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Game-changing Oil and Gas Exploration Technology

Investing in the oil and gas industry.

Bob Schwartz

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Summary:

Russ visits with Bob Schwartz of the Norwegian-based venture capital company. The company has, to date, invested three funds in oil and gas exploration production technology. The company is staffed by engineers and geophysicists. Schwartz explains investment criteria, upstream oil exploration and what he considers to be “game-changing technology.” It’s an intriguing look at the finances of oil and gas and how we define energy independence.

Energy Ventures Website

Full Interview text

Russ: This is the BusinessMakers Show heard here and online at thebusinessmakers.com. And it's guest time on the show and our topic this morning is oil and gas because my guest is Bob Schwartz with Energy Ventures. Bob, welcome to The BusinessMakers Show.

Bob: Russ, thank you for having us.

Russ: You bet. Well, let's start by you telling us about Energy Ventures.

Bob: We are a Norwegian-based venture capital company. We were formed in 2001. Since we've been around eight years, we have invested three funds. The first one was $50 million; the second one was $100 million. Those are fully invested funds and our third fund, which was $250 million, is about half invested. We have offices in Houston; we have an office in Aberdeen, Scotland; we have an office in Stavanger, Norway and our model is very simple; we invest only in oil and gas technology that serves the exploration and production segment of our business.

Russ: Oil and gas exploration. Technology in that arena has blown me away forever. I mean, it's incredible. Do you agree with me?

Bob: Well, we certainly do or we wouldn't be investing here. We think energy is a place to invest. We think there's a lotta room to invest in conventional oil and gas and we think the upstream part of that is the place to be; that's where we have always concentrated our investments; where we have been very successful and that's where we're gonna continue to invest our limited partners' money.

Russ: Now for our listeners out there that aren't tuned into the nomenclature in the business, tell them what upstream means.

Bob: When you think about the way oil and gas gets from the earth into the tail-end of your automobile, everything that happens to find, develop and produce that oil and gas is the upstream business.

Russ: Okay.

Bob: The pipelines that get it from offshore to a refinery is called mid-stream and the refining segment which turns that crude oil into all the various products we use and gets it to the consumers is the downstream end. We only participate and invest in upstream. So we are interested in exploration, production technology, period.

Russ: Okay. Okay well it seems to me that the coolest technology is in the upstream arena right now and I guess Energy Ventures, being a venture capital firm, are you guys actually looking for game-changer technologies?

Bob: We like to think that we look at – when we consider an investment – three things. First of all, we look at is the technology doable or is it what we would call sort of science fiction.

Russ: Uh huh.

Bob: Is there a market there that will support it? If it, in fact, works and third, are there a team of entrepreneurs, inventors, the men and women behind these technologies – do they have the kinda skill sets it takes to get from Point A to the point where we have a investment that is now valuable and can be sold to somebody else.

Russ: Okay.

Bob: That's the model. Our investments are equity investments.

Russ: Right.

Bob: So we're at risk.

Russ: Right.

Bob: We spend a lotta time in advance doing due diligence on these deals.

Russ: Uh huh.

Bob: We're not financial guys. So between the nine of us who professionally invest the money for our limited partners, we probably have somewhere in the neighborhood of 200 years of experience in this industry. So we feel that we have a pretty good handle on the technologies but we always seek outside confirmation of a technology. Has somebody tried it before? Can it be protected by intellectual property? Do we, based on past experience, think it would work? Is there a model here? How good are the people behind it? One thing you always find out – nobody ever makes their projections. It's always a little bit lower and a little bit later.

Russ: Always, right?

Bob: Always.

Russ: Yeah.

Bob: That's the one constant in our business.

Russ: Right. Well I think that happens in all venture capitals –

(Laughter)

Bob: It's probably true.

Russ: Okay. Okay.

Bob: We are a little bit unique in that we have never lost a company in the 23 investments that we have made.

Russ: Meaning they're all either – have exited or are still in business?

Bob: They have all exited profitably or we are still – have them in business –

Russ: Okay. Okay.

Bob: - still working with them and they're still viable companies.

Russ: Okay.

