date has been proposed for the Stargate center, targeting half a trillion dollars in investment with a capacity of 10 gigawatts by OpenAI and Oracle.

Diamondback has started to view the explosion in data center power demand as an opportunity to create new revenue streams, despite its pessimistic outlook on the U.S. oil industry. The company announced in its fourth quarter earnings call in February that it is seeking partnerships to build a large "measured-back" natural gas plant. The gas that comes close to the chair will be directed toward data center customers seeking suitable land and electricity production levels, in addition to strengthening the company's own operations.

Texas is not only witnessing a gas boom focused on data centers. Meta plans to use natural gas turbines in the background of its $10 billion data center in Louisiana. In Pennsylvania, there is a proposal to convert an old coal-fired plant into a large 4.5 gigawatts natural gas center. However, Texas has the advantage of open land, existing infrastructure, and an industry seeking new revenue opportunities.

By 2030, the demand for 50 gigawatts of data center power would be sufficient to almost triple the power supply to all households in Texas, and upstream oil and gas companies are rapidly growing the market as they explore new uses for gas assets. Mowatt-Larssen stated, "Grid connection delays, the intermittent nature of renewable sources, and heavy tariffs on international supply chains have placed the natural gas infrastructure under high demand." Texas is uniquely positioned to meet this challenge.

The result for upstream players is turning into a profitable energy business.