Warren Buffett likes Occidental Petroleum for a reason that isn’t reflected in the numbers yet

By | March 3, 2024

If you have an interest in Western petroleum (NYSE:OXY)then you probably already know that Warren Buffett is also a fan. Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) owns nearly 244 million shares of the oil and gas giant… a position that has steadily expanded since 2019 and is now worth a total of $14.5 billion. Buffett even mentioned Occidental’s “vast oil and gas reserves” in his recent annual letter to Berkshire shareholders, underscoring the idea that the company is adequately invested in its future crude oil and natural gas supply.

However, there is something else that Buffett said in his recently written letter about Occidental Petroleum that deserves further consideration. He added that Berkshire Hathaway is a fan of the company’s “leadership on carbon capture initiatives [even] although the economic feasibility of this technique remains to be proven.”

The comment raises a number of questions, the first of which is simply: what on earth is carbon capture?

What is carbon capture?

You probably know that fossil fuels like oil, coal, and to some extent even natural gas, are not exactly environmentally friendly. Using them creates byproducts such as carbon dioxide (or CO2).2), which can contribute to global warming.

As the name suggests, carbon capture prevents these carbon-based molecules from floating freely in the atmosphere and/or on the ground.

It’s easier said than done. That’s why it hasn’t really been done in a meaningful commercial way yet.

However, as technology continues to produce more and more technology, the ability to capture carbon dioxide is not only improving, but also approaching the point of being cost-effective. That’s also important because many of the world’s biggest polluters will soon have to pay for solutions that help them control their net carbon footprint.

And no one too early. The United States federal government has set a goal of becoming a net-zero emissions country by 2050. That is certainly ambitious. But it is not impossible if we push the proverbial boundaries.

Enter Occidental Petroleum.

Occidental’s carbon capture projects

Occidental Petroleum is one of the developers pushing these boundaries. In fact, it could put more pressure on it than any other organization.

Take the so-called STRATOS project in Ector County, Texas, as an example. Even though it is not yet operational, Black rock has committed $550 million of its own money to the joint venture that is expected to capture up to 500,000 tons of CO2 every year from mid-2025 directly from the atmosphere. Amazon And Airbus are just some of the companies that have already signed up to be ultimate paying customers when they need to reduce their carbon footprint.

However, that’s just the beginning. CEO Vicki Hollub believes this atmospheric carbon capture technology could be licensed to as many as 1,000 paying customers who need such tools to meet carbon emissions requirements in the future.

In fact, this captured CO2 does not simply need to be recorded, but thrown away in such a way that the world will never see it again. It can be used in different ways. One of these ways is to inject into existing oil wells to recover more oil than would otherwise be recovered using more typical pumping methods. This enhanced oil recovery technique (or EOR) can reduce total emissions from a well by approximately 70%.

This is also not just a theory based on a small-scale experiment. Occidental already injects CO2 in approximately 6,000 wells.

The company is also working on other ways to use this captured CO22. For example, it is working with a biotech company to find ways to use it to make industrial chemicals and polymers that are not only necessary, but also environmentally responsible. This work is still in its infancy, but it is promising.

The Occidental Petroleum opportunity is also yours

In terms of the scope of the opportunity, Global Market Insights believes the global carbon capture and storage market will grow from approximately $6 billion in 2022 to more than $35 billion by 2032. That’s an annualized growth rate of more than 20% between now and then. in line with Bloomberg New Energy Finance’s outlook. Occidental won’t capture all of this revenue, but even capturing a healthy portion of it would still represent a meaningful increase from its current annual revenue of just under $30 billion.

But perhaps just as important for Occidental Petroleum, these carbon capture initiatives promise that crude oil will remain marketable for much longer than many thought just a few years ago. The energy sector could look forward to a few more decades of respectable demand, if only because the shift to more renewables is so slow and expensive.

The hardest part? Waiting. As Buffett also noted: ‘[T]The economic feasibility of this technique has yet to be proven.” And to this end, Occidental does not yet have a revenue-bearing carbon capture business.

However, Buffett’s assessment arguably underestimates how close this technology is to economic viability. Occidental’s development projections suggest that the current cost of about $500 to capture one ton of carbon from the environment could be halved within a decade with the development of better filters, continued design refinements, greater scale and the sociopolitical will to realise this. Moreover, the prospect of decarbonizing the fossil fuel we will desperately need for many years to come seems worth the wait. Warren Buffett certainly seems to think so.

And on a more philosophical note, kudos to the Oracle of Omaha for recognizing that doing something good for the planet can also be a good business opportunity.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. James Brumley has no position in any of the stocks mentioned. The Motley Fool holds and recommends positions in Amazon and Berkshire Hathaway. The Motley Fool recommends Occidental Petroleum. The Motley Fool has a disclosure policy.

Warren Buffett Likes Occidental Petroleum for a Reason That’s Not in the Numbers – But Originally Published by The Motley Fool

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