The Oil Price Collapse Forces Innovation Prioritization and Focus

Background

In the first week of 2015, West Texas Intermediate – the US crude oil benchmark – dipped below $50 per barrel for the first time in more than five and half years, extending its slide of more than 50% in just six months. New types of resources, such as to Norway’s deep offshore, North America’s tight shale, Canada’s oil sands, and even arctic reserves that are more expensive to develop and extract have been the focus of new development as the addition of easily extractable conventional sources have leveled off in the last decade. The slide in oil price can be attributed to a basic supply-demand asymmetry, stemming from record US shale oil and gas production and consistently high production from OPEC nations, coupled with limited growth from countries such as Japan and India and a peaking market in countries like the US.  Cleantech Group tracks investment and innovation activity across 18 technology segments, including oil and gas, and it is clear that this pricing environment will have far reaching effects for innovation in the oil and gas industry.

After three years of a monthly WTI average above $94, and a 2014 monthly average of $101 before its June peak of $105, producers are cutting back spending on exploration and production. Capital expenditure budgets are expected to be cut by 25-30% in North America, with reports of some companies, such as American Eagle Energy taking more drastic measures to balance their books by completely eliminating 2015 drilling budgets and drilling operations until prices rebound.

 

Implications for Innovation

The financial markets in oil and gas will be focused mostly on the purchasing of distressed assets by larger players or well capitalized private equity groups. I expect funding to continue to be available to oil and gas innovation focused on core technology areas. While market players are certainly cash constrained, the long term play is to continue developing technologies core to major pain points. In some cases, operating companies can’t risk falling short of commercializing new technologies. For example technologies that can eliminate water usage or enable water recovery will continue to have access to capital. By the same token, I expect technologies that focus solely on exploration to find difficulty in the coming year as major development projects are deferred and the need for pure exploration slips.

Large scale innovation trends will continue as they focus on pressing issues in the space. Take for example, Canada’s Oil Sands Innovation Alliance’s Water Technology Development Centre which will allow operators to accelerate technology testing. Scheduled to open in 2017, the Centre will be attached to Suncor Energy’s Firebag facility which uses Steam Assisted Gravity Drainage (SAGD), the extraction technology responsible for the problematic tailings ponds.

Beyond core technology needs, I expect earlier stage investment in oil and gas startups to stall as players tighten purse strings and focus on cutting costs and keeping investors as happy as possible. Development of extraction technologies focused on currently unrecoverable resources will most certainly be shelved as their pay day gets pushed further away. Houston’s SURGE Ventures, the high profile startup accelerator focusing on energy technology and which often acts as the eyes and ears for some of the industry’s biggest names, will become a key health indicator for the oil and gas innovation, specifically the success of their $30M fund raise.

Regulation will have a significant effect on oil and gas innovation, specifically pertaining to water, as Canadian officials grapple with enforcing their own Directive 074, which regulates and mandates reclamation of oil sands tailings ponds, and the newly minted U.S. Republican Congress and State legislatures consider regulating fracking over water usage and ground water contamination. If regulators crack the whip, operators will be forced to search for new technologies to lower operating costs and enable water remediation and reclamation.

Cleantech Group will continue to track and report on innovation in the oil and gas space in i3. For any questions about this post, please reach Ben Brown directly at ben.brown@cleantech.com.