Houston’s Race for the Sun

Over the next three years, Houston has a once in a lifetime opportunity to firmly establish itself as the “New Energy” Capital of the World. Houston and the oil & gas industry that built it is possibly headed to repeat the same mistakes of its predecessors. There are two outcomes for this great city and the industry that built it:

1. Houston focuses exclusively on providing oil & gas to the world ignoring the growing renewable industry.
2. Houston reinvents itself and leads in both thought and deed of the sustainable production and consumption of all energy sources.

I believe the answer will come down to two questions. What is our core purpose and what are our core values. A core purpose is our reason for being and is unchangable. Core values are beliefs that we hold as sacred and do not change. Is Houston’s core purpose to lead in the exploration and production of oil & gas or to lead in the sustainable production and consumption of energy overall? Do we have the core values (beliefs) that will allow us to lead in building out and managing the new and clean energy world or should we allow someone else to do it?  Market forces, regulation and politics, and social factors all contribute to the environment that dictates how oil and gas responds as a commodity, but these factors do not dictate this city’s unchangeable core purpose nor core values.

And the battle is not over electrons, but rather over people! An estimated 71% of the energy workforce is 50 years old or older, and the American Petroleum Institute says that as many as 50% of skilled energy workers may retire in the next five to seven years. This event is commonly referred to as the “Great Crew Change.” The most important and longest lead time input and key leading indicator to growth of the oil and gas industry is people. Baby boomers are retiring faster than the oil companies can hire the millennial replacements whom do NOT have the necessary experience (that is why we invested in Expert Knowledge). Gen X’ers didn’t go into the oil business because when we went to college, oil prices were low, our parents told us to avoid it, no one was hiring, and the technology world was booming.

The oil and utility industries are already challenged to recruit and hire the best. The new talent pool coming out of the top universities would rather solve an iPhone app problem or go work for an inspirational millennial like themselves. ExxonMobil just finished spending their cash flow on building a giant millennial focused campus just north of Houston. It is cool, very cool, but this is not solving their new problem of recruiting the best and the brightest. Millennials would rather work in Midtown and join a startup. With $30 oil prices, the problem is only becoming worse.

More specifically, the direction that Houston takes falls onto the shoulders of the future generation and this city is not like Silicon Valley. Our culture, core values, and core purpose have been guided and controlled by baby boomers. Will baby boomers step aside and support the new generation? Will millennials come to Houston, step up and lead?

For background, what is the total addressable market for renewable and clean technology overall? Regardless of its accuracy, I have provided the latest forecast of energy consumption from the EIA. Do we see this chart as a reason to keep our heads in the sand or are we frustrated that the needle is not moving fast enough? If Baby Boomers are the past and millennials are the future, what is going to happen when the top talented kids starting their careers would rather work in Cleantech than Oil & Gas? Do you see a problem?

(NOTE: this chart assumes that long-term natural gas prices will rise, high capital costs for new coal and nuclear generation will limit growth, an improved efficiency of energy consumption (a huge wild card), and reflects current energy policies and final regulations (which means that any new tax credits or clean power rules are not embedded)).

The second set of data that is important to contemplate is the actual consumption of different fuel sources by sector to give us insight into the energy landscape in 2040. Besides the obvious difference in data (the previous chart shows that renewables will be 10% in 2040 to 12% here), Houston can either participate solely in the declining market share of oil & gas or be part of the industry’s future.

(NOTE: The third bar graph represents residential and commercial.)

At a high level, renewables are attacking its traditional fuel sources across the entire value chain. I will start writing more about the key areas being attacked by startups. I have learned from the cable and telecommunications industries that it is too early to accurately forecast the impact of Cleantech to these charts (think about how analysts tried to forecast the impact of mobile data prior to the iphone).

We launched SURGE in 2011 believing that there was never a better time for entrepreneurs to solve the world’s energy problems and I explained our thesis in my last post and why Houston was the best place to locate. After 5 years of building this ecosystem, I believe this is the best place to locate the New & Clean Energy Industry while also working with entrepreneurs that are bringing innovative technologies to oil & gas and utilities in order to reduce the massive inefficiencies in an amazingly complex industry (and this alone will have a dramatic impact to emissions and the environment).

I look at SURGE as an experiment and case study on Houston. Our successes are built upon the backs of entrepreneurs and the brave executives at the oil & gas and utilities that share in our purpose and values…(and most of them are millennials). There is an ideological shift happening and the city must make a choice.

