Venture-capital-backed investment has precipitated major advancements in oil and gas over the years and has been a major factor in the current shale revolution.
The deepwater sector is currently passing through a transitional period, with forecasts of a potentially bright, but unknowable, future following a period of low oil prices and strained exploration and production cash flows. That may be an ideal place for venture capital to play an outsized role in fostering the growth of the ideas and concepts that birth the reliable technologies operators need to succeed.
“For innovation, that is the best time to invest,” Kemal Anbarci, vice president and managing executive of Chevron Technology Ventures, said. “In the oil and gas industry, when times are tough, that’s when the breakthroughs happen. When you look at the decline, or at a troubled time, you start to see the innovations come in and they can make an impact. For deep water, you have companies working to make that happen.”
A panel session during the 2019 Offshore Technology Conference (OTC) looked at the role of venture capital in advancing technologies for energy companies. Digitization came up early in the session as an area the panelists thought was ripe for future investment, but the subject engendered somewhat cautious responses. Anbarci said that digitization enables further understanding of physical systems, but companies still need the physical equipment to deliver results.
Ram Shenoy, chairman of WellDiver, echoed a similar sentiment. [WellDiver develops materials science processes to deliver improved oilfield technologies.] He said the digitization trend has made it “tempting” for companies to look at digitizing their existing processes instead of thinking about how digital technologies reconfigure their operations. On the other hand, Shenoy said the industry has “tremendous capability” for the general improvement of offshore infrastructure. Companies that can improve operational efficiencies in any way are valuable in that respect.
“Generally, when I look at my activities with smaller companies, one area I look at is materials science, one area is around machine learning, and the other one—which I think the oil and gas industry has a lot to learn from—is just basic operations and logistics. I think the whole industry really could learn a lot from a company like Amazon, on how they manage the cash flow through their supply chain compared to how they manage their own operations,” Shenoy said.
Greg Powers, the former chief technology officer at Halliburton who now serves as the company’s vice president of global innovation, cited investment in machine learning as an opportunity for energy companies to become more efficient because it may enable greater automation of operations, minimizing the high variability in human labor. This may ultimately help companies better model and predict the behaviors of their entire operational systems.
James Sledzik, managing director of Saudi Aramco Energy Ventures, said machine learning and artificial intelligence appeal to investors because they are not capital-intensive sectors.
“Ultimately, you go after whatever opportunities offer the best return. When you think about offshore, it’s capital-intensive, so investors are more inclined to go outside of that area. If something’s capital-light, it can return more capital than what you put in quicker. By definition, that’s an area all of us are focusing on because it can bring more bang for your buck than these capital-heavy opportunities.”
The cross-pollination of technologies across industry is key to venture capital investment, as energy companies are increasingly looking outside of energy circles to find new ideas. The panelists spoke generally about how this cross-pollination can help bridge the gaps between the industry’s digitization goals and the limitations in the hardware currently being used in the oil field. However, Powers said getting buy-in on both sides—from inside and outside the industry—can be difficult.
“When you’re going outside oil and gas, you have to sell on the outside,” Powers said. “We jotted out into the Boston ecosystem, the San Francisco ecosystem, talking to companies that have no idea what we do. It’s a little harder sell, because you’re asking a three- or four-person company to divert their attention from an idea they have to something that may be valuable to me that they might not understand. I’m going to have to do a really good job convincing people of how valuable this is, how important it is to society, and why they should work in it.”
The session also delved into the role of the startup company in the venture-capital world, and what makes an ideal relationship between them and their investors. Anbarci said that startups make good partners because of their higher risk tolerance, which makes them liable to push more innovative ideas. Operators like Chevron, then, are more likely to seek risk-takers willing to “go forward” and “seize the ground.”
“I don’t think the larger companies have the risk tolerance to be able to do some of these technologies, so the value of the startup to be able to do these things is tremendous. If you’re a project manager, you play not to drop the ball. Every project you have should be successful. In a startup, a lot of companies fail. You play to win as much as possible, but if it dies early on, it’s going to die a natural death,” Anbarci said.
While energy companies may have a more conservative outlook than a startup, and are more driven to deliver consistent financial returns, Sledzik said their ability to take in their investments on a macro scale is valuable in venture capital.
“We’re trying to extend the value of the hydrocarbons,” Sledzik said. “Venture capital is something that tends to think a little longer term. I’m thinking about 2027 because the exit for the companies that we’re investing in today may come after 2027. We have to have that mental model of what the world is going to look like in 2027, 2028, 2029, because that may be when the exit is.”