Hollub speaks with IHS Markit Vice Chairman Daniel Yergin for the latest CERAWeek Conversations – available at www.ceraweek.com/conversations
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Occidental President and CEO Vicki Hollub says that “there has to be a lot more consolidation” among U.S. upstream producers as industry seeks to restore the economies of scale necessary for shale developments in the latest edition CERAWeek Conversations. The market downturn combined with the global pandemic brought the “industry to its knees,” she says, and a renewed focus on full-cycle returns will make it difficult for U.S. oil output to return to its pre-COVID levels.
In a conversation with Daniel Yergin, vice chairman, IHS Markit (NYSE: INFO), Hollub discusses Occidental’s new model for shale projects, public concerns and misconceptions over hydraulic fracturing, the company’s major investments in enhanced oil recovery and direct air capture and how those technological processes are transitioning Occidental towards a future as a “carbon management company.”
The complete video is available at: www.ceraweek.com/conversations
Interview Recorded Wednesday, November 18, 2020
(Edited slightly for brevity only)
On the evolution of Occidental’s integrated carbon strategy and its future as a “carbon management company:”
“We had been in CO2 enhanced oil recovery for about 40 years. We were trying to figure out a way to ensure the sustainability of our enhanced oil recovery using CO2, not only the sustainability, but how do we lower the cost? Ten years ago, we started thinking about trying to move away from organic CO2 for those projects to anthropogenic CO2.
“As we got to the point where we realized that there was no way to cap global warming at two degrees without a significant amount of carbon capture we then realized that there was an opportunity for us to go further with our anthropogenic plan and make it into a business. We saw that there were other industries that need a way to lower their carbon footprint, and without some way to purchase CO2 credits or to partner in a sequestration or a CO2 use project, they can’t otherwise do it. We saw a lot of opportunities to not only become carbon neutral ourselves but to help others do the same thing.
“Where we got the idea of ‘green oil’ was the fact that it takes more CO2 injected into the reservoir than the barrel of oil that is produced from that CO2 emits when burned. The fact that more injected and less burned means that you are either carbon neutral or negative. It depends on the reservoir as to how much CO2 offset difference there is between the injection and the emission.
“Ultimately, I don’t know how many years from now, Occidental becomes a carbon management company and our oil and gas would be a support business unit for the management of that carbon. We would be not only using [CO2] in oil reservoirs [but] capturing it for sequestration, as well. I expect that in the not too distant future our OxyChem business will also be involved in some way to use CO2 in products that they make. We’d have three ways to manage the CO2 with both OxyChem and the oil and gas business being a support for that. I believe this industry is going to be huge.”
On Occidental’s investments in direct air capture:
“We’re going to build what would now be the largest direct air capture facility in the Permian Basin. We expect to start on that in late 2022 or early 2023. Direct air capture is a process that just pulls CO2 out of the atmosphere. The great thing about what we’re doing there, when you pull the CO2 out of the air it’s potassium hydroxide that you use as a part of the process to separate the CO2 from the air. Our chemicals business is the largest producer of potassium hydroxide in the U.S. – second largest in the world – so you have a synergy there with our chemicals business. This direct air capture facility then spits off a pure stream of CO2 that we can use in our reservoirs. It enables us to increase oil production while taking advantage of our OxyChem synergies.”
On the pandemic’s impact on the oil and gas industry:
“The price war combined with the pandemic brought our industry to its knees. We’re a resilient industry and when we get knocked down, we get back up with more determination to be successful. These sorts of things always seem to drive innovation and ingenuity in our industry.
“In addition to finding new ways to create value and to lower our cost, this will also drive a different kind of scenario into our planning process. All of us might have a pandemic scenario from here on out. What that might do is have people doing a lot more lower risk M&A, more like the smaller ones that we’re seeing happening today and even some more mergers of equals.”
