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We’ve talked about the potential issues with inflated demand, depreciation expenses, and circular financing.
But my concerns with the AI build out go beyond that.
Even if we assume that the demand is really as high as they claim it is, and even if we assume that the funding is unlimited, there are still issues.
A great example is the Project Jupiter data center in New Mexico.
It’s one of the Project Stargate data centers that’s being developed by Blue Owl Capital with Oracle as a main tenant.
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The data center needs its own 2.45-gigawatt power plant that constantly produces electricity to run.
That power is to come from fuel cells made by Bloom Energy, which run on natural gas.
The gas is to come from a pipeline being built by Energy Transfer, which was to begin service in August.
Notice I said was.
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The pipeline is now scheduled to begin service in February of 2027.
The New Mexico State Land Office has rejected Energy Transfer’s attempt to have the pipeline cross a 0.6-mile stretch of state trust land…twice.
They argue that the pipeline would not benefit state lands.
Project Jupiter also doesn’t have the air permits needed to run the fuel cells yet.
That’s led Oracle to send a ‘Force Majeure’ notice to Blue Owl.
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This is a legal clause common in development contracts that protect a company if an unforeseeable, uncontrollable event makes it impossible for them to fulfill their end of the deal.
In this case, Oracle is using it to attempt to delay rent payments by up to three years if the data center isn’t online in time.
The longer it takes for the data center to be up and running, the longer it takes to start generating revenue.
And with $18 billion in debt from a consortium of banks, there is a clock running.
But the debt isn’t the only problem.
There are tax break agreements between Doña Ana County and Project Jupiter.
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In those agreements, the companies committed to bring a first phase of the facility into operation between October and December of this year, and complete the entire campus and power plant by the third quarter of 2028.
If you’re not going to have a gas pipeline until February 2027, I’m not sure how phase 1 will be running by December 2026.
Companies and analysts can project demand and revenue all they want, but the actual construction of a data center happens in the real world.
Which has its own set of problems.
Physical Constraints
The real constraint on the AI buildout probably isn’t really the chips or memory as Wall Street likes to imply.
U.S. power demand has stayed relatively stable since 2000.
Most of the new power construction has been to replace coal plants that have been retired.
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