“Fish heads fish heads, Roly poly fish heads, Fish heads fish heads, Eat them up yum
In the morning, Laughing happy fish heads, In the evening, Floating in the soup,
Fish heads fish heads, Roly poly fish heads, Fish heads fish heads, Eat them up yum”
I have started to unwind and catch up on the Real Housewives of Silicon Valley (#RHOSV), dive into a new novel about one of my favorite activities: surfing, and think about the disconnect (& opportunity) amongst the hydrocarbon industry, renewables, environmentalists, and the titans of the information age. I have been meeting with numerous former executives and employees laid off because of the price of oil. Having seen this happen many times, I now understand the definition of insanity and wonder why no one at the top of this industry feels a responsibility/stewardship to change it. This industry is filled with incredible people…and they depend on us, the entrepreneurs and leaders, to have a better answer to why we are firing them. Seriously, we can control it. Since I am on the soap box…
I love the outside world and thus spend as much time as I can running, swimming, surfing, paddling, and playing in it. And I want it to be clean and available to my children’s children. I am an entrepreneur that believes abundant energy is one of the largest problems to solve (~20% of the world still doesn’t have electricity) and that our planet is awesome. We have a responsibility to do everything in our power to protect and make it better. I grew up in and around the energy and technology industries. And I believe the existing oil & gas system is broken.
King Solomon said “That which has been is what will be, That which is done is what will be done, And there is nothing new under the sun. Is there anything of which it may be said, “See, this is new”?” (Ecc 1:9-10) What I want to disclose to you in this note is not new, but it is very disruptive and will improve energy and the earth forever. I openly write about it because I need help, it needs to happen, and I hope this note encourages energy-minded, earth loving innovators to reach out.
The best way to rapidly improve the environment and transition our world from hydrocarbon to renewables is to attack oil & gas straight up. In the words of Elon Musk himself, I am not for disruption for disruption sake. I am for better. And there is a better way. Just solving the right side of the equation (building out renewables) is not big enough. Impacting oil & gas directly will make a much bigger dent and here is how.
As I have witnessed, invested, and researched oil & gas, the industry will not change despite being at the mercy of the lowest cost producer, OPEC, and living a petrocity existence, until someone threatens the current status quo head-to-head. It is my belief and the data directionally supports that until there is a disruptive competitor knocking on the door, the industry will continue to focus on slow, incremental improvements and write-off low commodity prices as a cyclical problem that is unavoidable and uncontrollable. Forget environmental and climate innovations… The industry’s leadership and the culture underneath it is ambivalent about radical change. So let’s take advantage of their slumber.
There has not been in over two decades nor will there be large valuations and large acquisitions in oil & gas technologies…nor massive improvements to our environment until there are electron entrepreneurs threatening the current existence of the incumbents, the molecular men. I believe that Y-Com graduate Cruise Automation was bought by GM for over $1B because of the electron entrepreneurs like Tesla, Google, and Apple facing off against the status quo. Cruise is a startup that has raised more money ($19M) than it earned. How can you explain the multiple? Fear, Uncertainty, and Doubt.
As I have written before, oil & gas is here for a long time. While renewables are growing at an amazing pace (and let’s be honest, will deliver their own sets of problems), the growth rate is not fast enough nor does it improve the incumbent issues with oil & gas production. Unfortunately, the tech titans of Silicon Valley dislike the hydrocarbon industry too much to change it directly and Molecurlar Men by definition will not bite their own hand.
Here is how I would completely change and accelerate the energy industry forever through the lens of a new type of energy company:
First, the company has an inspirational core purpose (i.e. transforming molecules into electrons…), is built upon transformational core values that inspire and empower (think Valve Software), is a flat and empowered culture that operates and celebrates like this (watch at the 2:15 mark…yes, that!):
And has 3 important components:
- The Lowest Cost Producer of Oil & Gas (measured in Cost per Barrel)
- Operationally Climate Neutral (measured and reported in real-time)
- Uses its dividends to build out clean power (measured in KwH generated)
Being the lowest cost producer gives us the ability to be self-sufficient from the commodity curse, being operationally climate neutral allows us to set the global standard (ouch), and using our dividends to build out clean power allows us to accelerate our core purpose, recruit the best of the best, raise capital from visionary investors, and build a company to last.
Let’s break this down into bite sized chunks….
Lowest Cost Producer of Oil & Gas
Until a company can produce oil & gas at the same cost and/or cheaper than #Opec, the industry will stay chained to its desires. I believe the logical cost to shoot for is $15 – $20 per barrel. There has been much discussion in Houston about building companies to be the low cost producer. Most of these ideas are being imagined by Molecular Men (less people, smaller assets, outsource more, nothing new here). If electron entrepreneurs built an oil & gas operating company from the ground up, questioning everything, what would it look like? I do not have the answers, but here is how I would approach it:
- Start with an amazing team whose goal is $15 per barrel, being carbon neutral operationally, and saving the world. This is absolutely the most important and hardest objective.
- Implement our own SpaceX strategy: “The secret to the low cost is relatively simple, at least in principle: Do as much as possible in-house, in an integrated manufacturing facility, with modern components; and avoid the unwieldy supply chains, legacy designs, layers of contractors, and “cost-plus” billing that characterized SpaceX’s competitors.” It sure sounds simple…but it is not. Again, culture is key.
- Drilling is the largest cost by far…let us table this one for now but I have a few ideas.
- Reimagine and re-design the supply chain (as the CTO of one of the largest oil & gas companies confirmed, $15 is possible and a lot of waste can be found in the competing objectives and structure of the existing supply chain). McKinsey’s article has a good high-level view of the possibilities.
