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U.S. oil goliath ExxonMobil (NYSE: XOM) announced on Monday its plans to become a leading producer of lithium, a key component of the lithium-ion batteries that power electric vehicles (EVs).

Exxon’s Arkansas lithium project

Exxon’s entrance into the lithium production space isn’t a surprise. In early 2023, the company acquired the rights to 120,000 gross acres of the Smackover Formation in southern Arkansas, which is considered to contain one of the largest lithium-rich brine (salty water) deposits in North America.

The company has begun drilling in the first phase of its Arkansas project, it said in Monday’s press release. Exxon is leveraging its deep experience in its core business, as it’s using conventional oil and gas drilling methods to access the lithium-rich brine from reservoirs about 10,000 feet underground.

The company will use direct lithium extraction (DLE) technology to separate the lithium from the brine, with the remaining salt water reinjected into the underground reservoirs. This method is faster and has a smaller footprint than the traditional method of using huge above-ground evaporation ponds to let the water naturally evaporate. The lithium will then be converted onsite to a battery-grade compound. While the company didn’t specify the compound, it has to be either lithium carbonate or lithium hydroxide.

Exxon is targeting its first lithium production in 2027. And by 2030, the company has set its sights on producing enough lithium to manufacture “well over a million EVs per year.” It’s in discussions with potential customers, including EV and battery manufacturers.

The Inflation Reduction Act has spurred a lithium rush in the United States

There’s currently just one operating U.S. lithium mine, which produces an estimated less than 2% of the world’s total lithium. This is a brine mine in Silver Peak, Nevada, which is owned and operated by North Carolina-based Albemarle. Lithium brine mining is heavily concentrated in Chile and Argentina, while Australia and China are the big players in lithium hard-rock mining and processing.

Lithium prices soared over the past few years, hitting an all-time high in late 2022. They have since pulled back considerably. Nonetheless, this surge in lithium prices, combined with EV adoption that’s been faster than most experts had originally expected, spurred a “lithium rush” across the globe that’s continuing.

The Biden administration’s Inflation Reduction Act (IRA), signed into law last year, lit a fire under the development of a lithium-ion battery supply chain in the U.S. and with approved trading partners. For buyers who meet its income limits, the IRA provides a federal tax credit for the purchase of an electric vehicle or other clean energy vehicle with a price tag under certain limits and that is assembled in the U.S. For buyers who took possession of such a vehicle starting on April 18, 2023, the IRA added new qualifying requirements pertaining to the country of origin of critical minerals and battery components.

While the IRA is the biggest catalyst for the North American lithium rush, it’s not the only one. The COVID-19 pandemic demonstrated the vulnerabilities of U.S. companies that had supply chains that were dependent on overseas suppliers.

What does Exxon’s entrance into the lithium production sphere mean for the industry?

Increasing the supply of any commodity tends to drive down its price. So, if Exxon succeeds in becoming a major producer of lithium, it’s likely that the lithium that it produces will exert downward pressure on the price of lithium.

That said, demand for lithium should remain voracious for decades to fuel the electrification of the world’s auto fleet and the likely electrification of other forms of transportation. Indeed, demand for lithium is expected to quadruple by 2030, according to Exxon and other sources. Given this expected soaring demand and the fact that it takes a long time for new lithium sources to come online, it seems to me that the lithium glut some market watchers are predicting is an overly pessimistic view.

There is one thing that seems like a good bet: continued consolidation in the lithium production and processing space. The entrance of deep-pocketed Exxon has the potential to increase merger and acquisition (M&A) activity. Exxon could be on the hunt for acquisitions to accelerate its timeline for becoming a major lithium producer. Conversely, its entrance could spur other lithium producers to engage in M&A activity in order to become bigger.

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