Warren Buffett’s big bet on Occidental oil

by Ian Palmer

Billionaire Warren Buffett has been buying Occidental Petroleum shares since 2019. His stake has reached 20% of the company, worth about $180 million. Like all major oil companies, Occidental’s share price has soared 80% since the start of the year.

Some observers believe Buffett intends to buy Occidental, as he did with railroad group Burlington Northern Santa Fe Corp, which he began buying in 2006 and completed in 2010.

But it might be a smart investment in renewables. According to insiders, Occidental is turning into a carbon management company. They have big plans for Carbon Capture and Storage (CCS) activities starting in Texas where they have been producing oil and gas for many years.

How many CCS activities are we talking about? Probably 70 or more by 2035, which is an extremely big vision. Perhaps Buffett is deeply convinced of the future of climate business, such as CCS which is necessary to achieve a zero greenhouse gas (GHG) footprint by 2050.

Or perhaps Buffett is betting on big government subsidies that will support companies like Occidental and Exxon Mobil to do CCS — through big tax breaks or even a federal carbon tax that will expand such companies’ profits. Their activities deserve a deeper look.

Occidental’s vision for carbon management

An Occidental subsidiary 1PointFive has partnered with Canada’s Carbon Engineering to build a facility in the Permian Basin in Texas. The facility will have the capacity to absorb approximately 1 million tons of carbon dioxide annually from the air, and construction will begin this year.

First, the carbon dioxide that will be removed from the air will be pumped underground to produce residual oil from old fields. This residual oil would be characterized as carbon neutral because a large part of the injected dioxide would remain stored underground.

The company envisions 70 separate projects operating by 2035, or as many as 135 if economic conditions are favorable. This would amount to 70 million tons per year, which is only a tiny fraction (0.16%) of the total 43 billion tons of CO2 equivalent emitted annually by humans today.

The goal is to build each of these 70 projects in one giant factory. Hard to believe, but it’s a big part of their vision.

Estimates of the residual greenhouse gases that would need to be removed to achieve a zero emissions footprint by 2050 are around 10 billion tonnes per year. This would require 10,000 CCS projects to achieve.

Exxon Mobil’s vision for managing carbon emissions

Exxon Mobil last September announced giant plans to capture carbon dioxide emissions from industrial complexes in the Houston area and store them in offshore CCS projects along the US Gulf Coast. Ten other companies partnered with Exxon Mobil in this venture.

In March, Exxon Mobil announced its initial participation in these plans. The company’s Low Carbon Solutions unit said it will develop a blue hydrogen project, in which hydrogen will be produced through the chemical decomposition of methane, CH4. Exxon Mobil of course deals with a lot of methane, in the form of natural gas. One of the by-products produced by this method is carbon dioxide, which will be removed through CCS in which the company has extensive experience.

The initial project will focus on the company’s complex in Baytown, Texas. When completed, Exxon Mobil said the CCS operation will be among the largest in the world.

The goals are to store an initial 50 million tons of greenhouse gases by 2030 and 100 million tons per year by 2040. Early estimates of the project’s cost are around $100 billion.

The long-term problem of CCS

Despite these visions, there is a caveat. Rystad Energy, and others, have estimated what CCS activities would need to provide the escape route from the excess greenhouse gas emissions that will remain through 2050.

The US and the world have vast storage capacity for CCS for thousands of years. But the cost of CCS is high and will require a carbon pricing mechanism to promote their implementation.

If fossil energy companies continue to overproduce oil, gas and coal, a huge new CCS industry will need to be created – at least as large as the current oil and gas industry and perhaps – by some estimates – twice as large.

Fossil fuel production alongside the new CCS industry will be an extremely difficult and expensive undertaking for fossil energy companies, compared to renewables. It would make more sense to simply reduce their actual oil and gas production and invest in renewable energy.

Conclusions

Warren Buffett’s placement at Occidental may represent a business opportunity he sees in the development of CCS in the US because oil and gas companies do not want to reduce oil and gas production.

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

In addition, the US Department of Energy has recently undertaken joint initiatives with the oil and gas industry to reduce greenhouse gas emissions, and this may make companies like Occidental more profitable by reducing their direct costs or providing indirect tax breaks .

All of the above are safe in the short term. But in the long run there is a serious caveat: Scaling up carbon capture and storage looks huge, expensive, and impractical to manage.