On the changing nature of the shale business and Occidental’s new model for shale development:
“What’s going to change about the industry is there has to be a lot more consolidation. You have to create the scale necessary to optimize full-cycle development. Economies of scale are very important in shale development, otherwise the good returns that you get on the drilling and completion of wells gets eroded by infrastructure. The smaller the scale, the more likely an operator is going to have to do something with respect to consolidation.
“We’re looking at a new model for shale development; that is to take advantage of the infrastructure that we have over time…Now we’re going to be able to further optimize that with the application of CO2 and enhanced oil recovery to the shale process in the future. It’s now this opportunity to mitigate what people have so much concern about with shale: One, the value and low recoveries; secondly, the fact that the decline is very hard to overcome and to grow over time. This model for us is going to maximize the value and increase the value over what we had before.”
On the growth and recovery of the U.S. shale industry:
“It’s going to be hard for the shale development in the U.S. to get U.S. production back to 13 MMbd. Now, especially as consolidation occurs and as people really focus on full-cycle returns and net present value of their developments, the economics is going to drive a lot of decisions to not do these smaller scale developments. It’s going to take a while for the industry to rationalize out the smaller footprint companies and to help the ones that want to consolidate to get that scale so that development going forward does really generate a true return and profitability.”
On the changing attitude of investors towards shale:
“There was a time when we had a lot of other places where we could put our capital dollars. Any time we mentioned investment in anything other than the shale, our shareholders got upset about it. When you look at the capital intensity of conventional low decline development vs. high decline shale, the shale pays back right away, but over time that lower decline – the capital intensity – is actually lower over time. We’re happy to have the flexibility to have an alternative. With respect to the shale we do believe that our enhanced oil recovery puts us in a unique position to make it almost seem closer to a low decline kind of asset. Ultimately that’s going to deliver the most value out of the shale.”
On the Anadarko Petroleum acquisition and its synergies:
“We’re excited about what we’ve been able to accomplish with it. The timing wasn’t great; in less than seven months after the close of the acquisition we had already more than exceeded the synergy target that we had set for Opex and selling, general and administrative expenses. We’re also ahead of schedule with respect to the divestitures. We had said that we would sell $10-15 billion dollars of assets within 12-24 months. We’re now well on our way to exceed $10 billion before the end of Q1 or mid-year next year. We’re on track to do that in what’s probably the worst M&A market ever in our industry.”
Her outlook for Occidental’s oil export business:
“Exports in the United States had gotten up to about 3 MMbd. Now they’ve dropped to about 2-2.5 MMbd. We’re exporting about 500-600kbd. We believe that the U.S. will continue to be a swing exporter as crudes are needed around the world. WTI is a good substitute for Murban and Arab extra light and WTL is a good sub for Arab super light. We had the opportunity to send barrels to Asia and to fill requirements that they need. With the new Murban pricing that’s now managed by ICE that ANDOC had promoted, that gives us a marker that we believe is going to enable us to get more per barrel than we had been getting otherwise.”
On partnering with the incoming Biden Administration on common priorities:
“With President-elect Biden I do believe we have the opportunity to collaborate with him. They want to have a climate story. I believe that our climate story and what we want to do could match very well with what they’re trying to accomplish. I believe that, at least on one point, we’re going to be aligned and we can collaborate, and we can hopefully make things happen. On other issues, we want to be there with the Environmental Protection Agency and the Bureau of Land Management as they will almost certainly introduce more regulation on the industry. We don’t have a problem with that because a lot of what’s been recommended in the past we’re doing anyway. We think that there’s some middle ground that we can achieve if we are proactive in dealing with all of the regulatory agencies and doing it early on. They have to put some regulation in. We need to just make it something that’s effective, but reasonable.”
Watch the complete video at: www.ceraweek.com/conversations
About CERAWeek Conversations:
CERAWeek Conversations features original interviews and discussion with energy industry leaders, government officials and policymakers, leaders from the technology, financial and industrial communities—and energy technology innovators.
The series is produced by the team responsible for the world’s preeminent energy conference, CERAWeek by IHS Markit.
New installments will be added weekly at www.ceraweek.com/conversations.
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About IHS Markit (www.ihsmarkit.com)
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