The Oil and Gas Addendum

The Return of Homer City: What Data Centers Could Mean for Pennsylvania Natural Gas and Royalty Owners

There used to be a familiar sight when traveling west on U.S. Route 22 and coming down Chestnut Ridge toward Pittsburgh — the massive cooling towers and chimneys of the Homer City Generating Station. This coal-fired plant, with its 2-gigawatt capacity and status as one of the largest air pollution sources in Pennsylvania, was taken offline in 2023, and demolition began in 2025. Yet this industrial relic may not be idle for long.

Plans are emerging to transform the former coal power plant site into the “Homer City Energy Campus”, a facility envisioned to produce as much as 4.4 gigawatts of power from natural gas fueled generation that would serve proposed data centers at the site. Further west, a similar redevelopment may move forward at the former Bruce Mansfield power station, where natural gas would replace coal as the fuel source for power generation for potential on-site data centers.

Reusing decommissioned power plants for data center development is becoming common nationwide — and supported by proposed legislation in Pennsylvania. These legacy facilities already have valuable infrastructure: grid interconnections, transmission rights-of-way, access to water sources, and roadway connections. When these characteristics are combined with proximity to natural gas supplies, former power generation sites can be compelling locations for the power-hungry data centers that support artificial intelligence (AI) and cloud computing.

While this is an interesting story about potentially re-purposing some of the region’s many closed industrial sites, this news raises a basic question for Pennsylvania oil and gas owners. What impact could these developments have on oil and gas royalty payments? Like anything else, the answer is complicated. This note will explore two related components: first, the impact on regional gas pricing and second, producers’ obligations to market gas under existing leases.

Natural Gas Supply, Natural Gas Demand, and Data Centers

Roughly twenty years into the shale era, Appalachian gas production has many of the same structural hurdles that existed two decades ago. The transportation options to efficiently move gas out of the region have not kept pace with production. That results in substantial supply, but comparatively lower local demand. In basic economic terms, when supply exceeds demand, prices fall. Because of these realities, gas pricing in this region has generally trailed national benchmarks.

 Local hubs — notably Eastern Gas South (formerly Dominion South) and TETCO M2 — frequently trade at a discount to Henry Hub (in Louisiana). These long-term pricing discounts mean natural gas producers and royalty owners in Pennsylvania often realize lower prices than producers elsewhere. Lower gas prices typically mean lower royalty payments. While the pricing discount in the Pennsylvania, West Virginia and Ohio region has been longstanding, that may be changing as demand for gas within this region increases.

Data Centers as a New Source of Demand

Pennsylvania is part of the PJM Interconnection regional transmission organization. PJM “coordinates the movement of wholesale electricity” in much of the Mid-Atlantic region, as well as parts of the Midwest, including Chicago. The rapid acceleration of cloud computing and artificial intelligence has led to the need for data centers to house the computer infrastructure to support those technologies. Data centers are notoriously power-hungry. One of the densest data center locations in the world is in northern Virginia, which is within PJM’s footprint. The increase in energy demand from data centers has driven significant growth in electricity demand within the PJM grid.

At the same time, legacy coal-fired power plants, like Homer City and Bruce Mansfield in Western Pennsylvania, have gone off-line. This has created challenges with electricity supply, electricity pricing, and public policy. For example, Pennsylvania Governor Josh Shapiro recently addressed governors of other PJM Interconnection states and challenged PJM Interconnection’s governance and planning decisions to ensure electric reliability and affordability.

Given the substantial amount of natural gas that can be produced in the region, power stations fueled by natural gas are attractive candidates to supply the power demand. This is evidenced by the proposed use of natural gas to fuel the proposed power generating facilities at the former Homer City and Bruce Mansfield coal power plants. With proposals to re-start a nuclear reactor at Three Mile Island power plant to supply data center power needs, natural gas is an attractive alternative given the abundance of the resource in the region and the comparatively lower costs of building natural gas power plants.

For royalty owners, the natural question follows: if AI and cloud computing data centers are consuming more electricity, and the new facilities supplying that power are fueled by natural gas, could that translate into higher royalties from my wells?

Fungible Molecules and Weighted Average Pricing

The answer to that question is most likely “yes”. But, any long-term increase in price is likely to be broad-based, versus a sudden spike.

