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Venture Investing in Energy Disr

VIEWS: 3 PAGES: 17

									    NEW ENERGY
OPPORTUNITIES IN THE
   GLOBAL ARENA
                      2004
     Confidential - Property of Contango Capital   1
                     Management
         The Energy Industry Is at a Major
              Inflection Point Today
   Three                                                                                                                Three
   Major           Conventiona                                                               Environmenta             Additional
Investment           l Energy                                                                    l and                Pressures
  Themes           Supply and                                                                 Regulatory
                     Demand                                                                     Issues
                    Situation


                                                   Change
             Power                                Occurring                                           Industry
             Reliability
                                                  in Energy                                          Innovation
             and
                                                                                                       in Short
             Quality                               Industry                                             Supply
             Demands




                         Portable                                                         Security
                          Power                                                           Concerns
                       Requirement
                            s

                                                                                              Source: Contango Analysis
                                                                                                                          2
                                 Confidential - Property of Contango Capital Management
Conventional Energy Supplies Are Peaking and
Developing Country Energy Demand Is Soaring
   BP estimates that at the current global growth                      Crude Oil Refiner Acquisition Cost – EIA
    rate, we will need:                                                              Graph & Data
        An additional 7.25 mm bpd to meet demand in
         2007
        39mm bpd by 2010 with current 4.8% depletion
         rate

   Increasing gap in cost drivers
        Productivity is declining rapidly in the
         development and production of oil
        Operating costs are rising faster than inflation

   China and India alone will need
        An additional 13mm bpd by 2010 at 15% per year                                                                    Estimated World Oil Demand and Current Supply
         demand increase (Rate that Japanese demand




                                                                                  Millions of Barrels of Oil Per
         grew between 1965 and 1973)                                                                               105.0
                                                                                                                    95.0                                                            US/OECD IEA trend rate



                                                                                                                                                                                    1.7% per year with 5%
                                                                                                                    85.0
    If China and India:                                                                                             75.0
                                                                                                                                                                                    error




                                                                                               Day
                                                                                                                    65.0
        Increase their per-capita consumption to the                                                               55.0                                                            Current Supply Declining
                                                                                                                                                                                    at Current Depletion Rate
                                                                                                                    45.0
         level of South Korea (only 60% of U.S.)                                                                    35.0
                                                                                                                                                                                    of 4.8% Per Annum


        Demand in these two countries alone reaches


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         119 mm bpd of oil (50% increase over current

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         global production of 80 mm bpd)                                                                                                              Year
                                                                                                                                                                                         By 2014
   Global energy consumption profile shows                                                                                                                                          Production Gap
                                                                                                                                                                                     is approx 50mm
    rapid migration to electricity                                                                                                                                                         bpd


                                                                                                                            Source: Barron’s and British Petroleum                                    3
                                   Confidential - Property of Contango Capital Management
                The World is Dependent on a
               Small Number of Oil Fields and
            Those Fields Are Peaking in Production
000 Bbls/Day
   (% Of
 World Total)
       36,200                                          4,000 +
       (53%)                                         Other Fields




                7,900                            61 Fields Between
                (12%)                            100,000 – 200,000 B/D




                                             29 Fields Between
                   6,400                     200,000 – 300,000 B/D
                   (9%)

                                                                           Dr. King Hubbert predicted in 1956 that U.S. oil
                                                                           production would peak in about 1970 and
                        4,100           12 Fields Between                  decline thereafter
                        (6%)            300,000 – 500,000 B/D
                                                                           U.S. peaked in 1972 at 11, 185, 000 bpd
                                                                           Geologists using same methods estimate
                           13,900   14 Fields In Excess Of                 world production peak between 2000 and 2012
                           (20%)         500,000 B/D
                                                                    Sources: Simmons & Company International & Hubbert’s Peak
                                                                                                                                4
                                   Energy Is Oxygen
                                For the Digital Economy
  Causes of Network Downtime

                                                                               Business is moving toward an
                    Router
                    Failure              Disk Drive
                     12%                  Failure
         Operator                           15%                                 electronic medium
          Error
           7%


       Heat
        9%
                                                      Software
                                                                               Consumers around the world are
      Cabling
                                                      Glitches
                                                        23%
                                                                                demanding a higher level of reliability
        3%
                                                                                as a part of a higher standard of living
            Power
           Outages                 I/C & Card
             16%                     Failure
                                       15%                                                     "Digital Economy" Power Density (W/sq.ft)

