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14/12/2005. Source:Scottish Equity Partners. David Sneddon
Escalating global demand is switching private equity investors on to breakthrough energy technology, says Scottish Equity Partners. The growing energy-related technology sector of the venture capital market is one with considerable potential. “World energy demand is projected to grow by 50% by 2025 and $4.6 trillion was spent on energy production this decade, which lends some weight to the claims that energy is the new biotech,” says David Sneddon, Director of SEP’s Energy-related Technology group.
Soaring world energy demand is driving rapid growth in the sector and the SEP definition of energy-related technology has broadened from oilfield technology to encompass alternative and renewable energy as well as enhancements to traditional generation technology.
The scale of the energy industry is evident from the $4.6 trillion that was spent on energy production in the last decade. Oil demand continues to grow on a daily basis, while supply from existing oil and gas fields is declining rather than growing.
Prosperity and globalisation is the overarching driver. The USA alone adds 16-18 million cars per annum. Energy consumption in emerging countries such as China and India is set to explode. But while energy demand surges to higher and higher levels, industry experts warn that global oil supply may peak as early as 2007.
According to new research from the Oil Depletion Analysis Centre (ODAC), some 18 major oil producing nations and 32 smaller ones, accounting for 29% of world production, have already entered production declines. Matt Simmons, chairman of specialist energy investment bank Simmons & Co and energy adviser to President Bush, also contends that the true picture of remaining global energy reserves has been overestimated for years as Saudi Arabia, which is said to account for 25% of global reserves, is thought to have overstated its remaining reserves.
He argues in his new book “Twilight In The Desert: The Coming Saudi Oil Shock And The World Economy” that in the 1980s, Middle East reserves jumped by some 43% in three years, despite there being no major new finds. A lack of new big finds is an industry-wide problem, confirms Michel Benezit, vice-president, Northern Europe for Total. Benezit says that between 2003 and 2004 there was almost no growth in reserves by the majors.
Simmons’ claims are refuted by Saudi Aramco, although the company’s vice-president for exploration Mahmoud Abdul-Baqi acknowledges a global push is needed to meet future demand levels. He argues that if the industry is to meet world demand in 2020 it needs to add another 22 million barrels of oil per day. He adds: “The challenges are phenomenal. The main one is to commit new capital investment.”
As the pressure to find new sources of energy grows, renewable energy sources are coming under increasingly intense scrutiny as a serious alternative - in particular wind and solar energy. John Constable, chief economist with ExxonMobil, anticipates a rise in renewable energy output, particularly wind and solar energy, which he says will grow at a rate of about 10% from 2003 to 2030, driven by subsidies and related mandates. However, he predicts that renewable energy output will still only account for a small percentage of total energy supply for the foreseeable future, with oil and gas remaining the primary sources of energy.
With no easy new energy sources to tap into, the onus is on oil and gas producers to maximise the productive life of mature oil basins and to come up with smarter and more cost-effective ways of finding replacement reserves. Technological innovation is seen as the key to achieving that, making energy-related technology investment one of the fastest-growing areas of venture capital.
As David Sneddon says: “There’s lots to go for in terms of hydrocarbon exploration and production but there is a real need for enhanced technology to find reserves and improve recovery factors. With the price of oil at over $60 a barrel, the stakes are extremely high in this sector. There are huge opportunities for companies targeting the energy market and we are seeing some very exciting investment prospects in this area.”
Leading players such as Shell and BP concur that advances in technology are happening fast. Tom Botts, Executive Vice-President for Europe for Shell says that major projects being developed by the oil giant today would previously have been technically impossible. One fundamental example of this is in offshore drilling which, in its earliest days, took place in water depths of less than 50 feet whereas now rigs can drill in over 10,000 feet of water, vastly improving recovery factors.
Intelligent drilling techniques and detailed well data are vital for companies seeking to reduce time delays and avoid the costs associated with drilling dry wells. Up-and-coming independent exploration companies such as Canada based Talisman Energy have demonstrated that smart technology can extend productivity by decades. The company says the Buchan field in the North Sea was originally forecast to cease production in 2003 but Talisman has extended the field’s life at least to 2020.
Another company prepared to trial and adopt new technology is Edinburgh-headquartered Cairn Energy, led by chief executive Bill Gammell, which has had a string of major finds in India and has earned a strong reputation for its exploration skills. Cairn is at the forefront of oil companies taking part in international demonstration projects with MTEM, an SEP portfolio company which has pioneered the use of electro-magnetic technology to accurately pinpoint hydrocarbon reserves. MTEM’s technology has been hailed as representing a game-changing standard for global oil exploration which could radically reduce drilling risks and save the industry billions of dollars.
MTEM is among a number of promising companies within SEP’s energy-related portfolio, says David Sneddon, with a range of diverse approaches to tackling the evolving needs of the energy sector, from hydrocarbon detection through to finding ways to reduce energy consumption or improve reliability of supply.
These include ARKeX, which is building the world’s highest resolution exploration gravity gradiometer (the EGG), which uses minute variations in the earth’s gravitational field to provide high resolution data which can be used to assist in the detection of oil, gas and mineral deposits.