Bob: We don't subscribe to the notion that venture capital is a random-access game where you make 20 investments and hope 3 of them turn out.

Russ: Right.

Bob: We spend a lot of time in advance with the entrepreneur; with the people we do due diligence with, with the attorneys we work with; and when we make a commitment to a company, financially, our goal is to see that company succeed.

Russ: Right. Wow. What is one of the most interesting technologies that Energy Ventures has invested in so far?

Bob: When we see something that is really an interesting technology with a lotta potential, we call that a fund maker.

Russ: Okay.

Bob: That's a company that we think, if it pans out the way we think it will, has huge potential. Not to take away from any of the investments that we have. We have – there are 17 active ones today of the 23. The others have been sold.

Russ: Right.

Bob: There is a company that we have invested in called Ingrain. It is a true game-changer. It's like if you were using the old crank-up Victrola –

Russ: Right.

Bob: - to play a record and all of a sudden somebody came in and handed you an iPod.

Russ: Okay.

Bob: And that's – that would be the best analogy I know how to make.

Russ: That would be a game-changer. (Laughter)

Bob: It is a game-changer.

Russ: All right.

Bob: They are in the rock mechanics business.

Russ: Okay.

Bob: Probably the leading experts in the world in that area. Amos Nur, out of Stanford University. They have done an incredible job of being able to determine the permeability of our formation that holds oil and gas without the necessity of doing expensive coring.

Russ: Wow.

Bob: And if the technology can be made to work like we think it can – and all early indications are clearly that it does – this would be a game-changer.

Russ: And it's called Ingrain.

Bob: Ingrain.

Russ: Okay. When you say be able to tell what the soil, the rock, is like – is it something like doing it with seismic but a much higher, more accurate version?

Bob: It is not done through seismic. The best way to describe it is to compare it with a scan that you would do – let's say a medical scan – where you use very, very high definition scanning equipment to actually look at the pore of the rock itself –

Russ: Okay.

Bob: - at the nanoscale. In order for a reservoir to give up its oil and gas, it has to have two things: there has to be porosity, which is the total volume of oil; but there also has to be permeability, which is the ability of those pores to communicate with one another.

Russ: Right.

Bob: Think of it like a sponge. If a sponge was not porous, it wouldn't hold any water. If it wasn't permeable, you couldn't squeeze the water out of it.

Russ: Okay.

Bob: So the permeability determines a reservoir's – among other things –

Russ: Okay.

Bob: - but that is one of the key things that determines whether or not you can get that oil out.

Russ: Okay and does Ingrain do that by going down and bringing out a sample of that soil or –?

Bob: They can do it two ways; they can do it by looking at the drill cuttings that come up as the well is drilled –

Russ: Right, right.

Bob: Or in the area of reservoir management, they can go to most oil companies – especially the national oil companies – have huge libraries of cores that have been drilled in the past.

Russ: Okay.

Bob: And by taking a tiny sample of that core, they can accomplish that task. You can't do that with conventional core analysis. Plus, once you have done the analysis, now you have a permanent model of that reservoir. You don't need the core anymore.

Russ: Okay.

Bob: So it is truly a game-changer.

Russ: Real cool. We're talking with Bob Schwartz of Energy Ventures and we'll be back with more with him after this. You're listening to The BusinessMakers Show, heard here and online at thebusinessmakers.com.

[Aflac Commercial]

Russ: This is the BusinessMakers Show heard here and online at thebusinessmakers.com. And continuing on with Bob Schwartz of Energy Ventures. Now Bob, the name of your venture capital firm is Energy Ventures, focusing on energy. Does that mean that you guys would be attracted also perhaps to an alternative energy?

Bob: Russ, it's hard to imagine a situation in which we would be – not because we don't think there are places for those types of investments – it's just we as a group, given our background, what we all know, the areas that we've worked in –

Russ: Right.

Bob: - we don't bring much to that party. We also think investments in this area tend to be very overpriced at the moment. We've often said we think it's sorta like the IT bubble was.

Russ: Right.

Bob: Also a lot of these technologies depend upon government subsidy to work.

Russ: Oh yeah.

