Saudi Aramco’s venture arm pumps cash into startups seeking to reshape the energy industry

Houston Chronicle.
Houston Chronicle.

Jim Sledzik is a firm believer that the energy industry is in the middle of a fourth industrial revolution. Only this industrial revolution isn’t about big engines or big machines – it’s about big data and big machine learning accelerating the pace of automation and efficiency from the oilfield to the oil refinery.

As managing director of the North American arm of Saudi Aramco Energy Ventures, Saudi Aramco’s venture capital subsidiary, Sledzik’s mission is to help ensure the company is at the forefront of the one of the biggest transformations of the energy industry to date. Saudi Aramco Energy Ventures acts as a gatekeeper of between dozens of eager tech startups and the ears of executives at the one of the biggest companies in the world.

While Saudi Aramco, Saudi Arabia’s state-owned oil company, has long poured millions of dollars into research and development, it’s also been building a lesser-known strategy over the past six years focused on identifying startups with potentially lucrative technologies to be applied to the energy industry and related fields. Saudi Aramco Energy Ventures is focused on finding promising technologies that can be used in the oil, gas, chemicals, water renewable energies and nonmetallic composites.

Formed in 2012, SAEV generates returns to Aramco as it provides a platform for startups to see their products adopted on a mass scale by a company whose profits outpace giants like Apple, JP Morgan Chase and Exxon Mobil, according to estimates from Bloomberg.

“This platform for venture capital is the most unique on the planet, and I love that,” Sledzik said. “Aramco has the appetite for making investments, and this spans the downturns.”

Aramco is part of a group of majors who are increasingly turning to the startup community for ways to hasten the speed of innovation in their companies, tapping into digital technologies such as Internet-of-Things, artificial intelligence, machine learning and cloud-based applications. Chevron, Equinor, Shell, Total and Repsol, BP are also using corporate venture capital subsidiaries to dip into the fourth industrial revolution.

“Corporate venture capital has come in and out of vogue a couple times, but in its current iteration it seems to be more popular and bigger than before,” said Jordan Herman, partner in the Austin office of law firm Baker Botts, which works with venture capital firms. “This latest round of growth has seen a lot more companies participate.”

Energy corporate venture capital companies backed 96 investments in emerging companies last year, up from 77 in 2012, according to the Silcom Valley-based research firm Global Corporate Venturing. Although the total dollar volume decreased from about to $1.8 billion from $2 billion, the numbers of deals jumped 25 percent, according to GCV.

Diversifying and digitizing

Sledzik joined SAEV as managing director eight months ago to lead the subsidiary through a shift that parallels that of its parent company to focus on digital strategies and diversification beyond just oil production.

The University of Pittsburgh graduate arrived at the firm after a 30-year career in the energy industry that took him around the globe in various roles at Schlumberger and its geophysical services subsidiary Western GeCo. He learned the ins and outs of technology in the oilfield while working in nine countries, including in Nigeria, where he met his wife Shelli. He’s spent most of the last decade at Energy Ventures (now EV Private Equity), a Norwegian venture capital firm, where he learned the world of venture capital and its applications to the energy industry. Most recently he acted as Houston-based adviser for tech incubator Hall Labs, where he assisted startups with product development, patents and monetizing technologies.

Sledzik is now turning that venture capital and energy experience into a hybrid to expand the reach of Saudi Aramco Energy Ventures. The company has made 20 investments in North America since its inception six years ago. It has a presence in Europe and Asia, but its growing its team in Houston.

“The appetite (for investment) is certainly not going down,” Sledzik said. “That’s really the reason why we’re growing our team, to deploy capital.”

Backed by a $500 million fund, SAEV’s North American arm selects three to four energy-focused tech startups to invest in every year, along with co-investors. SAEV invests across all stages, from Angel to Series C. And just as with any other venture capital firm, the startup can use that investment to grow its business, advance its technological platforms and spread its reach into energy markets, even serving Aramco’s competitors.

If one of the startups in which it invests takes off, Aramco can both earn a return and choose to adopt the technology in its own operations. That’s a big deal for small startups that may find impossible to land in the hands of a super major otherwise, Sledzik said. Saudi Aramco’s investments also help to grow the startups themselves so they can eventually serve a company the scale of the oil giant.

One of SAEV’s early investments in a Massachusetts-based 3D printing company, Desktop Metal, could prove to be particularly successful exit as the unicorn has raised a total of $438 million and has a valuation of about $1.5 billion

“It’s not an easy process to sell to Aramco,” he said. “We help … them penetrate the wider Aramco much faster than they would otherwise.”

