In this note, Neil Quach, Senior Corporate Research Analyst – North American Oil & Gas, drills down into the financial and economic implications of recent moves by North American oil and gas companies.
Carbon Tracker has examined corporate alignment with climate targets, transition risk, incentives, and corporate climate targets in other work. In this piece, we focus on the economic and financial dimensions of three recent developments in the North American oil and gas space: (1) lithium extraction, (2) carbon dioxide removal (CDR)/carbon capture & storage (CCS); and (3) large scale consolidation activity.
- Two companies that appear to be ahead of the group in terms of these ET activities are: Occidental Petroleum (in CDR/CCS) and ExxonMobil (in CDR/CCS & lithium extraction).
- The US IRA (Inflation Reduction Act of 2022) and the relentless drive toward electrification of the global passenger car fleet provide support for potentially strong returns in lithium & in CDR/CCS. While some engineering challenges remain, our preliminary analysis suggests that returns for these ET businesses are very competitive with traditional oil & gas activities, given the tax incentives available.
- Lithium in particular could see strong tailwinds with double digit demand growth far surpassing that of oil & gas. Lithium is a cornerstone of the ET benefitting from both economics and the decarbonization impulse.
- The $85/ton section 45Q IRA tax credit could generate a strong return profile for point source CCS project partners.
- Though low-carbon investments remain a fraction of their overall investments, we are seeing a rising rate of change in ET activities with these businesses potentially becoming a meaningful part of company portfolios in the medium term.
- Also, there’s large scale consolidation in the traditional oil & gas space epitomized by: (1) ExxonMobil’s $60 billion acquisition of Pioneer, a Permian pure play, and (2) Chevron $53 billion acquisition of Hess whose core assets are long cycle offshore Guyana Stabroek Block.
- From a risk-weighted economic and financial standpoint, we believe short cycle shale is less risky than long cycle conventional oil & gas developments in a declining hydrocarbon demand scenario as shale has a lower risk of becoming stranded.
- We also note the importance of being the low-cost producer in the energy transition, as we have stated here and here, with larger oil & gas fields generally having a lower cost.
- Longer term, we expect industry consolidation could lead to a more limited pace of oil & gas development, since there’s a tendency toward supply restraint in concentrated industries.
If you have any further questions, feel free to email Neil at nquach@carbontracker.org
