First let me thank BreckHutHigh for the link to OXY’s presentation on CCUS. I’ve spent several hours with it today, and found a treasure trove of important specifics. It has helped me judge if I’ve missed anything of major importance concerning this subject. That’s appreciated.
I break some of these out below. There’s a lot of numbers. So focus on what OXY estimates the market will pay with what the supply will cost.
Point for the foregoing is pretty clear. You had better be the lowest cost guy to provide CCUS in a competitive market. It becomes a commodity.
Slide 22 describes the market environment OXY is seeking. It’s basically the same one all companies interested in CCUS are seeking.
In a current support scenario, we see market and policy conditions are supportive of 1PointFive building 70 Direct Air Capture facilities by 2035. This is dynamic and only represents the business environment we have today.
I would like to note five key qualifying criteria in this development scenario. The host nation must have supportive public policy and incentives for removals in place today or in the near-term. There must be growing demand from customers for our products. We must see scalable attributes such as suitable geologic storage and zero-emissions power supply. There needs to be a mature supply chain in place to enable construction and operations.
We also need an environment that supports high-integrity and transparent operations. Given these criteria, the United States is the most advantaged location for scalable and repeatable Direct Air Capture development today. However, we expect countries around the world to help de-risk this scalable model over the next decade with growing appreciation and support currently happenings.
What is really helpful is that they provide some data on their market conditions and economics.
Slide 25 gives their cost assumptions for their Direct Air Capture for the upcoming but indefinite period. The initial cost in $/ton of CO2 with the 500 kt/yr throughput is $425-$300 per ton. They anticipate five process improvements over time, each of about $50 per ton reaching a cost target of $175-$125 a ton for the Nth DAC plant. Time scale not shown. Anticipate DAC-1 startup late 2024. Then the results will determine if this technology is economic. They certainly aren’t anticipating zero costs.
Slide 29 shows their estimates for capture and underground storage market for the Gulf Coast. It starts at 5 MTPA CO2 at $50 a ton, increases to 10 MTPA at $50-60/ton, grows to 20 MTPA at $60-70/ton, and 40+ MTPA at $70+. (MTPA = Million Tons Per Annum). So doesn’t appear to be a market for DAC without significant subsidies above the market prices. This will be more of a Point Source related business opportunity.
Slide 34 shows a graph of anticipated carbon reductions in aviation from 2022 to 2050. Improvements by airlines in technology and efficiencies account for 24% over time. Use of sustainable and low carbon aviation fuels start at 4% and grow to 26%. Purchase of carbon offsets start at 72% and decline to 50% over the decades. Total market is minor today but grows to circa 1400 Million Tons per year CO2 by 2050. Carbon offset sales will be key for OXY followed by synthesis of aviation fuels from CO2 and H2 if this proves economically viable.
Slide 38 is a neat slide giving their overview of how the CCUS markets will evolve going forward. It is expressed in $ per ton CO2 for (a) what the markets will pay and (b) the costs to supply those markets. It is divided into three time periods: 2022-24, 2025-30, and 2030+. They also separate the Direct Air Capture business from the Point Source (i.e. the emitter sources) business. Sequestration is included in all cases
For DAC, 2022-24 markets are estimated at $250/ton for current markets, and as high as $450/ton if the nation adopts a Net Zero program to combat global warming. For current conditions, only a small part is policy driven – i.e. subsidies. Most is voluntary compliance. Under a NZ scenario, most of the added growth is policy driven – i.e. greater incentives. Costs are $300-450 a ton. Costs are at or above market prices.
For 2025-30, market prices remain in the same $250-450/ton range, but voluntary compliances grow as subsidies are reduced. Costs are $250-350 a ton under the “current” scenario reducing to $200-250 under a NZ push due to higher demands.
Post 2030, the market is assumed to have matured at the $125-175 range, all voluntary. Costs are under $150 a ton. (This is all easier to see on the slide.)
For Point Source, 2022-24 markets pay $50 a ton, growing to $100 a ton under a NZ commitment. Basically all policy driven. Costs are $50-$150 ton depending upon the type source being treated – i.e. how concentrated source already is in CO2. For 2025-30, markets pay $100-150 a ton, mostly voluntary compliance. Costs are $35-100/ton, presumably driven by technology improvements and higher scale demand. Post 2030, markets pay $50-100/ton and costs are $25 (low cost operator) to $100 a ton.
In my opinion, these are all aggressive scenarios. Spreads between market prices and costs are narrow to negative in early years. And they’re not exciting at maturity. Voluntary compliances are assumed to be a major factor – i.e., companies will be willing to pay a premium to combat global warming. Sales of carbon offsets will be an important factor.
I see no competitive advantages for OXY in the Point Sources market segments. They have ample storage opportunities in their existing and declining oil fields but these are primarily in the Permian Basin and far from the major Point Source generation locations so transportation becomes an issue. Otherwise, they will be competing with the super-majors and other large independents for this business – and usually with smaller resources.
So, in my view, their future in CCUS depends upon being successful in Direct Air Capture – and achieving costs far below what they are projecting so far. They also will largely depend upon the Voluntary Compliance markets to drive demand supported by policy decisions – i.e. subsidies, regulations, etc. – especially in the early years. And any oil produced via EOR from these sources will be expensive compared with other sources. Costs from DAC are far above the historic prices for CO2 - estimated around $40 a ton, and less for recycled CO2… How much of a premium will customers pay for such?
They’ve spelled out their expectations – and I congratulate them for doing so. They haven’t made the case for why it will happen. That depends upon policy decisions well beyond their control – and these decisions will apply to their competitors as well as themselves. Ditto for voluntary compliances. Hence, they’ll have to see how the ball bounces going forward and remain cautious, just like their competitors.
And geopolitics will play a large role in how these decisions are made. Will citizens tolerate reduced standards of living and companies accept competitive disadvantages to combat global warming while China, India, and others go forward focusing on economic growth? That issue is still in doubt.
I continue to see no justification, especially at this stage, for CCUS and EOR to impact Berkshire’s decisions on investing in OXY. Far, far too uncertain.
But I’m grateful for my increased insights from these debates. Glad it came up for discussion.