What’s next for natural gas: A talk with Williams CEO Alan Armstrong

Natural gas has become a significant part of the energy system, as both a key source of power generation and as an enabler of the energy transition (by complementing other sources of power generation). Alan Armstrong has witnessed growth in this space firsthand.

As president and CEO of Williams Companies, a natural gas infrastructure business based in Tulsa, Oklahoma, Armstrong has led the organization through ten years of EBITDA growth. During his tenure, the company has expanded to handle approximately one-third of US natural gas volumes through its more than 33,000 miles of pipelines across 25 states.

Armstrong recently sat down with McKinsey partner Dumitru Dediu to talk about natural gas’s evolving role in the energy system, navigating the energy transition as an infrastructure company, and leaning into challenges as a leader. This interview has been edited for length and clarity.

McKinsey: You’ve been in the energy industry for almost four decades. How has the role of natural gas evolved over that period, particularly in the US energy system?

Alan Armstrong: Natural gas has become essential to the energy system, and especially to the power grid. About 30 or 40 years ago, people knew it simply as the gas on your stove or in your residential furnace. That really was it. Today, because it’s so low-cost, natural gas has made its way into so many industrial applications, whether it’s agriculture, packaging, or manufacturing the primary components of your smartphone. Notably, the low cost of natural gas is enabling the reshoring of many industries.

In fact, today—and this is surprising to some people—natural gas is more than five times cheaper than crude oil, on a thermal unit basis. So it plays an indispensable role in our economy and way of life because it’s low-cost and, here in the US, very abundant.

In my view, natural gas is not just a “bridge” fuel. It is key to meeting both today’s energy demand as well as projected growth in electrification and renewables—not to mention providing an immediate, low-cost, nonsubsidized solution to emissions reduction. We saw many years ago that the natural gas industry wasn’t being recognized for all that it was accomplishing with regard to emissions reduction. For example, 60 percent of US emissions reductions have come on the back of converting coal to natural gas–fired power generation.

Another example is the use of natural gas in transportation. Many shipping fleets today use residual oil. Replacing residual oil with natural gas reduces emissions in the shipping industry by about 2.4 times. Obviously, the bigger the application, the more impact it has.

So when we think about impactful ways of reducing emissions, the things that are economically sustainable—such as putting a much-lower-cost fuel in place of a much heavier hydrocarbon fuel—are exactly what we ought to be going after first, instead of saying, “Well, it’s a fossil fuel, and therefore there’s no benefit to it.”

McKinsey: You mentioned the projected growth in electrification. How do you foresee natural gas coexisting with other forms of low-carbon generation, including renewables and nuclear power, as demand for electricity is expected to increase?

Alan Armstrong: One of the benefits of natural gas within the power generation sector is that it is very fast-following. In other words, a natural gas power plant can quickly respond to shifts in electricity demand, whereas nuclear plants or coal plants typically run in a steady state and can take more time to adjust power output. And on a capital cost basis, it’s a much lower cost to install gas-fired generation than either one of those technologies.

We’ve got to continue to keep up with the increase in load from things like data centers that are spiking growth in US energy consumption today. That’s one thing that’s sneaking up on people: the demand for power generation is really starting to grow. The loads that are starting to show up in certain markets are tremendous. PJM came out with a report that says they expect, just in their market, to see the power generation load increase by 32 percent between now and 2039, with 178 gigawatts of new demand from data centers and electrification.1  In those markets, where there are very limited wind and solar resources, natural gas will have to be part of the solution. We’ve got to have a backup for these intermittent power sources—and renewables can only grow so fast.

We’ve got to continue to keep up with the increase in load from things like data centers that are spiking growth in US energy consumption today.

I’m a huge fan of nuclear as a technology and a solution for the future. But today, the cost of installing it is so high that when you couple that with renewables, it becomes very pricey. Natural gas is a great complement because it’s a low-capital solution and it’s the lowest-emitting of the fossil fuels for load-following power generation.

McKinsey: In light of these shifts, what is the role of midstream natural gas companies and the infrastructure they provide?

Alan Armstrong: The midstream business that I grew up in was very focused on aggregating services for producers at scale. Instead of a producer building its own processing plant, its own gathering system, and its connection into a market, we could aggregate those services and lower the cost of doing that. We could connect producers to new markets.

Today, the systems have gotten so large that they are truly networks. We connect multiple markets and multiple storage facilities. We serve different kinds of demand, whether it’s industrial, residential, power generation, or liquefied natural gas [LNG] exports. All of those uses have different needs at different times of the year, so the network effect of being able to connect all of these markets and supplies is where the value is today.

If you look at that network value going forward, being able to deliver energy when it’s needed is getting even more important. Where it used to be seen as a seasonal issue, it’s really getting down to hour-by-hour management of the systems. The companies that have the very large networks, because they’re aggregating both supplies and market demand and can manage hour-by-hour loads, are going to be the winners.

McKinsey: What are some of the technologies that could reshape the midstream business?

Alan Armstrong: We could see a real impact on methane emissions detection from technologies like satellite-based and laser-based monitoring, which is why we’ve been actively investing in these areas. Containing fugitive methane emissions is not rocket science, frankly. But detecting where those methane emissions are and making sure we know their source is critical. It’s going to be important that we can show, in an unassailable manner, what our real emissions are and how we are working as a company and as an industry to reduce them.

