Energy Pulse: in brief (18 August)

A big week for Occidental Petroleum’s direct air capture strategy

Occidental Petroleum announced plans to acquire British Columbia-based direct air capture (DAC) start-up, Carbon Engineering (CE) for US$1.1 billion. The deal will be paid in cash in three approximately equivalent annual payments, with the first payment due at closing. Occidental and CE have been working together since 2019 and are building the world’s largest DAC plant in the Permian Basin. Upon completion of the deal, Occidental’s Oxy Low Carbon Ventures will control CE as a wholly owned subsidiary.

CE’s technology underpins Oxy’s DAC expansion plans. Other CE investors included BHP, Chevron Technology Ventures, Air Canada, and Airbus, among others. Prior to acquisition, CE had raised approximately US$110 million in funding to support it’s DAC technology development and pilot projects.

This announcement comes on the heels of the US Department of Energy (DoE) announcement of US$1.1 billion earmarked for two US DAC projects: Oxy’s South Texas DAC Hub in Kleberg County and Battelle’s Project Cypress, each expected to receive roughly one half of the total over the next few years.

With support from DoE and full ownership of CE’s technology and licensing rights, Oxy appears emboldened on its DAC journey. These announcements along with ExxonMobil’s acquisition of Denbury, are sign posts that companies are beginning to lean into CCUS business models.

Oxy is targeting cost reductions for DAC projects from US$350-400 per tonne to US$150-200 per tonne over the next 5 to 10 years.

ADNOC Gas signs LNG supply agreement with JAPEX

ADNOC Gas, a subsidiary of ADNOC, has signed a 5-year LNG supply agreement with Japan Petroleum Exploration Company (JAPEX). ADNOC confirmed that the contract was valued at between US$450 – 550 million. No additional details on pricing, start-up, or delivery basis were disclosed.

In recent years, ADNOC has largely marketed its volumes from the ADNOC LNG plant on a short-term and spot basis, as existing contracts expired.  But this deal with JAPEX and a recent 14-year agreement with India Oil Corporation LTD (IOCL) could signal a longer-term shift towards the Pacific basin.

ADNOC has big plans for its gas business. It listed 5% of the ADNOC Gas subsidiary in an IPO earlier this year, raising some US$2.5 billion – the largest IPO in Abu Dhabi’s history. ADNOC Gas is expected to invest around US$16 billion into gas and LNG growth projects between 2023-2028, excluding the capex for the proposed 9.6 million tonnes per year LNG export project in the industrial hub of Ruwais, the development of which will be managed by the ADNOC parent.

Oil prices hold on to gains as demand heads for a new record

Crude oil has this week held on to most of the gains it has made over the past month. On Friday benchmark Brent crude was trading at about US$84 per barrel.

Despite market concerns regarding a weak global economy, global liquids demand growth has held up and is on track to reach an all-time high this year, surpassing the 2019 peak by 0.2 million b/d.

The UK government updates its hydrogen strategy

The UK Government has published its Hydrogen Strategy Update, explaining the latest steps taken to nurture the domestic hydrogen industry. Current UK targets aim for 10GW (1.22 million tonnes per year) of low-carbon hydrogen production capacity by 2023, of which at least 5GW (0.61 million tonnes per year) should be green hydrogen. Intermediate targets aim for 1GW each of green and blue hydrogen in operation or construction by 2025.

Following a year-long consultation period, this publication indicates a growing acknowledgement of the need for transport and storage infrastructure to be developed. The UK’s 2030 targets for supply and demand of low-carbon hydrogen remain ambitious and would require a significant acceleration in awards and funding.​

The 2025 target for 2GW of production already appears out of reach. Electrolyser supply constraints together with project cost inflation are hampering the financial viability, and timely delivery of electrolytic hydrogen projects. However, the increased attention being paid to transport and storage is a positive signal for UK hydrogen in the long run.

Second quarter Permian earnings roundup

Earnings season wrapped up for Permian operators last week and three major themes stood out to us: operators brought a record number of wells online despite declining rig counts, service costs should soften as they likely peaked in Q2, and operators are having success in the 2nd and 3rd Bone Spring and across multiple Wolfcamp benches. As a result, many Permian players reported production beats and increased full-year guidance.

Pioneer Natural Resources should realise improved capital efficiency in the second half of the year. Incorporating steel pipe, fuel and chemicals cost reductions resulted in a US$125 million capex cut. The company dropped one rig, but only removed ten wells from its outlook. It continues to drive efficiencies with 3-mile laterals (now 20% of its program) and is investing in additional in-basin sand mines.

Devon Energy is finding success in the Wolfcamp B in Eddy County, New Mexico. It successfully de-risked 100 well locations in the Cotton Draw area of the Delaware Basin. Six Wolfcamp B wells have averaged 3,150 barrels of oil equivalent per day (44% oil), putting these wells in the top percentile of Wolfcamp B results. The company reported service cost deflation as it refreshes contracts driven by reduced activity from gas-focused producers and privately-held companies.

Other views

Simon Flowers, Fraser McKay and Ian Thom — Can upstream deliver the oil and gas supply the world needs?

Chris Seiple, Søren Lassen and Finlay Clark — Cross currents: Charting a sustainable course for offshore wind

Oil and gas exploration spending to recover from historic lows, average $22 billion per annum through 2027

Peter Osbaldstone and others — European power markets emerge from the energy crisis

Max Reid — Is the electric vehicle and battery supply chain charged for success?

Prashant Khorana — Eight things we learned from conversations with power and renewables investors in 2023

Thanks for this week’s Energy Pulse In Brief to Peter Findlay, Rachel Schelble, Fraser Carson, Iain Mowat, Greig Boulstridge, Murray Douglas and Jack Christian.