Solar Oil Project: Direct Exposure To Oil Via Tokenized WTI Production

Summary

• The Solar Oil Project (SOP) tackles an environmental and economic challenge: underutilized and abandoned oil wells in the USA.
• Thanks to ecofriendly and ultra efficient pumps powered by solar or other energy sources, wells become profitable again, preventing ecological disasters (water contamination, leaks).
• Investors in the Solar Oil Project can claim production rights on the project wells portfolio by buying SOAX tokens, and receive pro rata SOPX tokens redeemable for 60% of WTI.
• There are huge pressures on oil majors to pivot to renewables, which should reduce CAPEX. This might be a great opportunity for investors to get exposed to WTI prices.

Why The Solar Oil Project?

In the USA alone, hundreds of thousands of oil wells are underutilized or abandoned. Those wells present an environmental hazard: leaks can contaminate the land or water. Methane leaks can even provoke explosions. The US taxpayers or the landowners have to support the rehabilitation costs. In North America alone, it is estimated that half a trillion dollars will be required to eliminate this issue, that is being discussed in the media:

• Special Report: Millions of abandoned oil wells are leaking methane, a climate menace (Reuters)

• 680,000 wells hold waste across US -- with unknown risks (NBC News)

• Why 'Orphan' Oil and Gas Wells Are a Growing Problem for States (PEW)

Many of those oil wells are not profitable when WTI prices reach a certain threshold. Some produce so little that owners and companies are not interested in pumping the oil. Price volatility makes owners reluctant to invest in a potentially unprofitable asset.

However, what is true for decade old pump-jacks is challenged by modern methods. By installing state of the art pneumatic pumps specially designed for oil extraction, those wells can become profitable again. The Solar Oil Project aim is to convince well owners to let them replace their old machinery with modern, low maintenance, and ecofriendly pumps. In short, with a royalty model they simply let SOP take control of the oil patch (no down-payment, no maintenance fees, the project takes care of this thanks to your investment). Well owners receive royalty every month, as investors do.

The Tokenized Model: SOAX and SOPX

The Solar Oil Project works more or less on the crowdfunding model, with a major twist (royalties). They chose a tokenized model to execute it (although big investors can participate in more traditional ways). Don't worry, you don't need to know anything about crypto or blockchain to invest (you do it via their own centralized platform). Each SOAX token that you buy represents 10 years production rights on the wells portfolio you allocated your tokens to. The price of a new SOAX is always 10 cents.

Everyday the wells production is converted to SOPX, a tokenized version of a WTI barrel. You can redeem anytime your SOPX on the platform for 60% of the value of one barrel of WTI crude. The remaining 40% are used to pay the well owner and the Solar Oil Project costs.

Now the project generates a bit north of 2.5 barrels of oil per day for every 1,000,000 SOAX ($100,000 investment). Let's say you invest $10k, you will therefore get 0.25 SOPX per day. You can sell your production immediately or wait, it is up to you.

How The Solar Oil Project Operates?

The company started experimenting with new generation pumps in 2017. Once the viability was established, they moved on to offer to investors the possibility to participate.

When you buy SOAX, you basically provide capital to the company. They use that capital to buy new equipment and deploy it to new wells, finance maintenance operations, etc. Once you "stake" your SOAX you start claiming your production rights for 10 years.

The production figures are reported daily, either via smart meters or by the well owner (48h delay). The project platform takes into account those figures to allocate SOPX tokens pro rata to the participating investors.

Of course the Solar Oil Project sells immediately the production, it doesn't stock the oil waiting for owners to sell their SOPX. To make sure they have the money to pay investors redeeming SOPX produced at a lower price, they take hedges if and when required (oil futures, options, etc.).

How To Invest In The Solar Oil Project?

Here is how to invest in a nutshell:

1. You register on the Solar Oil Project website

2. You buy SOAX tokens (USD 0.1 = 1 SOAX), with wire transfer, Cash App, Zelle or cryptos

3. Your account gets credited with SOAX in usually less than 24 hours

4. Once "staked" (tokens allocated to a portfolio in a "contract", right now there is only one portfolio available), your tokens start to generate oil. Daily, your account is credited with SOPX

5. After 10 years, your SOAX tokens cease to exist

SOAX ROI

If this tokenized model has drawbacks, it also provides advantages. One of them being the ability to predict your ROI based on 2 assumptions:

• WTI price

• Well production

The actual production is a bit north of 2.5 bpd for every 1,000,000 SOAX. This should remain stable (the management is aiming for 3 bpd, but I would rather assume 2.5). Let's say you invest $10k, you will therefore get 0.25 SOPX per day. This equals to around $10 per day at current price. At the end of those 10 years, you will have collected around USD 35,500 assuming WTI price average equals current price ($65). You can earn much more if you compound.

