Oil giants Chevron (CVX 0.24%) and ExxonMobil (XOM 1.02%) can read the writing on the wall: They can see that fossil fuels will eventually go extinct. That's leading these energy giants to invest in expanding into lower-carbon energy.
One area both oil stocks are expanding into is lithium, a key ingredient for making batteries for electric vehicles (EVs). Exxon entered the sector in 2023 by acquiring land in Arkansas' Smackover Formation, which is rich in lithium brine. Chevron is now following in Exxon's footsteps by acquiring land in the region to produce lithium.
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Drilling for lithium
Chevron has signed two deals to buy leasehold acreage related to the Smackover Formation. It's buying 125,000 net acres across Northeast Texas and Southwest Arkansas from two sellers. The energy company noted that the Smackover Formation underneath this land has high lithium content. The land acquisitions mark Chevron's first step toward establishing a commercial-scale U.S. lithium business.
The energy company would utilize a direct lithium extraction (DLE) process to develop the acreage. DLE is a set of advanced technologies that extract lithium from brines produced from subsurface formations like the Smackover.
While Chevron doesn't have experience producing lithium, the DLE process would enable the company to leverage its subsurface, drilling, and resource extraction capabilities and strengths. That makes lithium production a strong strategic fit for oil companies like Chevron and Exxon.
Following Exxon's blueprint
Chevron's move into the Smackover follows Exxon's prior entry into the lithium supply sector. In 2023, the oil giant reportedly paid around $100 million for more than 120,000 total acres in Arkansas above the Smackover Formation. Exxon drilled its first well in the region that year and aims to begin commercially producing lithium by 2027. It set a bold goal of producing enough lithium by 2030 to supply the auto industry with the metal to meet the manufacturing needs of over 1 million EVs per year. That would make it one of the world's top producers in a very short period.
Exxon has already started signing lithium supply deals with potential customers for its branded product, Mobil Lithium. Last year, it inked a nonbinding agreement with battery parts maker LG Chem to potentially supply 100,000 metric tons of lithium carbonate over several years. LG Chem would use it at its cathode plant in Tennessee, which it expects to complete this year.
The oil giant is also looking into other potential lithium projects worldwide. It's reportedly working with oilfield services giant SLB on potential lithium investment opportunities in Chile.
An all-of-the-above approach
Energy giants Chevron and Exxon are taking methodical approaches to the transition to lower-carbon energy. Both companies continue investing heavily in oil and gas to meet the world's near-term needs for fossil fuels. For example, Exxon is investing $140 billion in major projects and in developing the Permian basin through 2030. This investment level will add 1.2 million oil-equivalent barrels per day (BOE/d) to its output, which it expects will reach 5.4 million BOE/d by 2030.
However, the energy companies are also steadily ramping up their investments in lower-carbon energy. They're taking a broad approach by investing in industries adjacent to the fossil fuel sector, such as hydrogen, biofuels, carbon capture and storage, and lithium. Exxon aims to invest up to $30 billion into lower carbon energy opportunities through 2030, while Chevron is currently allocating about 10% of its $15 billion annual capex budget to lower carbon energy opportunities. The oil companies want to methodically build profitable lower-carbon energy businesses that generate high investment returns to complement their oil and gas operations.
Building the future of energy
Chevron and Exxon know that the world wants to switch to lower-carbon energy sources. That's leading the energy giants to expand into new areas like lithium. They want to leverage their extensive expertise to build profitable businesses that can grow shareholder value over the long term. It's a smart approach that could pay off for investors in the future.
