‘Renewable natural gas’ sounds like a misnomer at best, and a misleading marketing term at worst. But energy giants are piling into the biogas, biomethane and biofuel space at pace. And given that the predicted increase in gas demand in the coming years (which assumes net zero policies are not quickly accelerated) is not matched by the forecast supply, renewable natural gas (RNG) is likely to become a bigger part of lower-carbon energy systems. According to Natalia Patterson, an analyst at consultancy Wood Mackenzie, renewable natural gas currently accounts for just half a per cent of North American natural gas production – but its volumes could climb by 10 times by 2050.
Shell (SHEL) is also likely to talk up its biogas and biomethane prospects at its capital markets day next week.
Biogas comes from organic matter breaking down, and is most commonly sourced from biodigesters, landfill gas recovery systems and wastewater plants. Biomethane is that biogas upgraded through another industrial process, which according to the International Energy Agency (IEA) is “indistinguishable" from the regular natural gas stream and it can be "transported and used wherever gas is consumed, but without adding to emissions”.
The key caveat here is that by replacing the extraction of natural gas from the ground, it does not add to emissions. But 'renewable' gas is still burnt for energy or in a boiler, for example, so does add to emissions that way.
Biofuels have been around for a long time, but have few green credentials without using waste matter as a base – even making ethanol from sugar cane, corn or soy means important farmland is used for fuel and not feeding people (or livestock). The IEA said just 8 per cent of biofuels came from waste sources in 2021.
For biogas and biomethane, investment is rising due to the potential returns on offer: Jefferies analysts reckon bioenergy “undoubtedly has the highest expected returns [of the renewable space], running into the mid-teens”, although they cautioned that this is reliant on government support. This suggests the space acts as a middle ground between high-return oil and gas projects and lower-return renewables, although bio options could also prolong the life of combustion technology, be it in cars or power generation.
Buy-o-gas
Shell and BP (BP.) both bought into the sector recently. Last year, Shell paid $2bn for Nature Energy, while BP bought Archaea Energy for $3.3bn. BP also lists renewable natural gas as one of its five “transition growth engines” alongside electric vehicle charging and hydrogen, among other areas.
Outside the extractive energy space, National Grid (NG.) has highlighted RNG as a growth area in the US thanks to the Inflation Reduction Act, which is throwing hundreds of billions of dollars into energy infrastructure.
It is this kind of government stimulus that has Jefferies so worked up about the potential returns. “These [mid-teens returns] estimates are, however, highly dependent on policymakers following through to create security of demand,” the analysts say. This is a similar story to the hopes for hydrogen power, where the lure of government cash is driving companies’ interest in the area.
Patterson at Wood Mackenzie agreed the area was very "policy intensive", with US investment driven by state and federal credits and grants.
"[Selling RNG] means BP, Chevron and Shell are able to offer low-carbon products to their clients, and they get credit for that," Patterson adds. While biogas and biomethane are not competitive with normal natural gas on a cost level, she notes that technological advances and larger-scale projects could lead to an even playing field as soon as a decade from now.
There are also a handful of companies specifically focused on this area – although we should note that the following were hyped on social media platform Reddit, and their share prices skyrocketed in late 2020, before crashing down to earth.
The renewable players
Direct investment opportunities in the space are limited on the London Stock Exchange. Eqtec (EQT) is a local company that has shifted its ambitions in the past two years, from building and running significant waste-to-energy and related bio plants to licensing its technology.
In its recent annual report, the company said the change of plan had come about after “the tighter capital markets accelerated our strategic focus and forced choices that will facilitate completion of the pivot toward technology licensing”. Raising cash became tougher after its shares fell from a high of 2.7p in January 2021 (as driven up by Redditors) to the current price of around 0.2p.
This year, it has opened a demonstration plant in Italy and is building others across Europe, and in March won a tender to run a waste-to-RNG plant in France alongside utility Idex.
Far more established, albeit a less direct investment play, is 3i Infrastructure (3IN), which owns bioenergy companies Infinis Energy and Future Biogas. It bought the latter for £28mn in March.
In the US, there is only slightly more on offer, largely through diversified companies adding biogas and methane capabilities. The leaders include Waste Management (US:WM) and Montauk Renewables (US:MNTK). The former dwarfs the other players in the sector with its $67bn market capitalisation, and is largely using RNG to power its sites, cutting costs in the process.
Alongside Montauk on the smaller side are Clean Energy Fuels (US:CLNE), which was co-founded in the 1990s by ultimate oilman T Boone Pickens. It has added some biogas options onto its model of selling liquefied natural gas to truckers. Despite its long experience in the sector and significant network of LNG refuelling stations, it is not profitable, although forecasts are for positive net income in 2026.
For profitability and a broader business, Darling Ingredients (US:DAR) offers positive margins and an EV/Ebitda ratio of 6.5 times. For the pure biofuel play, Gevo (US:GEVO) would do the trick. The company is an optimistic growth play, valued on its technology and its ability to build ‘Net Zero 1’, a biofuel plant in South Dakota that would supply the aviation industry.
Its March quarter performance shows shares are still factoring in hype instead of underlying performance – sales were just $4mn, and while the company is sitting on a cash balance of over $450mn, management is looking to add debt for the South Dakota project.
For comparison, Nature Energy was a more established business prior to its acquisition by Shell, selling biomethane across Europe. This was still only equivalent to around 3,000 barrels of oil equivalent per day (boepd), however. Archaea, bought by BP, produced around 6,000boepd, and made $100mn in revenue in the last quarter before the sale went through.
