Big Energy Follows Big Pharma

With high energy prices, one would think that energy companies would awash with cash and would be investing in their future. But that doesn’t seem to be the case. The US energy industry in particular is only spending $ 4 billion on research and development while making record tens of billions in profits. So, what’s wrong with this equation? As far as I know, only Chevron Texaco, Shell, BP and Conoco Phillips have active venture arms.
Since this question has puzzled me for the past 5 years, I have sought answers. One is that energy companies did not believe that energy prices would remain high for so long as they were burned with price collapses in 1986 and 1998. Well, that one is now off the table. The second is that it takes time for large companies to change. Well, it’s five years later.
Times have changed but the answer seems to be fairly simple. The major energy companies will not be creating much of the new technology that they need but will be buying it. They will be buying the oilfield services, cleantech and renewable technology that venture capital funds. They are following the Big Pharma model. Big pharmaceutical companies today are not creating much of the new drugs but are acquiring the companies that do. This makes sense to me as I do not see the scale needed in research and development by the energy companies but I do see the beginning of a massive shift into cleantech and renewables. So, the future of the energy industry is going to be increasingly dependent on small entrepreneurial companies that provide scalable solutions across the board in renewable energy, clean energy, information technology, energy storage and the like.

What will still be needed is large scale investment and scale. I see that coming from private equity groups not hedge funds or venture capital. We recently have seen both KKR and Blackstone start to make initial inroads into infrastructure and renewables. I have been told that there are over 4,000 private equity funds in America, and I know that they have soft circled cleantech and renewables. The investment will begin on a large scale when the US has developed climate change cap and trade legislation. That day is coming soon!

2 replies
  1. Peter
    Peter says:

    Energy companies have acquired technology through acquisition since the mid-1980s when they basically dismantled R&D. This is not a new story, if you've been around the industry at all.

  2. Johnny
    Johnny says:

    I completely agree. I would add that the oil industry actually does as much renewable energy research as the Federal government funds, but the solutions will come from smaller firms.Oil and gas companies have a core competency: discovering and producing oil and gas. Their biggest asset is their intellectual capital, not their financial, but their intellectual capital has a core competency that can't simply be transferred to alternative energies. When seriously faced with losing market share, they will acquire the innovators, not to shut them down, but because they will be in a position to then acquire the competency they can't currently possess.

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