Freddie Sarhan is the CEO of Sapphire Technologies and has extensive experience in international business development and operations.
Often when people think about a cleaner energy future, they conjure up images of wind turbines and solar panels, leaving traditional energy sources in the past. But, between the old and new world orders of fossil fuels and renewable energy, the midstream (a.k.a. transport and distribution) is positioned to do what it does best—connect A and B. The midstream energy sector, defined by the GPA Midstream Association as the segment that “connects upstream and downstream by gathering, transporting, storing and distributing crude oil, natural gas and other energy products,” is a constant that will be with us regardless of where we land in meeting our greenhouse gas (GHG) emission reduction goals in the next decade and beyond.
Throughout my career, I have been involved in power generation in various capacities. Since the early 2000s, my passion has been focused on cleaner energy and driving the world toward a more sustainable future. It’s essential for each of us to do our part; the scope of the problem is too vast to be solved by individual actions alone. That’s why we need to take a more significant, global approach to decarbonization, and the IRA is a great step in that direction.
The Environmental Protection Agency (EPA) calls the Inflation Reduction Act (IRA), recently signed into law, the most significant climate legislation in U.S. history. The IRA allocates $369 bn in funding to clean energy and energy security through incentives, grants, and loan guarantees. Naturally, since its passing, there has been much speculation as to how this legislation will impact traditional energy in both the near and long term. However, an important nuance to consider is how it will impact upstream vs. midstream traditional energy providers differently. For the midstream, I believe there is ample opportunity to leverage the IRA to make positive gains both financially and environmentally and expedite the transition to a cleaner energy future.
Energy Infrastructure Reinvestments (EIR)
The most straightforward evidence that the IRA doesn’t leave traditional energy behind entirely, at least not the midstream, may be the Energy Infrastructure Reinvestment (EIR) which will “guarantee loans to projects that retool, repower, repurpose or replace energy infrastructure that has ceased operations, or enable operating energy infrastructure to avoid, reduce, utilize or sequester air pollutants or greenhouse gases emissions” according to the Department of Energy (DOE). The EIR is a broad-ranging loan program that supports low-carbon transition for energy infrastructure related to electricity, fossil fuels and petrochemicals. The midstream stands to benefit from the EIR in varied direct and indirect ways—from investing in technology to future-proof their own assets (such as testing the safety of transporting hydrogen through existing natural gas pipelines or harvesting waste energy from existing infrastructure to generate zero-emission electricity), to be the indirect beneficiary of near-term plans to convert coal plants to natural gas leading to an immediate uptick in demand for midstream natural gas services (proposed by Michigan’s largest investor-owned electric utility in the first IRP filed in the U.S. which incorporates IRA provisions).
Clean Fuel Production And Investment Tax Credits
Other components of the IRA provide incentives for the midstream to invest in areas where they are well positioned to succeed, which are also future-proofed in terms of transitioning to cleaner energy sources. The Clean Fuel Production Tax Credit (PTC) and Clean Fuel Investment Tax Credit (ITC), along with the extension of several existing bioenergy and biofuel tax credits, can help propel midstream operators to invest in Renewable Natural Gas (RNG), which would be eligible for all the aforementioned tax credits. RNG, derived from organic waste matter, provides a number of environmental benefits and also helps diversify domestic energy production.
The midstream has already made significant investments toward exploring RNG because it can be stored and transported with the same infrastructure as conventional natural gas. Kinder Morgan, one of the largest energy infrastructure companies in North America, has been building their portfolio of RNG investments, including acquiring North American Natural Resources in August 2022. In October 2022, BP announced a $3.3 billion acquisition of U.S. RNG producer Archaea Energy. This past March, multinational pipeline company Enbridge, announced they would be taking a 10% stake in RNG infrastructure company Divert.
Hydrogen Production Tax Credit
Along a similar vein, the Hydrogen Production Tax Credit provides incentives to spur growth in areas where natural gas midstream operators are already exploring. The major advantages to using hydrogen as a fuel are that it can be produced using renewable energy sources and it does not produce greenhouse gases when combusted. As public and private entities continue to test the safety of transporting hydrogen through existing natural gas infrastructure, natural gas operators have begun forming partnerships and investments in hydrogen technologies. For example, in September, energy infrastructure company Tallgrass and petroleum refining company Equinor announced a partnership to explore large-scale hydrogen production incorporating a minimum of 95% carbon capture for sequestration.
Carbon Capture Tax Credit
The Carbon Capture Tax Credit outlined in the IRA provides immediate opportunities to accelerate the midstream’s GHG mitigation efforts—which are both lucrative and critical to meeting emissions reduction goals in the short term and preparing infrastructure for a greener future. The IRA extends and modifies existing carbon capture tax credits for carbon capture, storage and sequestration. Midstream operators have experience removing CO2 from natural gas to prepare it for transport through pipelines, as well as the infrastructure and geologic expertise required for carbon capture.
Indeed, midstream operators are already making notable investments in carbon capture utilization technology. For example, in October, natural gas and crude oil midstream operator Western Midstream and petroleum manufacturer Occidental announced intent to explore carbon capture, transportation, utilization and sequestration opportunities in Texas, Delaware and Colorado DJ Basins. That month, Exxon also announced a partnership with fertilizer company CF Industries Holdings and pipeline operator EnLink Midstream to capture, transport and store 2 million tons of carbon emissions per year produced by a Louisiana fertilizer plant starting in 2025.
Transitioning To A Cleaner Energy Future
While it is no small task to transition companies that have invested in tens or hundreds of thousands of miles of infrastructure to new or diversified energy products, the IRA provides opportunities to accelerate that necessary transition. There is no single solution to meeting emission reduction goals. However, what is clear is that existing midstream infrastructure will have a significant role to play in the clean energy transition.
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