The Solar Oil website has a calculator that lets you simulate any investing scenario based on WTI price, well production, investment size and compounding. You can play around with that in order to estimate potential ROI based on your assumptions.

Based on conservative assumptions (production of 2.5 and average WTI price $50), breakeven occurs after 44 months. With current WTI price, you break even in less than 3 years (34 months) if you don't compound.

Who Is Behind the Solar Oil Project?

The project is lead by a mix of experts in various fields. Hitesh Juneja is the CEO and CSO. He has a "multi-billion-dollar business development experience in eCommerce and financial markets", according to the Solar Oil website.

The operator of the project is Silver Edge Energy, a company incorporated in Wyoming. Their website has a lot of interesting information. You can invest via them in a more traditional way. But this is only for accredited investors willing to invest at least $100,000. The Solar Oil Project is therefore the “for the masses” iteration of this investment opportunity (you can invest as little as $20 via SOP).

Gary Sommese, from the company Air Lift Technology and CTP of Silver Edge Technology, "is responsible for ensuring timely deployment of the pumping technology on wells in the SOP portfolios". He has designed the patented pump that is used on the project wells. Given his involvement in the project, he has awarded exclusive use rights of his pump to Solar Oil Project/Silver Edge Energy. His team is the central piece of the project, as they provide the tech and the expertise that is crucial to its technical execution. For those coming from crypto, it is therefore not your usual crypto project lead by inexperienced people basically selling dreams and promises.

Is It Really Solar?

One thing that puzzled me when I researched the project is the impression that solar energy will be strictly used to power the pumps. Given the obvious limitations of this energy source, I couldn't see how it could work, so I asked questions. Here is the answer that I got:

"We will be using solar, wind and natural gas in combination with pulling power directly from grid. What power source we choose to use will be contingent on cost of CAPEX in relation to how efficient and the savings to our OPEX after it is installed. It is most critical for the electricity used in powering the ALT pumping systems be reliable and stable to ensure optimal oil extraction on the wells and regions we are deploying in."

"Using solar during the day coupled with grid power will help ease some OPEX cost by allowing us to consume less peak electrical hours from the grid during the day. If we are deploying in areas where wind makes the best sense from CAPEX and OPEX perspective, then we will be using it in combination with grid electricity in the same capacity as mentioned above with the solar."

To me those words were reassuring. But it is important to know in case you don't want to invest in something that is not purely solar.

SOAX Or Oil Major Shares?

Investors interested in energy will probably want to compare the potential ROI of oil major shares and SOAX. Unfortunately, if it is relatively easy to predict SOAX ROI, it's harder for stocks like XOM, CVX, etc. Of course oil price has an impact, but management decisions also matter, investors mood regarding the stock and/or the sector, etc. This article tried to value XOM based on oil price.

20 years ago XOM share was worth around $45. After reaching a peak of around 105 dollars in 2014 (when WTI was around 100 dollars too), the stock is now worth around $58 after reaching a low of around 30 dollars post Covid. Based on that we should not expect crazy share price appreciation.

XOM price - Source koyfin

Currently XOM pays a dividend of 6%. By comparing WTI price (which allows us to estimate quite accurately SOAX ROI) with XOM stock price, we can establish SOAX offers a better yield. 

WTI price - Source koyfin

Some scenarios

Let's go through some basic scenarios to quantify the difference.

