Warren Buffet’s Big Money Bet on Occidental Petroleum Company

Originally published on Forbes.com on July 25, 2022

Warren Buffet may see business opportunity in carbon capture (CCS) growth in the US. This may be a safe investment in the short-term but in the long-term CCS looks to be impractical.

Since 2019 the billionaire Warren Buffet has been buying stock in Occidental Petroleum. His holdings have reached 20% of the company, worth about $180 million. Like all big-oil companies, Occidental’s stock price has soared and it’s risen about 80% year-to-date.

Some observers think Buffet has plans to buy out Occidental, similar to what he did with the railway conglomerate Burlington Northern Santa Fe Corp that he started buying in 2006 and finished in 2010.

But maybe it’s a canny investment in renewable energies. Occidental are becoming a carbon management company according to insiders. They have big plans to set up carbon capture and storage (CCS) ventures starting in the Permian where they have operated and produced oil and gas for many years.

How many CCS ventures? Well, like 70 or more by 2035, which is a mighty big vision. Perhaps Buffet is a firm believer in the future of climate corrections such as CCS needed to reach net-zero greenhouse gas (GHG) emissions by 2050.

Or possibly Buffet is hedging for big government subsidies that will support companies such as Occidental and Exxon Mobil to do CCS — by providing big tax breaks or even a federal carbon tax that would enhance profits to be made by such companies. Activities by these companies are worth a deeper look.

Occidental vision for carbon management.

A company spinoff from Occidental, called 1PointFive, have joined with Carbon Engineering, a Canadian company, to construct a direct-air-capture facility in the Permian basin. The facility will be able to suck about 1 million tonnes of CO2 per year from the air using a large bank of fans. Construction will begin this year.

Initially, the CO2 removed from the air would be injected underground to produce residual oil from old oilfields. This residual oil would be labeled carbon-neutral because a large part of the injected CO2 would remain stored underground.

The company envisions 70 separate projects operating by 2035, and possibly as many as 135 if the economics are favorable. This would amount to 70 million tonnes per year, which is only a small fraction (0.16%) of the total 43 billion tonnes per year of CO2-equivalent that humans emit now.

A goal is to manufacture each of the 70 projects in a giga-factory. Hard to believe, but it’s a giant part of their vision.

Estimates of the “leftover GHG” that would need to be removed to satisfy net-zero by 2050 are about 10 billion tonnes per year. This would require 10,000 of these CCS projects to get the job done. 

Exxon Mobil vision for carbon management.

Exxon Mobil announced huge plans last September to capture CO2 emissions from industrial complexes in the Houston region and store them in offshore CCS projects along the Gulf Coast. Ten other companies have joined with Exxon Mobil in this undertaking.

In March, Exxon Mobil announced its initial contribution to these plans. The company’s Low Carbon Solutions business unit said they would develop a blue hydrogen project, in which hydrogen would be generated by chemical decomposition of methane, CH4. Exxon Mobil of course deals with lots of methane in the form of natural gas. One of the byproducts of the method is CO2 which would be removed by CCS which the company has tons of experience in.

This initial project will focus on the company’s Baytown Refining and Petrochemical Complex. When finished, Exxon Mobil said the CCS operation will be one of the biggest in the world.

This project would be a template for the integrated industry effort (the extra ten players) toward a CCS hub in Houston, the oil and gas capital of the US. The goals are 50 million tonnes per year of GHG stored by 2030 and 100 million tonnes per year by 2040. Initial cost estimates were around $100 billion.

The problem with CCS as an escape hatch.

Despite these game-changing visions, there is a caveat. Rystad Energy, and others, have estimated what it would take for CCS to provide the escape hatch to remove the excess GHG emissions that will remain by 2050:

The US and the world have immense storage capacity for CCS that could last thousands of years. But CCS costs are high and will require a carbon-pricing mechanism to promote their application.

If fossil energy companies continue to over-produce oil, gas, and coal (vis-à-vis the production gap), an enormous new industry for CCS will have to be created — at least as large as the present oil and gas industry and, by some estimates, twice as large.

Fossil fuel production and a new CCS industry together will be too cumbersome and expensive for energy firms to manage when compared to renewable energies. It makes more sense just to reduce the actual production of oil and gas and their GHG.

Takeaways.

Warren Buffet’s position may be that he sees business opportunity in CCS growth in the US, because oil and gas companies are not wanting to cut back on oil and gas production.

Instead, they are addressing climate change in indirect ways: by improving the carbon footprint of their own operations, fixing methane leaks, and CCS.

Further, the US Department of Energy have recently been tasked with setting up joint initiatives with oil and gas industry to reduce GHG emissions, and this may make companies like Occidental more profitable by lowering their direct expenses or indirectly providing tax breaks.

All of the above is safe in the short-term. But in the long-term view there is a serious caveat: scale up of carbon capture and storage looks massive, expensive and impractical to manage.