BP agrees to buy US renewable natural gas producer Archaea Energy for $4.1 billion

BP has agreed to acquire Archaea Energy, a US producer of renewable natural gas (RNG), for $4.1 billion in cash and debt as part of plans to expand its bioenergy business and meet its decarbonization targets, the energy major said Oct. 17.

Houston-based Archaea Energy operates 50 RNG and landfill gas-to-energy facilities across the US, producing around 6,000 b/d of oil equivalent a day of RNG, which would boost BP's biogas supply volumes by 50%, BP said.

Archaea also has a development pipeline of more than 80 projects that underpin the potential for around five-fold growth in RNG production by 2030. As a result, BP said the deal has the potential to take BP's biogas supply volumes to around 70,000 boe/d globally by 2030.

Biogas is generated by the decomposition of organic material at landfill sites, waste management facilities and dairy farms and can be used interchangeably with fossil fuel-based natural gas.

"Archaea is a fantastic fast-growing business, and BP will add distinctive value through our trading business and customer reach," BP CEO Bernard Looney said in a statement. "It will accelerate our key bioenergy growth engine, creating a real leader in the biogas sector, and support our net-zero ambition."

Bioenergy is one of five strategic transition growth engines that BP intends to grow rapidly through this decade. The company expects investment into its transition growth businesses to reach more than 40% of its total annual capital expenditure by 2025, aiming to grow this to around 50% by 2030.

BP said the acquisition of Archaea is "a strong strategic fit" with its existing biogas business, expanding its position in the US and potentially also in key geographies globally, including the UK and Germany.

Archaea has expanded rapidly since it was founded by owners of a Pittsburgh-area landfill in 2018 and has recently struck a few scale-boosting deals with a few companies along the RNG value chain. Earlier this year, the company announced a joint venture with US waste management company Republic Services to develop 40 RNG projects across the US to convert landfill gas into pipeline-quality RNG that can be used for a variety of applications to displace conventional natural gas.

Landfill-to-RNG projects account for around 70% of all RNG volumes in the US, according to the US trade group RNG Coalition.

Biogas growth

As a result of the agreed acquisition, BP said it also doubled to around $2 billion its target for the contribution to EBITDA from biogas by 2030. BP said it now expects to generate more than $10 billion EBITDA from its transition growth businesses by 2030, up from previous guidance of $9-10 billion.

BP also sees opportunities to integrate the business with its trading operations, as the major is a leading marketer of natural gas in North America.

"Demand for biogas is also diversifying with opportunities for growth into areas such as LNG, renewable hydrogen, and power for EV charging," BP said.

BP on Oct.17 positioned the Archaea bid as a compliment to its existing RNG businesses in the US, which include a joint venture with RNG marketer Clean Energy Fuels to co-market RNG in California through the latter company's fueling station portfolio.

"The more sources we can bring into that [Clean Energy joint venture] in terms of supply the more we can actually market out," BP's executive vice president of trading and shipping, Carol Howle, told investors on a webcast Oct. 17. "Also with Clean [Energy] we are more focused around the dairy digester side of the portfolio, while this is on the landfill side."

BP said boosting sales of RNG will support its net-zero ambition, specifically its aim to reduce to net-zero the carbon intensity of energy products it sells by 2050 or sooner. It has set an interim target to reduce carbon intensity by 5% by 2025 and aims to reduce it by 15-20% by 2030, both against a 2019 baseline.

In addition to RNG's environmental benefits compared to traditional natural gas, the low-carbon fuel's eligibility for lucrative federal and state-level incentives has recently made it an economically attractive investment for oil and gas players like BP.

BP's Howle estimated that the company can expect to realize RNG prices close to the Henry Hub gas benchmark plus the value of federal renewable fuel blending credits that have recently averaged around $33/MMBtu for RNG delivered to transportation markets.

The acquisition is subject to regulatory approvals and Archaea shareholder approval. BP is targeting acquisition completion by the end of 2022.