Occidental Petroleum (OXY 0.12%) has long been a leader in using carbon dioxide in its oil business. It injects the greenhouse gas into underground oil reservoirs in the Permian Basin to boost the production of those legacy fields through a technique known as enhanced oil recovery (EOR). The oil company is now leveraging that expertise to become an early leader in carbon capture and sequestration (CCS).

The oil company believes CCS could eventually grow into a $3 trillion to $5 trillion global market opportunity. It aims to capture a slice of that potentially lucrative market by building out Direct Air Capture (DAC) hubs. The U.S. Department of Energy recently awarded the company up to $650 million to accelerate the development of future DAC facilities.

The funding accelerator

The U.S. Department of Energy's Office of Clean Energy Demonstrations will provide Occidental Petroleum's 1PointFive subsidiary with funding to help accelerate the development of its next DAC facility. It will supply up to $500 million to support the development of the company's South Texas DAC Hub. It could potentially increase the award by up to $650 million to develop an expanded regional carbon network in South Texas.

Occidental Petroleum's subsidiary will initially receive $50 million to advance the ongoing work at its South Texas DAC Hub, which includes engineering, permitting, long-lead equipment, and community engagement. This site could eventually support a DAC facility with the initial capacity to remove 500,000 metric tons of carbon dioxide annually. The company plans to expand that to over 1 million tons per year in the future. The site has the space to support up to 30 million tones of carbon dioxide removal annually. It can store up to 3 billion metric tons of the greenhouse gas in underground saline formations.

The South Texas DAC hub is one of many the company aims to develop in the future. The government funding will help accelerate the development of that project, freeing up the company's capital to pursue other opportunities.

Already laying the foundation of its carbon capture platform

The South Texas DAC hub would be the company's second DAC project. It has already started construction of its first industrial-scale facility, called STRATOS, in Texas. It will have the capacity to capture and permanently store up to 500,000 tonnes of carbon dioxide per year when it comes online in the middle of next year.

The company is funding this first facility with the support of its joint venture partner, Blackrock, which is investing $550 million to advance its construction. Occidental has also made significant progress in commercializing the project. For example, it recently agreed to sell 500,000 metric tons of carbon dioxide removal credits to Microsoft over six years. That was the largest-ever purchase of carbon credits for a DAC facility. Microsoft is one of several companies that has agreed to buy carbon credits supported by the project to help reduce their carbon footprint. These commercial agreements will enable Occidental and Blackrock to earn a return on their roughly $1.3 billion investment in this initial DAC facility.

The sale of carbon credits helps lay the groundwork to commercialize future DAC facilities like the South Texas DAC hub. Occidental can sell them to new and existing customers to generate income for that facility and offset its expected future investment. The company will also probably look for additional investment partners like Blackrock to help fund some of the development that the U.S. government isn't covering.

Accelerating its lower carbon ambitions

Occidental Petroleum is investing heavily in building a lower-carbon energy business by constructing DAC facilities. It already has one project under way and is working on a second facility that the U.S. government is helping accelerate by providing the company with funding for that project. These investments put the company in a strong position to capture the potentially massive carbon capture and storage opportunity. That business could be a significant growth driver for Occidental and create a lot of value for its investors in the coming decades.