- Build our own software stack (open-sourced of course) from the ground up (*while leveraging a few existing electron entrepreneurs that have built amazing platforms) that is transparent, allows us to remove people, is mobile, and delivers actionable insights in real-time.
The critical milestone as a company will be to prove our ability to operate safely and efficiently. Unless we take advantage of the amazing fire-sale that is about to happen, we will only bite-off a small asset purchase and/or take-over an existing failing operator to show that we can “launch a rocket.” The key is not to be able to operate at $20 initially, but rather show that we can operate safely, effectively, and environmentally well with a plan to reach the next milestone with visibility to $20.
The organization will be flat and rewarded on: cost per barrel, carbon footprint, safety, and number of tests (fast failures to further reduce cost). Oil & Gas is one of the last industries to be faced with a fast moving, startup culture that is not afraid to implement a lean approach to testing and implementing. I get giddy just thinking about this alone. I know hundreds of millennial (and a few Gen-X and Boomers too) oil & gas “A” players…and many have proactively reached out to me to state that they would leave their company in a heart beat for one that has real purpose. Keep reading then…
Operationally Climate Neutral
While we are shooting to be the low cost producer, I am going to add a BHAG to the team by requiring us to be Climate Neutral. Unless we have science fiction to shoot for, we are not thinking big enough. The first challenge is to be carbon neutral (net zero carbon emissions) in our operations. The second and more science fiction challenge is to completely offset the hydrocarbons we sell by replacing them with renewables. Basically, if we do our jobs well, we will put our oil & gas operations out of business in the long-term. Hell yes, we are going to be an oil & gas company that strives to be truly climate neutral operationally. First, this is the right thing to do. Second, viewing our environmental footprint as a cost of compliance is the wrong motivation and a bad business strategy.
Being Climate Neutral is part of the culture and a metric we report and own. We turn a compliance cost into an asset. Hey Washington, once we crack this code, everyone else that is in our business must also follow suit…which adds $20, $30, who knows how much more per barrel to everyone else. While it adds cost to us, its impact is not at the same step-function increase as everyone else. Our culture and entire operations embraces it. And regardless, we LOVE IT! What seems to be an impossibility has become one of our greatest achievements.
Not only does this become a competitive advantage, it allows us to own the narrative globally.
Again, with this goal built into the culture, we attract the right people that will be able to make step-function improvements. How much will this add to our cost per barrel? I do not know…but it sure scares me to death which makes it an awesome core value.
For Every Barrel of Oil & Gas we produce, we build out an equivalent barrel of Clean Power
Instead of delivering dividends in the form of cash back to investors, we will build out and deliver clean Kilowatt hours. While our company could use our excess cash to “invest” into clean power, I do not think this accomplishes our objective nor is big enough and complicated enough to attract the right team and stay true to our core purpose: converting molecules into electrons. I want our team to get dirty and actually learn the business of building solar power plants. Our ethos and language needs to be invested into the future of energy while working really hard to impact the here and now.
I also believe that being a clean energy producer is core to our fundraising strategy. Our investor base will not be the traditional investors into energy. As NRG learned, “conventional energy investors are not going to be the investors that end up creating transformational energy 2.0 companies…Those investors live in a different ecosystem.” Changing the culture of a company is almost impossible. The last company that successfully converted a regulated and short-term minded energy company was Enron (and doesn’t this idea almost sound like Enron 2.0?). While no one else will say it out loud, I will. The company was amazing. It inspired an industry, a city, and many of us outside of it. Unfortunately, a few bad actors destroyed the value of the lighthouse and deflated the hopes of an entire industry and city. It is my opinion having spoken and interviewed numerous insiders, Enron collapsed due to the amazing culture change. The company’s core purpose became the stock price. To avoid these pitfalls of recruiting bad actors, the culture needs to be built and maintained correctly from the beginning. And we hire, fire, manage, and reward based upon our values. Instead of the stock price being our idol: cost, climate, and clean kilowatt hours will be. Ultimately, investors who buy into this vision will be rewarded by owning the most disruptive company in the energy industry since Standard Oil or Edison General Electric.
When competitors try to react, they will face the same challenges as NRG and Enron. Internally, the core values and culture of the company becomes confusing. Customers misunderstand the brand. And investors want their stable dividends, not growth. Culture leads innovation. Culture leads long-term earnings. Our barrier to entry: culture!
- Culture: This company is not for the faint of heart. Building the culture correctly will be the most difficult and important step. As I have talked to numerous executives from oil & gas to renewables, I keep getting the same response: the cultures are completely different, oil & gas people only know oil & gas, renewables people only know renewables, and electron entrepreneurs dislike hydrocarbons. Sounds like a challenge to me and one worth pursuing.
- Acquiring Assets: Our company will focus on acquiring primarily dry gas assets (the best bridge fuel and lower in carbon emissions)….but where do we get high value reservoirs at a good price? I do not know yet. In the short-term, this is going to be tough. The number of private equity backed teams chasing assets is staggering right now. And existing owners are holding on tight hoping for oil prices to rise. In the long-run, patience will win and I believe our investors will understand our purpose and will allow us to be strategic about this process.
- Focus: Investors like focus. It is their job to allocate funds into a diverse portfolio. If we are both a hydrocarbon and renewable based company, will investors buy into the potential distraction? I still believe that the operational knowledge of both arms of the company is critical to recruit the best talent and break-down known and unknown barriers to innovation.
- Hydrocarbon Hives: The ideal investors into this company will be those that believe in leaving fossil fuels behind. Will they buy into and/or be allowed to invest into a hydrocarbon based company, despite how innovative?
I am assembling other like-minded experts and game changers to discuss how to take this blog and make it a reality. It is huge, scary, and amazingly difficult. If interested, please let me know.
Today, there are laughing happy fish heads…(and when this gets executed), in the evening, floating in the soup!