Last weeks big deal why they think it can make money23 Oct 2022 09:45
BP expects the deal to double the earnings before interest, taxes, depreciation and amortization (Ebitda) the major expects from biogas to around $2 billion by 2030, which Looney said makes Archaea “obviously a material business even for a company like BP.”
If the deal’s Ebitda growth projections seem outsized relative to its headline production figures, it is because RNG has value locked in its environmental attributes to which BP’s commercial organization holds the key.
“In terms of price realizations … RNG does attract more than the pure Henry Hub molecule of gas,” BP EVP of trading and shipping Carol Howle told Energy Intelligence. “It depends on how the customer values it. Is the customer looking to take an RNG molecule from a lower carbon intensity and decarbonization perspective, or are we looking to take that molecule into the transportation network where it would qualify for an environmental attribute and that environmental attribute, depending on the source of the RNG, carries with it a different level of value?”
She pointed to the Henry Hub price of $6.87 per million Btu on Sep. 30 and the value of D3 RINs — blending credits for ethanol made from cellosic material including biogas — of just over $33/MMBtu on the same day. The realized price for RNG could be the total of the two, she explained.
BP's more than 3,000 customers — among them the Amazons and DHLs of the world that are making efforts toward decarbonization — as well as transportation agreements on more than 300 pipelines, and a “highly capable gas and power trading team who can manage the risk and price structuring” will allow BP to “optimize” Archaea’s existing portfolio of RNG contracts, she said.
“We have got lots of different customers in either the voluntary sector who want to increase their demand and utilization of lower-carbon fuels, and we have also got the regulated markets,” she said. “What we will be doing is working through that overall portfolio, looking at the different customer needs and supply sources, and optimizing between all of those different value sets as one customer doesn’t value RNG in exactly the same way.”
This will allow Archaea’s assets to scale from the current long-term outlook for $600 million in Ebitda to $1 billion after its operations are integrated into BP, because the project financing would no longer have to be tied to fixed-price contracts, BP CFO Murray Auchincloss said. Instead, BP would have the flexibility to manage risk inside of the company’s trading portfolio.
“Fixed-price [contracts] … do underpin a certain amount of earnings, but there is also more risk that we can take as a trading group because we have that larger established portfolio, and we have got the globally diversified markets and different sectors that we can play into,” Howle said. “What is important here is to note that any contracts [Archaea] has in place at the moment, we will of course honor, but we can honor those by using different sources
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