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Oxy Taking ‘Contrarian Approach’ to Net-Zero Emissions by Developing Oil Resources, Reusing CO2
Houston-based Occidental Petroleum Corp. is aiming for net-zero carbon emissions, but rather than investing in renewables, it plans to capture and then reuse the carbon from its global oil developments, CEO Vicki Hollub said Tuesday.
During a third quarter conference call, Hollub and the executive team offered details about the sweeping strategy to boost oil production while working toward a goal of net-zero carbon dioxide (CO2) emissions. The plan is to be emissions free in the direct operations by 2040, with emissions from other sources, including by customers down to zero by 2050.
The European majors, all of which aim to be emission free in 30 years or less, are charting growth in renewables and alternative fuels to reduce their carbon footprints. Oxy, as it is better known, has a simpler approach, said Hollub.
“We are doing a contrarian approach in that we believe that using our core competence of CO2-enhanced oil recovery expertise is the best way to go, rather than trying to go learn a new business.”
Enhanced oil recovery, aka EOR, is “going to be a huge industry going forward,” she said. “Globally, there’s only 40 million metric tons of CO2 per year that’s sequestered or used.”
Keeping Fossil Fuels
CFO Rob Peterson told investors that “Oxy’s approach to this is we also believe that fossil fuels have a role in the energy portfolio of the world long term. And this is a way to take the carbon footprint of those fossil fuels, keep them part of the portfolio, and still generate a low-neutral, even negative-carbon fossil fuel molecule.”
Using carbon capture equipment, said Hollub, “does the same thing as trees, but…it’s a much smaller footprint on the planet Earth, much smaller. So while I love trees and we need trees, carbon capture is important…”
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Oxy’s U.S. portfolio extends across the Permian, Denver-Julesburg (DJ) and Powder River basins, and into the deepwater Gulf of Mexico. It also has an extensive base of oil-rich development overseas.
To date it is the only U.S.-based producer aiming to be net-zero for both direct and indirect (customer) emissions. Houston-based ConocoPhillips recently set a goal to be emissions-free for its direct operations, and many U.S. energy operators, including utilities, also are aiming to be emission-free.
Oxy may have a step up on almost everybody. And it’s willing to share the technology, Hollub said.
First up is a massive direct air capture (DAC) project in the works for the Permian under the purview of Oxy Low Carbon Ventures LLC (OLCV). OLCV in August partnered with private equity firm Rusheen Capital to create 1PointFive to advance financing and develop the long-awaited Permian project using DAC technology created by Carbon Engineering Ltd.
Emissions from Oxy’s oil production are to be stored and then reused in the EOR operations to draw more resources from old wells.
“Through the work of Oxy Low Carbon Ventures, we expect our leadership in developing innovative technologies and services for carbon capture and sequestration will also help others achieve their net-zero goals, extending our impact well beyond our own emissions footprint,” Hollub said. “We’re very committed to this and excited about it because this, for us, is a win, win, win.
“This not only helps us to help the world by reducing CO2 out of the atmosphere, it will help our shareholders too by lowering our cost of enhanced oil recovery in the Permian and in other places as we dance this out.”
Oxy, she said, is “going to be able to expand beyond our own operations to give opportunities to those industries that can’t otherwise lower their carbon footprint. They can partner with us to do it.”
Once it’s operational, the Permian facility, sited on about 100 acres, could be the world’s largest, as it is expected to capture up to 1 million metric tons/year (mmty) of CO2. Currently, the world’s largest individual DAC facilities have capacity to capture “several thousand tons of CO2/year,” according to OLCV. Final front-end engineering and design is slated to begin in early 2021 with construction underway in 2022.
‘Floor Space’ Opportunities
With 1PointFive, “what we bring to the table for this kind of project is the floor space,” Hollub said. “We bring the floor space that’s going to be required for the ultimate sequestration of the CO2, and we bring the infrastructure. Nobody has an infrastructure the size of the infrastructure that we have in the Permian. So it’s extensive, and it’s going to be key to helping us develop this and to do it at a cost that delivers returns for Oxy, Rusheen and the other investors who want to come in and be a part of this…”
Once the Permian project is up and running, “we expect to go beyond the Permian. We expect to go from the Permian, the Powder River, DJ and ultimately internationally. So it’s something that is going to become, we believe, a significant business for Oxy over the next few years. And in 10-15 years, we expect that the cash flow and earnings from a business of this type could be similar or more than what we get from the chemicals business.
