Occidental And Warren Buffet Shoot For The Moon In The Permian Basin

Originally published on Forbes.com on November 3, 2024

Oxy and Buffet are putting good money into DAC and CCS, and the company is confident, but the worldwide deployment of CCS seems too expensive for oil and gas consumers.

Occidental Petroleum Corporation (Oxy) are embarking on a spectacular venture to reduce greenhouse gas (GHG) emissions in the Permian basin. Warren Buffet is riding along, owning 29% of Oxy stock. What do Oxy and Warren Buffet see that others don’t?

The Concept Of Direct Air Capture

Vicki Hollub, who is chairman of Oxy, dangles the tantalizing idea that if we could remove enough CO2 from the sky, we could stop global warming without having to cut back on oil and gas production. Hence the concept of DAC or direct air capture of CO2. As demonstrated by Oxy, a huge bank of fans is set up to suck in air that is passed over a chemical that absorbs CO2.

The captured CO2 can be buried deep underground in geological layers that trap the CO2. Or it can be converted into useful products like synthetic fuels or building materials such as concrete. A startup company called SkyNano uses a patented process to convert CO2 to solid carbon nanotubes that are used in vehicle armor, transmission cables, and woven fabric.

The first large-scale venture by Oxy, costing $1.3 billon in the Permian basin of West Texas, is called Stratos. Described in more detail elsewhere, Stratos will remove 500,000 m-tpd (metric-tons per day) of CO2, starting in 2025. This is 0.008% of U.S. release of GHG. Oxy envisions one hundred such plants that would raise this fraction to almost 1%, but this is still only a minor factor in alleviating global warming.

So, What’s In It For Oxy

A primary driver for Oxy is they will be able to sell CO2 removal credits to other companies who desire their oil or gas to be labeled low-carbon. These companies would purchase credits that currently lie in the range $500- $1100 per metric ton of CO2.

But the profit that Oxy would make on such a sale will depend on the cost of capturing the CO2 in the DAC process and injecting it underground. This is likely to be expensive, but the Inflation Reduction Act (IRA) of 2022 provides a tax credit of $180/m-t (metric ton) for CO2 captured by the DAC process and stored underground. 

Surprisingly, Microsoft have already signed to purchase 500,000 m-t of CO2 from Oxy. Even at the low-end of the price range of CO2 removal credits ($500/m-t) the cost to Microsoft would be $250 million, an enormous revenue to anyone but Microsoft.

A second answer to the question is to offset the CO2 that is contained in the oil that Oxy sells. When this oil is burned by a third party, the emissions are called Scope 3 emissions. There is a debate about who is responsible for Scope 3 emissions: the companies who produce the oil and gas, or the end users. But when Vicki Hollub talks about net-zero oil, it seems to be an Oxy goal to sell oil that is labeled carbon free or net-zero oil. This is a new trend: buyers of oil or gas, particularly in Europe, are looking for products that are low-carbon, and net-zero oil or gas is the ultimate classification.

Oxy leads the field in this regard because very few other oil and gas companies have committed to net-zero emissions that includes Scope 3. Most are committed to reducing Scope 1 and Scope 2 emissions, which are much easier to accomplish than Scope 3 emissions, because Scope 3 emissions are a high proportion (75-95%) of their total emissions.

What Will Happen To The Price Of Gasoline And Electricity

This is where the rubber meets the road for energy consumers. If companies are buying CO2 removal credits to reduce their carbon footprint, the cost will likely be passed on to the consumer. For example, suppose a major oil company commit to lowering their carbon releases from using diesel motors to power their frac pumps, because no renewable electricity is available. The company decides to buy, from Oxy, enough CO2 removal credits to offset the company’s own GHG emissions. They pass these costs on to their consumers by raising gasoline prices at their gas stations.

The same argument applies to natural gas used to fire power plants. The cost of buying CO2 removal credits to offset the use of gas from drilled wells would lead to increases in the price of electricity.

Longer Term Economics Look Dubious

CCS in 2020 stored a puny 40 Mt/year (Mega-ton or millions of tons per year). Rystad Energy predicted it will need to be 400 Mt/year by 2030, an increase by 10 times, and 8,000 Mt/year by 2050 – a total increase by 200 times. This would represent a 20% growth in CCS year-over-year. To make this happen a CCS industry would, by 2050, end up in size as big as the present-day oil and gas industry. This is hard to imagine, but if it did happen it’s likely that prices of oil and gas would have surged to an unattainable level.

This is supported from a study in Australia, where the Commonwealth Scientific and Industrial Research Organization (CSIRO) has concluded that, “The LCOE [levelized cost of electricity] cost range for variable renewables with integration costs is the lowest of all new-build power technologies in 2023 and in 2030”. The costs include solar or wind production, transmission, and storage of electricity.

Takeaway

One reason Oxy and Warren Buffet are willing to put good money into DAC and CCS is their confidence in the company. Occidental’s market cap is about $50 billion, and to expand its vast properties in the Permian it recently acquired CrownRock for $12 billion. Vicki Hollub says, “We’re incredibly undervalued. It’s because we’ve been going through a transformation, and we’re not quite done with that yet. It’s two-pronged. One was to get out of assets that were geopolitically risky… The second part was to get bigger in the U.S.” Hollub added, “… we have the best assets that we’ve ever had, and they’re safe assets.”