People
A strategic opportunity for E&P
The American electricity industry is undergoing a profound transformation, with major shifts in both supply and demand trends. In this rapidly evolving environment, energy and process (E&P) companies are uniquely positioned to enter the power generation market. Their natural strengths, including access to gas, operational experience, and capital project know-how give them a competitive advantage in this powerful new growth vector. But seizing this opportunity requires a clear understanding of the risks, regulatory complexities, and fast-changing dynamics that define this critical moment.
Decreasing pace of new supply meets an increasing pace of new demand
In 2024, more than a decade of year-over-year growth in the pace of renewable energy development culminated in a record-breaking 56 gigawatts of nameplate capacity added to the U.S. grid—all but 4% of it coming from solar, storage, wind, or nuclear resources.
Energy majors including Shell, BP, TotalEnergies, and Equinor participated in the boom, making substantial investments in renewable energy around the world, particularly in offshore wind and solar. This strategic pivot aimed to position traditional oil and gas (O&G) players as leaders in the global energy transition. But their market entry has not been easy. Financial returns on renewables have fallen short of expectations, due to escalating project costs, rising interest rates, and challenging regulatory environments. Meanwhile, the perceived reputational benefits have been challenged by shifting cultural and political headwinds.
These challenges are poised to intensify, as regulatory and fiscal uncertainty disrupts the ability of renewable developers to deploy new projects (much less do so profitably). While expectations are high for next-generation technologies like advanced nuclear, geothermal, and even fusion, they remain several years away from widespread commercial deployment. At the same time, aging coal and gas plants continue to be retired due to decarbonization mandates and rising maintenance costs, raising urgent concerns about grid reliability. This mounting pressure on the generation fleet is significant and comes at the worst moment—just as electricity demand is surging.
Fueled by the explosive growth of artificial intelligence (AI) and data-intensive services, electricity consumption by data centers is projected to grow exponentially. That growth builds upon earlier projections that demand would increase thanks to new manufacturing, as well as the electrification of vehicles and homes. On top of this, the oil and gas industry itself is broadly moving to electrify field operations, further increasing demand in regions that have historically enjoyed a broad surplus.
All in all, the pace of change is breathtaking—and bracing. After decades of nearly flat electricity demand growth, the next decade will see double-digit changes. Crucially, this surging electricity demand is overwhelming any pre-existing hesitation around adding new fossil fuel generation.
The data center opportunity
The most immediate opportunity for E&P companies is to meet, as rapidly as possible, the power demands of AI data centers. Across geographies, the ecosystem of legacy hyperscalers, third-party data center developers, and emerging AI companies are all struggling to find sites capable of handling extremely large loads—sometimes in excess of one gigawatt.
Utilities that have historically courted new, large customers are facing increasing public scrutiny, as it becomes clear that the costs of new infrastructure serving data centers may raise prices for regular consumers.
At the same time, significant backlogs for gas-fired turbines are delaying construction of new generation facilities. As a result, data center developers are exploring alternative routes for power supply, via “behind-the-meter” electricity generation co-located with the data centers.
In response, U.S. O&G majors—including ExxonMobil and Chevron—have recently announced plans to build onsite, natural-gas-powered generation facilities dedicated to powering data centers, with integrated carbon capture capacity. These efforts aim to provide off-grid solutions that offer reliability, scalability, and emissions benefits compared to traditional natural-gas-based baseload generation.
The oilfield electrification opportunity
In parallel to the AI data center boom, operators in regions like the Permian Basin are leveraging onsite generation for additional purposes, including crypto mining, energy storage, and improving field operational efficiency.
Operators are seeking to reduce Scope 1 emissions by powering rotating equipment with electricity rather than natural gas or diesel, while also exploring carbon capture, utilization, and storage (CCUS) opportunities tied to gas-fired generation assets. These efforts reflect a broader shift in the industry, where decarbonization goals are now aligned with operational resilience and resource optimization. Especially in the face of grid interconnection challenges, onsite oilfield generation coupled with microgrids have proved to enable more efficient and reliable operations.
Onsite power also opens a path for monetizing stranded or flared gas, creating incremental commercial value from underutilized hydrocarbons.
Matching opportunities with player classes
For E&P companies, the onsite power generation opportunity is not one-size-fits-all. Different types of E&P players should engage in ways that align with their capabilities and strategic goals.
Large integrated E&Ps have unparalleled expertise that offers a path to direct participation—developing, building, and operating onsite plants.
- Experience building and operating power generation at onshore and offshore production facilities translates well to utility-scale onsite generation, and allows for fast-track development and construction.
- Experience integrating CCUS into gas-fired power offerings provides a compelling differentiation for customers seeking low-emission electricity solutions—lowering carbon intensity and unlocking additional incentives or regulatory benefits.
- Strong balance sheets allow for the financing of multi-billion-dollar capital projects with greater agility, accelerating speed to market.
Independent E&Ps have geography-specific advantages that expand access to fuel and unlock price premiums. They can partner with utilities, tech companies, or infrastructure developers, limiting capital commitment.
- Permian Basin players are positioned to monetize associated gas currently constrained by takeaway limitations by:
- Offering their own acreage for siting data centers and power plants, enabling on-site utilization of produced gas, eliminating the need for gas transport, or long-distance power transmission.
- Electrifying field operations through buying power back from the power plants, effectively reducing emissions.
- Marcellus players could benefit from new takeaway capacity such as the Mountain Valley Pipeline (MVP) by structuring long-term gas supply agreements with data centers and/or off-grid power generation developers in high-demand regions including Pennsylvania, Virginia, the Midwest, and the Southeast.
Oilfield services & equipment (OFSE) providers have an opportunity to participate through joint ventures or engineering, procurement, and construction (EPC) services:
- They could focus on equipment supply, O&M services, or technology integration (e.g., microgrids, hybrid systems).
- Broad experience with relevant EPC services puts them in high demand.
Risks and opportunities for onsite power generation
Despite the compelling opportunity, several risks must be carefully assessed and mitigated:
- Robust power purchase agreements (PPAs): Data centers and industrial customers often require long-term PPAs. Poorly negotiated terms could expose E&Ps to unbalanced downside risk or insufficient returns. Sophisticated structuring will be essential to ensure project bankability and adequate risk management.
- Gas supply stability: Even for integrated players, ensuring a stable and reliable supply of gas—especially in regions with pipeline constraints or regulatory limitations—is critical for operational continuity.
- Project delivery risk: Speed is often a top priority for data center developers. Delays caused by equipment procurement (e.g., gas turbines), permitting, or interconnection can erode competitiveness. Close coordination across engineering, procurement, and construction (EPC) functions is key.
- Capital intensity and cost overruns: Large-scale onsite power plants may require $1 billion or more in capital for 1GW+ capacity. Managing capital efficiency, especially in inflationary environments, is crucial.
- Regulatory and policy volatility: Energy infrastructure projects remain vulnerable to changing environmental and utility regulations, tax incentives, and local community opposition.
- Market competition: Utilities, midstream firms, and independent power producers (many backed by private equity) are actively competing in this space. E&Ps must differentiate through execution speed, commercial terms, and low-carbon offerings.
- Learning from renewables: Many energy firms misjudged returns on renewable investments due to unforeseen policy changes, cost escalations, and supply chain issues. A disciplined, risk-adjusted investment approach is critical in power generation ventures as well.
Onsite power generation is compelling as a strategic fit for E&P companies, offering a path to monetize underutilized gas, reduce emissions, and deliver reliable power to high-demand customers—especially large AI data centers.
The challenge is maintaining commercial discipline in the face of volatile market dynamics and previously identified risks.
