From Expense to Revenue: How Exxon's Carbon Capture Initiatives Become Profitable
Explore the key factors contributing to the profitability of Exxon's carbon capture initiatives. These including the availability of the expanded 45Q tax credit
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Carbon capture and sequestration have long been viewed as the practice of burying costs, but for Exxon Mobil Corp., it presents an opportunity to unlock trapped dollars. In a strategic move, Exxon recently announced a groundbreaking deal to capture and store emissions from a Louisiana steel mill operated by Nucor Inc. This venture is part of Exxon's broader efforts to invest in its Low Carbon Solutions unit, aimed at helping other companies reduce emissions. As Chief Executive Officer Darren Woods emphasizes, this new business line must compete for capital based on its returns, posing a challenge for an industry seeking to monetize a molecule with little intrinsic value. However, a combination of factors, including government support and leveraging existing infrastructure, may facilitate the success of Exxon's foray into carbon capture and sequestration.
Unlocking Subsidies and Government Support
One significant factor working in favor of Exxon's carbon capture endeavor is the backing of the US government. The expanded 45Q tax credit provides lucrative incentives for carbon capture and storage, boosting the amount offered to $85 per ton of emissions. This tax credit, available for stationary emitters like steel and chemical plants, not only offsets costs but can transform carbon capture from a cost center into a subsidized profit center. The initial five years even offer a direct check, further enhancing the appeal. By tapping into these subsidies, Exxon can defray upfront costs and mitigate risks, making the venture economically viable.
Through Exxon’s contracted work in Louisiana with CF Industries Holdings Inc. to capture and store carbon from an ammonia plant, it is estimated to cost the company about $45-$50 a ton. With the $85 per ton subsidy, Exxon can offset a substantial portion of these costs, making the project economically feasible.
Leveraging Existing Infrastructure
Oil and gas companies are well-versed in minimizing risks and costs, and Exxon's approach to carbon capture is no different. By focusing efforts on the Gulf Coast, where the company already has a strong presence, Exxon can tap into existing pipelines and infrastructure, significantly reducing expenses. This strategy capitalizes on the allure of utilization, utilizing pre-existing equipment and operations to optimize efficiency. Moreover, by encouraging third-party participation in the same area, Exxon can further share costs, making the venture more economically feasible.
Beyond Dollars and Cents
While the economic benefits of carbon capture are evident, Exxon's motivation extends beyond immediate financial gains. The company recognizes the potential impact of climate change on its long-term valuation. As the market increasingly factors in climate risks, oil majors face challenges in maintaining their market value. Exxon's partnership in carbon capture serves as a way to bolster its near-term performance, prioritizing immediate payouts over future growth promises. This approach aims to reshape the company's valuation dynamics and restore investor confidence.
Exxon's valuation structure reflects the changing dynamics of the oil and gas industry. With its terminal value being squeezed, the company seeks to loosen its grip by venturing into carbon capture. Unlike renewable energy solutions favored by European peers, carbon capture enables Exxon to embrace oil and gas while addressing emissions concerns. Successful implementation of cost-effective carbon capture technology at scale could potentially postpone the anticipated peak in oil and gas consumption, positioning Exxon as a greener alternative in the market.
While the promise of carbon capture is undeniable, its widespread adoption remains uncertain. Previous setbacks, such as poor performance at a Chevron-operated project, remind us of the challenges and risks associated with this technology. However, Exxon's strategic move to seize significant subsidies and venture into a new business line holds the potential to enhance its stock price and investor appeal. With the opportunity to bet on carbon capture and sequestration, Exxon is poised to navigate a path that could reshape the company's future and solidify its position as an industry leader.