Introduction: The Current Oil Industry Landscape
It is no secret that oil price volatility over the past year and a half has caused turmoil in the energy sector. Between 2010 and 2014, crude oil prices stayed between $70 and $115 per barrel.[i] Then, at the end of 2014 crude oil prices dropped significantly to $50 a barrel.[ii] Since the end of 2014, crude oil prices have fallen below $35, with the price generally now sitting at around $50 a barrel.[iii] Fluctuations in crude oil prices have introduced factors that make it difficult for analysts to create models to predict where oil prices will go, resulting in speculations that vary widely, and leaving oil companies with little information on which to base their business decisions.[iv] Further, low crude oil prices have caused oil asset valuations to drop considerably, resulting in an uptick in private-equity backed joint ventures snatching up these assets at low prices from companies in need of cash to stay afloat, in the hope that the worst of low oil prices is behind the industry.[v] With the negative impact of low oil prices causing upstream and midstream companies to cease certain programs in order to preserve capital, consolidate, or go into bankruptcy, some companies are now investigating the startup world to find innovative technologies and ways of increasing revenue while cutting costs so they can avoid bankruptcy, hold on to their assets, and continue operating.
When oil prices were in the $70 to $110 range, oil companies were not necessarily looking to optimize their operations to save every penny. However, in the current economic climate oil companies are now looking to startups to provide them with inventive technologies they can use to remedy a wide variety of issues that cost oil companies significant amounts of money each year, which will in turn help them to mitigate the adverse effects of low oil prices.
Industry Separator: Analytics Startups Help Oil Well Operators Collect and Sort Through Big Data to Improve Oil Production and Cut Costs
Oil companies rely on large amounts of data (“big data”) when making technical decisions, such as finding out what resources lay below the surface, and how to extract those resources.[vi] Businesses invest in a vast array of technologies from visualization tools to seismic software that collect data to aid in decision-making.[vii] With the progression of technology in the past few years, affordable sensors that can collect and transmit data are now widely accessible at cheaper prices.[viii] However, the advent of technological advances associated with oil analytics has created growing complexities involved with the influx of big data, such as how to capture it, what to do with it, and how to unearth meaningful insights from the data.[ix] Analytical advantages could help oil companies improve production by 6 to 8 percent, and a survey of over 400 executives in several different sectors said that businesses with better analytics abilities were “twice as likely to be in the top quartile of financial performance in their industry, and five times more likely to make decisions faster than their peers and three more times more likely to execute decisions as planned.”[x]
Several startups saw the need for better analytics in the oil industry and wanted to satisfy this demand. One startup, Tachyus, which closed a $13 million series A round in 2015 with a subsequent $5 million investment in October of 2016, builds data tools for the oil industry that combine “data-driven models” with “physics-driven simulations” and machine learning.[xi] While oil companies have a large amount of data at their disposal, Tachyus observed that oil companies needed better ways to analyze and interpret their data.[xii] Oil companies usually have geologists analyze big data and “manually create a model of subsurface maps of oil,” which can take months.[xiii] Using Tachyus’ data analytics tools, oil companies can quickly access calculations and recommendations in seconds instead of months, which show operators how they can extract more oil from their wells in cost efficient ways.[xiv] The tool’s strengths lie in the tool’s ability to understand the unique aspects of individual wells, allowing for the platform to calculate and optimize certain processes, such as finding the ideal water injection rate, and to offer bespoke results tailored to the well’s specific conditions.[xv] Further, Tachyus’ tools help customers to answer two common concerns that span across many companies operating mature oil fields: first, how to inject CO2, water, or steam into wells in cost efficient manners, and second, where in their existing field to extract additional oil from.[xvi] Tachyus’ engine can also predict if there might be equipment failures so that oil companies can implement preventative measures before equipment breaks down.[xvii] Since its inception, over 6,000 domestic oil wells are using Tachyus’ data models to increase their oil production by 20 to 30 percent while decreasing oil production costs by up to 40 percent.[xviii] In a time when most oil operators have a large amount of data at their fingertips, what these operators do with their data through improved data analytics will be partly responsible for separating companies that can stay afloat from those that sink.
Connecting Operators and Service Companies: A Vendor Marketplace for Efficient and Safe Operation
Oil companies contract with many different parties offering a wide variety of services to keep their operations going. RigUp Inc., an Austin-based startup that recently closed a $15 million seed A round, is a software platform that has an online marketplace where exploration and production (“E&P”) buyers can obtain equipment vendors and oil-field services via the service provider bidding process, “validate and verify compliance attributes of the vendors, and pay via the platform.”[xix] In short, RigUp is a “bidding, compliance, and invoicing platform” connecting operators and services companies, while placing an emphasis on efficient and safe operations and transactions.[xx] Over $150 million in transactions are completed on RigUp’s platform each month, with 80 E&P companies and over 9,000 services companies taking part in the marketplace.[xxi] One of RigUp’s major selling points is that it streamlines the vetting process that operators have to go through when hiring vendors, as safety and compliance are major concerns for all oil well operators.