Bob: We never make an investment in an area where the financial outcome is dependent upon government subsidy.

Russ: Okay.

Bob: We just don't touch them.

Russ: Now I might interpret that to mean, as well, that you guys wouldn't get attracted into some sort of cap and trade technology, either.

Bob: That's an interesting question because there are some technologies that are involved in terms of how a reservoir is managed because if you have CO2 sequestration that is something we would look at.

Russ: Okay.

Bob: We have made an investment in a company in the UK called Evergreen that uses the energy that results from water flowing to actually generate electricity or to generate power.

Russ: Right.

Bob: We have looked at a couple of opportunities in the gas-to-liquid space which intrigues us but they tend to be capital intensive. We're also interested in water technology. So there's a lot of water used in the fractionation of wells –

Russ: Oh yeah.

Bob: - especially in the tight shale formations.

Russ: Oh yeah.

Bob: We have looked at a number of opportunities there. We've never seen one that we really thought could be scaled to the extent that's required to frac large wells in a shale formation.

Russ: Okay. Now I find it interesting as well that the company is Norwegian-based. Are there US-based venture capital firms that just look in the same area that you actually might compete against?

Bob: There are some companies that look at the same sort of things we do. There's a company in Denver, Altira.

Russ: Right.

Bob: Chevron –

Russ: Right.

Bob: - has a technology arm.

Russ: Right.

Bob: There are a number of companies in Europe that look into these same areas but really none that bring the kinda background and experience and focus totally on exploration and production the way we do.

Russ: Okay. Now I noticed when you were describing the three funds that you've been making these investments out of, they've grown exponentially. This last one that you're still actually funding out of, the $250 million fund – when was that actually raised?

Bob: We had had a first closing in the fall of 2007 and then closed the fund out in January of 2008.

Russ: Okay. Well I ask that only from the perspective is that – sometimes it seems like the oil and gas industry is under siege, you know, from the environmentalists, from a lot of the government's perspective on oil and gas, yet many of us know that we still need fossil fuels for quite some times to supply the energy that we need. But I'm wondering if it actually affects the ability of Energy Ventures to raise funds.

Bob: Well our first fund was very attractive to our investors. So they followed into Fund II.

Russ: Okay.

Bob: We have every indication that Fund II will be very successful.

Russ: Okay.

Bob: We have sold no companies out of Fund II. Fund III, which we began to invest in January of 2008, we have actually already sold a company –

Russ: Okay.

Bob: - out of that fund. DDS, which was sold. Direct Drive Systems, which was sold to FMC Technologies. You really have three customers in our business.

Russ: Uh huh.

Bob: First of all, if you do a good job you have to be able to attract the technology. And so the entrepreneur has to want to come to us rather than go somewhere else.

Russ: Right.

Bob: The second group of folks you have to satisfy are your limited partners –

Russ: Right.

Bob: - because if you don't do a good job for them, they won't be back in your next fund.

Russ: Right.

Bob: And the third group of people you have to satisfy are the people to whom we look to sell our companies because the market for our companies are the Schlumbergers, the Halliburtons, the FMCs of the world.

Russ: Right.

Bob: So if we can satisfy those three audiences, those three customers, and we have so far, then I think we'll continue to be successful. I think the good job we have done with Fund II and Fund III during a real downturn in this market, I think, validates the model that we use.

Russ: Yeah I guess it does. The other thing that's sort of so unique about the industry as well is the nationalism that's been taking place around the globe actually on the oil and gas itself. Does that play a role at all in what Energy Ventures looks at and how you're able to successfully do business?

Bob: If you look at our investment portfolio, we have always tried to invest close to home. Our investments are in the Norwegian sector in the North Sea; the U.K. sector; Gulf of Mexico, or on land in the U.S.

Russ: Okay.

Bob: We have looked at some opportunities in China. We've looked at an opportunity in Australia but we have never really seen our way clear. We like to be hands-on with these companies. We spend a lotta time with the CEOs, with the Chief Technology folks, and it's hard to manage a company when you're that far away from it.

Russ: Right.

