Senate bill would raise value of tax credit to use captured CO2 to produce more oil

A U.S. Senate panel has proposed equalizing the tax credit for carbon capture used in enhanced oil recovery (EOR) with the credit for permanent carbon sequestration, setting both at $85/metric ton. This change to the 45Q tax credit, part of the 2022 Inflation Reduction Act, favors oil and gas producers, potentially incentivizing increased oil production via carbon capture. While proponents, including Occidental and the Carbon Utilization Research Council, argue EOR can lower the carbon intensity of oil production, carbon removal advocates like Carbon180 express concern that it could divert investment away from durable carbon removal projects and expand fossil fuel production.

Analysis

A U.S. Senate finance committee has proposed a significant alteration to the 45Q tax credit, aiming to equalize the incentive for carbon capture utilized in enhanced oil recovery (EOR) with that for permanent geological sequestration, setting both at $85 per metric ton. This proposal, part of a Republican budget package, contrasts with the House version maintaining the EOR credit at $60/metric ton and diverges from the original 2022 Inflation Reduction Act's intent, which valued permanent removal higher to mitigate concerns about incentivizing continued fossil fuel production. The change is seen as a potential benefit for oil and gas producers like Occidental (OXY), which is developing direct air capture projects for both EOR and permanent storage, and is supported by industry groups such as the Carbon Utilization Research Council, chaired by Occidental, arguing it supports lower carbon intensity oil production. However, carbon removal advocates like Carbon180 express concern that this parity could divert investment towards fossil fuel extraction rather than durable carbon removal solutions. Other major oil companies, including ExxonMobil (XOM) and Chevron (CVX), are also active in carbon capture, though ExxonMobil stated it did not lobby for this specific EOR credit increase. The overall sentiment towards this legislative development is moderately positive, particularly for companies poised to leverage EOR with carbon capture.

Key Decisions for Investors

• Investors should closely monitor the legislative progress of the proposed 45Q tax credit equalization, as its enactment would likely improve the financial outlook for companies heavily involved in Enhanced Oil Recovery, such as Occidental Petroleum.
• Consider the potential for increased investment in carbon capture for oil production if the credit is equalized at $85/metric ton, while also evaluating the associated ESG risks related to the potential extension of fossil fuel extraction and diversion of capital from permanent sequestration projects.
• Re-evaluate positions in oil and gas companies like ExxonMobil and Chevron based on their specific involvement and strategy in carbon capture, utilization, and storage (CCUS), as this legislative change could alter the relative attractiveness and economic viability of EOR versus permanent sequestration projects.