James Chepya
Money for Something
James Chepyha is the chief investment officer with Emergex Capital Partners, a firm that intends to invest in technologies that will both generate a return and improve capital efficiency and cost profiles in Canada’s energy sector
AO: Did the Canadian energy sector get a bit too comfortable with the idea that $100 oil was a floor for prices?
JC: There may have been elements of that. But we operate in a cyclical business, and it’s so funny every time we find ourselves back in this position. It’s like we’ve forgotten that we are operating in a cyclical business. But now that we’re in this position, are we able and prepared to do what we absolutely have to do? Because now they’re harder to do.
AO: What are some of those things?
JC: It comes down to the idea that energy cannot be created nor destroyed – it can only be changed in form. So when you break it down, everything that we do in this industry when we’re producing energy requires the expenditure of energy. If you think about it from that perspective, how do you go about reducing the energy input cost to get that energy out? The thing about shale is that there’s no real finding cost for it. Every time you hit that rock in oil and gas exploration, it was just lousy rock – you couldn’t produce it. But the technology comes along to advance multi-stage horizontal fracking, and it takes the energy required to extract that oil and puts it on a slightly more positive footing. Shale was not economic – it was the technology that brought it there. So when you think about it from that perspective, whether it happens to be in the renewable space or the hydrocarbon space or the nuclear space, it comes down to how much energy we have to put in to get the energy out. That will determine where you sit on the cost curve.
AO: What role can venture capital play in that process?
JC: There are a lot of parties that are developing different technologies that, on the face of it, may not look like they’re applicable at all. And those people that are developing those technologies don’t necessarily understand or have experience operating in the energy sector. Venture capital can be a significant bridge between the developers of those technologies and the consumers of those technologies.
AO: Your CEO, Michael Brown, has mentioned that Emergex’s fund structure is key to its purpose. Can you elaborate on that?
JC: There’s been commentary that venture capital in the space has not been successful. I can actually accept that, but there are reasons for it. If you look at technology relative to energy, our view is that it takes more time and more capital to develop technology. And the capital isn’t just financial – it’s financial and intellectual. So if you’re stuck in the standard fund structure where you have a 10-year window, that leaves you somewhere between three and five years to take a technology from innovation to adoption in an industry that may take more than 10 years for adoption. You can be setting yourself up to fail – and that doesn’t help the industry, either.
AO: How important is it to have the right partner?
JC: Our view is that you have to have more time and more capital, but you also need like-minded energy companies that can provide a place for technology to be proven out. With a lot of technologies, there’s a race to be the second one adopting it. We’re working with companies that are prepared to be first adopters, and that are prepared to take a chance.
AO: In other words, you’re looking for some really patient capital.
JC: Exactly. You have to have some patience. That’s not to say that we’re not looking to generate returns. We just think we can generate higher returns by not being forced to sell at the wrong time.
AO: Is that a challenge to the traditional venture capital model, where there’s a clearly specified exit date for investors?
JC: It is. But even the 10-year funds aren’t getting out in 10 years. They’ve all had to get extensions. The model that we’re proposing is the one you’d want to use for ICT or other venture capital. This is really specific to a capital-intensive industry like energy where you need to have the time and the availability of capital to get through the piloting and adoption stages. The problems are real. They’re not going away. So rather than getting in a debate, our view is that we need to take our resources and the capabilities that we have right now and make a difference. We believe we’re in a position here in Alberta to play that leadership role on a global basis.
Gandeephan Ganeshalingam
Open House
Gandeephan Ganeshalingam is the leader of GE’s Calgary Customer Innovation Centre, which opened in June 2012 and brings businesses, researchers and entrepreneurs together in an open-concept environment. It’s the first of its kind in North America, and GE hopes that it can bring the same collaborative spirit to solving the energy sector’s biggest problems as it has to other industries that it works with.
AO: How do you get people in the energy sector to collaborate more effectively?