“This is something that the world needs without us pushing it and without others doing this,” Hollub said. “There’s no way that the world could achieve a cap on global warming of 1.5 or two degrees” she said, referring to the goal set by the United Nations, aka the Paris Agreement.
“It’s something that has to happen, needs to happen,” the CEO said. “But unless you can make it a business, unless you can make it profitable, it’s likely not to happen. So our teams have been very strategic with this and innovative in the way they’ve approached it.”
The passage of Section 45Q, an Internal Revenue Service tax credit on a per-ton basis for CO2 that is sequestered, has been “a big step for us to be able to make this happen in a way that will enable us to, over time, improve the technology, lower the cost and operating efficiency so that this becomes ultimately profitable without tax incentives, and so just like solar and wind has done in the past,” Hollub said.
Meanwhile, Oxy management plans to be conservative in its capital spending program overall. The 2021 capital budget is set at around $2.9 billion, the maximum for sustaining capital, “even if prices are higher than we expect. We take more into account than just strip oil prices. We look at what’s driving the oil prices and what is sustainable.
“For example…some may have thought a quarter or so ago that prices by this time would be…much higher than $40…we never believed that because we were looking very closely at the fundamentals and what’s happening around the world with inventories and demand and things like that. We’re very cautious about basing our program on strip prices and/or what some might say they believe about near-term prices.
We’ll go into 2021 conservatively. We’ll recommend to the board a capital that would allow us to balance cash flows coming in.”
It’s easier “to decrease activity than to do a last-minute increase in activity,” she said. “And one of the things that’s important to us is to allow the teams to ramp up activity in a safe, efficient way. Doing it in a planned way, as we have been, gives our teams the chance to be successful as they have been. They’ve brought rigs on and achieved the same efficiencies that we had when we ramped down.”
Oil Over Natural Gas
Natural gas prices may be stronger, but Oxy has no plans to move capital from its oil developments.
The Permian “is still our best asset,” but oil is the primary target. For the other global assets, “we don’t have any intention at this point to do any…pure gas and build investment in the U.S…So certainly, our investment dollars will go to oil.”
Oxy’s cost reduction measures implemented earlier this year are paying off, along with completing overhead and synergies following the takeover of Anadarko Petroleum Corp. Oxy generated almost $1.4 billion of free cash flow in the third quarter.
Oil and gas operating costs averaged $6.04/boe in 3Q2020, with a U.S. operating cost of $5.38.
Production from continuing operations averaged 1.24 million boe/d, exceeding the midpoint of guidance by 12,000 boe/d despite the “unusual number of named storms resulting in higher than expected production downtime in the Gulf of Mexico,” Hollub noted.
Permian output averaged 360,000-380,000 boe/d, with other domestic output averaging 500,000-520,000 boe/d. International production was 245,000-255,000 boe/d.
The Permian continued to be the star of the show. In the Delaware sub-basin in West Texas, Oxy brought online the company’s “best” well to date in the Silvertip area, formerly Anadarko acreage, with a peak 24-hour rate of 9,000 boe/d-plus, Hollub said.
In the Permian New Mexico acreage, the team set a completion pumping time record of more than 20 hours/day for a three-well pad, while the Midland sub-basin team set a new Permian-wide record by drilling more than 7,500 feet in one day.
“After a modest resumption of activity in the third quarter, we plan to increase activity more meaningfully in the fourth quarter and add two rigs in each of the Texas Delaware, New Mexico and DJ basins,” Hollub said. Activity also has restarted in the Midland with joint venture partner Ecopetrol SA with two rigs running during the third quarter.
Meanwhile, Oxy has completed or announced nearly $8 billion net divestitures since completing its $55 billion mega-merger with Anadarko. It is “targeting an additional $2-3 billion of asset sales to be announced in 2020 or in the first half of 2021,” Hollub said.
Net losses in 3Q2020 totaled $3.8 billion (minus $4.07/share), compared with a year-ago loss of $912 million (minus $1.08). Oxy recorded a one-time $2.4 billion writedown in 3Q2020 for its equity investment in the Anadarko’s pipeline partnership Western Midstream Partners LP. It also recorded a one-time impairment of $700 million for losses associated with asset sales in Colombia, as well as mineral and surface acreage in Colorado, Utah and Wyoming.
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