Warren Buffett appears to have zeroed in on his next acquisition target. The renowned investor has received regulatory approval to acquire up to half the outstanding stock of oil giant Occidental Petroleum (OXY -0.84%). His company, Berkshire Hathaway (BRK.A 0.55%) (BRK.B 0.50%), has already amassed more than 20% of Occidental's outstanding shares. That's in addition to his $10 billion preferred-stock investment and warrants to buy another $5 billion of the stock.
Buffett's bold bet on Occidental suggests he believes oil will remain a vital fuel for years to come. One factor likely driving that outlook is the company's investments to make oil more sustainable through its subsidiary, Oxy Low Carbon Ventures (OLCV). Here's a closer look at that business, which might be the key to Buffett's bet on Occidental Petroleum.
Investing heavily in a lower-carbon future
Occidental formed OLCV in 2018 to advance leading-edge, low-carbon technologies. It has made several investments for developing and commercializing carbon capture and storage technology, creating new products derived from captured carbon, and reducing the carbon footprint of its legacy oil and gas operations. These include:
- Forming 1PointFive to commercialize and deploy large-scale direct air capture (DAC) technology.
- Investing in Carbon Engineering to commercialize its DAC technology.
- Investing in NET Power, a developer of a low-cost natural-gas power system that generates zero emissions and includes full carbon dioxide capture.
- Working with White Energy to evaluate its carbon capture, utilization, and storage project (CCUS) in Texas.
Earlier this year, Occidental unveiled its first proposed DAC investment. It's planning to invest between $800 million to $1 billion to build the world's largest DAC plant in the Permian Basin oil field. The company expects to start construction later this year and finish the plant in 2024. It is meant to remove 1 million tons of carbon dioxide from the air annually, about 100 times more than the 19 other DAC plants currently operating worldwide.
The company hopes to develop three carbon sequestration hubs by 2025 and 69 smaller DAC plants by 2035. Occidental has been securing the rights to subsurface pore space and surface rights to land to develop and operate carbon sequestration hubs. It has also worked with midstream companies to develop pipeline systems to move captured carbon to these sequestration hubs.
Occidental Petroleum's potentially lucrative low-carbon future
Occidental Petroleum expects these investments to pay big dividends for its shareholders over the coming years. The company estimates that carbon capture and storage could eventually become a $3 trillion to $5 trillion global industry. It's not alone in that view. ExxonMobil (XOM -0.88%) estimates that carbon capture will be a $4 trillion global industry by 2050.
Because of that, Occidental believes it could one day generate as much profit and cash flow from carbon dioxide as it currently does from its oil and gas operations. That also aligns with Exxon's thinking. Exxon estimates that carbon capture will be about 60% of the $6.5 trillion oil and gas market it sees in 2050.
Occidental is already starting to monetize its carbon business. 1PointFive sold 400,000 tons of carbon removal credits from its first DAC project to Airbus. The aerospace company has pre-purchased the capture and permanent sequestration of 100,000 tons of carbon dioxide for four years, with the option to secure more volume in the future. Occidental also agreed to sell 200,000 barrels of net-zero oil per year to SK Trading International. The company will create net-zero oil by capturing enough carbon dioxide from the atmosphere at its first DAC project to entirely offset the emissions produced by the oil's consumption.
Meanwhile, Occidental is looking for other ways to monetize captured carbon. It partnered with United Airlines on a collaboration with a biotechnology company that's looking to transform carbon dioxide into sustainable aviation fuel. United is investing heavily in sustainable airline fuels to help achieve its goal of having net zero emissions by 2050 without relying on traditional carbon offset credits.
Betting that oil has a place in a low-carbon world
Warren Buffett invests for the long term. Because of that, he's not making a short-term trade on oil prices with his big Occidental investment. He's wagering that oil will continue playing a vital role in fueling the economy for years to come.
One factor driving that belief is Occidental's investments to reduce the carbon emissions profile of oil and make it more sustainable. The company believes these investments will benefit the environment and shareholders as the carbon market continues developing. That could enable Warren Buffett to make a lot of money on his Occidental Petroleum investment in the coming years.