Occidental is Eyeing California’s Clean Fuels Market to Fund Texas Carbon Removal Plant

Pipe Dreams: Second in a continuing series on whether capturing carbon is a climate solution or a dangerous distraction.

Occidental Petroleum is seeking to sell credits in California’s transportation carbon market to help finance the construction of what would be the world’s largest industrial carbon dioxide removal plant.

The operation would effectively invert what Occidental has done for a century, by taking carbon out of the air and sending it underground, even if on a relatively small scale.

But there’s a twist. Occidental has said it plans to use some or most of the carbon dioxide it captures from the Texas plant to squeeze more petroleum out of the ground, by pumping it into aging oil fields. As a result, the California carbon market, which is meant to help lower the climate emissions of transportation in the state, could supply tens of millions of dollars to help extract more oil, thereby contributing more emissions.

Occidental’s plans raise one of environmental advocates’ biggest concerns about carbon removal technologies: that they will be used by oil companies to delay the far more urgent task of rapidly transitioning away from fossil fuels. By allowing companies to sell credits for captured carbon dioxide used to produce oil, some advocates warn, California’s program is poised to do just that.

Indeed, Chief Executive Vicki Hollub has said Occidental will expand oil production, rather than curtail it, using captured CO2 to produce what the company is audaciously branding as “net-zero oil.”

People familiar with Occidental’s plans say that accessing California’s transportation market is critical to financing the “direct air capture” plant, which the company has said would cost up to $1 billion and would initially pull half-a-million metric tons of the greenhouse gas out of the air every year.

Occidental says it will break ground this year in West Texas, near Odessa. If the project is completed as planned, it would mark a quantum leap for a technology that some scientists and advocates say could play an important role in meeting climate targets.

But some environmental advocates say that many of the policies that are emerging, including California’s clean fuels market and a federal carbon capture tax credit, have been shaped by oil companies to their own advantage, diluting the climate benefits.

“There’s a holy war brewing in climate politics over these kinds of technologies and whether or not they’re a tool of the oil industry,” said Danny Cullenward, the policy director at CarbonPlan, a nonprofit that analyzes the integrity of carbon removal efforts. Cullenward said incentives like California’s are beginning to shape a new field, “and I don’t think it’s an accident that we’re seeing deployment aligned with industry priorities. Deployment is not aligning around pure climate objectives.”

Getting to ‘Net-Zero’

The case for carbon removal emerged from the uncertain math of climate models. When climate scientists have tried to model pathways that limit warming to 1.5 degrees Celsius, nearly all of them have required some degree of removing carbon dioxide from the atmosphere. Many of the models require billions of tons of carbon removal per year by mid-century.

When accounting for sectors like agriculture and long-haul shipping, scientists and governments simply haven’t figured out how to get all the way to zero emissions fast enough. That leaves carbon removal to provide the “net” in “net-zero.”

Few if any scientists or experts think direct air capture technology alone can achieve that scale. Natural carbon removal like reforestation will need to play a large role, and there are a suite of other techniques, like converting waste biomass into charcoal that can be mixed into the soil or tinkering with seawater to enhance its absorption of CO2. But all these approaches have their limits, risks and drawbacks, and increasingly, many people say direct air capture should be part of the mix.

Still, the largest existing direct air capture plant, built by the Swiss start-up Climeworks, which has not partnered with oil companies, removes only 4,000 tons of carbon dioxide per year. Even if Occidental can realize its direct air capture ambitions to eventually remove 1 million tons annually at its Texas plant, the benefit would be miniscule on a planetary scale. 

The International Energy Agency has said direct air capture capacity must reach roughly 85 million tons by 2030, a feat that would still represent less than three-tenths of 1 percent of current global energy-related emissions. 

The hope, or prayer, is that capacity could rise sharply in the following two decades. By 2050, the Biden administration’s long-term strategy for reaching net-zero emissions is counting on direct air capture and other carbon removal technologies to make up nearly 10 percent of all emissions cuts.

