One Gas RNG strategy to be driven by customer uptake while avoiding investment risk

The One Gas approach to renewable natural gas could help answer a critical question: What is the market demand for the alternative fuel in the American Southwest?

One Gas is focusing almost exclusively on building pipeline interconnections that link sources of renewable natural gas, or RNG, with large-volume gas buyers on its systems in Kansas, Oklahoma and Texas, executives told S&P Global Commodity Insights in an interview. The strategy will mean that the uptake of RNG, a pipeline-quality gas processed from captured methane waste, will largely depend on customers deciding that the fuel is their best option for achieving climate goals.

"That is the question we're trying to answer: What unique role can we play to facilitate that transition in a way that makes sense with our overall strategy?" One Gas President and CEO Sid McAnnally said at the American Gas Association's Financial Forum in Miami Beach, Florida. "And we think this really hits the sweet spot there."

The immediate benefits for One Gas will be twofold, according to McAnally. First, transporting RNG will improve the distribution system's carbon profile. Second, the fuel will serve a need of industrial customers: a pathway to offset their own greenhouse gas emissions.

But the strategy also reflected what McAnally called the focus of any regulated utility: Balancing cost impacts with opportunity. It will avoid the risks of investing in RNG production facilities or purchasing the fuel directly, One Gas COO Curtis Dinan said. It also will not require much investment.

"If we were in a situation where we didn't have a lot of capital projects to pursue, it might be a different story," Dinan said.

However, pipeline replacement and extending infrastructure to growing communities are "an ample capital investment opportunity," he said.

Assessing RNG demand

The one exception to the overall strategy of avoiding RNG production investments and RNG fuel purchases is a program that will allow One Gas subsidiary Oklahoma Natural Gas to spend $5 million each year to procure RNG as part of its purchased gas mechanism. The subsidiary had initially requested a cap of $10 million, plus permission to invest $10 million in RNG infrastructure. According to Dinan, executives expected state utility regulators to reject the proposal outright.

"Normally, you've got to introduce a concept and then tell them about it again," Dinan said. "We were pleased to get the $5 million."

The program will provide another opportunity to demonstrate demand for RNG, Dinan said. One Gas planned to file an opt-in tariff that would allow customers to receive a portion of their gas supply as RNG.

Yet One Gas expected the interconnection initiative to drive more demand. The company has prioritized outreach to transport customers, which consume roughly 60% of its annual gas volumes of approximately 385 Bcf. Unlike residential customers, these industrial buyers purchase gas in large volumes and often have emissions targets, so they present an opportunity to quickly scale up RNG demand.

Since articulating the strategy in 2021, One Gas has identified 175 Bcf of potential RNG resources in its service territories. It has lined up more than 20 projects at dairies, landfills and wastewater treatment plants across its three states, with 10 projects through the preliminary interconnection design phase as of May.

Aligning with broader strategy

For the time being, RNG will only play a supporting role in the One Gas effort to cut greenhouse gas emissions from its distribution system 55% from 2005 levels by 2035.

One Gas cannot predict what portion of customers will opt for RNG purchases over other emissions mitigation measures and then reach cost-effective supply and project development deals, Dinan said. This has made it difficult to forecast what role RNG can ultimately play in decarbonizing the gas grid.

One Gas has a longstanding policy of not announcing climate goals until it has identified ways to achieve them. Replacing leak-prone pipe will deliver much of the company's emissions reductions through 2035. Yet in setting the goal, One Gas had to factor in emissions linked to new infrastructure that will support customer growth alongside emissions reductions from its system integrity program.

"We thought it would be disingenuous to put a goal out there without being honest [that] we intend to grow our system and grow our assets," One Gas CFO Caron Lawhorn said. "So I think it's a fair number, and it's an achievable number."