Midstream energy assets and businesses have been one of the most popular sectors for infrastructure investors. But as ESG priorities continue to be integrated into infrastructure investment portfolios and the wider infrastructure market, legacy assets that don’t measure up to these standards are at risk of becoming stranded.
According to the Environmental Defense Fund’s report Managing the transition: Proactive solutions for stranded gas asset risk in California, increasingly, certain gas assets will no longer be considered “used and useful,” and this will leave investors exposed. What constitutes a “used and useful” gas asset will, for example, determine whether a utility can charge customers via rates to recover an investment.
What can investors do if an investment becomes stranded?
“For future near-term gas infrastructure investments, California should establish a decision-making framework that provides for continued operations and safety, ensures an effective transition, and maintains investor confidence,” notes the Managing the transition report. “A first step is developing a ‘bright line’ for determining when investments are more at risk of being stranded and identify potential stakeholders in apportioning that risk. Clear mandates for electrification would provide regulatory certainty and a transition timeline for utilities.”
The decision for investors is a challenge because natural gas investments — and oil, too — have been profitable, and they seem to have staying power.
But in its 2018 report, The Economics of Clean Energy Portfolios, the Rocky Mountain Institute noted gas-fired power plants would increasingly be challenged by renewable energy and distributed energy grids that would offer lower rates and emissions. “In addition to beating proposed gas-fired power plants on a levelized cost basis, ‘clean energy portfolios’ of renewables and DERS will also increasingly threaten the profitability of existing gas plants.”
For gas pipeline owners and investors, this future could risk obsolete assets as well as higher costs for power supplies, but that has not deterred many investors.
For example, in April, a Noble Energy–led joint venture announced plans to build a 44-mile pipeline from Noble operated gas fields in Equatorial Guinea. The pipeline is expected to be operation in 2021. In March, Noble received $200 million from Global Infrastructure Partners to help build the EPIC Crude Pipeline in Texas’ Permian Basin.
EnCap Flatrock Midstream-backed Nuevo Midstream Dos, meanwhile, has agreed to acquire Republic Midstream from an affiliate of ArcLight Capital Partners. Republic Midstream owns and operates a crude oil gathering, storage and intermediate transportation system in Texas’ Eagle Ford Shale.
Stonepeak Infrastructure Partners paid $3.6 billion in April to acquire pipeline assets held by affiliates of Quantum Energy Partners, Post Oak Energy Capital, Concho Resources and WPX Energy in the Permian Basin.
ExxonMobil and its partners, Plains All American Pipeline and Lotus Midstream, announced in January they are moving ahead with the construction of a 650-mile pipeline in the Permian Basin.
Private equity firm Hitecvision recently agreed to acquire Solveig Gas, the second-largest owner of Norway’s offshore gas pipeline system. The current owners of Solveig Gas are Canada Pension Plan Investment Board, Allianz Capital Partners and Infinity Investments, a wholly owned subsidiary of the Abu Dhabi Investment Authority.
Investors committing capital to midstream energy are doing so in a climate that is going through rapid change toward alternative sources of power and a political environment that is increasingly supportive of those changes. The question a lot of investors ask is, when will these changes become material to the bottom line? In other words, when could pipeline investments become stranded due to a switch to renewable fuels? Is natural gas destined go through the same changes as coal did over the past decade? At the moment, with the price of natural gas so low and competitive with renewables, midstream investments still look like a good investment, and that risk seems remote.
“Recent advances in power plant technology and the currently low price of natural gas mean that new natural gas-fired turbines are more efficient and less costly to run than aging power plants,” notes the Economics of Clean Energy Portfolios report. “This has led to a ‘rush to gas,’ with utilities and independent power plant developers having announced plans to invest over $110 billion in new gas-fired power plants through 2025.”
The report suggests by 2030 more than $500 billion will be required to replace all retiring power plants with new natural gas-fired capacity. Pipelines supplying natural gas seem to have strong long-term demand in natural gas-fired power plants, but for how long?