GG: For me, collaboration is absolutely important, but you have to have trust – and that takes some time. These are all experiments, too. I haven’t figured out the Holy Grail for this. But we have some things that we do. We don’t sell to our customers when they come in here. You won’t see GE collateral splashed around the walls here. We really listen carefully to their pain points and dig deeper to understand their root causes. And when we help them solve their problems, we actually try and live in their shoes. That’s when you really understand the challenges, and that’s when they feel willing enough to really open the kimono and share more details.
AO: How can the kinds of technologies being developed by GE help Alberta become more competitive with other sources of supply?
GG: Water treatment, as you can imagine, is a big portion of spending, both on the procurement of it and the treatment of it. Having, for example, mobile water treatment technologies that allow companies to be able to reuse water – there’s an environmental component to that, and you don’t have to spend money trucking all this water to disposal wells. That’s an example of where we work on projects that are really painful, million-dollar line items for our customers, on every well that they drill and frack. But there’s also an environmental benefit. When you look across our portfolio of projects, we really try to develop solutions that hit on a number of key indicators for our customers – safety, environment and the cost as well.
AO: Is there still a fair amount of low-hanging fruit – or, at least, medium-hanging fruit – in terms of operational improvements that could help drive costs out of the business?
GG: Absolutely, and I’ll give you a simple example. You have a combination of gas, oil and water coming out of most wells in Alberta, and we still don’t have really good ways of measuring that simply, effectively and in real time. You have these big group separators, or you have to manually test that stuff. Our vision is to have one of these multi-phase flow meters on every well. Now, we’ve got competitors who are doing that, but every meter is huge and costs a quarter of a million dollars. Imagine if we could cut that cost by a fifth? Imagine if we could put a meter on every well where smart engineers are able to get real-time data on the water cut versus the oil cut versus the gas cut? Imagine the process optimization they could do.
This is the kind of stuff where GE has developed technology and we’re bringing it to play in the oil sands and the unconventional space. And we’re bringing it in the form of pilots. We’re not saying, ‘Here’s a solution; now pay us this much to buy it from us.’ We’re saying, ‘Here’s a solution. We’d love to not just sell you a meter but solve the production optimization issues. Let’s work together on that.’ To me, that’s a low-hanging fruit – or a medium-hanging fruit, at least.”
AO: Everyone would like higher commodity prices, but is it fair to say that the lower price environment is encouraging companies to be more attentive to their operational efficiency and re-examining everything they do?
GG: I couldn’t agree more. I think they’re actually being more open now. It’s almost like necessity is the mother of invention, right? But we work through cycles like this all the time, and we will pounce on this opportunity to focus on the real bleeding-from-the-neck problems and co-create with our customers. The best way to incentivize customers to innovate in this kind of time is by not asking them to take all the risk. If you’re really here to stay, and you’re really committed to the energy business, work with them on the downside and share the risk. Customers will respond – that’s what we’re finding.”
AO: What’s your favorite part about working at the GE Innovation Centre?
GG: I’ll be honest with you. We don’t know if any of this is really going to work, long term. This whole concept of entrepreneurial innovation has worked in software and other industries, but bringing it to oil and gas is a grand experiment for us. It’s a high-energy environment – they’ve pulled 300 people into this center as an experiment in proximity, on how all these different functions can work together to present one cohesive face to our customers. And to be a part of any organization that is being asked to knock down industry-level challenges and solve them – to me, that’s really rewarding.
Kirk Andries
The Great Leaps Forward
Kirk Andries is the managing director of the Climate Change and Emissions Management Corporation. It was created in 2009 in order to help Alberta reduce its carbon emissions by 200 megatonnes by 2050, and is funded using the proceeds of Alberta’s carbon levy on large emitters.
AO: The CCEMC’s mission statement says that it’s interested in “stimulating transformative change.” How come?
KA: We really are in the business of supporting not just incremental changes and improvements but also to find, seek and work with proponents who have what we consider to be transformative technology. And the reason we pursue transformative technology is because the greenhouse gas reduction targets that the province has established for itself are very aggressive. The numbers are very large. And you can’t get to those numbers with incremental changes. They can help, for sure, and they’re improvements that are necessary and should be done. But we do need to find different ways of discovering and processing.
AO: How do you balance the desire to fund transformative technologies with the need to manage risk?
