Most financial investors in oil and gas projects concentrate largely on reserve estimates. The science underpinning such data receives very little attention. Instead, financial analysts tend to rely on the qualifications and experience of investee company managers to deal with the scientific and technological issues. Even when some of those financial analysts or investors employ in-house geologists and engineers, the often passive contribution of such scientific advisers does not allow for a detailed understanding of the science behind the asset and recovery techniques for increased reservoir performance.
Such limitations affect financial markets participants approach to the following issues of emerging risks and opportunities:
1. Project efficiency. With lower-for-longer oil prices, oil firms must rely on efficiency gains to reduce energy costs and improve their position in the cost curve. The use of improved science to better understand oil fields combined with technological improvements is leading to significant strategic shifts as companies reevaluate their business strategies in order to navigate through these tough times and be resilient. The success of the shale oil industry in the US has demonstrated how better data, refined technological tools, and improved scientific methods are enabling new levels of field development. Science and technology investing is no longer a carve-out within a petroleum project – it IS the project.
2. Long-term investing. Oftentimes, there are incongruities between long-term financial objectives of the fund manager and the short-term objectives of their investee company managers. These incongruities arise in part because the company managers in acting to capture the potential value of science and technological mega-trends are, in many cases, struggling to keep up with the market of ideas and future value creation. As focus is increasingly shifting to returns and cash preservation, there is a need to build competencies of company managers and improve the quality of the information upon which they operate their oil and gas fields. These company managers may have little technical understanding of scientific and technological issues. Or they may have rigidly defined frameworks or operational processes that they do not want to (or cannot) modify to account for either evolved fund priorities or altered market realities. These factors result in a set of relatively short-term decision-making frameworks that in the aggregate are not in harmony with the strategy of the long-term investor – and over time could exacerbate the risk carried by any given portfolio of investments.
3. Low-carbon economy. Commodity markets and oil and gas investing are undergoing a sea change today. The crux of this change is the compelling relationship between a company’s financial performance and its performance around sustainability issues. This requires a better understanding of the make-up of a company’s oil and gas resources and their onshore vs offshore locations. A portfolio that is heavy on projects with sustainability issues such as oil sands, heavy oil and offshore location is also in higher risk of being financially stranded due to high costs of developing those reserves. These projects are also in greater risk due to having higher sensitivity of earnings and cash-flow to moves in oil and gas prices. Under a steadily – rising oil price scenario, taking greater risks may deliver more value. But under a low-price scenario, the greater risk may well end up destroying shareholder value. Having a science-based investment strategy is crucial in low-cost sustainable development of light oil and gas resources, because science provides the foundation for identifying where those resource lie and how to extract them profitably.
What these issues of emerging risk and opportunity speak to is the need for investors to align their portfolios with the realities of a rapidly changing world. Science and technology are of overwhelming importance in aligning such interests. Historically, we have seen a virtuous cycle in the oil industry in which demand for more efficient oil field management has driven scientific and technological advances, creating new models for success and driving further demand. Today we are on the cusp of another big technological phenomenon. The new technology-driven era of growth led by the unconventional oil industry in the US is revolutionizing the way that conventional resources too are efficiently developed as shareholders are increasingly looking to have their projects express their values.
Enclime estimates that 60-75% of global conventional oil and gas deposits are left unrecovered today. Due to the geological complexity of conventional oil and gas reservoirs, it can be difficult to establish where the oil is to be found within individual reservoirs, hard to estimate what the remaining volumes are, and then a major technical challenge to produce the oil economically. Continuing efforts are being made by oil companies to understand their oil fields in more detail by using integrated reservoir characterization techniques and improved recovery methods.
Enclime has an important role to play in this global energy market that is undergoing a paradigm shift where science and technology is creating new profit pools and disrupting old ones. Our multidisciplinary team of scientists and engineers has a long track record in recognizing the true value of the hydrocarbon resources in geologically complex reservoirs, optimizing production, and adding substantial reserves. Understanding such complexities is even more significant in foreland fold and thrust belts that are hydrocarbon-bearing regions of the Earth’s crust where two tectonic plates collide and where our management has a long track record of creating value. By focusing on the use of science and technology to improve the knowledge of these reservoirs and being small and agile, we are able compete with traditional private equity firms – and our investment partners can use that to their advantage.
