The oil and gas industry holds promise and danger in equal measure for water-tech innovators and their venture capital investors. The industry’s water needs are vast and growing, but so is its reluctance to adopt new technologies with no track record of reliability and safety. It is a paradox. The oil and gas industry operates in many water-scarce regions, utilising more water-intensive extraction techniques, such as hydraulic fracturing, and facing tightening water regulations. It knows it needs water innovation like never before, but on an operational level the magnitude of the associated risks are so high that it will rarely try experimental water technologies.
At Veolia, we have a business model that solves this paradox. We can deploy the new technologies of water-tech start-ups in the oil and gas field under a licensing agreement while reassuring the customer of quality, safety and reliability. Licensing is designed to work hand in hand with corporate venturing, with the latter providing the required development investment while Veolia provides the means to build the business and shareholder value more quickly than would otherwise be possible, an approach that could perhaps be described as venture licensing. We believe this approach is the key to unlocking water-tech growth.
Historically, water has been seen by the oil and gas industry at best as an important utility, at worst as a waste stream for treatment and disposal at minimal cost. This is now changing. The Leif Brief on Water Innovation in Oil and Gas, which Veolia has sponsored, highlights ambitious venture-backed innovative water-tech start ups that are responding to the oil and gas industry’s growing water problems. In some cases, the start ups are backed by oil and gas corporate venture capital.
For example, the venture unit of French energy giant Total invested in NanoH20, a high-efficiency desalination business that was sold to South Korean conglomerate LG for $200m earlier this year. The Leif report describes this sale as “the best water-tech exit in 2014” and “a great confidence booster for the water-tech sector”. Veolia was an early partner to NanoH2O, qualifying its membranes by means of pilot plants in the Middle East, the Mediterranean and Australia.
But NanoH2O is more the exception than the rule. As many readers of Global Corporate Venturing will know too well, water-tech has had mixed results for venture investors and is seen to be slow, capital-intensive and difficult. Interviewed in the report, Veronique Hervouet, senior vice-president of investments at Total Energy Ventures, helps explain why. “As in other capital-intensive industries, whose billion-dollar assets are expected to operate without compromising safety and reliability, innovations [in the oil and gas industry] must bring clearly measurable and proven added value without compromising safety and reliability.”
Asked to describe Total’s water-tech needs, Hervouet goes on to say: “From a technology view point, it is very much a tool-box approach to tailor solutions to specific needs. The tool box encompasses conventional physical, chemical and biological treatments, with emerging novel processes, equipment and new combinations of equipment and processes. The trend is clearly to enlarge the tool box and develop system engineering capability.”
Through our water technologies group, we at Veolia believe we have the world’s largest tool box of water treatment technologies for the oil and gas industry, combined with an unrivalled reputation for reliability. But we cannot claim to have all the technologies we need because the water requirements of the oil and gas producers are growing considerably and changing constantly. We seek to close these gaps by working with innovators to bring new technologies tothe market under licence.
This is not the passive licensing arrangement you might associate with the software industry. Ours is very much a hands-on approach involving performance validation, technical due diligence, engineering support, piloting and access to our markets. We are able to incorporate licensed technologies into the turn key solutions that our clients require to address complex operational problems, while resolving inevitable teething troubles without compromising safety or reliability. This is only possible because our clients know that Veolia will not walk away and will take full responsibility for our work.
For this licensing model to work, both sides – we and water-tech businesses – must gain. In return for providing water-tech businesses with faster market entry and validation, and revenues of course, we want a measure of exclusivity. Conventional models granting exclusivity in a particular region are difficult to manage as a global company. Exclusivity in one industry usually works better, as for example with the US company Genesis, whose rapid dewatering technology was originally developed for the urban dredging market. Veolia has exclusive rights to promote Genesis technology in the global mining sector as well as having approved vendor status in the oil sands market. See below for this and other examples of Veolia technology partnerships. Alternative models include, for example, exclusive licences covering specific Veolia key global accounts.
As well as benefiting the water-tech companies, this licensing approach is good for their investors. By having clearly-defined and limited licensing agreements, Veolia does not become too dominant a customer of the water-tech businesses, which are left free to grow in other markets. This means the companies’ exit options remain open.
The oil and gas industry has always been seen as conservative in adopting new ways, characterised by the queue of companies wanting to be second, but the absence of any wanting to be first. Such an approach is hardly surprising given the magnitude of the risks. An unforeseen incident with a new technology can lead to catastrophic loss of life or damage to the environment, but more commonly results in significant financial loss associated with the failure of a new technique to deliver the promised performance or reliability.
It is in this area – helping innovators and their investors cross the oil and gas industry’s “valley of death” – where Veolia’s licensing strategy has a positive role to play in helping reduce the time and cost of bringing innovations to commercial reality.
Headquarters: Albuquerque, US
Technology: On-site chemical generation technology
Partnership: Joint distribution agreement for downstream oil and gas water treatment, cooling tower water treatment, waste water reuse and industrial water treatment.“This is an exciting development for Veolia,” said Nathalie Martin-Ionesco, global director of Hydrex, Veolia’s water treatment chemicals range. “Miox technology brings a competitive edge to Veolia’s portfolio by effectively removing biofilm, reducing chemical usage and reducing carbon footprint.”
Investors: In June 2013, Miox announced a strategic investment from TEL Venture Capital, the corporate venture arm of Japanese semiconductor manufacturer Tokyo Electron. The amount invested was not disclosed. TEL joins DCM, Sierra Ventures, Flywheel Ventures and Schlumberger on the Miox shareholder registry.
Genesis Water
Headquarters: Denver, US
Technology: Rapid dewatering of dredged slurries or tailings at high throughputs, releasing clear water from a wide range of solids, immediately returning it to the waterway or industrial circuit.
Partnership: Veolia has exclusive rights to promote Genesis technology in in the global mining sector as well as conferring approved vendor status in the oil sands market. The Genesis Water system was originally developed for the urban dredging market. “The Genesis rapid dewater system will introduce a new, sustainable approach that will lower the cost of tailings management for our clients,” said Chris Howell, global market director mining and primary metals for Veolia.
Investors: Genesis Water is the main operating division of Colorado-based Joshua Water Technology, which raised $2m of fresh equity in October 2012 from investors, including the Impact Opportunities Fund, to finance its near-term expansion plans.
NanoH20
Headquarters: California, US
Technology: High-efficiency desalination via nano-tech membranes.
Partnership: NanoH2O had a partnership agreement with Veolia, which has supplied its membranes to two clients in the Americas, having first worked with NanoH2O to qualify the membranes by means of pilot plants in the Middle East, the Mediterranean and Australia.
Investors: Prior to its sale to LG in 2014, NanoH20 raised $40m from Total Energy Ventures, BASF Venture Capital, Khosla Ventures and others.