Oil, Renewables, and Rates of Return: What The Texas Oil Boom Means for Technology Investors and High-Tech Companies Q&A with Ed Hirs and Walter Schindler

In the previous Transformation blog, we spoke with Energy Economist and Managing Director Ed Hirs about the Texas Oil Boom. Part two of this discussion explores the demand of new technologies during this time, where the Majors fit in, and what all of this means for energy and tech investors. Included in this discussion is Chairman and CEO of Transformation LLC, Walter Schindler.

Ed is an internationally recognized expert and economist in all forms of energy, BDO Fellow for Natural Resources, Energy Fellow at the University of Houston, and Managing Director of Hillhouse Resources LLC, an independent E&P company.  (See Ed’s full bio below.)

Walter is a lawyer, investor, and thought leader in energy investing. After a 19 year legal career at international law firm Gibson Dunn & Crutcher, Walter founded SAIL Capital, one of the first VC firms focused on renewable energy and clean technology. He now serves as a legal and strategic advisor to global family offices and corporations.  (See Walter’s full bio below.)

With regard to the Texas Oil Boom, pipeline capacity in the Permian Basin is in rising demand. What are some of the other obstacles at this time for exporting the large amounts of oil being produced in a timely manner?

Ed:

This is what happens when a new area becomes developed - there is a need for additional take-away capacity. We saw this occur, for example, in the Rockies in 2006-2007 where the price of natural gas fell to one penny per mcf simply because there was no take-away capacity.

A second example would be in the northeast in the Marcellus shale where the ample supply of natural gas with few market outlets has led to a significant price discount versus the natural gas price along the Gulf Coast where well-developed consumer markets are located. The Atlantic Pipeline that would take natural gas up to New England will help the producers achieve a little higher price. If not, then Boston will continue to suffer very high natural gas prices.  

This past winter, Boston consumers paid $14 per mcf over the winter because they had to buy natural gas via LNG that was shipped into Boston harbor while the price of natural gas in the Marcellus rarely rose above $3 per mcf.

Now in the Permian, the amount of oil and gas production has far outstripped the takeaway capacity - this will be solved over time. The marginal barrel is taken out of Permian by truck. There is crude by rail which takes oil away at a little better price.  The least expensive method of transport is by pipeline and several companies are building pipelines to take oil to consumer markets in Corpus Christi or Houston.

Keep in mind the US remains a net importing of crude oil, and simply exporting crude means we’re just trading barrels with our trading partners.

Which tech investments do you think deserve more time and capital? What are their biggest challenges?

In the Permian Basin I know companies that are enhancing recovery with the application of different chemicals through the completions processes. One is a Biosafe chemical applied in wellbores that, depending on the geochemistry of the specific formation, seems to increase production by 10%, 20%, or 30%, which drives the cost per barrel down tremendously.

One of the great challenges in the world market of 100M barrels a day of supply and demand at about $70 per barrel (plus or minus) is the access to markets and the ability to control price.  Most of the producers around the globe rely upon crude oil to fund their national budgets and agendas. Here in the US, it’s simply another industry. And because of our property rights and ability to explore, the private companies and individuals are well positioned to develop mineral leases on private, state, and federal lands.

We have a very different market configuration than, for example, France, where the resource below the surface is owned by the state. Even though France has tremendous natural gas reserves in shale formations, France’s political economy and the legislature will not allow it to be developed.

As an industry expert based in Houston, is this an exciting time for you?

Houston is the center of hydrocarbon exploration; so whenever there is a boom, Houston expands, but whenever there is a bust, everyone still focuses on and huddles around Houston. This is where energy technological leadership resides, and we are at the center of capital deployment.   Energy leadership converges on Houston.

Walter, as the Chairman and CEO of Transformation, what are your thoughts on Ed’s remarks?

Walter Schindler:

Ed’s remarks on energy and technology fit strategically with our thesis in Transformation: the convergence of Energy and Technology is the most important trend of our time.

Ed Hirs:

On that note, Walter, I’d like to point out that one of the great challenges of technological development in the oil patch is the one that’s faced in many industries:  the rate of technology adoption in the oil patch is sometimes slow in high-price environments.

When the price of crude is high and the price of natural gas is high, everyone in the business is brilliant but reluctant to diverge from tried-and-true methods.  But when prices are low, there is an explosion of startups. Now, coming out of that downturn, we’re beginning to see some of the fruits of those labors, and potentially we’ll see more cost improvements as new technologies are applied to the oil patch.

Walter:

What is your assessment of the top oil majors in terms of commitment to technology as applied to energy?

The commitment of the oil majors to technology is the greatest it has ever been.

Ed:

The oil majors are in a tremendous position - they have the opportunity to develop the lowest cost reserves and they also have the ability to see which way their markets are going and adjust to that, much more so than small individual oil and gas companies or small individual solar or wind companies.

The oil majors view themselves as energy companies and not just as oil companies.  Shell invested more than $600 million in bringing solar in-house this year. Shell has also had a large wind portfolio, and Exxon is focused on developing alternative fuels.

The challenge for investors in the new renewable energy environment is that technology is changing at such a pace, the capital deployed really doesn't earn a significant rate of return for the shareholders in the near term. But the major energy companies take the long view and are looking ahead to the time when we will move away from fossil fuels. For the moment, the rates of return are just not there.

Walter:

Exactly. So anyone who is investing beyond the current state of technology is looking at a 20 year time horizon, not a 5 year horizon.

Ed:

The major oil companies are looking at 5-20 years, and while we will make progress, we’re not going to transition away from hydrocarbons in the next 20 years.

Ed Hirs Bio

I am BDO Fellow for Natural Resources and a UH Energy Fellow at the University of Houston, where I teach energy economics for all types of energy—critical, data driven, and apolitical analysis of energy markets and policy decisions—to undergraduate and graduate students. I am a Managing Director for Hillhouse Resources LLC, an independent E&P company developing onshore conventional oil and gas discoveries; I previously served as chief financial officer for an early leader in the Niobrara shale play. I have worked as an investment banker and co-founded an independent power producer. Early in my career, I worked in the Department of Energy’s Office of Conservation and Solar Energy, where we convened DOE’s first national conference on energy conservation and alternative energy. I also chair an energy conference at Yale University where we consider the developing energy markets, investments, and new technologies.

Walter Schindler Bio

I am the Chairman and CEO of Transformation, LLC a strategic advisory firm for energy and technology companies. I founded SAIL Capital Partners, a leading venture capital firm for cleantech and sustainable innovations. SAIL was selected as a member of the World Economic Forum’s “Community of Global Growth Companies” and hand-picked by the U.S. Department of Commerce to co-lead the first U.S. Trade Mission on Clean Energy to Munich, Germany alongside Deutche Bank. Out of Harvard Law, I began my 19 year career at international law firm, Gibson, Dunn & Crutcher where I became partner at the Orange County, CA office and played a key role in the firm’s expansion into the Middle East, Asia, and Europe and was a lead strategic advisor to over 60 successful mergers, acquisitions and IPO’s, and over 25 renewable energy projects.

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