KA: If we didn’t have some losers, I would say that we’re not being aggressive enough. We’re being too safe. But at this point in time, we haven’t had many, actually. Now, the reason for that is that we’re still early stage. We have 100 projects in play right now, active projects, and we have 10 that have been completed. Of the 10, one project so far in the CCEMC portfolio was not successful in terms of achieving what it was originally designed to do.
And we don’t do this in a flippant way, I can assure you of that. We do our due diligence and make sure we do our risk assessment on every single project. The money that we provide to support technology is really risk capital. And it’s patient capital. We’re not like a venture capitalist who wants to triple their money or quadruple their money in 18 months. We’re patient capital, because return for us is not strictly a financial return – it’s a significant reduction in GHG emissions. Not only do we get the benefit of the reduction being experienced in Alberta, and being able to deduct that from our emissions profile. We also get the benefit of pioneering the technology, and we become a source of knowledge and expertise that we can export to other parts of the world.
AO: Given the importance of conquering the emissions issue, from both a political and environmental perspective, would it make sense to increase the CCEMC’s funding? Is this something that we should be doubling down on?
KA: I think if we had more money, we could do different kinds of projects. In a backhanded way you’re kind of asking me if the price of carbon should go up, and I think that’s a public policy question. The premier is wrestling with that right now, with $45 oil and all that stuff. These are complicated matters.
But I will tell you that if we had more money, we would attract different kinds of projects. While our funding sounds like it’s a lot, and we might get $70 to $80 million a year, in the world of major industry it’s not really a lot of money. When you run competitions and we select projects and we contribute $15 million to a project, you get a certain kind of project submission. But let’s imagine, for a second, that we had a billion dollars, and we ran a competition in which $250 million could be made available to a single project. It would need to be matched one-to-one and all those kinds of conditions, but we would attract a different kind of project than we’re currently involved in.
AO: Tell me about the Grand Challenge. What’s the objective there?
KA: Our Grand Challenge is to take the carbon issue and turn it on its ear – turn it 180 degrees and look at CO2 as if it was a resource. Alberta excels at getting value out of resources, so if we quit looking at it like it’s a byproduct or waste material and could turn CO2 into useful products, then we will have done a couple of very significant things. We will consume it and reduce the emissions by that process, and we could start a whole new economy, based in Alberta, where this asset called CO2 exists in abundance.
AO: It almost sounds too good to be true. How much upside is there in terms of creating economic value out of something that we make a lot of here in Alberta? Are we talking millions of dollars? Billions?
KA: It’s hard for me to say right now, but my personal view is that some of these things are hundreds of millions of dollars. The guys who are sequestering CO2 in ready-mix concrete used to be in prefab stuff, and now they’ve graduated to this. When you look at the scale of the market in concrete, that exists anywhere in the world. If you can impact it on that level, the upside for doing this kind of stuff is pretty evident.
Kevin Frankowski
Customer Service
Kevin Frankowski is an executive-in-residence at Innovate Calgary and the program lead for Kinetica Ventures, an energy-focused tech accelerator that was launched in late January.
AO: Tell me about Kinetica Ventures. What is it seeking to accomplish?
KF: We’ve been working on this for over a year. The board had instructed Innovate Calgary to determine what focus area it should be doing a deeper dive into, because based on the nature of what Innovate Calgary is and who they serve by definition they’re pretty broad. They work across all the sectors, and so being in Calgary the sector that was chosen to be the target of the deeper dive was energy. We’ve put together a plan for an energy technology accelerator that will augment the incubation services that Innovate Calgary currently provides.
The broad-brush concept is to make this a different kind of accelerator than what we were able to see currently in the marketplace. A lot of accelerators work with entrepreneurs to accelerate their technologies and move them into growth stages, and we’ll definitely be doing that. But we decided to put a different lens on that, and that’s the lens of market pull or industry-first. Rather than start with the technology developers, we’re actually going to start with industry. We’ll be sitting down with them and having one-on-one conversations about what their key challenges are, and that forms our significant challenges, which are then used as a screening criteria or filter for any intake.