Robots and blockchain

The investment from SAEV also lends the credibility of a super major to these platforms, Sledzik said.

That’s been the case so far for Data Gumbo, a Houston-based blockchain company focused on the oil and gas industry. SAEV recently led a $6 million Series A round of funding for the startup, along with co-investor and Equinor Technology Ventures, the venture subsidiary of Norwegian oil giant Equinor.

“It’s a crucial part of the puzzle for us,” said Data Gumbo Chief Executive Andrew Bruce of the SAEV and Equinor backing. “It’s a huge benefit for us to say, ‘Well, look who is backing us up, you know we’re going to be around in six months.’”

While blockchain is most often associated with cryptocurrencies such as bitcoin, Data Gumbo’s technology uses the digital ledger qualities of blockchain to automate contracts between companies in the oil and gas industry. Tapping into sensors attached to equipment in the oilfield or refinery, Data Gumbo’s technology uses data many companies are already collecting to streamline the contract process and avoid common and costly disputes over service contracts that can slow down operations.

This could potentially save an oil company like Aramco, which works with thousands of contractors across its vast global operations, millions of dollars if applied on a broad scale.

Bruce said when he first met Sledzik over breakfast and explained the concept, “he got it immediately and threw weight behind the investment decision.”

Within days of the May investment announcement, Bruce and the Data Gumbo team flew to Saudi Arabia to meet with 30 Aramco officials on ways the technology could be applied to the oil and gas company. Those kinds of meetings would never have happened without those initial breakfast conversations with Sledzik and the SAEV team.

An investment from a corporate venture capital fund like SAEV can also offer an early-stage company invaluable experience as its builds products in real time with a built-in customer.

“When you build your product, you want to build it by testing it with real-world experts and real-world examples. That only happens behind the doors of a real company,” said Babur Ozden, chief executive of Maana, a Menlo Park, Calif. -based software developer with offices in Houston.

SAEV has invested roughly $16 million in Maana through multiple funding rounds, Ozden said, and Sledzik has a seat on the company’s board. Since SAEV made its first investment in Maana, the startup has worked with Aramco on incorporating its software into the company’s operations. Maana’s software platform helps its customers tap into expertise at their own companies by combining human-based knowledge with data analytics and artificial intelligence to improve decision making.

Ozden said Aramco is about to go live with a new strategy powered by Maana’s platform that aims to increase efficiencies in shipping oil. Because of Aramco’s scale, the optimization strategy will affect about 6 percent of the world’s oil supply, Ozden said.

Maana recently trained about 70 Aramco officials on how to use its platform. Aramco has about 17 different scenarios its working on to implement Maana.

Since Aramco first invested in Maana in 2016, leading a $26 million Series B funding, that startup has received increasing recognition and formed partnerships with more major corporations. Maana’s funding has reached $73 million, including a Series C round in which SAEV also participated. Maana’s investors also include the corporate venture capital arms of Intel, GE, Chevron, Shell, global consultancy Accenture and Chinese investment bank China International Capital Corp. In March, the startup announced a partnership with Microsoft’s Azure platform, giving thousands of Azure business users easier access to its technologies.

The potential for artificial intelligence and machine learning technologies for oil and gas majors is huge, said Herman, the Baker Botts partner.

“Maana and artificial intelligence that been demonstrated to increase efficiency, even if that efficiency is incremental, when you’re talking about the energy industry like Aramco, a small percentage across the enormous value of their infrastructure potentially generates enormous savings,” Herman said.

Startups may also move to develop technologies faster than a major corporation could, Herman added.

And because Aramco and more energy corporate venture capital firms are investing in tech startups without exclusivity in their agreements, that means that Aramco as an investor can also see the financial returns of a startup’s growth when it exits.

A deep digital transformation of the oil and gas industry could generate $1.6 trillion of added value for the industry and customers it serves, according to estimates from the global consultancy Accenture. By investing in tech startups leading the way in digital innovations, oil companies could earn a slice of that added value too.

Even beyond oil and gas though, Sledzik said he’s looking to diversify SAEV’s investment portfolio beyond oil and gas production to include technologies that tackle anything from helping companies reduce emissions to better managing water supplies. It’s also looking at ways to expand technologies in non-metallic composites as a way for hydrocarbons to compete with metals – think a carbon fiber bicycle replacing a heavier metal bicycle.

“The reason I’m here is because the platform is so unique and has the ability to open doors and to get into doors because of the parent (company) that’s behind it,” Sledzik said.

This article first appeared on the Houston Chronicle – an Energy Voice content partner. For more from the Houston Chronicle click here.

Breaking