Source: Strategic Research Corporation

                                                                                   Internet D ata C enters
 Power Density in the “Digital                                                                     ISP 's

  Economy” is as much as 12X of that of                                                   Search Engines

                                                                                          Online B ro kers
  the Industrial Equipment Economy                                                              E-T ailers


 Damage from Power Surges estimated
                                                                                            Web H o sting

                                                                                    Semico nducto r F abs

  to be over $100B across all “Digital                                        Semico nducto r C leanro o m

  Economy Sectors”                                                                                           0    50       100      150      200        250




                                                                                                        Source: EPRI, Stephens Inc.; Jupiter Research
                                                                                                                                                        5
                                               Confidential - Property of Contango Capital Management
               Lack of Investment Is Choking
                Electric Distribution System
 Investment of $56 Billion in
                                                                                           Average Annual Growth Rates in US Transmission
  Transmission Assets needed between                                                       Capacityand Summer Peak Demand for 1979-1999
  2000 – 2010 in order to keep the Grid in                                                               and Projections for
                                                                                                            1999 - 2009
  current condition
                                                                                          3.5%
 In 1999 U.S. Utilities spent over $3 billion




                                                                   Growth Rate (%/year)
                                                                                          3.0%
                                                                                                                                        Transmission
  to operate and maintain transmission                                                    2.5%
                                                                                                                                        (GW-miles)
                                                                                          2.0%
  lines                                                                                   1.5%                                         Summer Peak
                                                                                          1.0%                                          (GW)
 Transmission Bottlenecks cost                                                           0.5%

  consumers at least $500 million per                                                     0.0%
                                                                                                 1979 - 1989 1989 - 1999 1999 - 2009
  summer, according to the FERC                                                                             Time Period

 Bottom Line – Electric Utilities have and
  will continue to under-invest in Electric
  Grid Infrastructure




                                                                                                                       Source: Eric Hirst, PhD, EEI 6
                               Confidential - Property of Contango Capital Management
                 Portable Electronics Growth
                       Is Threatened by
                  Inadequate Power Sources
Growth in Portable Devices                                History of Portable Power Sources




• Energy density requirements for powering portable electronic devices are not being met
• Lithium Ion is being challenged due to safety issues
• Technology is advancing at 5% or less in energy density improvement
• Huge breakthrough in battery technology has not occurred for over 10 years
• Lack of long runtime, light, and sizable power source is limiting portable electronic
  innovation (Intel’s investment in fuel cells is an example of attempt to solve problem)



                                                                                          Source: Motorola   7
                                 Confidential - Property of Contango Capital Management
       Geopolitical Security Concerns Are
           Squeezing Energy Prices
   The volatile Middle East will garner an
    increasing share of the global hydrocarbon
    market since OPEC controls 77% of the
    global oil reserves and currently
    comprises only 32% of global production
   The nature of interdependency and lack of
    investment in both the U.S. and Western
    European electric and natural gas
    infrastructure raise considerable system
    failure risks
   Modern militaries require reliable power
    sources for weaponry, computers, and
    other equipment, especially when crossing
    large, sparsely populated distances at high
    speeds (a la the run-up to Baghdad in
    2003)
   Internal political strife in Saudi Arabia
   Arafat’s death

                                                                               Sources: EIA & World Sites Map Collection website
                                                                                                                            8
                             Confidential - Property of Contango Capital Management
Environmental and Other Regulatory Issues
 Are Creating Pressures and Opportunities
       In the Global Energy Markets
   Air and water quality are major issues                            Atmospheric Concentrations of
    with increasingly global importance                                Carbon Dioxide Since 1750
   The pressure from U.S. and Global
    environmentalists continues to escalate
   Concern over global warming is more
    likely to continue over the next 10 years
   Declines of oil and natural gas reserves
    place greater emphasis on dirtier fuels to
    meet demand (i.e. coal)
   Any U.S. energy legislation will have an
    impact on the current capital structure in
    the energy market
   Re-election of Bush portends passage of
    an Energy Bill in 2005



                                                                                                      9
                             Confidential - Property of Contango Capital Management
          Energy Industry Requires
    Charting a New Investment Approach
We drilled our way out of the last energy crisis;
 no major oil and gas fields to be found now

This crisis needs to be answered from the
 demand side

Example – New technologies to squeeze more
kilowatt hours out of a molecule of gas