Bob: Certainly a lotta the technologies that we're developing are very much of interest to the national oil companies and some of our companies, like Ingrain that we talked about before, do a great deal of business with the national oil companies n the Middle East.

Russ: Okay. And so but this China deal and the Australian deal that you looked at were both technology deals that geophysicists and geologists and scientists developed there?

Bob: That is correct.

Russ: Okay.

Bob: You know we think they may get funding.

Russ: Right.

Bob: Just not from us.

Russ: Okay. We're talking with Bob Schwartz of Energy Ventures and we'll be back with more with him after this. You're listening to The BusinessMakers Show, heard here and online at thebusinessmakers.com.

[Aflac Commercial]

Russ: This is the BusinessMakers Show heard here and online at thebusinessmakers.com. And continuing on with Bob Schwartz of Energy Ventures. Well Bob, it definitely seems like an exciting space that you're in but man oh man, it's controversial as well. I mean the whole carbon emissions thing; the nationalization that's taking place in other countries; the global demand and economy and I love to ask you energy guys this one very important question. If you were made Energy Czar for the planet, what would you do?

Bob: Well I guess the first thing I'd do would be, I would turn down the job. I think that's –

(Laughter)

Russ: Okay. All right.

Bob: Ah, but assuming I couldn't turn it down, I guess the first thing I would do would be get people away from this notion that there is such a thing as energy independence.

Russ: Okay.

Bob: That's a crazy idea.

Russ: Okay.

Bob: What we need is an energy policy that gives us a supply confidence, an insurance of supply over time.

Russ: Okay.

Bob: And that means doing some things longer term than we always do. Politicians get elected for two years; energy programs run ten.

Russ: Okay.

Bob: We need nuclear power in this country.

Russ: Okay.

Bob: If the French and the Belgians can figure it out, I think we can figure it out.

Russ: I totally agree with that.

Bob: I think natural gas, as a fuel for buses and trucks and things like that, has a real future to it and I think it's something we have to look at.

Russ: Okay.

Bob: I think we need a policy in this country that when people talk about ethanol in this country, that's not an energy policy, that's a farm policy.

Russ: Okay.

Bob: And when you start to substitute fuel for food, you're headed down a road that isn't gonna get you anywhere.

Russ: That's –

Bob: And ethanol isn't a very good fuel. It's hard to transport. It absorbs water. All kinds of technical reasons. There's no country in the world that's energy independent.

Russ: Right.

Bob: I mean the Saudis, for all the oil they produce, don't make all the gasoline they need.

Russ: Right.

Bob: So I think the notion that we're all inter-independent, that we're always gonna import certain parts of our – but if you can get the base load of things like electricity onto nuclear, I think you'd make a big step. If you could make trucks and buses on natural gas, eventually they'll be more and more cars on electricity, but that electricity could be generated by coal or by nuclear.

Russ: Gad, those sound smart. Well look, before I let you go, I've got one more question. I think you're definitely an advocate of the energy industry, specifically the oil and gas world, what would you tell, perhaps a young person that's just now getting ready to start and define their career for the future – should they consider the oil and gas industry?

Bob: Oh, that's the easiest question you've asked me all morning.

Russ: (Laughter) All right, great.

Bob: This is the most exciting business there is in the world. I mean it really is. It has an incredible history. I was the second generation in my family to be in this business. Our daughter's a geologist. I hope one of my grandkids want to get in this business. It's given me an opportunity to see the world that I would never have seen before; to make wonderful friends and also to grow in a – and to see the type of change that's taken place in this industry. It's an exciting industry and I think for young men and women who are in high school today who are thinking about a technical career; you know what could be more exciting than the earth sciences? What could be more exciting than chemical engineering? What could be more exciting than geophysicists? That's, to me, it's a wonderful opportunity and it's gonna be for a long time.

Russ: Well, Bob, I really appreciate you sharing some time with us.

Bob: Russ, it's our pleasure. Thank you for having Energy Ventures on your show.

Russ: You bet. We've been talking with Bob Schwartz of Energy Ventures and you're listening to The BusinessMakers Show, heard here and online at thebusinessmakers.com.

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