Energy Companies Follow the Big Pharma Model for R&D

By Peter Fusaro

With high energy prices, one would think that energy companies would be 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 (CVX), Shell (RDS.A), BP (BP) and Conoco Phillips (COP) have active venture arms.

Since this question has puzzled me for the past five 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 funded by venture capital funds. They are following the Big Pharma model. Big pharmaceutical companies today are not creating many 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. I see that coming from private equity groups, not hedge funds or venture capital. We recently have seen both KKR (KFN) and Blackstone (BX) 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!

Disclosure: None

Comments

[john s. gordon:]

no new products except through acquisitions - a recipe for a dull gray ho-hum company.
> jack

2008 Sep 18 08:19 AM

[Tim Miles:]

Meanwhile IT and electronics firms like Apple, HP, Intel, IBM, and Microsoft remain relatively strong in this weak economy because they had the wisdom to invest heavily in R&D.

2008 Sep 18 08:39 AM

[Steven Ward:]

R&D can be frustratingly elusive in results. Look at Apple and Microsoft, initially startups. Apple in a garage with only two guys. Then look at IBM and their vast amounts poured into their OS and PC harware.
We all know who is left standing.
That maybe the model we are liikoing at instead.

2008 Sep 18 09:12 AM