Another recent energy-related technology investment for SEP is Atraverda, a company which has made a major breakthrough enabling the production of innovative lead acid battery plates with improved performance and longer life. Although all of these companies have enormous potential, as early stage businesses they are also faced with the difficult challenge of selling into customers which are global giants.
MTEM chairman Bruce Dingwall, founder and former chief executive of Venture Production, one of a new breed of successful independent exploration and production companies to have emerged in the last five years, says it can be hard for small companies to achieve global adoption of their technology as they compete with giants like oil services company Halliburton which has 109 bases around the world.
Dingwall says initially it can be easier to work with smaller oil companies as they can get direct access to the company’s principal officers. But he says, reduced expenditure on research and development by oil majors, dating back to the oil price slump of 1986, means that oil majors and international services companies are always on the lookout for breakthrough technologies by smaller firms, so the opportunities to sell to big customers are there.
“Sometimes it takes an external company to see the value of a new idea, or think of new ways for simple principles to be applied,” he says. “Look at the revolution of horizontal well drilling - a simple idea yet people only started talking about it for the first time 10 to 15 years ago. In MTEM’s case, their technology is based on detecting resistivity. People have been using resistivity for decades yet here for the first time we have a really intelligent oilfield application which has come from hardrock technology,” he adds.
David Sneddon of SEP says that, as well as seeing a growing number of technology businesses targeting the oil and gas sectors of the energy market, SEP sees lots of opportunities for investment in renewable energy technologies too: “Although renewable energy sources are not going to be an overnight answer to meeting global energy demand, we definitely see it as a coming area. Our strategy in the sector is to invest in and support the development of enabling technologies, not to provide project finance for windfarms.”
Renewed awareness of the effects of global warming on weather patterns, rising demands for a reduction in carbon dioxide
emissions, and a push for greater energy efficiency and reliability of supply, have intensified interest in renewable energy as a longer term option. The result, say energy investment experts, is an upsurge of interest in the area from venture capital and private equity funds. Simmons & Co says alternative energy is gradually making a transition from being “an interesting theoretical possibility to more of an economic reality.” Political action is acting as a spur, from the Kyoto Protocol to action by individual governments from Washington to Canberra and Beijing on directives concerning clean energy or energy-saving measures. And on a corporate level, innovations such as Toyota’s hybrid-electric car Prius also bear witness to a growing emphasis on environmentally-friendly goods.
The stage seems set for an increase in investment in this area. Michael Liebreich, chief executive of specialist publication New Energy Finance, says historically the venture capital world has had a stormy relationship with energy technology, with waves of investment interest rising with high oil prices. However, the past four years have seen a remarkable increase of funds flowing into the sector.
Analysing 201 venture and private equity investment rounds in new and renewable energy technology companies globally between 2001 and 2004, Liebreich estimates a total investment of around $2.2billion across sectors such as wind, marine, solar, geothermal, biomass and biofuels, fuel cells and hydrogen, and small-scale hydro. “One area that is attracting a lot of investor interest in particular is the “intelligent grid”, which concerns software and hardware solutions to allow the integration of functions of power supply and demand,” says Liebreich, adding that biofuels are generating a lot of interest too, while solar energy is also a fast-developing investment sector, partly driven by tariffs in Germany and Spain.
As well as helping to develop new energy sources, technology is also being applied to energy conservation. Following the recent catastrophe caused by Hurricane Katrina in the United States, the debate on conserving energy has moved significantly higher up political, economic and environmental agendas, creating opportunities for companies like Cambridge Semiconductor, another SEP portfolio company. CamSemi is a fabless semiconductor company targeting the power integrated circuit (IC) market. As well as being used in computers, CamSemi’s chips can also be used in designs for environmentally friendly low-energy fluorescent lamps.
“We see energy-related technology investment opportunities in a variety of areas,” says David Sneddon. “You may not think of a semiconductor specialist as being in the renewable energy sector, but their technology enables power to be conserved, making it a critical part of the wider renewable energy and energy-efficiency equation.”
Efforts like these have helped the world to slowly become more energy-efficient, achieving a rate of decline in energy usage intensity of 0.8% per year since 1970, according to ExxonMobil. This rate is expected to accelerate to about 1.3% in the decade approaching 2030, partly as a result of anticipated improvements in personal transportation and power generation.
However, the world’s population is set to hit eight billion people by then, all needing energy for heat, light, and transport as well as to power factories across the globe. The challenge presented by that one statistic alone illustrates why there is a raft of opportunities for innovative technology companies offering solutions as to how to find cheaper energy, cut emissions or reduce bills. Sneddon says SEP is determined to play a part in identifying and nurturing star future players.
“We’re an experienced investor in the energy sector and we’re already working with a number of leading-edge players with potential to become major successes. We remain keen to identify fresh opportunities,” he concludes.
David Sneddon
Director of Energy Related Technologies, SEP.
Scottish Equity Partners (SEP) is one of the largest independent private equity groups in the UK, and is currently investing from a venture capital fund in excess of £100 million, which is backed by leading UK and European institutional investors.
With offices in Glasgow and London, SEP is one of the most active venture capital investors in the UK and has a strong investment track record. Typically, we invest between £500,000 and £5 million or more, in financings of up to £30 million, in early stage and growing companies in the information technology, healthcare & life sciences and energy related technology sectors. For more details visit www.sep.co.uk
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