My Energy Investment Thesis #1: Oil Prices

by kirkcoburn
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A few of my colleagues have asked me why I am doing this… I will let you know once I figure it out. In the meantime, it is time to dive into my energy venture capital investment thesis. In the introduction of this series, I talked about what the world was like in 2010 (and why I still think cleantech investing is the place to be today). The energy market was different. Let’s explore how:

Thesis #1: Oil Prices

Oil prices continue to significantly impact the energy industry as a whole. Consider:

chart reflecting energy venture capital trends

Chart created at Macrotrends.com. Thank you!

Then:

In 2010, oil prices were between $80 and $90. They would steadily climb to almost $100 in the summer of 2014. Life was good in the oil and gas industry. The industry was optimistic, making it easy to raise money and easy to ignore the important infrastructure investments required to sustain itself. At the same time, the rising price of oil also made it more economical for alternatives to compete against its fossil fuel competitors.

What did I warn you? Investors love running into overvalued opportunities. It seems that some of the smart investors know when to pile up cash once the bubble bursts.

The price of oil has a significant impact on both gasoline (which competes with biofuels and electric vehicles) as well as natural gas. Low oil prices also make it more difficult for clean energy entrepreneurs to convince investors to invest in their clean energy sources, which can have a substantial impact on the energy industry as a whole.

In 2015: 

Oil prices fell to below $50. Suddenly, the industry wasn’t flying nearly as high. Throughout the industry, people were laid off in significant quantities. This caused a number of immediate impacts:

  • New ideas were put on the back burner.
  • Fundraising became increasingly difficult.
  • Strategics, institutional investors, and high net worth individuals started to seek diversification.

Now:

Oil prices have hovered around $50, give or take a little. The industry has adopted the strategy “Lower for Longer,” which means that there is a belief that oil prices will be low and remain low for the foreseeable future. In order to survive, the industry must be able to make money at $50 or less in perpetuity. To survive at this level, the industry must be able to do more with less. And operational efficiencies have mainly plateaued.

This means that instead of riding the oil price wave in and out of decades, the industry is basically re-wiring itself to operate in perpetuity at $50 or less. The increased demand for improved technology, especially digital technology, is now an absolute as observed throughout the global and independent oil & gas companies. Time to create, you may be too late.

This also means that the oil & gas companies are standardizing on software platforms as there is pressure to reduce costs and create simplicity on a global basis. This is possible due to the recent roll-out of cloud solutions (allowing anyone on the planet to access the same platforms, systems, and databases) and mobility (giving remote workers the ability to access these same systems on any device including in the field).

In summary, oil prices used to be an excuse for the industry to ebb and flow on technology investments. When prices were low, there was no budget to invest. When prices were high, there were too many larger projects that generated more upside than these projects. Today, the rules have changed. The digitalization of the energy industry is upon us and a new long-term view of oil prices is one of the main reasons. What say you?

In a couple weeks, I’ll move on to unconventional oil and gas. In the meantime, let me know what you think about the recent changes in oil prices.

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