What Is the Future of Gas?

On July 5, Dominion Energy announced that it would divest its natural gas transmission storage business along with a 25% stake of its interest in the Cove Point LNG export facility in a sale to Berkshire Hathaway Energy. This announcement may indicate that the natural gas midstream sector has arrived at a crossroads. One path leads toward a more sustainable, lower carbon energy future while the other leads to business as usual. Will these pathways continue to diverge, or will they continue in parallel?

Dominion’s pivot from the midstream sector toward a cleaner energy profile does not come as a surprise. The company is committed to a comprehensive net zero target by 2050 for carbon and methane emissions. This divestiture is a signal to their stakeholders that they are committed to those goals, even if the divested assets contribute positively to earnings and shareholder value.

At first glance, the motivation for the transaction seems clear for both parties. For Dominion, the deal enables the company to invest in its growth strategy focusing on a clean energy future in its core regulated retail energy business, whereas Berkshire Hathaway Energy benefits from building its energy infrastructure profile. Beyond the near-term attractiveness and strategic rationale of the deal, the transaction raises several questions about the future of natural gas.

Natural Gas Infrastructure May Face Stiff Competition in the Future 

Fundamental signals suggest that the natural gas midstream sector will be challenged in the coming decade. Low natural gas prices and record production levels have enabled gas-fired generation to permanently take market share from coal. Continued growth in renewable generation and growing adoption of renewable portfolio standards suggest that natural gas will face increasing competition in the power sector. This trend could be accelerated by more stringent environmental policies aimed at 2050 decarbonization goals, which could result in lower utilization of the midstream infrastructure as gas shifts from providing baseload to supplying peaking load in support of intermittent renewables. Also, US LNG exports, expected to be a leading driver of growth in gas demand and new infrastructure buildouts, have stalled due to low oil prices, the economic impact of the pandemic, and increasing global competition.

Pipeline Construction Continues to Face Obstacles 

Dominion also announced the cancellation of the Atlantic Coast Pipeline project based on increasing cost uncertainty and ongoing delays from legal and regulatory challenges. This cancellation, along with several other notable project delays and cancellations, suggests that oil & gas midstream infrastructure development will face challenges for environmental concerns, commercial reasonableness, and long-term viability of the asset’s utilization. In Canada, for example, recently passed legislation requires proposals for new mines, power plants, pipelines, or railways to include plans to hit net zero emissions by 2050 to be approved.

The future is far from certain whether existing midstream infrastructure will become more valuable due to the obstacles facing new construction. This transaction does suggest, however, that midstream operators need a clear vision about how to participate in a clean energy future. In future blogs, we will discuss additional issues that midstream operators should be considering, including:

• How important is the midstream sector to resiliency of the entire energy system?
  
• How can comprehensive energy policies support the transition of the midstream sector to reinforce 2050 carbon abatement goals?