Net Zero is Not Realistic. But Carbon Capture Can Help.

This just in: humanity emits.

Net zero—the idea we can perfectly balance the amount of carbon dioxide (CO2) we release into the atmosphere with an equivalent amount removed from the atmosphere—is not realistic.

Never will be.

Bill Gates has been flying private for at least three decades now. He’s not going to be standing in front of you as B12 in the Southwest Airlines roll call anytime soon.

But that doesn’t mean interesting stuff that reduces emissions isn’t happening.

And you know what’s funny? The companies pushing hardest (translation: investing the most money and building actual infrastructure) are existing energy companies: ones that many might perceive to be the problem.

But first, let’s take a step back.

There’s been a lot of interesting stuff happening for a long time. Natural gas, and our ability to pull it from the ground efficiently, has been a god send for emissions.

We went from the perception of energy scarcity in the 1970s to becoming the largest exporter of natural gas in the world—surpassing Russia for the first time last year.

Why does this matter? It pushed us away from coal—the largest source of CO2 emissions.

Natural gas is only one obvious example of how our energy industry is changing. Everyone knows about wind & solar, but there’s interesting new technologies being implemented as well.

One that has recently caught my attention: carbon capture.

It seems like every Tom (Exxon Mobil), Dick (Chevron), and Harry (Occidental) is making a big splash into the space.

Exxon Mobil—the largest energy company by market cap—spent $4.9 billion last month to buy publicly traded Denbury Resources.

Denbury self-described themselves as “a unique carbon solutions company,” owning and operating a 1,300 mile pipeline network that transported CO2 in the Rocky Mountain and Gulf Coast regions.

Chevron—the second largest energy company by market cap—is running full steam into carbon capture as well. This press release from earlier this year.

And Warren Buffett’s favorite energy company—Occidental Petroleum, of which he owns nearly 30 percent—bought a carbon capture business in the past few weeks.

Occidental CEO Vicki Hollub had this to say on their August earnings call re: carbon capture:

“I will say that there's probably not any carbon capture or CO2 related projects happening in the U.S. or even worldwide that we don't follow very closely.”

In short, the biggest players in energy are moving towards carbon capture. Which means … we should probably define it and explain what it is.

Carbon capture is a process designed to mitigate the release of CO2 into the atmosphere. The goal is simple: capture CO2 emissions produced by industrial processes before they are released into the atmosphere and then store them, in most cases, underground.

The process has three parts:

1. Capture the CO2 emissions from sources such as power plants, industrial facilities, or even directly from the air. Various technologies can be used for this purpose: chemical absorption or adsorption (captured air is brought into contact with a material that has a high affinity for CO2) is one example.

2. Transport the captured CO2 from the capture site to a storage site. This can be done via pipelines, ships, or other means, depending on the location.

3. Storage, which usually takes place in geological formations deep underground, a process known as carbon sequestration. These formations might include depleted oil and gas fields, saline aquifers, or other geological structures that can securely contain the CO2 over long periods of time.

One specific example? Energy pioneer Harold Hamm described one of the projects his company—Continental Resources—is involved with in his new book. Continental is the largest investor in an Iowa Company (Summit Ag—a pseudo agriculture private equity company) who is contracting with ethanol plants in the Midwest (Iowa, Nebraska, Minnesota, etc.) to capture carbon and transport it through a pipeline network up to North Dakota where it will be stored in underground rock formations.

Effectively, they’re putting a condom on ethanol plants to prevent the release of CO2. (It probably goes without saying I’m not a scientist.)

By the way, building a pipeline network from each ethanol plant all the way to North Dakota is a logistical pain in the ass. You have to contract with every landowner between the ethanol plant and the final destination where it will be stored. And we all know nothing happens fast that requires government permission—but they’re still expected to be up and running by 2025.

The physical buildout of all this infrastructure does create a barrier of entry; not many companies will want to take the time, capital, and hand to hand combat required to make this all happen.

Now from an investment perspective, what does this mean?

The quick answer: hard to say.

The longer nuanced answer: it could be a tremendous tailwind. The Inflation Reduction Act was loaded up with incentives—tax incentives, renewable energy credits, emission reduction credits—for energy companies to move in this direction.

Specific to the carbon capture project Harold Hamm’s involved with … they will get carbon credits based on the specific amount of carbon they capture. Those credits can then be turned around and sold to companies that want to reduce their own emission scores.

You know who wants to purchase these credits? Really, really big companies that have lots of cash.

The Iowa company (Summit Ag) talked about their experience meeting with companies in Silicon Valley about pre-selling their carbon credits:

“Apple wanted to buy all of them. Same story down the road at Google.”

Two companies with $100 billion cash on the balance sheet and it’s burning a damn hole in their pocket!

If that story is too anecdotal, here’s a Wall Street Journal headline from May—JPMorgan is committing $200 million to buy carbon credits.

That’s real cash that will be going to companies building this infrastructure out.

I don’t pretend to be an expert, rather I simply think this stuff is very interesting. Some oil companies have been priced in recent years like the entire world will be driving around in Tesla’s in ten years. Of course, anyone with common sense knows that’s not true.

Scrolling Twitter X this week, I saw this quote from the Rivian CEO:

“I think the reality of buying a combustion-powered vehicle is sort of like building a horse barn in 1910; Imagine buying a Chevy Suburban in 2030 … what are you going to do with that …in 10 years? Gas stations will be slowly disappearing; It’s just weird.”

If somebody’s making a market, I will take the other side of that. There will be more—not less—gas stations in10 years.

Quotes like this seem to be a feature of being a tech CEO, however.

John Zimmer—the founder of Lyft—claimed in 2016 that the majority of rides on Lyft’s platform would come from autonomous vehicles by 2021. Fast-forward half a decade and the number of Lyft rides coming from autonomous vehicles rounds down to zero. The future doesn’t always unfold the way we plan.

None of this to say that carbon capture is manna from heaven. But I think it’s fair to say some of the companies that have been hated on for ruining the environment might actually be carrying some of the heaviest weight to improve it.

And they might make a pretty penny doing it.