Powering Progress Episode 3 – The Fuel Behind the Future: How AI Gets Its Power

Aubrey Bishai [00:00:09]

Welcome back to Powering Progress, a podcast series exploring the infrastructure, energy, and market dynamics shaping the next generation of data centers and AI development. I’m your host, Aubrey Bishai, Chief Innovation Officer at Vinson & Elkins.

As demand for computing power grows, so does the need for reliable and scalable energy supply. For many projects, that means securing natural gas supply, developing pipeline infrastructure, or building on-site generation solutions to ensure consistent uptime.

In this episode, we’re joined by Suzanne Clevenger, who advises clients on fuel sourcing, pipeline infrastructure, and energy supply strategies that support large-scale digital infrastructure.

Let’s dive right in. Suzanne, is long-term fuel supply secured and contractually reliable?

Suzanne Clevenger [00:01:18]

That’s a threshold question that all these data center development projects are going to be looking at. If they’re relying on gas-fired power generation, then they will want to look at two very distinct contractual issues to determine whether their fuel supply is going to be secure. So one is the actual gas purchase contract itself, and the other is the transportation contract to get that gas to the facility. So you can have a great gas purchase contract that’s really strong, with fixed price and firm volumes, excellent creditworthy counterparty. But if you don’t have pipeline capacity underpinning that, and bringing it to the facility on a firm basis, then you’re not secure and contractually reliable.

So I think the first thing that is a good discussion that developers need to have is, where are your firm transportation rights coming from? Is there a pipeline nearby? Does it need to be built? And what do I need to do as a developer to make sure that happens?

And then on the actual supply side, the structure of the agreement, of course, matters for the actual gas supply itself. You need to look at the long-term horizon. And the data center developers, of course, want price certainty, looking for fixed price, maybe an index price with an adder, but something that gives them a structure that they can budget on. A lot of times looking for 10, 15, 20 year contracts there for that gas supply. And the flip side of that is the person that you’re buying from, whether that’s a producer or a marketer — they’re going to want to be able to take advantage of the markets. They want a little more of a market-based type price.

A couple of ways to secure that: you could just have a blended structure sometimes, and maybe there’s fixed price for a certain tranche of the capacity that’s going to absolutely be your base load, market price if you have incremental demand.

Another way on contractual reliability that you have to look at is to trace that delivery chain. Where’s this gas coming from? Is it coming all the way from a wellhead? Is it coming from a supply hub? Where are you going to get that gas from? So make sure to link that chain up to understand that your gas supply is going to be secure.

And the final thing on your contractual reliability is to do an end-to-end analysis. When you have all your contracts in place, where’s this gas coming from? How’s it going to get there? Do you have multiple transportation contracts? Do you have a couple different actual purchase contracts? And align the reliability terms through those contracts, and that will make you have a more secure and contractually reliable gas supply.

Aubrey Bishai [00:04:10]

And along these lines, what permitting or regulatory approvals could slow down development?

Suzanne Clevenger [00:04:17]

So the projects can stall if they aren’t prepared for the permitting process upfront. So the first thing, a good thing to do, is to get that jurisdictional analysis done at the outset. I work through, on any project, the jurisdiction of the connecting pipeline, and how far upstream do you need to go to get to your supply source? Where are you buying your supply from? And we talked about that a minute ago — are you buying it, however you’re trying to get all the way back into a production area, and buying it out of a processing plant? So take a look at that.

Is there interstate pipeline or intrastate major transmission lines that are going to bring the gas to your facility, and then how are you going to get that connection lateral in place? Is that just a lateral off of the existing transmission line? Is it an intrastate line that’s subject to state regulatory jurisdiction?

And so once you understand what construction needs to happen in order to secure that firm gas transportation, then this jurisdictional analysis will control everything else. How are you going to get access to the capacity? What are your services going to look like? What tariff is going to apply? What’s the recourse framework if you don’t get that transportation as firm? And then also just what timelines are you working against in order to get that infrastructure in place if you need to build infrastructure?

I’ll hit on a couple differences, mentioning interstate pipelines, intrastate pipelines. For an interstate pipeline, the capacity is going to be governed by a FERC-approved tariff. So if the developer needs new infrastructure — whether that’s expanding the existing interstate line, adding a lateral, meter stations, compression upgrades — that’s all going to require a FERC certificate approval, which sometimes is a larger proceeding that’s called a full certificate proceeding. Other of these facilities may be able to be authorized under the pipeline’s blanket certificate, which allows for a little shorter permitting timeline at FERC. But either way, this is a critical path that needs to be identified early to know what you’re working for on a timeline there.

On the intrastate pipelines, you’re in a different framework. From a service standpoint, you can potentially have more negotiated terms — you’re not stuck to just precisely what the tariff provides. On that flip side, you may have less standardization in the terms of the access rights that you can count on, because they may negotiate something else with somebody else. However, from a construction standpoint, you’re generally going to get a faster permitting and construction timeframe — definitely in Texas, but a lot of states do not have significant siting and permitting for the infrastructure. You get your normal environmental permits. Sometimes there’s reporting to the public utility commissions, but that’s all that you have to worry about there.

