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Peer Strategy

US Majors Define Their Brand of Decarbonization

Copyright © 2021 Energy Intelligence Group
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  • Chevron and Exxon Mobil are betting that alternative solutions to electrification will be required to economically decarbonize hard-to-abate sectors, although their paths may still diverge.
  • Exxon’s emerging interest in biofuels and hydrogen complements its primary interest in carbon capture and storage (CCS).
  • Chevron sees CCS as a pillar, rather than a foundation, of its plans and has grander ambitions in biofuels and “green” hydrogen.

    The Issue

    Shareholders have demanded more aggressive decarbonization strategies from Chevron and Exxon. Both want to meet those demands while sticking to businesses they believe offer greater competitive advantage than stand-alone renewable electricity. That means investing in CCS, biofuels and hydrogen to tackle hard-to-abate emissions from marine, rail and heavy-duty transport, as well as in industries such as steel and cement. But early indications suggest the two US majors may approach these emerging businesses in different ways.

    A Different Path

    Both Chevron and Exxon have chosen not to follow the European majors into renewable electricity.

    Wind and solar power generation have become increasingly commoditized, as countless new players and billions of dollars in fresh capital look to build out green grids globally. The US majors see little advantage here, being put off by margin compression due to the heavy competition and the ubiquity of solar and wind technologies. So, they would rather make a bet that other low-carbon alternatives will play a large enough role in the future energy mix to keep them busy, even if electrification takes off.

    To date, Exxon has largely thought about tackling decarbonization within the existing petroleum energy system. CCS offers a way for established hydrocarbon fuels to potentially have a longer lease on life, assuming enough carbon can be abated from their production and processing, as well as at large, concentrated end-users of hydrocarbons including heavy industry and chemicals manufacturing.

    Chevron also has significant CCS ambitions, but is more open to developing alternative fuels as well. That’s because it aims to leverage existing infrastructure and marketing assets — or at least its capabilities to build and manage such assets — to connect emerging fuel producers with emerging demand centers, all while owning a piece of the full value chain. Chevron is willing to foster this competition with its core oil and gas business due to expectations of “double-digit returns” — returns it doesn’t see in wind or solar, even on a levered basis.

    Stand-Alone CCS

    Exxon hasn’t set CCS capacity goals, but the success of its low-carbon plans rests on its widespread deployment.

    The company is particularly keen on spearheading large-scale hubs that capture and link CO2 from many industrial sites, including its own and those operated by third parties. For example, its US Gulf Coast hub concept — which is multiples larger than any CCS installation under way — has had 10 refiners, chemicals manufacturers and power producers join it to plan and advance policy discussions.

    Exxon has not said explicitly how it plans to make money here. But the benefits will likely be twofold. First, designing significant hubs where Exxon also has facilities helps it share infrastructure and storage costs, achieve greater economies of scale and more effectively advocate supportive fiscal incentives. Second, Exxon will likely monetize proprietary CCS technologies that it is looking to deploy at scale to cut CCS costs by one-third by 2030.

    Houston CCS Hub Supporters
    CompanyPotential Targeted Assets in Greater Houston Area
    Integrated Majors
    Exxon MobilBaytown refining-petrochemical complex
    ChevronPasadena refinery
    Independent Refiners
    Marathon PetroleumTexas City refinery
    Phillips 66Sweeny refinery
    ValeroHouston, Texas City refineries
    Chemicals
    IneosManufacturing complex in La Porte, petrochemicals facility at Chocolate Bayou
    LyondellBasellChocolate Bayou, Bay City, Channelview, LaPorte, Pasadena chemicals facilities; Houston refinery
    Dow ChemicalDeer Park, Freeport, Houston, La Porte, Seadrift and Texas City facilities
    ChevronPhillips (Chevron, Phillips 66 JV)Baytown, Sweeny, Pasadena facilities
    Power Generation
    CalpineSeveral cogeneration facilities across Deer Park, Baytown, Pasadena and Texas City
    NRG EnergySeveral natural gas generation facilities across Cedar Bayou, Houston, La Porte, Bay City, Thompsons
    Industrial Gasses
    LindeLa Porte hydrogen facility, other

    Chevron has provided more detail on capacity and its business model. The company is targeting 25 million tons per year of equity CCS capacity by 2030 — the industry’s largest announced target for that time frame. Its strategy presentation last week suggested that figure might push above 50 million tons/yr by 2035.

    Some of this capacity will address Chevron’s operational emissions. But the bulk will come from services rendered. Chevron hopes to become a provider of one-stop shop and customized CCS solutions to third parties, independent of whether its own facilities are also involved. The major is exploring several initial opportunities in the US and Asia-Pacific in the 5 million-20 million ton/yr gross capacity range. Fiscal credits — including the US federal 45Q and California’s low-carbon fuel standard — play a role in augmenting the margins it might make in this service provider-type role, allowing it to hit its double-digit return threshold.

    Exxon may also move this direction but it has not articulated such plans to date.

    Cornerstone vs. Extension

    Exxon has gone from talking exclusively about CCS earlier this year to now touting interest in hydrogen and biofuels. But critically, its interest is an extension of its CCS strategy.

    Exxon’s new target to produce more than 40,000 barrels per day of biofuels by 2025 follows what it calls “increased momentum” for CCS-linked biofuel and hydrogen projects. A case in point is the CCS-renewable diesel scheme planned at its Strathcoma refinery in Canada. If sanctioned, affiliate Imperial Oil will use local biofeedstocks, “blue” hydrogen produced from natural gas with CCS and a proprietary catalyst to produce renewable diesel.

    Chevron is also weighing blue hydrogen opportunities, but biofuels and hydrogen are cornerstones of its strategy independent of whether CCS is utilized. In all cases, Chevron’s primary objective is to serve transport and industrial customers, rather than produce power.

    “Green” hydrogen is expected to help Chevron meet its new 150,000 ton/yr goal by 2030. The company is advancing a solar pilot in northern California, entering an integrated green hydrogen production-storage project in Utah and testing carbon-negative hydrogen produced from landfill waste. Similarly, its aim to be a leading supplier of carbon-negative renewable natural gas could offer hard-to-electrify transport fleets alternative ways to reduce their emissions, lower the carbon footprint of natural gas-based hydrogen even if CCS isn’t deployed and cut emissions from industrial processes that consume gas for heat.

    Sufficient Scale?

    Both strategies will require longer lead times to achieve global scale than the renewable electricity ambitions of the European majors due to the nascent nature of many technologies and markets. But Chevron and Exxon’s management believe they are putting forward a compelling alternative for investors to play the energy transition, given that hydrogen, CCS and biofuel investments are often disparate and in the hands of upstarts. The key is whether investors will stay patient.

    Chevron’s approach offers a clearer line of sight on tangible life-cycle emissions reductions given its greater diversification into competing low-carbon fuels. But the exact impact on its so-called Scope 3 (end-use) emissions is unclear. Further details are expected next month in its updated climate report. Watch to see how large investors respond.

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