March 9, 2023 [Financial Times] – Inflation Reduction Act’s tax credits include technologies favoured by fossil fuel sector

An oil industry that opposed President Joe Biden’s signature climate law is now manoeuvring to claim billions of dollars of US tax credits established by the legislation.

The Inflation Reduction Act, passed in 2022, aims to slash greenhouse gas emissions by supercharging clean energy industries. Its $369bn in climate provisions has sparked new investments in renewable power generation and in manufacturing everything from electric vehicle batteries to solar panels.

But the law also includes generous incentives for a set of lower-carbon technologies and fuels where oil and gas executives argue they hold a big advantage. Oil companies are starting to plough cash into projects to capture and lock away carbon dioxide, to retool refineries for making biofuels, and produce low-emission hydrogen, all supported by the IRA’s green subsidies.

“There’s a lot of activity in this space, a lot of interest, particularly with the IRA,” ExxonMobil chief executive Darren Woods told investors last month.

“I think we’re very well positioned there,” he said. “This is not a game for start-ups. These are large, world-scale projects that require the kind of project expertise that we have, require the kind of size and balance sheet capacity that we have.”

Energy trade associations including the powerful American Petroleum Institute opposed the IRA before Biden signed it into law in August, calling its tax increases and new government spending “the wrong policies at the wrong time”.

Now oil companies are moving into position to take advantage of the IRA. They include shale producer Continental Resources, Gulf of Mexico-focused oil company Talos Energy and Phillips 66, an oil refiner. Exxon in December increased planned low-carbon spending by 15 per cent and outlined plans to invest $17bn on its low-carbon business through to the end of 2027, about 10 per cent of overall spending.

Analysts expect activity to accelerate, both as a growth opportunity and a way for companies to soothe investor concerns about the industry’s future amid a push to decarbonise the economy. Big oil companies with sizeable tax liabilities could also underpin green energy development by buying other groups’ clean energy tax credits, which are now transferable under the IRA.

Credit Suisse has estimated the “transformative” tax credits in the IRA that make many new carbon capture and storage and low-emission hydrogen projects suddenly profitable could spur about $160bn in spending over the next decade.

The law set a tax credit of $85 per tonne for CO₂ captured and permanently stored underground, which executives and analysts say opens up huge opportunities to trap emissions from industrial sites. Even as they opposed the legislation, oil companies and trade groups lobbied centrist West Virginia Democrat senator Joe Manchin, one of its architects, to include tax credits for carbon capture, hydrogen and biofuels alongside wind, solar and battery power incentives. API supported tax credits for carbon capture.

Not everyone is convinced. Climate activists have slammed the Biden administration for subsidising technologies such as carbon capture they argue are costly, unproven and promoted by oil groups as a scheme to keep pumping fossil fuels.

Yet US energy secretary Jennifer Granholm has called on fossil fuel producers to seize on the new government support to reimagine themselves as “more diverse energy and carbon management companies”.

Granholm has cheered on Occidental Petroleum’s plans to deploy direct air capture technology, which sucks CO₂ from the atmosphere to be stuffed underground, in the oilfields of west Texas. The company plans to have its first such project up and running in 2024 and says it will spend up to $600mn on it this year.

Direct air capture, a promising but so-far unproven carbon management technology, is eligible for a tax credit of up to $180 a tonne under the IRA.

BP’s US boss Dave Lawler told the Financial Times the company was “really excited” about the IRA and that the climate law made the US the “most lucrative” place in the world for green hydrogen development.

The British oil and gas producer, a member of API, individually supported the IRA’s passage. BP recently closed a $4.1bn deal for Archaea Energy, whose projects harvest methane created at landfill sites. Last month BP said it would spend $1.3bn to acquire TravelCenters of America, a chain of US highway fuel stations, to bolster its EV charging business. Both businesses would benefit from the IRA’s green incentives.

Mike Wirth, chief executive of Chevron, has taken a more cautious line. He told the FT that the tax incentives were “only one part of what it takes to build these businesses” and that his oil and gas major was still “proceeding on the path that we were before the IRA”.

Wirth said the industry still needed to improve nascent technologies, build infrastructure, agree deals for novel projects and receive government permits, meaning it would “take years” to stand up the new businesses.

Still, some smaller oil producers see big opportunities for growth.

Denbury Resources, a small oil producer, has long had an “enhanced oil recovery” business that uses CO₂ pipelines to pump the gas into ageing oilfields and boost their output.

But after passage of the IRA, owning one of the US’s largest networks of CO₂ pipelines and expertise managing the greenhouse gas suddenly put the company in a “completely unique space”, said Denbury chief executive Chris Kendall.

Denbury envisions itself transforming into a big player in carbon capture and storage to capitalise on new IRA tax credits. It is more than doubling spending this year on early-stage CCS projects to $150mn. Kendall said the company was “just scratching the surface of where we’re going with this”.

Kendall believes Denbury will be pumping 50mn-70mn tonnes of CO₂ a year into underground storage by 2030, more than the roughly 40mn tonnes that are captured and stored globally each year.

“There are a lot of industry emissions that can now be captured economically under that $85 tax credit . . . and our strategy is to build that business as rapidly as we can,” Kendall said.

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