Sunya Spotlight – Oxy’s STRATOS

Occidental’s (Oxy) subsidiary, 1PointFive, is developing STRATOS, the world’s largest Direct Air Capture (DAC) plant in Ector County, Texas.

Here’s the general way DAC works, courtesy of Carbon Engineering:

Pretty much a giant vacuum sucking CO2 of out the air and purifying it.

Here’s an animated video from 1PointFive on the project.

(In case the embedded video link doesn’t work)

The project was first announced in 2019 when 1PointFive partnered with Carbon Engineering for DAC technology commercialization. And construction began in Q3 2022.

The latest timeline puts the Stratos facility commercially operational in mid-2025. This timeline was adjusted from the previously planned start in 2024. Sort of expected, every major project like this has been delayed.

The plant’s initial capacity is to capture 500,000 metric tons of CO2 annually with an ability to scale up to 1 million metric tons.

For a point of reference, the cancelled Navigator CO2 project was aiming to capture and store 15 million tons / year.

Oxy aims for 70 DAC facilities globally by 2035. So another seven a year for a decade if this one works.

In August 2023, the DOE announced that the South Texas DAC Hub, proposed by 1PointFive, will receive over $1 billion in federal grants.

1PointFive partnered with King Ranch in South Texas to gain access to 106,000 subsurface acres and a storage capacity of 3 billion metric tons of CO2. 

While this DAC hub is separate from STRATOS, it certainly relies on its success to move forward.

Shortly after the DOE funding, Oxy makes a splashy deal.

Oxy announced the purchase of its technology partner, Carbon Engineering.

The acquisition, valued at ~$1.1 billion, put Oxy in the driver’s seat in US DAC.

BlackRock enters the room.

In November 2023, BlackRock invested $550 million in STRATOS.

BlackRock formed a joint venture with Oxy through 1PointFive, which will own the Stratos project. The JV is aimed at advancing the DAC technology and its commercial application at scale.

At the time of announcement, Oxy increased the project budget for STRATOS to $1.3 billion. This was the second price hike within a year, with the initial estimate ranging between $800mm and $1 bn in 2022.

Haven’t come across anything in the energy transition space that hasn’t been subject to some cost over-run.

BlackRock’s investment is underpinned by corporate buyers committing to the carbon removal credits.

Key offtake partners include Amazon, Airbus, Shopify, ThermoFisher, SK, Houston Texans, and TD Bank Group.

Whatever you think of DAC or whatever you think of carbon removal, the market for credits exists. It’s nascent. It’s not very deep. And it’s usually underwritten by demand from big tech companies like Microsoft. That’s been a bit of a challenge for Oxy.

After all, who wants to buy carbon credits from an oil and gas company? Well, the reality is hitting these aggressive net zero targets through credits isn’t going to be easy. There are a large list of players who recognize the traditional energy companies will be deeply involved in energy transition and carbon management. And that list appears to be growing.

DAC is expensive. How expensive? Estimates put it at ~$1,000-2,500 / ton.

For point of reference, nature-based carbon credits (like planting trees) trade at $5-20 / ton.

This is not the Honda Civic of carbon credits. It’s the Rolls Royce.

Now, if we are to believe there’s a chance to materially reduce the cost curve and fit any sort of Moore’s law type trajectory, then DAC could be the silver bullet.

If costs come down 10-100x, there are going to be DAC units all over the planet, solving our carbon problem pretty quickly.

That’s the IF.

These DAC projects are interesting to me. They are effectively mobile CO2 generators that can be put anywhere. CO2 on demand. This becomes an obvious use case in the Middle East where the operators have stranded gas (powering the DAC units) to generate CO2 to pump more oil.

Does that ultimately generate a net zero oil product? I’m not sure. What I know is those conventional oil reservoirs in the middle of the desert would love some CO2. Enhanced oil recovery is currently the most compelling Utilization case – putting the U in CCUS.

At this very moment, there are decarbonization solutions the oil and gas industry can prosecute with far greater impact than DAC. Whether it’s emission reduction from operations or coal to gas switching.

A billion dollars to remove a million tons a year is interesting. Someone has to do it. I’m glad they are. We’re better off for it. It may not work. It may not scale. It may not end up being the holy grail. But we certainly won’t know unless someone steps up to the plate. Sizing the bet to any large energy producer’s capital budget, the cost of being wrong is rather inconsequential but the reward could be immense.

That said, to me, the impact of this billion or two billion or whatever it is – it’s not as material as the impact the industry has already had. From eliminating flaring, replacing pneumatic valves (and associated methane venting) or offsetting coal with natural gas – we’re talking an order of magnitude larger per dollar spent.

Unfortunately, that doesn’t make for the greatest of headlines.

Reply with your thoughts. What (or who) do you think we should profile next?

DISCLAIMER: None of this is financial advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. Please be careful and do your own research.