When warren law firm Asked in April to explain why Berkshire Hathaway, his investment firm, had acquired a 14% stake in Occidental Petroleum, or Oxy, during a frantic fortnight of buying that began two months earlier, his answer was long. It included a digression on John Maynard Keynes’s “General Theory” of 1936, and an amusing description of why Wall Street still resembles a gambling hall, as it did then. He barely mentioned the Houston-based oil company, now worth $69 billion, aside from saying that he had read Oxy’s annual report for 2021 and that Vicki Hollub, his boss, “made nothing but sense.” . The most succinct explanation came from Charlie Munger, Buffett’s former partner: “We found some things we’d rather own than Treasury bills.”
It hardly sounded like a resounding endorsement. However, Berkshire’s stake has since risen above 20%, making it by far Oxy’s largest shareholder, and on August 19 it obtained authorization from an energy regulator to buy up to half of the shares. actions of the company. The shopping spree has made Oxy the highest climber this year in the s&p 500, one of the US stock market benchmarks. It has also fueled speculation that it is the prelude to a takeover.
Whether it has bigger designs or not, it won’t be surprising that a company like Berkshire, whose energy subsidiary includes coal-fired power plants and whose freight trains run on diesel, is willing to invest in oil. Although it also has massive wind and solar capacity, its executives in their 90s are proudly old school. As for her faith in Ms. Hollub, a cynic might say her biggest draw is the value destruction she unleashed when Oxy bought rival Anadarko for $55 billion in 2019. The fallout from that ill-timed deal, little before the pandemic, they caused the debt-ridden company to underperform its American peers, at least until oil markets recovered this year. Buffett likes nothing more than a cheap old-economy stock, especially one that sheds cash.
That’s one way of looking at it. Another is that Buffett, who backed Hollub’s bid for Anadarko by providing $10 billion of high-yield investment, has come to appreciate his idiosyncratic approach to the US oil business. For what it’s worth, Schumpeter, who first met Hollub six years ago, has long considered her above the average American oil industry boss. An engineer by training, she then went into detail explaining how Oxy increased the yield of old oil wells by pumping carbon dioxide to dislodge residual crude, which she said reduced costs as well as the footprint of carbon, from each barrel. Today, she’s doubling down on that, saying Oxy is about to build a carbon management business that could reach the size of its oil and gas business by 2050, which she says could make it the “last company to foot”. in the US oil industry. As she says, “Oxy is what an oil and gas company of the future should look like.”
What he means is that in addition to pumping more oil and gas, Oxy is betting on carbon sequestration technologies to reduce its net carbon footprint. The main one is the direct intake of air (dac), a way to suck COtwo from the atmosphere through gigantic extraction fans and burying it underground. Oxy will soon begin construction of its first dac plant, which will cost up to 1,000 million dollars and will be located in the Permian Basin of Texas. Its baseline plans are to build 70 worldwide by 2035. They are central to the company’s commitment to become net-zero by mid-century. But Ms Hollub also hopes they will become a big business in their own right as companies pay for carbon capture to offset their emissions. United Airlines and Airbus, an aircraft manufacturer, are the first sponsors.
A tailwind is coming: the recently approved Inflation Reduction Law in the United States increases substantially dac tax credits (although per ton of COtwo hijacked is still incredibly expensive). If costs come down, the recent stampede of companies to commit to net-zero targets is likely to create “incredible demand” for carbon sequestration, including dacsays Michael Greenstone, an economics professor at the University of Chicago. “Everyone wants a guaranteed way to remove tons of COtwo.”
There is a stinger in the tail. Oxy will continue to use a large amount of sequestered gas to enhance oil recovery, its decades-old practice of using COtwo to squeeze more oil from the deposits. When that fuel is burned, it will add to the carbon stock in the atmosphere, reducing some of the benefits of storage. In addition, Oxy’s low-carbon bet is, so far, relatively small. This year it intends to spend between $100 million and $300 million on low-carbon projects, compared with a total capital expenditure of up to $4.3 billion. Given the scale of the climate problem, it goes without saying that many will dismiss the small steps of decarbonizing the oil industry as greenwashing. Thom Allen of Carbon Tracker, a ngoestimates that the energy industry worldwide emits almost 1,000 times more tons of greenhouse gases per year than the available capacity for all forms of carbon capture and storage.
sewerage for the planet
Those are justifiable red flags. However, they miss a big point. While people still want to use oil and gas to run factories, homes, and vehicles, fossil fuels have to come from somewhere, and the less net carbon they add to the atmosphere, the better. Hollub is not blinded by the survival instincts of the industry. She laments some efforts to stop climate legislation by industry lobbyists. Her bid to sequester her is also backed by science: Ultimately, some forms of carbon removal are as vital to cleaning the air as sewage systems are to handling household waste.
He is reluctant to say whether these arguments appeal to Buffett, although he points out that Kraft Heinz, a consumer goods company part-owned by Berkshire, recently struck a big renewables deal with one of its energy subsidiaries. The Sage of Omaha may be old school, but he surely sees how the tide is turning in favor of renewable energy. He definitely likes Oxy oil. But the old-fashioned idea that the demonized oil industry can help spearhead decarbonization probably tickles your fancy too. ■
Read more from Schumpeter, our columnist on global business:
For businesses, water scarcity is where climate change hits home (Aug 17)
Tencent is a success story beset by splinternet (Aug 13)
Spirit deal is a missed opportunity for creative destruction (July 28)
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