Exxon's Well-Timed Hop Onto Carbon-Capture Bandwagon -- Heard on the Street

By Jinjoo Lee

All the cool kids are doing carbon capture.

Exxon Mobil is the latest to embrace the trend, announcing on Feb. 1 that it has formed a new business unit to commercialize its low-carbon technology portfolio, mostly comprising carbon capture and storage. The move comes on the heels of reports that a pair of activist investors are pushing the company for changes. One of those, Engine No. 1 LLC, reportedly is planning a proxy fight for board seats.

Exxon's timing fits a pattern. Occidental Petroleum launched its low-carbon business -- dubbed Oxy Low Carbon Ventures -- in 2018, a year after shareholders pressured it to assess the long-term climate impacts of its business. As the industry faces questions -- both from its own investors and from governments -- about its role in the energy transition, many in the oil-and-gas sector have announced some form of investment in the technology, however small the dollar amount.

Both Exxon and Occidental's moves followed shareholder pressure, but they are timely for other reasons, too: The stars are aligning just so on the policy front.

The oil-and-gas industry has in fact been using carbon capture well before global warming became a concern, mainly to produce even more hydrocarbons. Since the 1920s, the industry has used it to sift out unprofitable carbon dioxide that naturally occurs in natural-gas reservoirs from valuable methane. Starting in the 1970s, drillers began using it to squeeze more oil out of reservoirs.

The difference today is that companies are committing substantially higher dollar amounts toward advancing expensive techniques for capturing carbon dioxide that is more dilute than the concentrated forms that can be found in natural-gas processing.

Exxon said its low-carbon business unit plans to spend $3 billion through 2025 and that it is looking at projects and partnerships that capture carbon from other sectors, too. The company already has spent more than $10 billion on lower-emission investments since 2000, so the new commitment means the company would be increasing its investment into the space by roughly 20% on an average annual basis.

That sounds like a lot but, based on the conservative end of Exxon's companywide spending program, its allocation toward low-carbon technology would amount to roughly 3% of its capital expenditures over that period. Even if the payoff is unclear, spending $600 million a year is a relatively modest price for calming investors' sustainability concerns and hedging against any future costs that could be placed on carbon emissions. For context, a sentiment-driven 1% price swing for Exxon means a gain or loss in market capitalization of more than $2 billion.

Oil-and-gas companies have been laying the policy groundwork for some time: Exxon was among the first oil companies to lobby for a national tax on carbon. Placing a price on it would certainly increase compliance costs for energy companies, but it also opens up an entire market of emitters -- including cement, steel and chemicals plants -- that also would need to start capturing carbon.

The stars have aligned in other policy areas, too. A federal tax credit for carbon capture has been around since 2008 but only became a substantial carrot for new investment since 2018, when rules were amended to increase the tax-credit value and to remove annual caps on the amount of captured carbon that could use the subsidy. A tax-extender bill from last year also pushed out the term of the tax credit by two years to Jan. 1, 2026. On a state level, California in 2019 began allowing captured carbon to qualify for tradable credits under its low-carbon fuel standard.

Drillers are familiar with expensive bets with uncertain payoffs. Compared to their normal course of business, carbon capture is a modest investment with predictable returns -- if not in dollars, then in investors' peace of mind. In other words, a no-brainer.

Write to Jinjoo Lee at jinjoo.lee@wsj.com

(END) Dow Jones Newswires

February 08, 2021 07:14 ET (12:14 GMT)

Exxon Mobil (NYSE:XOM)
Graphique Historique de l'Action
De Juin 2024 à Juil 2024