Bringing smaller investors to the oil and gas sector
Historically the oil and gas sector has had a very close relationship with institutional investment. The reason for this was relatively simple: the size and complexity of oil and gas projects meant that leadership teams preferred to work with professional investment organisations that could fulfil financial requirements quickly and with the minimum of fuss. In short: most money, least effort. The world is changing however, and the oil and gas sector needs to spread its net a wider.
As we have discussed on several occasions, the complexity of oil and gas projects coupled with the timescales involved has meant that it is easier to focus fund-raising efforts on major investors that have the depth of pocket to fulfil financial requirements with very little effort.
There has been a well-trodden path between oil and gas and institutional investment organisations with relationships that sometimes stretch back decades.
The end of a special relationship?
In recent years however, some oil and gas organisations have started to find it more difficult to drum up funding from traditional sources. Some in the investment industry have been raising an eyebrow at what they perceive as a level of complacency in the natural resources sector. There are also opportunities arising elsewhere that offer more consistent returns with, perhaps, a little less of the environmental stigma that oil sometimes attracts.
A year ago, this was a long way from being a problem. The central role that the oil and gas sector plays in the global economy meant that it was unlikely that major projects would seriously struggle to find support in the near term. There was simply a little more resistance.
The problem is that as support frays at the edges, the smaller organisations and projects may find it more difficult to find funding. If they go out of business, the reduction in capacity will drive prices up. The industry has always been cyclical so this might not be too much of a problem, where it not for the fact that other forms of energy are in the process of becoming viable.
At the same time, Covid-19 has completely changed global economics. We don’t know how things are going to evolve over the next six months, but we do know that the oil and gas industry faces a period of unprecedented uncertainty. Uncertainty can be an opportunity for investors, but oil and gas firms need to find ways to ensure funding.
Finding an alternative
So what should the oil and gas sector do? We believe that the answer can be found at the smaller end of the investment market, by making it possible to fund oil and gas projects through many small contributions rather than a few big ones.
There are several reasons why approaching the smaller end of the market hasn’t really been viable in the past.
The most obvious is the size of the administrative task. The amount bureaucracy that would be involved in managing 200 small investors compared to a single institutional investor would totally changed the economics of a project, diverting funds away from the project itself and into administrative management.
The blockchain can remove this hurdle, automating investment management to a far higher degree than would have been possible even five years ago.
A blockchain strategy would also make the investment process far more transparent from a regulatory perspective, ensuring that know-your-client and anti-money laundering expectations were met without having to devote administrative time away from the project itself.
Looking at it from the individual investor perspective, the blockchain would also make it far cheaper to invest in oil and gas. From the investor perspective, this would create a valuable way to balance a portfolio, adding an asset class that has been prohibitively expensive in the past.
It could also remove some of the challenges that activist investors have created over the last few years. With projects attracting funding from a far more diverse set of investors and the investment itself being far more transparent, an organisation might be less likely to find its ambitions curbed by activists at a key point in project development.
Ultimately, the oil and gas sector needs to evolve quickly to ensure that it can react to rapidly changing circumstances. The blockchain creates an opportunity for the industry to take a fresh approach to some of the challenges that it faces.
If you would like to hear more about the PermianChain approach to the oil and gas sector, join us on permianchain.com
PermianChain is a proprietary technology platform that brings together the crypto-mining and oil and gas sectors. Using a permissioned access blockchain, PermianChain makes it possible to utilise stranded and wasted energy resources, unlocking liquidity and transforming the way that oil and gas projects are funded, produced, bought and sold. Established in 2018, PermianChain Technologies is a pioneer member of the Blockchain Research Institute (BRI) and start-up member of the Petroleum Technology Alliance Canada (PTAC).