When Warren Buffett was asked to explain in April why Berkshire Hathaway, his investment firm, had built a 14 per cent stake in Occidental Petroleum, or Oxy, over a frenetic fortnight of buying starting two months earlier, his answer was long.
It included a digression into John Maynard Keynes’s “General Theory” of 1936, and a rollicking description of why Wall Street still resembles a gambling parlour, as it did back then. He barely mentioned the Houston-based oil company, now worth $US69 billion ($102.6b), besides saying that he had read Oxy’s annual report for 2021 and that Vicki Hollub, its boss, “made nothing but sense”.
The pithiest explanation came from Charlie Munger, Mr Buffett’s long-standing sidekick: “We found some things we preferred owning to treasury bills.” It hardly sounded like a resounding endorsement. Yet Berkshire’s stake has since climbed above 20 per cent, making it Oxy’s biggest shareholder by far, and on August 19 it got authorisation from an energy regulator to purchase up to half of the firm’s shares. The buying spree has made Oxy the highest climber this year in the S&P500, one of America’s stockmarket benchmarks. It has also fuelled speculation that it is the prelude to a takeover.
Whether it has grander designs or not, it will come as no surprise that a firm like Berkshire, whose energy subsidiary includes coal-fired power plants and whose freight trains run on diesel, is keen to invest in oil. Though it also has huge wind and solar capacity, its nonagenarian executives are proudly old school.
As for their faith in Ms Hollub, a cynic might say her greatest appeal is the value destruction she unleashed when Oxy bought Anadarko, a rival, for $US55b in 2019. The aftermath of that ill-timed deal, shortly before the pandemic, caused the debt-ridden firm to underperform its American peers — at least until oil markets rebounded this year. Mr Buffett likes nothing better than a cheap old-economy stock, especially one belching cash.
That’s one way of looking at it. Another is that Mr Buffett, who supported Ms Hollub’s bid for Anadarko by providing $10b of high-yielding investment, has come to appreciate her idiosyncratic approach to America’s oil business. An engineer by training, in a previous interview with The Economist she went into detail explaining how Oxy increased the yield of old oil wells by pumping in carbon dioxide to dislodge the residual crude, which she said lowered the costs, as well as the carbon footprint, of each barrel. Today, she doubles down on that, saying that Oxy is on the verge of building a carbon-management business that could reach the size of its oil-and-gas one by 2050 — which she says could make it the “last company standing” in America’s oil industry. As she puts it: “Oxy is what an oil and gas company of the future has to look like.”
What she means is that, in addition to pumping more oil and gas, Oxy is betting on carbon-sequestration technologies to lower its net carbon footprint. The main one is direct air capture (DAC), a way of sucking CO2 from the atmosphere through giant extraction fans and burying it underground. Oxy will soon start construction of its first DAC plant, which will cost up to $US1b and be located in the Permian Basin of Texas. Its baseline plans are to build 70 worldwide by 2035. They are critical to the firm’s pledge to become fully 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 sequestration to offset their emissions. United Airlines and Airbus, an aircraft manufacturer, are early backers.
A tailwind is whipping up. America’s newly approved Inflation Reduction Act substantially increases DAC tax credits (though per tonne of CO2 sequestered it remains eye-wateringly expensive). If costs come down, the recent stampede by companies to commit to net-zero targets is likely to create “incredible demand” for carbon sequestration, including DAC, says Michael Greenstone, a professor of economics at the University of Chicago. “Everyone wants a guaranteed way of removing tonnes of CO2.”
There’s a sting in the tail. Oxy will continue to use plenty of the sequestered gas for enhanced oil recovery, its decades-old practice of using CO2 to squeeze more oil out of reservoirs. When that fuel is burned, it will add to the stock of carbon in the atmosphere, reducing some of the benefits of storage. Moreover, Oxy’s low-carbon wager is, as yet, still relatively small. This year it intends to spend $US100m-$US300m on low-carbon ventures, compared with total capex of up to $US4.3b. Given the scale of the climate problem, it goes without saying that many will dismiss small decarbonisation steps by the oil industry as greenwashing. Thom Allen of Carbon Tracker, an NGO, estimates that the energy industry worldwide emits nearly 1000-times more tonnes of greenhouse gases a year than there is capacity for all forms of carbon capture and storage.
Those are justifiable red flags. Yet they miss a big point. While people still want to use oil and gas to run factories, homes and vehicles, the fossil fuels need to come from somewhere and the less net carbon they add to the atmosphere, the better. Ms Hollub is not blinkered by the industry’s survival instincts. She laments some efforts to halt climate legislation by the industry’s lobbyists. Her bet on sequestration is also supported by science: ultimately, some forms of carbon removal are as vital for cleaning the air as sewage systems are for handling household waste.
Whether such arguments appeal to Mr Buffett she is loth to say — though she 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 notices how the tide is turning in favour of renewables. No doubt he likes Oxy’s oil. But the unfashionable idea that the demonised petroleum industry can help spearhead decarbonisation probably tickles him, too.