Natural gas producers court data centres with off-grid power

Article content

Some natural gas producers are still hoping to lure data centre developers to Western Canada by offering bespoke alternatives to relying on congested power grids even as the artificial intelligence sector’s perceived endless appetite for electricity comes into question.

Article content

Article content

Pine Cliff Energy Ltd. earlier this month struck a definitive 25-year deal with an unnamed data centre developer to supply between 3.2 and 4.8 million cubic feet per day (MMcf/d) of natural gas, which represents around five per cent of its production. It was described by one analyst as “a nice little hedge” for the Canadian intermediate oil and gas firm.

Article content

Pine Cliff said its partner plans to construct and operate a sub-100-megawatt data centre adjacent to one of its gathering facilities near Drumheller, Alta., and use large natural gas engines to power its off-grid operations.

“Projects like this don’t require us to send our gas anywhere other than right into our backyard,” Pine Cliff chief executive Phil Hodge said. “That’s really key. It insulates us from some of the unknowns and the volatility that’s going to be in the markets. Too much of our production today is exported into the United States.”

The deal was praised by Alberta Technology Minister Nate Glubish, whose government is aggressively courting investment from tech firms in data centre infrastructure with a dedicated “concierge” program that has met the proponents of 15 proposed projects since November and offered support in navigating regulatory requirements.

Alberta currently lags other provinces when it comes to the number of data centres it has operating. Provinces such as Quebec and British Columbia have benefited from being able to offer relatively abundant and affordable hydroelectricity and large data centre projects have typically been backed by firms with significant commitments on carbon emissions that have led them to favour renewables.

Article content

Article content

But many tech firms are seeking ways to avoid growing queues for connecting to power grids.

“This is exactly where Alberta’s advantages … are (on) full display,” Glubish said on X Tuesday. “With plenty of natural gas to provide reliable power and the ability to have power supplies not connected to the grid, we are a prime destination for investment.”

For natural gas producers currently watching their returns be crippled by price discounts driven by weak seasonal demand, higher production volumes, high gas storage levels and possible United States tariffs, the prospect of new buyers — and scant transportation costs — holds tremendous appeal.

Pine Cliff will be paid based on a rolling 12-month average of the NYMEX natural gas futures contract, a key U.S. benchmark based on prices at Louisiana’s Henry Hub, which frequently trade much higher than Alberta’s AECO gas price.

“It allows a relatively smaller natural gas producer like ourselves to be able to access pricing across the continent without having to pay to send our gas,” Hodge said.

But the enthusiasm sparked by Pine Cliff’s deal may have been tempered somewhat this week as technology and power stocks convulsed after a new open-source AI model from China called DeepSeek was introduced on Monday as a rival to U.S. AI companies because it reportedly requires a fraction of the energy use.

Article content

Experts and analysts are still evaluating DeepSeek and it’s uncertain how companies in North America will react, Ben Levitt, an associate director at S&P Global Commodity Insights, said.

“DeepSeek’s achievements kind of put into question the strategy of these massive capex outlays on data centres, but the tech companies don’t appear to be slowing down quite yet,” he said. “We’ll see if they change strategy, and if they do, we may see a resulting impact on the trajectory of power demand.”

U.S. power companies in particular had been riding high on the belief that energy would be key in the race to build out AI technology. But independent power producer stocks were hit hard on Monday, though some analysts have questioned if lowering the costs of generative AI could ultimately actually trigger wider adoption of the technology.

“(It’s) too early to tell what impact the DeepSeek news will have on ultimate energy and natural gas demand,” Hodge said.

He said the company has been in conversations with multiple parties interested in data centre developments.

“These things are quite scalable if you’ve got the right situation with a very stable natural gas supply, and if you’ve got fibre optics and you’ve got a jurisdiction that is conducive and friendly to these types of developments,” Hodge said. “This is the first one that we’ve done. Hopefully, we’ll be able to do more.”

Article content

But Ian Archer, an associate director at S&P Global and an expert in North American natural gas markets, said there remains a live debate over the extent to which energy demand can grow from advances in AI and data storage.

More off-grid data centre development would undoubtedly diversify markets for natural gas producers and provide another source of income that gets them off of very low AECO price, he said.

“This a very, very emerging and nascent field,” Archer said. “There’s way more heat than light right now in terms of what people think the potential for this is.”

• Email: mpotkins@postmedia.com

Bookmark our website and support our journalism: Don’t miss the business news you need to know — add financialpost.com to your bookmarks and sign up for our newsletters here.

Article content