The strategy behind Oxy's acquisition of Carbon Engineering
Musings on the biggest acquisition yet in Direct Air Capture
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Since Occidental Petroleum (Oxy from now on) announced that they intend to acquire Carbon Engineering (CE), there’s been some vague moralizing and negative mood affiliation.
Some folks are upset about a fossil fuel company buying a DAC pioneer, and are using scientific-sounding terms like ‘social license’ to vent that frustration. But if you care about climate, the only thing that matters is whether this leads to more or less carbon removal.
Put differently, what matters is how this acquisition alters DAC learning curves, technology strategy, and competitive dynamics. I’ll cover some of that here. If you want more background on the acquisition, check out this short thread.
Reasons Oxy + CE are joining forces
(1/5) Technology: This is not Oxy jumping on the hype cycle. CE is the DAC company with the best fit with what Oxy does best. Most of Oxy’s business is about scaling up chemical engineering processes to make them cheap. Almost all of these processes are liquid-based, and so is CE’s tech:
CE is the only credible liquid-based DAC player. When you are the only of anything, that makes you valuable. And when you are the only in a tech category that fits so neatly with petrochemicals, a giant industry with many players looking to decarbonize, you are going to get good offers.
These two firms fit even on a chemical level. Oxy is one of the world’s largest producers of potassium hydroxide (KOH), which is a major input for CE’s process:
(2/5) Petrochemical game theory: Why did this happen now? First, Oxy received a big grant from the DOE which made their second big plant with CE more certain. Second, Oxy likely moved in anticipation of larger offers from other big petrochemical firms later. For these reasons, I don’t expect air-based players to get (large) offers from fossil fuel firms in the future, even if the DAC hype cycle kicks into even higher gear.
(3/5) Incentives aligned for scale: Again, most of Oxy’s business is about scaling up processes to make them cheap. That’s how it builds competitive moats. A few weeks before the acquisition, I wrote about how making this cheap was complicated by the terms of what was then just a partnership between Oxy and CE:
There is a clear tension between Carbon Engineering’s learning goals and the profit-maximizing goals of primes like Oxy. Carbon Engineering is focused on bringing the cost to capture a ton of CO2 from $500-$1000 today down to ~$100 (or lower) in the next 5-10 years.
Oxy is less focused on cost declines through learning, at least across projects. It wants the Stratos plant to be profitable for as long as possible, and if more profitable plants come online, Stratos may be forced to sell carbon offsets at a loss. Put differently, as Oxy learns how to improve DAC processes and thereby reduce costs at Stratos, it may hesitate to relay those learnings back to Carbon Engineering for use in future plants. That’s because CE could just turn around and work with other primes — Chevron, for example, is said to be interested in a partnership.
There’s real potential that these divergent incentives hobble Carbon Engineering’s ability to learn from scale, since this pattern will be repeated at just about every plant. The only way out of this dilemma is to work mostly with one prime, but that would limit Carbon Engineering’s ability to grow.
Now this tension is gone — Oxy has every incentive to develop the deep tech, bring costs down, and potentially license the tech to other prime contractors. It might also spin Carbon Engineering via IPO, or to another strategic buyer in 3-5 years.
(4/5) Revealed ambition: It’s fashionable to question whether Oxy wants to do carbon removal:
I get it — it’s hard for anyone with an environmental streak to trust Oxy. As a simple heuristic, it’s probably right to be skeptical of just about every green sounding statement from fossil fuel companies.
But that’s a weird approach in this specific case. Assuming Oxy is not genuine assumes that the leaders of Carbon Engineering blindly walked into this acquisition, which they did not. They were allowed to choose their destiny.
A payday was coming for CE, as we’ve already covered. It is one of the top 2-3 DAC companies, with leadership in a key part of the tech tree. In 1-2 years time, with a few massive DAC plants operating, a public offering or another strategic buyer would have been there for CE.
The CE leaders probably went with Oxy partly to get an earlier payday, and because a few years of partnering convinced CE that Oxy is genuine about growing a big DAC business. CE leaders have insight into Oxy’s true stance that we do not have, so CE pulling the trigger on this should make us a bit more excited about Oxy’s direction.
And we should have already been excited about Oxy! This is the same company that intends to build 70 large DAC plants before 2035. Now they are putting their money where their mouth is.
(5/5) Oxy integrates end-to-end: DAC is a new market, and in every new market there is a player from a legacy industry that tries to enter through acquisition. Oxy is now the only player with a foothold in all parts of the DAC value chain, from technology development through marketing and selling:
1PointFive is the early leader in offset sales.
The title on this chart is misleading, as we don’t know yet who will be the leading DAC provider and seller. Climeworks and others could easily catch-up, especially if offset buyers start to question how much carbon dioxide Oxy is storing vs. using in EOR, recycled fuels, etc.
