The venture community in energy and cleantech took a major hit in 2012 with poor short-term performance causing venture capitalists to reassess their investment thesis and capital allocations in 2013. This realignment/retraction has been driven primarily by outsized time horizons, infrastructure-like capital investments, and risk tolerance to yield strong returns for limited partners. Some of the key indicators that reflect the changing landscape in the energy technology ecosystem were recently highlighted in Cleantech MoneyTree™ Annual Cleantech Report and the Preqin Special Report on Cleantech:
While it may be too early to diagnose the success of the industry, it’s clear that a different approach and mindset on capital intensity and time horizons will be required. Of the pool of investors in the ecosystem that are accustomed to this mindset, corporations have become the likely and required candidate to fill the void in capital, deployment and liquidity. Among the broad landscape of industries, major oil and gas companies have been deploying increased capital in external and internal innovation, understanding the need to continually adopt new technology. The impetus has been driven by major technological, environmental and operational challenges the sector faces in Canada and around the world.
The past year has been a transformational—yet, rollercoaster—year for oil and gas, especially for capital intensive oil sands producers, for the following reasons:
Producers will therefore be continually pressured to challenge the status-quo and think outside the box in understanding how to more effectively prospect, extract, refine and transport oil to existing and new markets. Internal research & development, industry collaboration, and external innovation through corporate venturing are several options that producers will assess in the attempt to solve these challenges.
In 2012, oil producers helped the province of Alberta outpace the national average in research & development spending with a total spend of $825 million, a year-over-year 33.4% increase (national average was 6.1%). The province’s leading performers were Cenovus Energy (placed 11th nationally for total R&D spending), followed by Imperial Oil (14th), Syncrude (26th), Suncor (31st), EnCana (50th), Trican Well Services (54th), Total E&P Canada (59th), and Nexen (62nd). In total, oil and gas companies in Canada spent approximately $1 billion in 2012, which equates to about 0.5% of revenue compared to the national average of 1.8%.
In 2012, twelve major producers officially signed the charter for the newly formed Canada’s Oil Sands Innovation Alliance (COSIA). COSIA is an alliance of producers focused on accelerating the pace of environmental performance in Canada’s oil sands through collaborative action and innovation. There are now 14 member companies committed to capturing, developing and sharing the most innovative approaches to improve environmental performance in four key areas: tailings, water, land, and greenhouse gases. While companies remain competitors in all respects, they recognize that together, they can deliver accelerated improvement in environmental performance. Members of COSIA are committed to providing leadership and accountability within individual companies and the broader alliance. To ensure that all companies contribute equally to COSIA’s goals, each company has allocated multi-year resources (financially and through dedicated time) and will initiate, participate in or lead projects within COSIA’s mandate.
In the past several years, the investment community has witnessed a resurgence of corporate venturing in the oil and gas space; however its roots can be tied back to the late 1970s when Exxon Enterprises, an affiliate of Exxon Corporation, was created. Between 1970 and 1980, the company invested in 37 new technology ventures – 18 venture capital and 19 internal investments in unfamiliar markets relative to Exxon’s core business, including healthcare, information systems, and air pollution control. Although the program was eventually shutdown in 1981, it provided a strong foundation of learnings for new entrants who would introduce similar initiatives years later.
Fast forward to 2013 and Exxon appears to be one of the few oil and gas majors without a public-facing corporate venture fund. Some of the dominant and active players now include: Chevron Technology Ventures, BP Ventures, General Electric, Total Energy Ventures, ConocoPhillips, Enbridge, EnCana, Cenovus, Repsol New Energy Ventures, Schlumberger, and Statoil Technology Invest AS. Additionally, in the past year, two new dominant forces have entered the market. Saudi Aramco Energy Venture, a subsidiary of Saudi Arabia’s national oil company, announced a mega-fund in July 2012. And in April 2013, Shell Royal Dutch officially announced their intent to invest several hundred million dollars over the next six to eight years through Shell Technology Ventures.
With corporations representing upwards of 20% participation in all energy technology deals in 2012, as reported by Cleantech Group, we might ask: where are these dollars being deployed? Highlighted below are some notable recent investments with corporate participation, categorized into four buckets:
Much like the Internet bubble in 2001, energy venture capital will continue to evolve in light of over a decade of experience. The one thing that is clear in the minds of all investors and entrepreneurs is this: Corporations will be the key to ensure early-stage companies have the fuel to reach the finish line.
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