We also have a product called NextGen Gas, which is a certification process that tracks and measures end-to-end emissions from the point of production to the point where gas is delivered in the market. It is done through blockchain technology. People may think, “What does blockchain technology have to do with delivering gas to an end point?” The truth is, there are many different paths that the gas can take and many different sources of emissions along the way. The blockchain technology tracks that, and we then have an outside auditing firm that verifies the information and certifies it.

In the US market, we are seeing local utilities whose utility commissions have allowed them to pay a premium for NextGen Gas. So there’s economics in that. The technology will have to be adopted at a larger scale before we’d want to tell our investors it’s a great thing. But we’re getting there pretty rapidly.

McKinsey: Williams has set company-wide targets for reducing greenhouse gas emissions. How do you balance growth, sustainability, and affordability for customers?

Alan Armstrong: As a public company, you always have this conflict between delivering on quarterly results on the one hand, and on the other hand really thinking about the perpetual shareholder of your company and operating your business in a very sustainable way. It’s an interesting challenge.

It does take a board that thinks about the long term, that’s confident, that has the conviction to make sure you’re not taking the easy or short-term route—a board that’s thinking about how you can keep your business relevant and sustainable for the long term.

When the term ESG [environmental, social, and governance] came out, a lot of people wrestled against it. But I thought it was very positive, to the degree that the focus was on sustainability. It’s nice to have the support of investors that are focused on the long term, on whether your business is sustainable or not—on whether your business is going to be here tomorrow or not.

McKinsey: Williams has made a series of acquisitions recently. How do you approach M&A opportunities?

Alan Armstrong: We have an annual strategy process with our board. We talk about the fundamentals and industry trends we see coming down the pike, we discuss where we should be investing to stay ahead of the market, and we gain conviction and alignment on those elements.

In my experience, having been involved with many acquisitions over the years, you have to know where you can add value. Doing deals just to get bigger is a failed strategy, especially in a market that already has a number of very large players. Anytime we are looking at a transaction, we measure the synergies that we uniquely bring to the table versus the overall net present value of the transaction. We ask, “What unique advantages do we have in the space? What makes us the right buyer for this?” Otherwise, you’re just coming up with the most optimistic assumptions—and that usually doesn’t turn out very well.

Anytime we are looking at a transaction, we measure the synergies that we uniquely bring to the table versus the overall net present value of the transaction. We ask, ‘What unique advantages do we have in the space? What makes us the right buyer for this?’

McKinsey: Making assumptions and predictions has been especially difficult in recent years, given the volatility in the energy sector. How do you navigate uncertainty and try to stay a step ahead?

Alan Armstrong: The one thing we can’t predict is price. But what we can do is predict underinvestment in infrastructure. It’s not that hard to see that—the second derivative of an opportunity.

For instance, we had been watching the gas storage business. We could see, with increased power generation demand and intermittent power generation loads, that the number of incremental services that we were being asked to carry on our pipelines was going to be an issue—the lack of new storage being built, on the one hand, and the increase in volatility associated with both intermittent power and LNG loads on the other.

In particular, LNG demand going up and down is a tremendous shock on our storage systems, which, frankly, they weren’t built to handle. So we expanded our storage capabilities through acquisition. We saw the disconnect between the rates being paid for infrastructure and the cost to build new. That’s exactly the kind of thing we look for.

McKinsey: As an infrastructure company, how do you address the potential for stranded assets, as the energy transition shifts demand for energy sources?

Alan Armstrong: Back in the late 1980s and early 1990s, we realized that people were paying for fiber-optic capacity. So we rapidly converted many of our pipelines—which were carrying refined products at the time—into fiber-optic capacity. We turned that into a couple-billion-dollar business twice, generated two companies from it, and sold that off.

Today, many people are excited about hydrogen. A lot of people don’t understand that to be able to use hydrogen as a fuel, we’re going to need a lot more pipelines. Williams is involved in two hydrogen hubs here in the US right now. There’s a long way to go on hydrogen, but we are very much in the middle of it.

We’re excited for the future, no matter what it holds, because we know it’s going to take the kind of networks and capabilities that we have as an organization to be successful in providing large-scale infrastructure.

McKinsey: You’ve been on the job for 13 years. What are your most important leadership lessons?

Alan Armstrong: I joined Williams in 1986 and I grew up in the company as an engineer with an engineer mindset: “There’s always a right and there’s always a wrong. There isn’t anything gray. People should just wise up.” I wasn’t easy to coach. But I was fortunate, at one point in my career, to have a boss—Steve Springer—who helped me realize that you can be the smartest person in the room, but if you don’t have people coming along with you because you haven’t listened to what their passions are, what their ideas are, and what they perceive as success, you will lead only through dictation, not inspiration, and leave the powerful tool of teamwork laying idle. That was definitely an important lesson for me: you’re not going to get other people to follow your passions unless you are willing to listen to their passions.

At other points, I probably underestimated the power and the ability to attract great talent and the importance of making sure that the team has the right chemistry and incentives. That was another hard lesson for me: to take my hands off the reins of the operations as much as possible and form a team that complemented one another and was excited to work together.

Three of my four children are in the energy industry, in very disparate parts of the industry. I tell them, particularly if they’re feeling overwhelmed, “The tougher it is on you, the more you’re learning. You really ought to be excited about the biggest, toughest challenges, because that is when you’re on a steep learning curve. Be on the steepest learning curve you can possibly stand.”

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