Scenario 1: Houston becomes an asterisk in the history books. Houston is the “Oil and Gas Capital” of the world just as Nantucket was the “Whale Oil Capital.” Unfortunately, Houston may be headed for the same destiny.  The original “Energy Capital of the World” is an island 30 miles off of the coast of Cape Cod known as Nantucket. This island served as the hometown of the famous whaling ships and candle factories for 100 years (1750 – 1850) that provided light to the rest of the world. Those of us that read Moby Dick, learned that the journey to find, kill, extract spermaceti, and make it back home alive from a whaling hunt was dangerous if not suicidal. When you visit Nantucket, you will see the widow’s walks on top of many of the houses as loved ones waited a year or more for the return of these roughnecks from the oil patch.

The island became the center of the energy world because of its strategic location and its expertise: exploration, production, transportation, refining. After a 100 year domination, Nantucket became a ghost town while the new energy age of petroleum was kicking off in Pennsylvania. There were many substitutes to Whale Oil in the mid 1800’s. And the rise and fall of Whale Oil has been debated many times; the point of my post is that the Whale Oil industry only saw itself as a provider of Whale Oil, not Energy to the rest of their world. As a result, the factors that led to its decline, whether market forces, poltics & regulation, and/or social factors, are irrelevant. The industry killed itself.

Now, unlike whale oil, petroleum will not be replaced, but rather complemented. As a result, collaboration is critical (and the reason Cleantech 1.0 failed in my opinion is that it ignored Robert Dolan’s 5th “C” = Collaborators and those were the experts here in Houston). However, Renewables just finished another record-breaking year, with more money invested ($329 billion) and more capacity added (121 gigawatts) than ever before and this has been taking place outside of our city.

And while technology (including cleantech) startups have been booming around the world, Houston has seen its technology expertise completely fall off the map. A recent Kauffman study comparing startup density amongst the largest metropolitan areas found that 4 Texas cities had the largest decreases in high-tech startup density: Houston, Dallas, Austin, and Fort Worth. “The metropolitan areas in the top ten shuffle around, for example, but only one top ten city in 1990, Houston, dropped off the list entirely.”

Scenario 2: Houston becomes the New Energy Capital of the World. Based on my previous assertion, Houston and the Oil & Gas industry must decide that it is more than just a provider of Oil & Gas to the world. It must decide that it will provide “sustainable” production and consumption of energy to the world and recruit a workforce of inspired millennials by being authentic to this vision and purpose.

Now, Houston is not JUST an oil and gas capital. Houston and the great state of Texas ranks #1 in many other categories including chemicals & plastics, metals, manufacturing, wind energy production, energy public policy, energy trading, retail electricity and deregulation, largest medical center, NASA’s manned space HQ, entrepreneurship undergraduate program, and transportation & logistics fueled by the the busiest port for foreign shipments. Houston also has the 2nd largest population of engineers.

Houston also is rebuilding its startup ecosystem as seen with the rise of one of the most active angel investor groups, a leading early-stage venture fund, top graduate school programs for entrepreneurship, numerous accelerators like OwlSpark, Red Labs, and SURGE, an explosion of medical innovation surrounding the Texas Medical Center with J Labs, ATT’s Foundry, and Dreamit Health all located inside TMCx, and the emergence of a millennial led incubator 2.0 known as The Station.

In other words, Houston is Nantucket during the height of Ahab and Moby Dick while having the built in fundamentals (engineers, entrepreneurs, cost of living, investors, experts) to dominate the arrival of the new petroleum based energy future. In this case, Houston has the built in fundamentals to build out an energy world that includes clean technologies.

Other industry titans and capitals have faced this problem before. New York, the financial capital of the world, decided to compete against Silicon Valley for entrepreneurs and the important FinTech industry that supports and buffers it. Silicon Valley is still the #1 FinTech cluster in the world, but New York is #2 and the fastest growing FinTech cluster.

“Unlike Silicon Valley, New York offers proximity to a huge potential customer base of financial institutions and a vast existing financial technology workforce, in addition to its burgeoning venture ecosystem. This makes the city a natural contender to be a world leading fintech capital, bringing new jobs and capital to New York and helping to secure the long-term competitiveness of the US financial services industry.” 

Houston has the same fundamentals as New York has to FinTech to dominate the future of energy. It also has the baggage to stay mired in the past.

Houston has never had a more important decision to make and the time is now to make it. Will it stay solely focused on finding a better journey to the center of the earth or will it compete to become the first city to send someone to the sun?