And so the developers that are going to move the fastest, or that are going to be the most efficient and give you a timeline that you can rely on — they’re going to be the ones that have talked to the pipelines, that have gotten the jurisdictional analysis done early in the process, and there’s a full understanding of the timing before the project begins to move forward.

Aubrey Bishai [00:07:42]

And how about the storage components? So how are storage or backup supply strategies structured?

Suzanne Clevenger [00:07:48]

Yeah, so one of the good things about storage is it helps and leads towards reliability, resiliency. All of the data centers want a secure fuel supply and they want it all the time. If you’re going all the way back to the basin to get it, you may have to travel on a couple of pipes to get there. If you’re relying on a marketer, you’re going to be subject to some of the market conditions. If your data center is near — specifically if it’s near a storage facility — you’re going to be able to have your fuel supply in the ground ready to go and come bring it to the facility, regardless of what’s going on in the production fields or other major needs.

So storage is right now very active for infrastructure development. And from a regulatory standpoint, natural gas storage facilities, specifically the salt cavern storage on the Gulf Coast, they are in high demand. Those can be constructed as either intrastate or federal jurisdictional assets, just like the pipelines. And understanding what storage products are available under that tariff, what your injection and withdrawal rates look like, how those storage services can be integrated with pipeline transportation, is all essential to structuring the reliable backup supply strategy.

On the commercial side, backup supply strategies could also include some combination of firm pipeline capacity on an alternative path. So you maybe have two pipelines that you can get to your facility. The storage service agreements I was just talking about, for on-site or nearby storage, you’d be close by. Alternative supply obligations and the primary supply agreement — so really nailing down where is that supply coming from if you’re buying it from a marketer. And they commit to you — maybe you have them commit to you that there’s a couple of primary supply sources that they will go to, to ensure your supply.

The LNG peaking facilities is another tool. So if you’re looking for facilities that are in markets where the pipeline capacity is constrained during peak demand periods, and if there’s LNG peaking facilities in that area, that’s something to look for.

I would say the key structural question, and whether the backup supply strategy is going to be structured the best, is whether it’s contractually integrated with the supply — the primary supply and transportation agreements — or whether it’s a separate standalone arrangement. So if you have your transportation agreement and your supply agreements and they’re firm, and then you have completely separately an interruptible agreement on a different pipeline, that will work and it could be used, of course, but your more resilient structure would be to get your backup supply, potentially your storage or your LNG peaking, or like I mentioned earlier, have a secondary primary supply source built into your gas supply contract. If you get those all into the same negotiated package as your primary supply and your primary transportation, then you’re going to have a more reliable structure, because it’s all backed up within the same set of agreements, and you’re not continually working at executing multiple different arrangements.

Aubrey Bishai [00:11:32]

Who bears the risk for delivery interruptions or price volatility?

Suzanne Clevenger [00:11:38]

So this is always a question — it’s, of course, something that the data centers are grappling with right now, but it’s a question that industry has grappled with. There are a lot of industrial end users that rely on gas supply. There’s power generation and other end-use facilities. But the risk allocation is always negotiated. The outcome of that is going to depend very heavily on how sophisticated the parties are, for sure, and how carefully the agreements are drafted. And a lot of that is driven by, is this a very long-term agreement? What’s that pricing structure? We talked about that before — you’ve got your developers that are pushing for fixed price structures, and suppliers who are looking more for a market price. Do you blend that? And in those negotiation dynamics, you’re going to get a bit of a play on who maybe feels like they’re getting the better pricing — they might be more willing to take on more of the risk in the delivery interruptions and the pricing volatility as well.

So on the delivery interruption risk, I think one of the critical distinctions that drives that analysis is your firm versus your interruptible transportation contracts. I think almost all data centers are going to be signing up for firm transportation. Whether you’re on an interstate pipeline or an intrastate pipeline, the interruptible service is always curtailed before the firm service in any capacity allocation scenario. So that means interruptible transportation service really is not effective for a data center’s needs, potentially as a backup — yes, because you do pay a reservation charge for firm capacity, so you may not want to pay two pipelines’ reservation charges for your full supply transportation needs. But of course, that’s an option. I think it’s more likely that you would only want to use your interruptible from the delivery interruption standpoint — you’d only want to have interruptible contracts as a backup.

So the commercial answer to the problem on securing firm capacity is that you need to know that that’s going to come with a cost. And there’s going to be a cost allocation between the developer and the gas supplier, and it’s all going to be negotiated who’s bearing what cost in the event that there is a delivery interruption. So who’s going to pay that reservation fee? Who does that fall on if the gas supply is not available and you have to go get secondary supply, which is usually more expensive — who’s going to pay that additional cost? That will all be set forth in your agreements.

Key terms in all these contracts will be: what are your force majeure definitions? What are your interruption and curtailment mechanics? What does the consequential damages provision look like? And you want to think through and stress-test those against all your realistic operational scenarios, and make sure that your terms are all lined up with what you expect to be some of your real operational scenarios that could occur.

Aubrey Bishai [00:15:12]

Thank you, Suzanne, and thanks to everyone for listening to Powering Progress from Vinson & Elkins. For more insights on AI infrastructure and the forces shaping the data center economy, visit velaw.com.