Midstream growth outlook: Increasing natural gas demand

Natural gas demand growth is now potentially approaching 25%–34% by 2030.¹ That means that our previous expectations about natural gas demand appear conservative. (Read: Midstream Energy to Fuel Growth in AI.). Driven by the expected increase in demand for power generation from artificial intelligence (AI) and data center computing, the growing demand for natural gas could benefit the midstream sector. Plus, there are other tailwinds for the sector. Supportive macro trends combined with continued capital discipline have benefited project returns within the midstream sector, meaning that capital spending today may benefit investors more now than in the past.

Future of natural gas

Estimates for natural gas demand growth have been increasing. For example, Bernstein now forecasts data center-linked natural gas demand growth of 12 billion cubic feet per day (bcf/d) over that same timeframe.^2,3

These robust estimates are starting to match with real-world action.

• GE Vernova (NYSE: GEV), one of the largest manufacturers of turbines for gas power plants, recently announced plans to produce over 50% more gas turbines annually by 2026 than it does today.⁴
• Energy Transfer (NYSE: ET) recently announced a 0.44 bcf/d firm natural gas supply agreement to power a ~1.2 GW data center outside of San Marcos, TX, beginning in third quarter 2026.⁵
• TC Energy (NYSE: TRP) will be filing an application with the Federal Energy Regulatory Committee (FERC) for approval of the ANR Heartland project, which will provide ~0.45 bcf/d of natural gas to serve data center demand.⁶
• Williams (NYSE: WMB) announced a $1.6 billion behind-the-meter project to provide natural gas and power generation infrastructure to a data center customer.⁷

While it is still too early to confidently predict how large data center-linked natural gas demand will be, it appears clear to us that the volume will be material. This emerging source of demand is in addition to the significant and predictable demand growth underway from the completion of numerous liquified natural gas (LNG) export facilities and continued industrial demand growth.

In total, these trends could lead to 28–37 bcf/d of additional demand by 2030, which is a 25%–34% increase.¹ While natural gas demand has experienced steady growth historically, rarely have the drivers of demand been as visible. 

This visibility is significant for the midstream sector, in our view. It allows midstream companies to plan to meet this demand with greater certainty and foresight. That’s why we believe today’s projects can be more efficiently executed and carry fundamentally less risk.

Smarter capital spending

The midstream infrastructure buildout that supported the emergence of the US shale basins over the previous two decades was colossal. Thousands of miles of pipelines, as well as enormous processing, treating, fractionation, and storage capacity additions, were built. Recent and future capacity expansions are often able to leverage existing assets in a more efficient manner. For example, annual capital expenditure (capex) for the 29 largest midstream companies in 2026 is expected to be roughly equal to the amount spent in 2023.⁸ In 2023, data center-driven demand had not yet been recognized, and earnings before interest, taxes, depreciation, or amortization (EBITDA) for those same 29 companies was 32% lower.

One measure of capital efficiency is return on invested capital (ROIC), which is calculated as EBITDA or net operating profit after tax (NOPAT) divided by total capital invested. From 2015 through 2023, the average ROIC for the midstream sector rose from 9.8% to 11.9%.⁹ This trend is expected to continue with average ROIC expected to rise to 12.7% in 2026 and 14.5% in 2028.⁸ This improvement in capital efficiency, combined with the sector’s ability to largely fund growth projects through internally generated cash flows and without issuing new dilutive equity, means that investors may benefit more from today’s capital investments than in past periods.

Outlook

The midstream sector offers investors an attractive distribution yield and an improving outlook for cash flow and distribution growth, in our view. These fundamentals are supported by significant and predictable natural gas volume growth and improving returns on invested capital. Roughly 75% of the sector is natural gas production focused.⁸ With natural gas demand potentially growing 25%–34% by the end of the decade, increasing capital efficiency, and healthy balance sheets, we believe the midstream sector is a compelling asset class with macro driven tailwinds.¹