Reasons for skepticism
I think it’s healthy to be skeptical about any acquisition, but important to be specific. Here are my concerns:
(1/2) Oxy doesn’t want to do geologic storage: By 2025, Oxy will probably be doing more carbon capture than any other company. The real question is what they will do with that CO2. Will they remove it permanently, or use it?
My guess is that Oxy will do very little true geologic storage, instead engaging in Enhanced Oil Recovery (EOR) and making recycled fuels. EOR pumps CO2 into active oil wells, increasing the pressure and pushing out more hydrocarbons. Recycled fuels — also called synthetic or drop-in fuels — use captured CO2 to make gasoline for cars, trucks, etc. EOR is a core part of Oxy’s drilling process, while marketing fuels of all kinds is a core part of Oxy’s go-to-market. Oxy might relish the opportunity to market fuels made with DAC.
Neither of these are bad options. With EOR, carbon dioxide does stay underground, and that oil would have been pumped up anyway. It is a kind of geologic storage. Recycled fuels can theoretically be almost carbon neutral (we’re not there yet). But the best possible use for CO2 is a permanent solution: bury it underground or store it in cement.
For more on why geologic storage is the best option, check out Storing Emissions Underground, Part 1.
Too much non-storage use of CO2 will lead buyers to consider Oxy/1PointFive’s offsets to be of lower quality, opening the door for competitors to catch up.
To be clear, even if Oxy does zero permanent storage, this acquisition can still be good for the goal of carbon removal if Oxy manages to bring capture costs down significantly. Remember, the expensive part of carbon removal is capturing, not storing, so the key task for DAC in the next decade is bringing these down.
(2/2) Big company destroys small company culture + innovation: A potential killer in any acquisition. Bureaucracy of the big company stifles the small, leading the truly passionate, innovative people to leave for greener pastures. 90% of the people stay, but the 10% who leave were the essential doers.
Oxy’s ‘social license’ is irrelevant
To much of the commentary on this acquisition has been about how it may or may not extend Oxy’s ‘social license’ to operate fossil fuel plants.
Social license: the perceptions of stakeholders that a project, a company, or an industry that operates in a given area or region is socially acceptable or legitimate
This sounds scientific, but it’s really a statement of political-moral inevitability. Behind this term is the assumption that, eventually, many people will protest outside their local fossil fuel plant, and governments will respond by revoking legal licenses to operate.
I doubt that more than ~5% of people will spend a moment of their time even considering protesting the use of fossil fuels.
Oxy doesn’t need a social license because it has both a legal license and an economic license. Put differently, every customer is a counter-protestor, and Oxy will have fossil fuel and petrochemical customers for many decades.
Will Oxy build a big DAC business?
What really matters is whether Oxy builds a sustainable and large DAC business. Here are the things I’ll be looking out for:
Offset delivery: 1PointFive has made massive DAC offset sales, but can it deliver? Will they actually build 1 million ton capacity at both plants? CE’s tech has never been deployed beyond pilot scale.
Impact on carbon removal: What is the split of permanent storage, EOR, recycled fuels, and other uses for capture CO2?
Cost of DAC and slope of the learning curve: What is all-in $ per ton of CO2 captured from Stratos and the South Texas DAC Hub?
Revenue: What is Oxy’s avg. revenue from a ton of CO2? Put differently, for the average ton of CO2 captured, what is: (Offset sales) + (Internal transfer payments for EOR) + (IRA tax credits)
Shareholder value from DAC: In 2033, how much of Oxy’s market cap will come from fossil fuels vs. carbon capture? Should we expect a 95% / 5% split? 80/20? 50/50? It will be interesting to hear how management messages this business line if it grows.
Ultimately getting this acquisition right is about Oxy/CE execution, not how environmentalists feel about Oxy’s right to exist. If Oxy ends up making this version of DAC cheap, that should be celebrated!
A final note: I hope Oxy is able to draw in good talent. And I don’t just mean good in the sense of competent. I mean people who will bend Oxy’s business toward long-term emissions destruction.
If you (1) are a smart engineer or climate tech operator and (2) care about reducing emissions, then going to Oxy to work on DAC probably has a higher expected value than most other climate-related jobs, including founding a DAC company. Startups can fail for one of a million reasons.
By contrast, we know Carbon Engineering’s tech works. Incentives are better aligned than they were a few weeks ago. Oxy now needs people who will steer the business toward both more DAC and more geologic storage.
If you work in this business unit and succeed, you’ll be a part of the first groups to scale up DAC. And if you fail, at least it will be a good story for VCs when you raise for your DAC startup.
The opinions in this article are my own and do not reflect the views of my employer, Bain & Company