Occidental Dives Headfirst into Direct Air Capture, Analyst Raises Doubts

Occidental Petroleum and its affiliate 1PointFive are gung- ho on direct air capture (DAC) technology, but one Wall Street analyst from Wells Fargo isn’t yet drinking all of the DAC Kool-Aid for several reasons.

Citing economic uncertainties and a lack of a commercial performance track record, Wells Fargo analyst Roger D. Read raised concerns on DAC’s economic viability.

“Within the nascent carbon dioxide removal (CDR) market, [Occidental] has positioned DAC as a modest but crucial solution for hard-to-abate sectors to economically meet increasingly stringent CO₂ regulations,” Read said Nov. 8 in a research report. “The biggest hurdles for DAC success are project execution, delivering commerciality, elevated CDR prices (up to $630/ton) and target date deferrals for CO₂ reduction/mitigation.”

“[Occidental] estimates CDR costs of $450/ton at 10 million tonnes per annum (mtpa), $400/ton at 30 mtpa and $300/ton at 50 mtpa,” Read said. Occidental must further reduce costs and/or firm up commitments for CDR buyers for DAC valuation to see additional upside potential, Read said.

During Occidental’s third quarter 2023 conference call on Nov. 8 with analysts, the company’s president and CEO Vicki Hollub said DAC was expected to play an increasingly important role in the company’s portfolio over time.

“The DAC technology we are using leverages the skills and expertise of our chemicals business and our enhanced oil recovery business. Our team's achievements in DAC will drive benefits to Oxy in three ways,” Hollub said. “First, it will advance DAC for commercial use. Second, it will increase Oxy's slow resilience and generate solid returns to our shareholders over the long-term. And third, it will broaden our pathway to carbon neutrality and help others to achieve the same.”

Through DAC, Occidental aims to use technology to capture and remove large amounts of CO₂ directly from the atmosphere. Once captured, the plan is to safely and securely store the CO₂ deep underground in geologic formations. Other uses for the captured CO₂ include using it in EOR operations, among other commercial uses.

Hollub said recent deals with 1PointFive, BlackRock and ADNOC in the UAE and OQ Gas Networks in Oman are positive signals of the company’s ability to attract capital and customers interested in the technology.

“Having partners in the beginning is critically important for us to move further down the road faster to get this technology to a point where we are comfortable not only [that] we could build it, but we could license the building to others as well,” Hollub said. “And then once we get to that point … instead of expecting to build 100 of these, then we can start to get into the 100s of them and essentially the 1000s that are going to be needed to be built, but we would benefit from all of that.”

Hollub said a key part of the DAC plan is related to licensing.

“And we've talked about regional concepts, having partners around the world that can manage and drive their own construction of these facilities as we go and … what would come back to us would be those licensing fees,” Hollub said.

Still, Read isn’t giving any value to Occidental’s DAC project, at least not yet.

“We are big proponents of [carbon capture utilization and storage] and believe it will be a key pillar of global decarbonization efforts, but we are far from convinced that current technology and applications can do so economically,” Read said.

“Our DAC strategy has been visionary and deliberate, aligning investment with advancements with technology, partnerships, policy and CDR markets,” Richard Jackson, Occidental’s president of operations, U.S. onshore resources and carbon management, said during the call.

“This approach has enabled Oxy to deploy capital responsibly, while establishing leadership in this critical technology and growing CDR market,” Jackson said. “Our accomplishments to date have positioned us as a DAC technology and market leader. The next phase of our DAC strategy is focused on growth through accelerating cost reduction and expanding partnerships with full ownership of carbon engineering's technology now in-house.”

Not pursuing M&A

Hollub said the Houston-based company wasn’t considering acquisitions, responding to an analyst’s questions during the conference call, and cited Occidental’s earlier Anadarko acquisition as a reason to not seek new opportunities.

“We did that because we saw significant synergies there,” Hollub said. “The acreage was in an area that made it possible for us to understand the subsurface and to gain those synergies.”

Importantly, the Anadarko acquisition allowed Occidental to more than double its production, she added.

“So the good thing is we don't have to do acquisitions ... while [we’re] aware of what's happening in our industry, we feel no need to have to do anything or be a part of it,” Hollub said.

Earnings slump, production relatively flat

The company reported adjusted income of $1.1 billion in third quarter 2023, down 54% compared to $2.5 billion in third quarter 2022 due to lower oil, NGL and gas prices, the company said in its third quarter financial press release.

“Our teams continued their outstanding performance across all three of our business segments, resulting in our strongest earnings and cash flow from operations to date this year," said Hollub in the release.

The company said total production averaged 1.22 MMboe/d in third quarter 2023 compared to 1.18 MMboe/d in third quarter 2022.

Importantly in the third quarter 2023, Occidental Petroleum introduced a natural gas hybrid frac pump to the D-J Basin and drilled a three-mile lateral in the basin in 5.3 days, setting a new company record, the company said.