A window opens for oil and gas majors to fund energy transition startups

Startup companies traditionally have turned to private equity and venture capital funds for financing, but big oil and gas companies have a chance to become early supporters of cleantech companies, according to a panel of energy financiers at an industry conference.

The gap between the needs of low-carbon, climate-focused startups and the resources of large energy companies is a window of opportunity for oil and gas players, said early-stage investor Naynika Chaubey, a partner at Evok Innovations. The oil and gas companies have the project development experience and the know-how to finance and guide fledgling energy companies.

Chaubey made her comments Sept. 19 with other financial experts to a packed lunchtime audience at the World Petroleum Congress in Calgary.

“A startup is a tech company, and a tech company is good at taking the product from zero, from the benchtop, to — pick your metric — let’s say a ton a day,” Chaubey said. “But then to take it from a ton per day to 1,000, 10,000, or 110,000 tons per day, that is not at all the purview of a tech company.”

“If you have exploration and drilling and infrastructure, road building, engineering, et cetera, you have deep balance sheets [and] you’ve got cheaper capital — the startup simply can’t do that,” Chaubey told oil and gas executives.

To pull this off, oil and gas companies need to change their acquisition philosophies to include more than leases and assets, Chaubey said. While investing in later-stage companies will reduce some risk, it is not worth the extra expense compared to a smaller, earlier round of funding of a startup, she said.

For Evok Innovations, the hot spots for investment are white and blue hydrogen projects and lithium extraction from the wastewater brine of oil and gas wells, Chaubey said. White hydrogen comes from natural deposits and can be extracted by drilling. Blue hydrogen is produced by using heat from natural gas combustion to reform water into hydrogen and carbon while capturing and storing the resulting carbon.

These projects play to the strengths of oil and gas companies, Chaubey said.

Management team is critical
Keila Diamond is the managing director and head of environmental, social and governance strategy for Quantum Energy Partners, a private equity firm traditionally focused on oil and gas investments. “We have a deep bench” of energy experts, Diamond said.

“We invest all the way for a management team that has deep experience,” Diamond said.

The sweet spots for investment for Quantum include projects that involve carbon capture and storage (CCS), LNG and methane detection, Diamond said in an interview. As an example, Diamond pointed to Quantum’s investment in Trace Carbon Solutions LLC, a company formed to decarbonize heavy industry using CCS. Trace Carbon closed a round of funding from OGCI Climate Investments LLP in August, bringing to $420 million the total investment by Quantum, Climate Investments and company management.

The same management team oversaw Haynesville Shale midstream operator Trace Midstream Partners LLC, which sold to midstream giant Williams Cos. Inc. for $950 million.

Size brings services and contacts
For companies looking for advice and contacts to help them grow, nothing works like size, according to Nicole LeBlanc, a partner with Woven Capital LP, the in-house venture capital firm of Japanese carmaker Toyota Motor Corp.

“From a venture capital perspective, a lot of wounds in companies are self-inflicted,” LeBlanc said. “We can actually help these companies by getting them revenue and getting them clients. And that is what a company that’s a corporate like us does — we bring the customer relationship.”
Source: Platts