Status quo

Assuming an average WTI price of $65 for the decade to come, no substantial capital gains are to be expected, if history is a guide, if you invest now in an oil major stock that still focus on fossil fuels. You would collect the dividend, which would be around $600 dollars per year assuming the current yield is maintained (6%). After 10 years, you would end up with:

• XOM: $10k shares value + $6k dividends = $16k
• Solar Oil: $0 token value + $35k revenues =  $35k 

Bullish scenario

Now let’s assume oil reaches $100, it would imply Exxon at around $100 per share (its price between 2011 and 2014, when WTI ranged between 90 and $110, which should be generous given the downward trajectory of the stock): :

• Exxon: $17.2k shares value (+72%) + $10.3k dividends (72% increase) = $27.5k
• Solar Oil: $0 token value + $54k revenues = $54k

Bearish scenario

Finally, let’s assume oil averages $40 in the years to come. To calculate XOM share price at around $53, I assume the stock price will go down, but not that much since the stock was hit hard in March 2020: :

• Exxon: $9k shares value (-10%) + $6k dividends (assuming it’s not lowered, a generous assumption) = $15k
• Solar Oil: $0 token value +  $22k revenues  = $22k 

As you can see, SOP wins in every scenario (around 50-100%). Of course this is a very, very basic assessment. Exxon produces natural gas, light crude around the world, it has midstream operations (pipelines), downstream (gas stations), produce chemicals… However, given the correlation between XOM and WTI prices, those rough calculations highlight that, with a pretty good margin of error, currently SOP should yield more than an investment in an oil major... if everything goes right.

So let me be clear, I am not suggesting that people should sell their energy shares to buy SOAX given the specific risks attached to the project (see below). I didn't do it. In case of a major problem, production might stop and your SOAX would become worthless. However, if things go well it is an effective way to bet, if not on higher oil prices, on stabilization around 60 dollars given the positive ESG component of the initiative.

The Risks

As we have seen, SOAX might be a lucrative investment. However, there are risks that are worth considering:

• Tokenized model risk: the tokenized model carries some risk. While equities require companies to publish information about their accounts and results, here we are in some kind of black box situation. The Solar Oil Project might become more transparent in the future since we are in the first inning, but you might want limit your exposure until it becomes more established

• Regulatory risk: saying that fossil fuels are not loved in the US right now is an understatement. In principle the Solar Oil Project should be immune to new regulations that might seek to curb oil production in the States since SOP serves an environmental purpose, but nowadays you never know

• Oil price risk: if WTI price collapses for a reason or another, your income will be directly impacted since you get 60% of WTI price per barrel allocated to you. However, a $19 WTI barrel would allow you to recover your capital, you would lose money only under that very low level

• Execution risk: as every company, the project could fail execution, hence leaving you with worthless SOAX

• Illiquid investment: at the time of writing, it is not possible to exit your position. The project said they will create a secondary market in order to allow investor to sell their ongoing contracts, but there is no date to as when it will be possible. Also, we cannot predict how liquid this marketplace will be

On a personal level I took a limited position. I won't compound so that I derisk ASAP my investment. If transparency increases and project gains in legitimacy, and oil prices don’t collapse of course, I will increase my investment, with fresh funds and/or with the sale of my energy stocks (XOM, OKE).

The Misguided War Against Oil

There are at the moment a lot of heated discussions about the oil sector. In the States, if we want to see things in a binary way, we have:

• One camp made of the “evil Trump supporters” who deny climate change and don't care about pollution, are the puppets of big oil

• One camp made of “daydreamer hippies” who want to stop oil production ASAP, without thinking about the consequences

As a European, I don't identify to any group, and in general I don't talk about politics when I discuss investments. I'm a pragmatic who believes in ecology, but not at the cost of humanity. At this pace, activists and zealots might very well decimate the West oil industry. But they won't be able to kill it, simply because we won't be able to maintain our actual living standards without oil before decades. So we might very well get a scenario in which oil consumption will go down, but prices will increase. Maybe dramatically.

We live in a strange world. On one hand, the first mandate of governments and central banks is growth generation. Since growth is the direct result of a higher economical activity, it requires more energy. However, those same powers are rushing for fossil fuels replacement with renewables, which simply cannot compete with oil and NG right now. If they could, we wouldn’t have carbon taxes, subsidies, etc.

Low energy prices and petrochemical products were one of the main (if not the principal) factors that allowed the dramatic improvements in the standards of living of the Western world during the last century. Those are required to allow the developing world to enjoy as well modern life until renewables become competitive. Oil will remain a crucial commodity (petrochemicals).

It is natural to work towards sustainability, to decrease our impact on the environment. But it has to be done in an orderly fashion. The rush to get away with oil might very well, at the end, benefit to the people those activists want to fight, namely the oil industry and their investors, by limiting offer. With the Solar Oil Project you have the opportunity to take a measured stance with your investment, which is contributing to a greener oil industry while providing an essential commodity at an affordable price.