Investment

A sustainable future for oil – and a pretty penny for investors

Green technology has produced electric cars, solar panels and wind farms. Baillie Gifford equity manager James Anderson says oil could lose its competitive advantage in five years. Bill Gates is bankrolling alternative energy.

A UK company called Technology Enhanced Oil sees a different future, where the oil industry disrupts itself by using new ways to extract crude from capped wells.

Teo is offering its corporate backers a 6% yield through a convertible bond…

It is producing oil in Texas for just $8 a barrel and wants $500 million to expand further after winning the support of UK local government pension schemes like Berkshire and Merseyside who back sustainable investment. 

Teo is also interested in winning support from family offices interested in tapping into a range of green initiatives, with a nod from NextGen.

Teo’s approach, reinforced by clear corporate governance standards, is a practical response to calls for a hefty reduction of carbon emissions from the oil industry. BP has pledged to achieve a zero-carbon approach this by 2050, although details on how it will get there are sparse. 

Rather than selling crude in bulk, Teo seeks to extract Permian light oil, rich in paraffin, and free of toxins, to sell to agri-farmers, lubricant makers and pharmaceutical firms at a premium price. Whatever the future of transport, the industrial use of fossil fuels is likely to continue.

Teo is offering its corporate backers a 6% yield through a convertible bond 20% owned by Iskandia Energy. 

In due course, investors will have the chance to convert their shares into equity in a business just starting to turn a profit following significant start-up losses. Evaluating Teo’s current and future cash flow needs to form part of any investment decision.

Mainstream interest rates are close to zero making it hard for investors to generate anything close to 6% to cover their needs. 

Teo is led by Iskandia Energy chief executive Stephane Lamoine, who recently worked for Elliott Advisors after a successful investment banking career. Chairman Marc Samuel previously worked for Edmond de Rothschild Bank. 

As well as Teo, they are working on ways to finance oil extraction through an exchange-traded security sponsored by a company called SLU Enterprise.

Teo has been buying leases on capped wells in Texas capable of extracting oil as little as $8 a barrel, which makes its business viable at an oil price of $20 a barrel. It has acquired capped oil wells from producers struggling to come to terms with oil prices which hit zero earlier this year and now trades nervously at $40. 

Residual oil reserves left in capped wells can be large due to the inefficiency of extraction years ago and the tendency of explorers to rush from job to another seeking easy profits.

Rather than a single technology, Teo is using a range of them to double production from the wells it has taken over. This has lifted their cash-flow margins from 28% to 71%.  

Teo saves money by using existing site drillings at capped wells and employing clean technology to open them up.  To clean its boreholes, and drills, it uses pulses of energy rather than toxic chemicals. It uses a compound found in orange peel to ensure paraffin stays suspended in oil, rather than clogging up extraction.

It does not need to inject large quantities of freshwater into a well to flush out toxic chemicals. It only needs to recycle smaller quantities of underground saltwater. 

Surplus methane gas is captured rather than flared, then resold to gas users. Teo executives like to point out it is rather harder to recycle electric car batteries, once they have been exhausted.

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