Energy infrastructure and natural gas companies look toward the renewable energy future

Gabriel Moreen
Gabriel Moreen Senior Midstream Energy and Natural Gas Equity Research Analyst
November 23, 2021

After a long period of investment to support the production and transportation of shale oil and gas, energy infrastructure and natural gas companies are keenly focused on growth from renewable energy. 

Investors, regulators, and customers are increasingly concerned about the environmental impact of the energy infrastructure and natural gas industry. In response, companies must demonstrate progress toward sustainability, and renewables play a key role in that effort. While these companies’ core operations will continue to be in hydrocarbons, slowing shale-related infrastructure investments should free up cash to put toward other priorities. In the short term, returning cash to shareholders should be a top priority, however, these companies are looking for new growth opportunities and renewables are at the forefront of planned investments. 

The push for renewables comes from all sides 

We are seeing a greater focus on energy sustainability from a broader group of investors and alongside that is an increasing supply of capital being raised, and dedicated to, investments with strong environmental, social, and governance (ESG) credentials. 

Governments and regulators are also promoting more environmentally-friendly energy sources. Cities in California and Massachusetts have banned natural gas hookups in new construction and New York has announced plans to do so. However, the energy industry is vocally opposed to and lobbying against such bans, and consequently legislatures in Arizona, Tennessee, and Oklahoma have passed laws which forbid local governments from enacting such bans. But even where gas hookups are still allowed, natural gas companies may need to convince consumers of their environmental bona fides. 

Finally, with little growth in the domestic market for natural gas, many companies are looking for opportunities overseas: LNG exports now account for 10 to 15 percent of the total U.S. natural gas supply. However, many international customers, especially in Europe, are concerned about methane leakage and about the carbon content of LNG. To continue to gain share in the LNG export market, U.S. natural gas companies will likely need to make their products greener. 

Three strategies for renewable investments

Companies with the resources to make investments in sustainability are proceeding with due caution and with a view that new focus areas should be aligned with their areas of expertise. 

The simplest approach is for companies to reduce emissions from their own operations. Infrastructure companies are swapping out natural gas to power their pipelines, purchasing renewable electricity to lower their carbon footprint. For example, Williams Energy has identified initial locations for solar installations near its existing facilities in nine states. 

Another option is for natural gas companies to purchase certifications for their products. Certified natural gas is guaranteed by a third party to have met enhanced environmental criteria, such as eliminating methane leakage from the point of production to the final customer. 

Increasing the supply of renewable natural gas (RNG) is perhaps the most technologically difficult and expensive option. To produce RNG, energy companies capture methane from man-made sources such as dairy farms and landfills and then transport that gas to a pipeline where it is blended with traditional natural gas. RNG presents huge potential for carbon savings with the caveat that it is only available in relatively small quantities. This summer, Kinder Morgan paid $310 million to acquire Indianapolis-based Kinetrex, a supplier of both LNG and RNG. 

Overcoming cost and regulatory hurdles

Despite the pressures companies face to embrace renewables, the transition is likely to be gradual. One reason is that regulators who want to see improved environmental performance are also concerned about the impact on a customer’s utility bill. Currently, RNG costs $10-12/MMBtu—more than twice the price of traditional natural gas, at $4-5/MMBtu. RNG, like carbon capture, is also a relatively new area for natural gas companies. As a result, regulators would likely prefer a go-slow approach, approving renewable investments in the $10-$30 million range. 

Investors should view the transition to renewables as a longer-term phenomenon for energy infrastructure and natural gas companies. Even as companies focus on rewarding shareholders with share buybacks and/or dividend increases, they must also look toward the future. By greening their operations through emissions reductions, natural gas certification, or investments in RNG, they are also importantly signaling their commitment to sustainability in a changing energy landscape. 

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