Oil giants Chevron (CVX 1.54%), BP (BP 1.58%), and Shell (SHEL 1.46%) can see the writing on the proverbial wall. The global economy is shifting fuel sources from carbon dioxide-spewing fossil fuels to lower-carbon alternatives. Oil producers know they can't beat back this change, so they're joining in by investing in lower-carbon fuel sources.

One fuel that big oil companies are betting big money on this year is renewable natural gas (RNG). Shell and BP have made multibillion-dollar acquisitions in the space, while Chevron has made less splashy investments. Here's a look at the sector's recent moves and why big oil companies are betting big on this renewable fuel.

Buying and building RNG platforms

Earlier this week, Shell agreed to buy Nature Energy for nearly $2 billion. That deal will give it control over the largest RNG producer in Europe. Nature Energy has 14 operating plants that currently produce 6.5 millionLol MMBtu of RNG per year (about 3,000 barrels of oil equivalent per day (BOE/D)). That company has a pipeline of about 30 new plants under development, which could add up to 9.2 million MMBtu (4,400 BOE/D) to its annual RNG output by 2030. 

That deal follows BP's pending $4.1 billion acquisition of Archaea Energy (LFG), which it unveiled last month. Archaea Energy is a leading RNG producer in the U.S. It currently has 50 operating RNG and landfill gas-to-energy facilities that produce around 6,000 BOE/D. The deal will boost BP's biogas volumes by 50%. Meanwhile, Archaea Energy has another 80 projects that could grow its RNG production fivefold by 2030, half of which are part of a joint venture with collections and disposal company Republic Services. 

Meanwhile, Chevron has taken a different approach by building out its RNG platform organically. Last year, the integrated energy giant set a goal to expand its RNG output to 40,000 MMBtu per day by 2030. It has made good progress on that goal over the last year. Chevron's Brightmark RNG joint venture recently delivered first gas from a project in South Dakota. The company also recently expanded a dairy biomethane joint venture in California to produce RNG and acquired full ownership of Beyond6, which owns 55 compressed natural gas refueling stations that can support RNG. 

Why RNG?

In 2020, methane made up 11% of U.S. greenhouse gas emissions, with carbon dioxide contributing the bulk of the country's emissions at 79%. However, methane has a 25 times greater impact than carbon dioxide on the atmosphere. Because of that, reducing methane emissions can have a huge effect on the climate. 

Two of the biggest methane emitters are the agricultural and landfill sectors. That's leading farmers and landfill owners to team up with energy companies to capture biomethane emissions. They can then easily convert them into a pipeline-quality gas that utilities can use in place of natural gas to generate electricity or distribute to other natural gas consumers. RNG can also replace diesel as fuel for trucks with natural gas engines.

Because it involves capturing biomethane, RNG is a very low-carbon fuel. RNG produced by landfills has 45% lower carbon emissions than gasoline or diesel. Meanwhile, RNG produced by dairy farms is carbon negative because it avoids more emissions than it produces. 

RNG can also be very profitable. Companies producing RNG can sell it under long-term contracts, which provide stable revenue. Meanwhile, federal and state government programs often subsidize RNG production through credits -- meaning the returns that big oil companies can earn on their RNG investments can be pretty lucrative. For example, BP expects to generate $2 billion of annual earnings from its biogas business by 2030, while Shell expects its Nature Energy deal to be accretive to its earnings and deliver double-digit returns.

Big oil sees big profits ahead

Big oil companies are spending billions of dollars on building their RNG capabilities. That's because the renewable fuel is good for the environment and their bottom lines. These investments should enable big oil companies to grow their profits even as the world slowly switches fuel sources.