Why Warren Buffett Likes Occidental's Multibillion-Dollar Bet

Occidental Petroleum (OXY 0.10%) operates in a business that’s inherently risky. There are a lot of things that can go wrong with producing oil and gas. 

One of Occidental’s biggest fans, Warren Buffett, views his role at Berkshire Hathaway (BRK.A -0.34%) (BRK.B 0.26%) in large part as the conglomerate’s chief risk officer. He recently told CNBC, “It’s my job to think about risks that nobody else thinks about.”

Occidental is giving Buffett yet another major risk to think about these days. But it’s one that the legendary investor seems to be fully comfortable with. Here’s why Buffett likes Occidental’s multibillion-dollar bet on carbon capture.

Occidental’s big bet

Some believe that oil and gas companies will fade away as the use of fossil fuels gives way to renewable energy sources. Occidental doesn’t intend to quietly disappear in obsolescence.

The company is investing at least $1 billion in a facility located in the Texas Permian Basin to suck carbon dioxide out of the air. This carbon dioxide would then be stored underground. Occidental expects the carbon capture and sequestration facility will be operational in 2024.

But this isn’t the only direct air capture (DAC) plant that Occidental plans to construct. Last month, the company announced that it’s building another facility in southeast Texas that’s expected to begin operations in 2026.

Occidental’s goal is to roll out 70 DAC facilities across the world by 2035. The company hasn’t put a price tag on the total cost, but it will certainly be in the tens of billions of dollars.

However, DAC is controversial. When the Biden administration’s infrastructure bill included funding for the technology, some renewable energy proponents expressed their displeasure with the decision. JL Andrepont, a policy analyst with environmental organization 350.org, even called DAC “a scam.”

What Buffett thinks

Buffett isn’t one to go along with scams. So what does he think about Occidental’s DAC plan? CNBC’s Joe Kernen questioned Buffett about it last week.

The Oracle of Omaha first pointed out how much he respects Occidental Petroleum CEO Vicki Hollub. Buffett said that Hollub “is an extremely competent, good citizen of America.” He added that “she understands oil” and “is extremely concerned with ways to have carbon capture.”

Buffett also challenged the argument that the transition to renewable energy sources will cause oil production to fall significantly anytime soon. He noted that the world uses around 100 million barrels of oil per day right now and predicted that at least the same amount of oil will be produced five years from now — and perhaps even more.

In his view, the global economy simply can’t reduce its dependence on fossil fuels as quickly as some environmentalists hope. So what should be done about carbon emissions if the demand for oil remains at current levels or higher?

Buffett told Kernen: “It’s an ever-present problem. And you really need somebody that understands the dimensions of it and what can be done with carbon capture.” He seems to have that somebody in mind — Occidental’s Hollub.

Buffett’s own big bet

While Occidental is betting billions of dollars on carbon capture, Buffett is making his own big bet on Occidental. It was one of only four stocks that he bought for Berkshire Hathaway’s portfolio in the fourth quarter of 2022. Occidental now ranks as the sixth-largest position for Berkshire. That stake is worth more than $13 billion. 

Look for Buffett to increase his bet on the oil producer significantly. Berkshire won regulatory approval last year to acquire up to 50% of Occidental. It’s not even halfway to that level yet.

It remains to be seen if Occidental’s direct air capture initiative will pay off as the company hopes. But if it does, Buffett and Berkshire will be among the biggest winners.

Keith Speights has positions in Berkshire Hathaway. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool has a disclosure policy.