When natural gas wells are connected to pipeline networks, the gas molecules flow out of a well and into the pipeline, joining molecules from other wells. In these typical circumstances, the molecules in the pipeline network are fungible. Methane molecules from one well are just as good as methane molecules from another well. Gas producers are overwhelmingly not selling molecules from discrete wells. Instead, they sell large volumes of gas and the source of those molecules is generally unimportant. Natural gas molecules produced in Pennsylvania are often sold at numerous locations. Some volumes may be sold close to the wells, some volumes may be sold some distance away from the wells, and other volumes may reach buyers far from Pennsylvania.

If natural gas demand increases while supply remains fairly constant, prices would generally be expected to rise. Those price increases could benefit royalty owners. Additionally, if more gas is produced to meet stronger demand, larger volumes sold at higher prices may benefit royalty owners even more.

Supply Exclusivity & Obligations to Market Gas

An interesting wrinkle in this story is the potential for supply exclusivity. If the reimagined Homer City and Bruce Mansfield power plants supplying massive data centers come to fruition, then those facilities would need substantial volumes of natural gas to use as fuel. According to press releases, EQT Corporation has been identified as the exclusive gas supplier to the proposed Homer City and Bruce Mansfield facilities.

On its face, this may seem uniquely beneficial to oil and gas owners who receive royalties from EQT Corporation (or its subsidiaries). It is not difficult to see the potential economic benefits that could come from receiving a royalty from a gas producer that has secured exclusive contracts to supply volumes of gas to industrial users with (currently) almost limitless demand. But, understanding how this could actually play out  requires a more nuanced analysis.

Natural gas is a commodity and its pricing depends on supply and demand. The reimagined Homer City and Bruce Mansfield facilities are not yet consuming natural gas to fuel data centers. As a result, natural gas producers are selling gas produced in this region to other buyers and users. If the Homer City and Bruce Mansfield developments come to fruition, and EQT Corporation is exclusively supplying those facilities with natural gas, then EQT Corporation (or whatever exclusive supplier) would likely have three options: (1) produce more gas (by likely drilling more wells); (2) re-orient gas sales away from certain buyers and towards these facilities; and (3) purchase gas from other parties in order to supply the necessary volumes to these power plants.

Each of those outcomes could generally benefit all royalty owners, as well as those whose royalty is paid by EQT Corporation (or any exclusive supplier of gas to these types of facilities). If more wells need to be drilled to align supply with demand, that likely means that pricing is competitive in the marketplace. If one company is re-directing volumes of its own production toward new facilities and away from past buyers, that means that other producers have the opportunity to fill that void and to supply new customers. And, if one company needs to purchase volumes to supply a certain project, then that is an increase in demand that should be associated with beneficial pricing for the suppliers. Overall, these dynamics are generally positive for royalty owners.

But, beyond the economic dimension, there is also a legal consideration - the gas producer’s duty to market gas. If an oil and gas lease does not expressly require a driller to market gas, Pennsylvania law recognizes an implied obligation that drillers market the gas that they produce. See Chambers v. Chesapeake Appalachia, LLC, 359 F. Supp. 3d 268, 279 (M.D. Pa. 2019); Iams v. Carnegie Natural Gas Co., 45 A. 54 (Pa. 1899). This implied duty to market has been more frequently addressed by courts in Texas than courts in Pennsylvania.

In Texas, the law obliges a lessee to manage and administer the lease as a reasonably prudent operator, which includes an obligation to market the production with due diligence and to obtain the best price reasonably possible. See Cabot Corp. v. Brown, 754 S.W.2d 104 (Tex. 1987). The implied covenant or obligation for a producer to market gas is rooted in protecting a lessor from the lessee’s “. . . negligence or self-dealing that would result in unfairly low royalties. . .” Phillips Petroleum Co. v. Yarbrough, 405 S.W.3d 70, 78 (Tex. 2013).