AO: How do you bring disruptive technologies to an industry that hasn’t traditionally been all that welcoming to disruption? Not that any industry goes out looking for disruption, but there’s an ethos in the tech sector that welcomes it in a way that the energy probably doesn’t. How do you get people to embrace that mindset?
KF: One of the challenges that energy companies face is that they’re dealing with a large and diverse portfolio of risks. One of the criticisms that’s leveled against the energy sector is that it’s risk averse. But it’s not that the energy sector is risk averse – it’s that it’s already dealing with a whole bunch of other risks, from resource risk to labor market risk to financial market risk. The last thing that they need to add on to that pile is technology risk.
In order for them to really embrace new disruptive technologies or potentially transformative technologies, they need somebody to come in and help de-risk them. We see that as being part of our role. The core business of the energy companies is not to develop technology. It’s to develop resources and to produce those resources and get them to market. Asking them to take on technology de-risking is, I think, unrealistic – and it’s unfair. Other entities such as Innovate Calgary and Kinetica can help to do that, along with other players in the innovation ecosystem. We have a strong innovation ecosystem in Alberta, and it’s a matter of getting the right elements of that ecosystem working together in the right way.
AO: Does the energy sector have the kind of risk tolerance that’s needed to embrace these new technologies even after they have been de-risked?
KF: If you zoom out and you look at the types of risks that the energy technology already takes in other aspects of the business, it understands how to evaluate and take on risk. What hasn’t happened up until now in an effective way – or an effective enough way – is people sitting down with the energy industry and understanding the lenses through which they view risk and then lining things up so that it works with their processes and their evaluation criteria. If we can get that alignment, and we can start showing some early successes, I think that everyone will be amazed at how fast things move.
AO: How urgent is the need to de-risk these new technologies? Obviously, the current commodity price environment makes that pretty clear, but do the people in the energy sector that you deal with have that sense of urgency about getting costs down and improving performance?
KF: Definitely. Not everyone, because you can’t paint the energy industry as this homogenous monolith. There are all sorts of different characters and perspectives. But there’s definitely a strong core group of thought leaders and innovators in the energy industry who realize that we’re a high-cost producer and we need to get to being a medium- or low-cost producer. We need to address the real environmental challenges that are there, and the perceptions (and some of the unfounded perceptions) of the environmental challenges that have already been addressed or that never existed. We have to overcome access to market issues and stakeholder issues, and technology and technical innovation is definitely a big part of that.
AO: What can energy tech startups learn from their more consumer-minded startups down in Silicon Valley? Is there a mindset or a mentality that they can adopt?
KF: Absolutely – the two biggest are customer first and minimum viable product. By customer first, I mean going out and talking to your customers. A lot of the technology developers that we work with or come across, sometimes it’s a bit of a challenge to get their head wrapped around the concept that commercialization success is about more than just technological features. In order to have a commercially viable product, there are 14 success factors that need to be addressed, and only two have anything to do with technology. You also have to have the right partners and the right supply chain and all that sort of stuff.
The other big aspect that I think is done much better in consumer tech than in industrial or energy tech is the concept of minimum viable product. In consumer tech, we see people going to market very early with something that is very obviously a beta. Then they fail fast, iterate and move forward, and what eventually hits prime time is two or three versions removed from their initial attempt. The important thing is that those iterations have been developed in concert with customer feedback.
Sometimes we see technical people in the energy side working on iterations four, fix, six or seven in isolation from the customer, because they make assumptions about what the customer needs. I’m always encouraging them to get in front of the customers early – really early – and have those conversations about what they need. It’s not just about the technological features, either. What are the capital costs? What are the operational costs? What are the operational integration considerations? How does this need to play with all the other equipment and processes you have on site? That idea that you don’t know what you don’t know is actually much larger in the energy sector than I think most people realize. It’s only when you start those conversations that you start pulling back those shrouds and clearing up the fog and understanding how many things you need to address before you turn your technology into a product.
AO: Nobody’s happy about the current commodity price, but could it be a long-term benefit to the industry in that it will encourage everyone to focus more on innovation and not simply doing things because that’s how they’ve always been done? Is it forcing everyone to re-examine their operational footprint from top to bottom?
KF: I think that’s definitely the hope.
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