BP Plc agreed to acquire biogas producer Archaea Energy Inc. for about $4.1 billion including debt, the latest step in the UK energy giant’s expansion into into lower-carbon fuels.

BP will pay $26 per share, a 38% premium to the average share price in the 30 days to Oct. 14, Archaea said Monday in a statement. The Houston-based company, which captures waste-gas emissions from landfills and farms, will become a key part of BP’s bioenergy business and accelerate its growth, according to the statement. 

Archaea fits with BP’s “strategic focus on bioenergy,” Nick Stork, chief executive officer and co-founder of Archaea, said in the statement. The deal will “increase the role of renewable natural gas in helping customers reach their long-term climate goals.”

Archaea was formed in 2021 when Rice Acquisition Corp. merged with two other companies to create a giant in so-called renewable natural gas. The environmental benefit of the fuel comes largely from preventing emissions of the powerful greenhouse gas methane, which is created by the decomposition of organic waste under certain conditions. 

The company captures biogas at landfills or farms and processes it into pipeline-quality natural gas. Burning the fuel still releases carbon dioxide, but has a lower overall climate impact than if the methane had been allowed to simply vent into the atmosphere. 

Under CEO Bernard Looney, BP has sought to position itself at the leading edge of major oil companies’ efforts to curtail greenhouse gases and transition to cleaner forms of energy. It was one of the first to promise to achieve net-zero emissions by 2050 and has made big bets on offshore wind and electric cars. 

Even as the industry made record profits this year on the surge in oil and gas prices after Russia’s invasion of Ukraine, companies including BP, TotalEnergies SE and Shell Plc have said they will continue to channel a growing portion of their cash flow into low-carbon energy, while transitioning away from fossil fuels as the main source of revenue. 

Archaea has a “huge backlog of sites that they can develop into RNG” and BP’s acquisition “does imply a ton of growth,” said Matthew Blair, head of chemicals, refiners and renewable fuels equity research at Tudor, Pickering, Holt & Co. The target company is being valued at the equivalent to roughly four times Archaea’s forecast $1 billion in earnings before items such as interest and taxes by 2027, compared with about $140 million currently. 

Still, the deal values Archaea at a discount relative to peers such as Montauk Renewables Inc. in terms of dollars per volume of projected 2025 gas production, Blair said. 

In its latest guidance, Archaea said it planned to produce 10.9 billion cubic feet of gas a year, about 0.5% of BP’s total output of the fuel. 

BP shares erased earlier gains and were 0.9% lower at 450.95 pence as of 4:22 p.m. in London. 

At the time of the 2021 deal, Archaea was valued at $1.15 billion. Since then, Russia’s invasion of Ukraine has boosted gas prices worldwide, while President Joe Biden’s push for action against climate change is set to increase demand for lower-carbon fuels. 

The sale to BP is “the best way to create a stronger platform to achieve Archaea’s full potential, while maximizing value for our shareholders,” Daniel Rice, chairman of Archaea’s board and architect of the transaction that created the company. 

Bank of America Securities acted as financial adviser to Archaea and Kirkland & Ellis LLP acted as the company’s legal advisor.