If a gas lease requires royalties to be paid based on “proceeds”, then the implied duty to market requires the lessee gas company to market the production with due diligence and to obtain the best price reasonably possible. See Cabot Corp., 754 S.W.2d 104. This inquiry into whether a gas producer has satisfied its obligation to market gas involves “ . . . a fact specific, location-by-location inquiry for each lease.” Union Pacific Resources Group, Inc. v. Neinast, 67 S.W. 275, 284 (Tex. App. 2001); Parker v. TXO Production Corp., 716 S.W. 2d 644, 646-47 (Tex. App. 1986). The test of this duty is whether the lessee performed in the manner of a reasonably prudent operator under the same or similar circumstances. See, Occidental Permian Ltd. v. Helen Jones Foundation, 333 S.W. 3d 392, 401 (Tex. App. 2011). A contention that a driller has breached the implied duty to market gas examines the lessee gas company’s own conduct, and not other sales. Id.

The current marketplace is being substantially impacted by AI and cloud computing data centers that consume substantial amounts of power. Does this reality inform the obligations of Pennsylvania drillers to market their production? And, how do the prospects of exclusive deals to supply natural gas to fuel the generating facilities that supply this power inform the obligations of Pennsylvania drillers to market their production?

The “reasonably prudent operator” standard, which informs the duty to market gas, is inherently flexible. It is measured by what a prudent operator would do under similar circumstances. From a threshold level, does the existence of an exclusive supply contract for gas to fuel data center power demand require other drillers to explore similar arrangements? Would a reasonably prudent operator in this marketplace have to at least pursue those opportunities?

While some producers may lack the production volumes, transportation capacity, or marketing abilities to exclusively supply fuel to data center-linked power generation facilities, would they at least need to explore the opportunity? If the exclusive ability to supply gas to these power generation facilities is not available, do drillers have to at least explore this new marketplace as part of their sales practices to comply with the obligation to market gas? If the best pricing reasonably available is through an exclusive supply arrangement to large demand centers, are drillers obliged to follow that path?

On the other hand, the discussion thus far assumes a degree of premium pricing for an exclusive natural gas sales contract to power generation facilities. But, that is not necessarily the case. It could very well be that the certainty of demand for large volumes of gas is more valuable to a natural producer than optimal pricing. From this viewpoint, would the implied (or express) covenant to market gas look disfavorably upon these types of exclusive supply contracts for large volumes of gas, where perhaps more competitive pricing in the general marketplace may be available?

And, even if these exclusive contracts offer premium pricing today, would the exclusive commitments of large volumes of gas create a risk? What if this seemingly limitless power demand from AI and cloud computing data centers actually has a limit and these AI-focused data centers simply do not need the volumes of gas predicted under these exclusive supply contracts? What if the costs of operating these data centers and upgrading GPUs is too expensive that their proliferation ceases? What was once a premium price for substantial volumes of gas may no longer exist. Does the implied covenant to market and to obtain the best price reasonably available suggest a diversified sales portfolio?

At a more granular level, questions about implied duties to market gas arise if a driller is paying royalty owners based on different prices. For instance, if certain wells are tied-into infrastructure that exclusively supplies gas to a power plant, a driller may pay a royalty based on the pricing obtained for that exclusive sales contract. Meanwhile, other royalty owners in that same area, and even with the same producer, may receive royalties that are based on sales made to a broader marketplace.

Additional datapoints are necessary in order to fully evaluate, and to begin to address these questions. But, it is nonetheless important to evaluate the application of baseline legal principles to current developments.

An Evolving Marketplace

The potential conversion of the former coal-fired Homer City and Bruce Mansfield power stations to generation facilities fueled by natural gas and aimed at addressing AI and data center computing demands exemplifies how broader market forces can impact oil and gas owners and the royalties that they receive. Increased power demand from these facilities could lead to broad-based price increases, which should have a positive impact on royalties. More gas demand could result in more drilling, more volumes being produced, and potentially more leasing opportunities, all of which benefit oil and gas owners.

At the same time, changing market conditions and gas sales structures could not only impact the value that royalty owners receive, but the standards that apply to drillers’ gas sales. Do exclusive deals to supply gas to data center campuses obligate other marketplace participants to explore or sign similar deals? Does the potential downside of putting more eggs in a single basket obligate drillers to pursue diversified sales portfolios?

These are complex, interrelated dynamics that deserve close attention. Houston Harbaugh’s oil & gas lawyers in its Oil & Gas Practice Group monitor both the economic and legal dimensions of these changes. If you have questions about how emerging power-generation projects or market developments could affect your lease or royalty income, or if you have questions about this post, contact Brendan A. O’Donnell at odonnellba@hh-law.com or 412-288-2226.