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Essential Energy Insights - October 2021

Midstream approach to renewables takes shape as more firms announce investments

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Refiner Phillips 66 plans to buy a stake in lithium-ion battery materials supplier Novonix Ltd. as the White House accelerates the transition to electric vehicles.
Source: Drew Angerer via Getty Images

Under pressure from shareholders and policymakers to reduce greenhouse gas emissions, U.S. pipeline companies are firming up strategies for investing in existing renewable fuels facilities and decarbonizing oil and gas projects already under construction.

In terms of acquisitions, the wave of clean energy-oriented M&A that industry experts expected to materialize following Kinder Morgan Inc.'s decision to buy renewable natural gas developer Kinetrex Energy for $310 million is beginning to take shape.

Days after U.S. President Joe Biden signed an executive order calling for all-electric cars to make up 50% of new sales in the country by 2030, refiner Phillips 66 announced plans Aug. 9 to purchase a 16% stake in Novonix Ltd., which supplies materials for lithium-ion batteries. Phillips 66 will feed its existing business into Novonix's synthetic graphite manufacturing facility and expand that asset's capacity.

"[Phillips 66's] production of specialty coke, which is used to make anode material for batteries, supports the development of a fully domestic supply chain for sales into the rapidly growing U.S. EV market," analysts at energy investment bank Tudor Pickering Holt & Co. told clients Aug. 10. "The acquisition bolsters PSX's commitment to pursue lower-carbon solutions."

On Aug. 9, Tallgrass Energy LP closed the acquisition of a 75% membership interest in Escalante H2Power, which is developing a hydrogen-to-power project at the Escalante generating station in New Mexico. The company plans to convert the retired coal-fired power plant, owned by Tri-State Generation and Transmission Association Inc., into a clean hydrogen-fired power generating facility as gas utilities advance hydrogen pilot projects to decarbonize pipeline networks.

While many midstream management teams have expressed interest in potentially blending limited amounts of hydrogen into existing gas pipelines, they have also maintained that retrofitting them for that purpose does not necessarily make financial sense. Midstream and end-use infrastructure will be another major challenge for blending, according to S&P Global Platts Analytics, since compressor stations, meters, natural gas turbines, furnaces, water heaters and gas burners would all need to be recalibrated to account for hydrogen's higher burn speed and lower calorific content.

EnLink Midstream LLC and DCP Midstream LP, meanwhile, are focusing on opportunities to corner the market for carbon capture, utilization and sequestration.

DCP Chairman, President and CEO Wouter van Kempen told investors earlier in August that carbon capture and sequestration is "adjacent to the core" business.

"We're already doing a significant amount of carbon capture and sequestration in our southeast New Mexico business today, and we have additional opportunities ... in New Mexico, in Colorado, in Michigan," van Kempen said. "If you think about it, gas processing plants are fairly significant aggregation points for carbon."

For EnLink, the Mississippi River corridor's "between 80 [million] and 100 million metric tonnes per year of total CO2 emissions" could justify "repurposing some of the assets that we have in the ground ... that we think fits the market," according to Executive Vice President and COO Benjamin Lamb.

Other companies are looking to reduce the emissions impact from projects under construction.

Mountain Valley Pipeline LLC announced plans in July to acquire carbon offsets for 90% of greenhouse gas emissions associated with operating the gas pipeline over a 10-year period. The Equitrans Midstream Corp.-operated project will purchase more than $150 million of carbon offsets through a NextEra Energy Resources LLC unit and sourced through a coal mine methane abatement project in southwest Virginia.

Achieving carbon neutrality, however, may not become mainstream throughout the sector. On July 13, analysts at ClearView Energy Partners LLC wrote that "not all members of the natural gas industry appear inclined to pursue such voluntary action and may not welcome [Mountain Valley's] move as it could be viewed as potentially setting a higher bar to future project approvals" and budgets.

S&P Global Platts and S&P Global Market Intelligence are owned by S&P Global Inc.