Oil and gas producers eye lithium sector disruption with new investments

Deep-pocketed oil and gas companies could disrupt the lithium industry if they can turn their geology and processing expertise into efficient lithium production, analysts and observers told S&P Global Commodity Insights.

Oil giants such as Exxon Mobil Corp. surprised the mining industry this year when they snapped up more lithium assets and created strategic partnerships. While the scale of the lithium market will never rival oil and gas, booming demand due to the energy transition presents a unique opportunity for some oil and gas companies, experts said.

Companies may see lithium as a useful hedge against a changing energy mix. S&P Global Commodity Insights expects crude oil supply to peak in 2027 at just under 82 million barrels per day. The oil sector can afford to take risks with balance sheets that eclipse even the largest miners. Exxon Mobil, the fourth-ranked global oil and gas company according to Commodity Insights, had a market cap of about $443.66 billion as of Aug. 31, more than double that of BHP Group Ltd., the largest global miner.

"Exxon does this quite well. They pick like 10 investments and they put $100 million or $250 million into [each of them]," said Henry Lee, a Harvard Kennedy School professor who has advised oil and gas companies on their energy transition strategies. "That's a lot of money for most companies. But not for Exxon, it isn't. ... They are looking at several different paths, and they're looking at what's in their competitive advantage."

Oil and gas go lithium

Exxon Mobil reportedly acquired rights to lithium brine assets in Arkansas' Smackover Formation from Galvanic Energy LLC in an over $100 million deal. Exxon Mobil later partnered with Tetra Technologies Inc. on lithium assets at a separate site in Arkansas.

While Exxon Mobil remains more broadly focused on carbon capture, hydrogen and biofuels, or technologies and materials that are tied to consumable fuels as part of its energy transition strategy, the oil giant is also assessing the potential of lithium, Executive Chair and CEO Darren Woods said on a July 28 earnings call.

"I'd say we're still early in evaluating the opportunity," Woods said. "But we believe that by ... applying our advantages in this space, that we can bring on a much-needed resource, lithium, one that's predicted to go short ... at a much lower cost and, I think importantly, with much less environmental impact versus, say, the [open pit] mining that they're doing in other parts of the world."

Exxon Mobil declined to comment on their lithium strategy for this story.

Equinor ASA, Schlumberger Ltd. and Occidental Petroleum Corp. are among other companies looking at how to transfer their processing know-how to extracting lithium from brine, in some cases from waters at oil fields, before reinjecting it underground, according to media reports and industry sector players. In 2021, Equinor said it invested in Lithium de France SAS to investigate producing lithium from hot brines at geothermal energy sites. Likewise, Occidental partnered with All-American Lithium to explore lithium extraction from geothermal and other brines. These endeavors serve as a testbed for the oil companies to deploy lithium extraction processes more broadly.

"This means a double business opportunity to produce both heat and lithium from the same wells, with very low impact on the environment," Equinor said on Nov. 18, 2021.

Oil and gas companies recognize that the demand for metals such as lithium is growing, and extracting it can play to their strengths. It could help lower their costs at some fossil fuel operations in cleaning up water and provide another stream of cash as demand for fossil fuels wanes.

"Refiners and oil and gas producers have ample experience with ... removing specific components from water prior to it being discharged back into whatever body they came from or into municipal wastewater systems," Fellipe Balieiro, S&P Global Commodity Insights' director of energy and mobility research, said in an email. "Economics will drive the rate at which more producers chase this as a viable diversification strategy. But I suspect more will."

Disrupting mine development

The slow pace of building new mines also plays to the advantage of oil and gas producers, experts said. While lithium is relatively abundant and rich deposits abound, mines often take a decade or more to plan, permit, fund and build. Oil and gas producers might trim this timeline by tacking on lithium extraction at some existing operations, requiring far fewer regulatory approvals than a new mine.

"A lot of these brine resources are in oil and gas deposits ... or in the jurisdiction of oil and gas operations," said Simon Moores, CEO of London-based Benchmark Mineral Intelligence, noting oil and gas producers and investors have shown increasing appetite for lithium research projects. "There's a complete harmony there."

Experts said the potential to disrupt the lithium industry is huge as oil and gas companies might see lithium production as a mere byproduct at much larger oil and gas operations that generate far more profit. If oil companies make brine extraction more efficient, it could damage producers in Australia and Canada that pull lithium from spodumene, a hard rock deposit.

"If it works, it would really change the cost structure of the lithium sector," said Joe Mazumdar, a mining analyst and publisher of Exploration Insights. "I don't think anyone would be mining spodumene dykes anymore."

Lithium limits

Still, oil and gas producers are under no illusion that lithium and other battery metals stand to replace fossil fuels as a similarly rich revenue stream. To give a sense of the vastly smaller scale of the lithium sector, Albemarle Corp., the top-producing lithium miner according to S&P Global Market Intelligence data, had annual revenue of $7.32 billion and EBITDA of $3.48 billion in 2022. That same year, Saudi Arabian Oil Co., the top-ranked oil and gas company, according to Commodity Insights data, had revenues of $604.37 billion and EBITDA of $307.46 billion.

The likelihood of far-reaching disruption in the lithium industry is uncertain. Oil companies will need to make technological advances that will let them cheaply isolate and extract lithium in usable forms from many different brines, which can be tough to process. Lithium extraction may be highly brine dependent, experts say. It may work in some places but not others, limiting its spread.

"I don't really see it as a competition between resource types," said Alex Grant, a metals sector entrepreneur who co-founded Lilac Solutions Inc., a direct lithium extraction startup. "I think oil field brine [with] lithium, like the Smackover Formation [in Arkansas] will, in fact, likely contribute meaningful tens of thousands or hundreds of thousands of [metric tons] per year [of lithium carbonate equivalent] supply by the end of the decade," Grant said.

Even that amount of lithium from oil and gas companies would not necessarily flood the growing market. Lithium demand is set to grow from just over 700,000 metric tons of lithium carbonate equivalent in 2022 to 1.9 million metric tons in 2027, according to a Market Intelligence analysis.

Experts also said they doubt oil and gas producers will dig much deeper into the broader mining sector beyond using their know-how to extract lithium from brines. Competition among miners is already fierce, and oil and gas companies lack expertise in building and running mines. Further, changing battery chemistries make it difficult to securely bet on what metals will be needed most in the decades to come.

"It is much harder to make a profit on it," Lee said of oil producers breaking into the broader mining sector. "And your return is not going to be like oil and gas."