From Software to Hardware: Enhanced Imaging Tools for Detecting Oil Well Defects and Reducing Operation Related Costs
While accessing and analyzing big data and finding vendors to provide safe operation services are a large part of an oil well operator’s job, being able to see down their own wells is an important task too. Many businesses use antiquated technologies that can yield inaccurate results. DarkVision Technologies Inc., a startup which raised a $5 million series A round and a separate $3 million investment in September 2016, has developed an advanced downhole imaging tool that gives oil operators the ability to see inside their wells by producing high resolution 3-D 360 degree scans.[xxii] DarkVision’s technology is ultrasound-based which can see through opaque fluids that have inhibited the use of traditional cameras and other optics as oil well diagnostic tools.[xxiii] Further, the technology can image a whole kilometer long well at a sub-millimetric level.[xxiv] DarkVision’s technology is able to detect and identify a wide variety of downhole issues across a number of applications, such as production tubing defects, casing corrosion and erosion, sand screen damage and plugging, perforations and sliding sleeves, connection cracks and failures, and obstructions and fishing.[xxv] The technology’s benefits include reducing well operating and intervention costs by finding issues when they are small before they worsen, increase efficiency in terms of finding the sources of problems quickly, and allowing operators to solve downhole failures with a detailed visual understanding of the problem.[xxvi]
Conclusion: Oil Companies Need to Spend Money to Make Money
The overarching problem facing the oil industry is relatively simple: Oil prices are low. Therefore, oil companies need to extract more oil at lower operating costs to make up for revenue deficits caused by low oil prices. The solution to this challenge however is not simple. Many oil companies have responded by laying off thousands of workers to create more working capital, while others have gone into bankruptcy, or have sold assets at discounted prices to willing buyers. But there is an alternative way forward. There are thousands of different processes involved in operating an oil well, and many of these processes can be optimized using new technology. The oil industry is an inherently “old” industry, and as such many aspects of the upstream and midstream industry require updating. Technology startups that can look at the oil industry with fresh eyes are beginning to take notice of the oil industry’s technology needs and are creating ground-breaking ways of improving many of the processes involved in operating oil wells.
Although energy-related startups have largely stayed in the clean tech industry in recent years, the number of oil industry startups is increasing as processes like advanced data analytics become a key part of what separates successful oil companies from the crowd.[xxvii] When more oil companies catch on to this trend and see how much the startup community can contribute, the demand for advanced data analytics, improved imaging software and hardware, and efficient service management in the oil industry will increase, and companies like Tachyus, RigUp, and DarkVision will start providing more state-of-the-art ways of helping oil companies drive down operating costs while increasing oil production.
[i] Clifford Kraus, Oil Prices: What’s Behind the Volatility? Simple Economics, The New York Times (Sep. 29, 2016), available at http://www.nytimes.com/interactive/2016/business/energy-environment/oil-prices.html?_r=0.
[iv] The M&A Lawyer, Interview: The Cloud Energy M&A Picture, 19 No. 9 M & A Law. NL 3, available at https://1.next.westlaw.com/Document/I5e089a8877bb11e5b299dff8fcf4dc0f/View/FullText.html?transitionType=UniqueDocItem&contextData=(sc.Default)&userEnteredCitation=19+No.+9+M+%26+A+Law.+NL+3.
[v] Ryan Dezember, Private-Equity Firms (Finally) Finding Value in the Oil Patch, Wall Street J. (Jul. 18, 2016), available at http://blogs.wsj.com/moneybeat/2016/07/18/private-equity-firms-finally-finding-value-in-the-oil-patch/; Ernest & Young, Capitalizing on Opportuniies: Private Equity Investments in Oil and Gas, available at http://www.ey.com/Publication/vwLUAssets/ey-capitalizing-on-opportunities/$FILE/ey-capitalizing-on-opportunities.pdf.
[vi] Riccaro Berocco and Vishy Padmanabhan, Big Data Analytics in Oil and Gas, Bain & Co., available at http://www.bain.com/Images/BAIN_BRIEF_Big_Data_analytics_in_oil_and_gas.pdf.
[ix] Deloitte, Oil & Gas Analytics Solutions: Achieving Rapid Insights, available at http://www2.deloitte.com/us/en/pages/deloitte-analytics/solutions/oil-and-gas-analytics.html
[x] Berocco, supra note 6.
[xi] Katie Fehrenbacher, Oil Data Startup Tachyus Fuels up with Funding from Founders Fund, Fortune, (June 1, 2015), available at http://fortune.com/2015/06/01/tachyus-funding-founders-fund/.
[xii] Tomio Geron, Oil Industry Vets Back Oil Data Startup Tachyus With $5 million, Wall Street J., (Oct. 12, 2016), available at http://www.wsj.com/articles/oil-industry-vets-back-oil-data-startup-tachyus-with-5m-1476271805.
[xv] Fehrenbacher, supra note 11.
[xvi] Geron, supra note 12.
[xvii] Fehrenbacher, supra note 11.
[xviii] Id.; Geron, supra note 12.
[xix] Yuliya Chernova, RigUp’s Oil-Well Service Gets $5 Million Despite Oil Price Dip, Wall Street J., (Apr. 14, 2016), available at http://blogs.wsj.com/venturecapital/2016/04/14/rigups-oil-well-service-gets-15-million-despite-oil-price-dip/.
[xx] RigUp, available at https://www.rigup.com/#/.
[xxi] Chernova, supra note 19.
[xxii] Products & Services, Dark Vision, available at http://darkvisiontech.com/products-services/.
[xxiii] About, Dark Vision, http://darkvisiontech.com/about/.
[xxvii] Eliot Peper, Tech Startups are Taking on the Oil Business, Venture Beat, (Jul. 24, 2015), available at http://venturebeat.com/2015/07/24/tech-startups-are-taking-on-the-oil-business/.