Corporate venture capital (CVC) groups at major oil companies are vital to the oil and gas start-up ecosystem. They have an equity stake in about half of all oil and gas start-ups that have raised funding. However, oil companies have also committed hundreds of millions of dollars to petroleum substitutes like biofuels, solar, and wind. Among the top eight CVCs’ investments in unique start-ups since 2005, they have publicly announced investments in 153 unique start-ups, 37% of start-ups are focused on oil and gas substitutes, with BP and Total leading the effort. However, there is more to the story than the high level numbers.
After a brief period of experimentation, oil majors have shifted their focus from renewable power and alternative feedstocks to focus back on oil and gas. While the number of deals has remained relatively consistent, averaging 22 transactions per year, the share of renewable power and alternative feedstocks deals has dramatically decreased, from 79% in 2010 to just 16% in 2015. Unlike traditional venture capital firms focused purely on financial results, CVCs theoretically aim to invest in technology that add value in their operations. Given oil majors did not have major businesses dedicated to renewable power or alternative feedstocks, their operations did not benefit from these investments. Similarly, CVCs could not add value beyond their cash (i.e. field trials, technical expertise, industry knowledge, etc.) to the start-ups they invested in, which is counter to the true value of a strategic investor. Little surprise, therefore, to see the oil and gas CVCs progressively retrench back to their core. With the exception of Statoil, most oil majors have plans to exit the alternative feedstock and renewable power generation space to focus on technologies more closely aligned with their core business. Oil and gas technology start-ups accounted for 84% of investments in 2015, up from 21% in 2010. That said, while the new investment strategy might be financially beneficial in the short term, it may leave oil majors vulnerable in the long term.
Among the top eight CVC groups, Chevron and Shell have the strongest track record of success. Chevron has been the most prolific oil and gas CVC group, with 43 companies in its portfolio, but with a series of major exits. Shell has a strong track record of success with oil and gas start-ups, having sold eight of its portfolio companies to major oilfield services providers since 2005. As an additional twist, Chevron’s two most notable exits, IronPort Systems and BlueArc, were information technology companies. IronPort, which was acquired by Cisco for $830 million, had developed a security system to protect critical networks, like oil and gas, from internet threats. BlueArc provided high performance network storage systems before it was bought by Hitachi for $687 million. Though both are applicable to Chevron’s operations, they were not incubated in the oil and gas industry. Meanwhile, the two most promising companies in Shell’s portfolio – GlassPoint and GEODynamics – are applying technologies developed in the solar and defense industries, respectively. The companies are generating over $100 million in revenues annually. This should lead potential investors to take a similar tack and find promising companies, without an oil and gas investor, attempting to bring outside technologies into oil and gas. Among companies that stand out to us are Biota, developing microbial DNA sequencing technology for hydraulic fracturing and waterflooding applications; Aqdot, commercializing copper salt based antimicrobials and corrosion inhibitors; and MicroSilicon, developing miniaturized electron Paramagnetic Resonance (EPR) sensors.
For active CVCs in the space, including the recently highly active Saudi Aramco, as well as the conspicuously absent ExxonMobil, there are plenty of opportunities to chase even in a low cost oil environment.
By: Daniel Choi