The question now is whether the technology can be pursued in such a way that it doesn’t distract or detract from the urgent task of phasing out fossil fuels. And many advocates warn there’s little hope of achieving that goal if the emerging direct air capture industry is built by oil companies.

Seeking Access to California’s Market 

California’s Low Carbon Fuel Standard, or LCFS, aims to lower the state’s transportation emissions by setting a statewide benchmark for the carbon intensity of its fuels. In order to sell gasoline or diesel, which fall above that mark, a refiner must buy credits, which companies generate by selling low-carbon fuels like biodiesel.

Since 2018, oil refineries and biofuels plants have also been allowed to install carbon capture equipment to effectively lower the carbon intensity of their fuels. Direct air capture plants do not need to sell any fuel at all—they can simply generate and sell credits by capturing and storing carbon dioxide. They cannot, however, sell the oil they extract with the CO2 they capture as a low-carbon fuel. Any of these operations can be located outside California, but refiners or biofuels plants must sell their fuel in the state to access its carbon market. 

The value of the credits fluctuates, but at the beginning of this year they averaged about $170 per metric ton of carbon dioxide, making the market extremely attractive for carbon capture and removal operations looking to cover their costs.

Robert Zeller, vice president of technology at Occidental’s low-carbon business, said in an interview last month that his company was working with regulators in California to gain access to the LCFS market for the Texas direct air capture plant. He did not elaborate on whether the company plans to sell credits for captured CO2 that is used for oil production, as opposed to pure storage. Occidental declined to answer questions for this article.

But the LCFS rules are clear: Companies are free to sell credits for carbon removal from the atmosphere, even if the carbon is used to extract more oil, and they are not required to account for the emissions that come from burning that oil when determining how many carbon credits they can sell.

Many environmental advocates say that system undermines the state’s larger climate goals.

“Giving a carbon capture project the same number of credits whether or not it helps produce additional oil makes no sense as a climate mitigation or a carbon removal policy,” said Cullenward, the policy director at CarbonPlan, in an email. “It only makes sense as a carbon capture technology subsidy that actively privileges oil and gas production over climate-safe applications.”

California’s equal treatment of carbon dioxide used for so-called “enhanced oil recovery” and that which is just stored is particularly problematic, Cullenward said, because each credit sold in the state represents an additional volume of gasoline or diesel that is burned in its cars and trucks. In other words, the removal comes instead of phasing out some amount of fossil fuels.

Jeremy Martin, director of fuels policy at the Union of Concerned Scientists, said he thinks the state should “adjust” how it treats enhanced oil recovery. Like many environmental advocates who support carbon removal technologies, Martin said their promise is in helping address emissions from certain sectors, like aviation and heavy industry, that are extremely difficult or expensive to reduce.

“But I think it’s also really important not to lose sight of the fact that using these technologies to maximize emissions reduction as we’re transitioning off of petroleum, that’s what makes sense to us, that’s what our analysis supports,” Martin said. “It does not support using these technologies as an alternative to ramping down petroleum.”

In March, the Environmental Justice Advisory Committee for California’s Air Resources Board, which administers the LCFS, submitted draft comments recommending that enhanced oil recovery projects be barred from the system, warning that allowing them increases emissions and extends the life of “highly polluting facilities.”

James Duffy, a staffer at the board’s LCFS program, said in an interview that his agency had developed robust regulations to ensure that carbon dioxide storage is safe and well monitored, even when it is injected in oil fields, but that any emissions that come from the oil produced are “not part of the accounting.”

Occidental’s Grand Ambition 

At the CERAWeek energy conference last month in Houston, a couple of dozen men and women hailing mostly from the financial and energy sectors watched as Occidental unveiled a holographic animation of its direct air capture plant. The presentation showed a rectangular perimeter of giant fans sucking in vast volumes of virtual air. 