Reliability and Application historically drive
 change in the energy industry

Conventional Approach – the Upstream,
 Midstream, Downstream sectors




                                                                                    10
                           Confidential - Property of Contango Capital Management
                             Why Fuel Cells?
            Advantages                                                                          Choke Points
Fuel cells act as a battery replacement,                                      Hydrogen storage or production
often at a much lower weight and higher                                         technologies
power density than existing technology
                                                                                     Weight
Fuel cells act as an efficient generation                                           Cost
technology, solving the problem of Btu                                               Amount of energy or runtime
cost
                                                                                       for the fuel cell
Fuel cells provide a reliable power                                           Conversion device
source that can work with and permit                                                 Cost
wider use of other forms of renewable
energy, such as solar and wind                                                       Life
                                                                                     Ambient operating temperature
Fuel cells and hydrogen are efficient at
converting natural gas into electricity Lead Acid Batteries
                                Rechargeable,                                              Jadoo SuREII
                                                (Gel Cells)                              Hydride Cartridge




                                                                                                                 11
                                      Confidential - Property of Contango Capital Management
                 First Markets, First Profits
 Mid-wattage (20 to 300 Watts) portable markets
      Pro video camera power
      Covert camera power
      Military solutions
      Medical systems
      Pipeline monitoring stations


 Back-up Power
      Telecom back-up
      Data center back-up
      Remote powering of homes / commercial sites
      Developing country power




                                                                                     12
                            Confidential - Property of Contango Capital Management
     Where Will Hydrogen Take Us?
 Hydrogen is a storage medium
 Fuel cells will serve as batteries first, then migrate to
  generation
 Fuel cells must come down in cost and up in reliability
  and life
 Fuel cells will eventually decrease the amount of
  hydrocarbons needed per capita through:
    Ability to store wind and solar energy on site and bring reliability
     to renewable energy
    Higher efficiency




                                                                               13
                      Confidential - Property of Contango Capital Management
             Funding Issues for
       Alternative Energy Companies
         The Collapse of Energy Trading and Merchant Companies

  2000          2004                                  • Sudden collapse of the U.S. and European
                                                        Energy Merchant sector reduced a significant
 Enron         Enron                                   source of innovation and energy venture
                                                        investments
 Reliant       Reliant                               • Energy ideas and entrepreneurs are now
                                                        scattered across the landscape. No clear
 Dynegy        Dynegy                                  funding alternatives

 Aquilla       Aquilla                               • Erosion of venture investment domain
                                                        expertise has created a barrier to venture
 Williams      Williams                                funding. Lack of expertise slows the velocity
                                                        of venture capital

 El Paso       El Paso                               • 1970’s status quo revisited – Slow-moving oil
                                                        majors, utilities, and financial institutions
                                                        again dominate the energy business


  The Source of over $1 billion in Energy Venture Funding no longer
  exists in the market.
                                                                                                 14
                      Confidential - Property of Contango Capital Management
                           The Solution:
    Formation of Funds Focusing on Alternative Energy Technology




         Contango Capital is looking for technologies that solve the
         energy storage issue, provide a cheap and storable energy
              source, and/or reduce the cost of hydrocarbons.



Contango Capital divides the industry into:
 Reliability / Portable Power Solutions
 Cost of the Btu, synthetic or real
  hydrocarbon Btu



                                                                                  15
                         Confidential - Property of Contango Capital Management
 Contango Capital’s Investment Strategy

 Contango Capital
  invests in companies
  that are:
   Three years or fewer from
    commercialization (low rate
    production product launch,
    revenues)
   Targeted to specific,
    identified markets
   Focused on enterprise
                                                 Contango Capital focuses on achieving liquidity
    solutions, not incumbent                           events for investors through:
    utility solutions
                                                 1.    Purchase by larger company
   Positioned to deliver                        2.    Investment going public – Current public market
    multiple value propositions                        valuations average 15X revenues for the energy
                                                       technology industry

                                                                                                  16
                      Confidential - Property of Contango Capital Management
                   Disclaimer
This material should not be construed as an offer to sell
or a solicitation as an offer to sell any security in any
jurisdiction where such an offer or solicitation would be
illegal. We are not soliciting any action based on this
material. This material is for general information
purposes only. It does not constitute a personal
recommendation or take into account the particular
investment objectives, financial solutions, or needs of
individual investors. Before acting on any advice or
recommendation in this material, individuals should
consider whether it is suitable for their particular
circumstances and, if necessary, seek professional
advice.

                                                                          17
                 Confidential - Property of Contango Capital Management

								
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