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How Kinder Morgan Is Transitioning to the Future of Energy

By Matthew DiLallo - Jan 23, 2021 at 10:20AM

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The energy-infrastructure company needs to adapt as the energy market pivots toward a cleaner future.

Kinder Morgan (KMI 1.31%) is currently one of the largest energy-infrastructure companies in North America. It operates 70,000 miles of natural gas pipelines, nearly 10,000 miles of oil and refined-products pipelines, and has an extensive storage footprint. The bulk of its assets transport, process, and store fossil fuels, which are vital to supporting the U.S. economy.

However, the economy is slowly transitioning to cleaner fuel sources. That could impact Kinder Morgan's business in the coming years unless it joins the transition. The company's management team addressed these concerns during its recent fourth-quarter conference call. Here's what they had to say about the company's plans for the energy-market transition.

A hand holding a lightbulb with icons of the energy industry such as an oil pump, solar panel, and wind turbine around it.

Image source: Getty Images.

Focused on the cleanest fossil fuel

Kinder Morgan is already a step ahead of many fossil fuel-focused companies because it generates the majority of its revenue by operating natural gas infrastructure. That's key because it's a cleaner fuel, and its increased usage is important for reducing greenhouse gas (GHG) emissions. It's also why electric utilities are investing in new natural gas power plants.

These plants currently have a competitive advantage over renewable energy in that they produce steady electricity. By contrast, renewables can be intermittent because the sun isn't always shining and the wind doesn't always blow. However, as the costs for battery storage come down, this competitive advantage will fade away.

Still, as CEO Steve Kean stated on the call, the company's large-scale natural gas business "will continue to be needed to serve domestic needs and export facilities for a long time to come and continue to reduce GHG emissions as we expand its use around the country and the globe." In the near term, the value of this business "increases as more intermittent resources are relied on for power generation" because "natural gas is clean, affordable, and reliable. And pipelines deliver that commodity by the safest, most efficient, most environmentally sound means."

Looking ahead to the energy transition

While natural gas will remain vital to the economy for a long time, Kinder Morgan is already looking toward the future of energy. Kean noted that:

Also among the energy transition businesses that we participate in today is the storage handling and blending of liquid renewable transportation fuels in our products pipelines and terminals segments. We've handled ethanol and biodiesel for a long time. Today we're handling about 240,000 barrels a day of a 900,000 barrel a day ethanol market, for example. We also handle renewable diesel today. That's part of our business that is ripe for expansion on attractive returns.

As the CEO notes, Kinder Morgan has already started to pivot some of its liquids assets toward renewable fuel sources like ethanol, biodiesel, and renewable diesel. That's beginning to open up new expansion opportunities.

For example, it's investing $18 million to expand its market-leading Argo ethanol hub to add 105,000 barrels of ethanol-storage capacity and enhance the system's ability to load this fuel into transportation vessels like rail and barges. Meanwhile, as demand for these fuels rise, the company should be able to leverage its existing footprint to capture additional expansion opportunities.

Kinder Morgan sees several other adjacent opportunities to participate in the energy transition in addition to what it's already doing. Kean stated that:

Moving out the next concentric circle of opportunities is a set of things that we can largely use our existing assets and expertise to accomplish. Those include things like blending hydrogen in our existing natural gas network and transporting and sequestering CO2. A further step out would be businesses that we might participate in if the returns are attractive, such as hydrogen production, renewable diesel production, and carbon capture from industrial and power plant sources.

Hydrogen could be a massive opportunity since it could eventually replace natural gas as an emission-free fuel source. In addition to that, the company already has expertise in transporting and sequestering carbon dioxide since it uses that greenhouse gas to produce oil out of legacy fields in Texas. Thus, it's well-positioned to potentially capture it from industrial sources and use it for oil production, or sequester it in abandoned oil and gas fields to reduce the economy's carbon footprint.

While the company plans to participate in the energy transition, Kean made one thing clear: "[A]s always, we will be disciplined investing when returns are attractive in operations that we are confident we can build and manage safely, reliably and efficiently." He said that the company "will not be chasing press releases" because "energy transitions for a variety of reasons take a very long time." The company plans to "look hard as we lead" and will "evolve to meet the challenges and opportunities."

A key theme to watch in the coming years

Kinder Morgan currently focuses on the infrastructure needed to transport and store the fossil fuels vital to supporting the economy. However, it's well aware that the economy is moving toward cleaner fuel sources. That's why it's also beginning to transition its business to support the future of energy.

While it's taking small steps now, Kinder Morgan will need to continue making strides to keep up with this change, which investors need to watch closely in the coming years.

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