The company has licensed technology from Carbon Engineering, a Canadian direct air capture start-up, that passes air over a mineral-laced liquid, which draws out the carbon. The display showed how this carbonated mineral would then be sent through a series of pipes and towers, which would mix it with another mineral before processing and heating it to eventually produce a concentrated stream of carbon dioxide.

The plant would be powered with a combination of renewable energy, generated specifically for its operation, and natural gas. Carbon Engineering’s designs include equipment to capture the emissions from burning the natural gas as part of the plant’s operations.

That morning, Hollub, Occidental’s CEO, told a ballroom full of people at the annual energy industry conference that “initially, this was solely a business focus for us.”

The company’s oil fields in the Permian Basin, beneath Texas and New Mexico, still hold about 2 billion barrels of oil, she said, but in order to pump the oil to the surface, Occidental must inject carbon dioxide into the reservoir to increase its pressure. That carbon dioxide had generally been mined from naturally occurring underground pools, but about a dozen years ago, Hollub said, they realized those pools were drying up. “There wasn’t sufficient CO2 to help us develop all of those reserves,” she said.

Perhaps carbon capture offered a solution, she recalled. Technologies to extract carbon dioxide from exhaust plumes had been used by industry for decades, and more recently, some scientists and companies had begun experimenting with ways to pull the gas straight from the air. Even when it is injected in oil fields, the vast majority of the carbon dioxide can be locked away underground, if it is monitored properly.

For both approaches, the chief obstacle to scaling the technology is not technical but financial, so Occidental set about trying to help tip the scales, and in 2018, two key pieces fell into place.

In Washington, Congress passed an expansion of a federal tax credit for carbon capture and storage, which Hollub said her company worked on with then-Sen. Heidi Heitkamp, a North Dakota Democrat and the bill’s sponsor. And in California, state regulators began allowing carbon capture and direct air capture plants to begin accessing its low-carbon fuels market, even if they were located outside the state.

Both changes drew lobbying and support from Occidental and other oil companies. And because carbon capture or direct air capture projects can combine, or “stack,” the two credits, a new market emerged.

To underscore the importance of the 2018 federal tax credit to his business, Zeller, the vice president at Occidental’s low-carbon business, told a CERAWeek panel, “That’s the reason I’m here today.”

In a call with investors late last month, Hollub and other executives said the company would build 70 direct air capture plants by 2035. But central to this plan is a strategy to produce what Occidental calls “net-zero oil.”

Over time, nearly all of the carbon dioxide injected for enhanced oil recovery can remain underground if it is monitored properly, and experts say it is possible to store more carbon dioxide than is emitted by the oil that’s produced. Compared to a conventional barrel of oil, the life-cycle emissions are substantially lower, and Hollub has made a spirited case for the environmental benefits of oil pumped with captured CO2, saying it is better than drilling new fields with new infrastructure.

In a March interview, Zeller said the company’s position has evolved, from focusing almost purely on producing oil to being open to other uses for the carbon dioxide. If a customer is willing to pay a premium to inject carbon dioxide for pure storage, he said, “sure, ok, we’ll do that.” If companies want to buy CO2 to make synthetic fuel, he said, “sure, no problem.”

But Zeller made it clear that Occidental’s plans haven’t strayed from oil, either.

“We’re trying to be listening to the market, and people aren’t ready for net-zero oil, really, they’re not.” But, he added, “They will be, because it is going to be a high value, low cost answer, and people just need to get past the emotions of it, and they will. They have to.”

Over the last three weeks, Occidental has announced a flurry of activity around its direct air capture plans. Airbus, the European airplane manufacturer, said it would buy credits to remove 100,000 metric tons per year for four years from the Texas plant, coming on top of investments by United Airlines, Shopify and others.

One week later, Occidental announced a deal with a South Korean refiner to buy up to 200,000 barrels of oil squeezed out of the ground with CO2 captured by the Texas plant. In a press release, the companies boasted of a milestone in emissions reduction efforts, an “affordable, scalable” way to work toward their own climate goals, by buying and selling net-zero oil.