Long before the debate over pipeline construction, the oil price differential, production curtailment and government-purchased rail cars dominated headlines, a pair of Toronto entrepreneurs were busy travelling from wellsite to wellsite in frigid northern Alberta, testing technology that has the potential to transform the conversation.
Ian Burgess and Nouman Ahmad had developed a system to help energy companies receive a fairer price for their product — a possible solution to the price differential problem that has plagued both conventional and unconventional oil and gas producers.
“On our very first hardware field test, I hit a whiteout storm driving north from Edmonton,” recalled Burgess with a laugh, “and my van full of equipment started to skid. I remember thinking ‘this could turn out to be a very expensive first trip.’” Fortunately, he was able to stay on the road.
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At that stage, Validere Technologies, as the two named their fledgling company, had just graduated from Silicon Valley’s prestigious Y Combinator seed accelerator, in the summer of 2016.
Through Y Combinator, the company received critical early stage capital from Clint Chao and Ammar Hanafi, partners at Palo Alto, Calif.-based venture capital firm Moment Ventures. “We invest in industry verticals outside the immediate sphere of Silicon Valley,” Hanafi said.
“When Nouman and Ian first presented to us, it was clear they were thinking big picture on how to effectively introduce leading edge AI powered IoT tech to the age-old world of oil and gas,” Chao added.
As crude oil moves from wellhead to refinery, custody transfer takes place an average of eleven times. Each time this happens, it mixes with different crude oil streams from different storage facilities as it moves progressively from smaller feeder pipelines to larger arterial trunklines, to eventually arriving at a refinery thousands of kilometres from where it was drilled.
Inevitably, the commodity’s composition changes.
Whenever there’s a compositional change, there is a good chance it’s no longer representative of what was sold — all crude oil is not created equal. “Of course, there are third party labs that do sporadic tests, but they aren’t done in the field or in real-time,” Burgess said.
Validere’s technology works in two stages. Validere 360 is a testing product, sold on a software as a service model. Alpha takes that data and uses artificial intelligence to suggest what to do with the oil once the information is known. “Whereas 360 is all about producing useful crude oil quality data through internet connected testing devices in the field, Alpha is about how to use that information over time, in the most optimal way, using our proprietary predictive AI engine,” Burgess said.
Once a pipeline company has a greater degree of confidence in the quality of the crude entering their system, it can then for example, redirect a sour (referring to crude oil’s hydrogen sulphide content) stream of oil into a more appropriate storage facility. “Our technology creates trust because if ever there is a custody transfer dispute, we can print out an audit form showing much more accurately how, at various points along the supply chain, the composition of the oil changed,” Ahmad said.
So how do a pair of energy-industry neophytes end up coming up with a possible solution to one of the Canadian oil industry’s most nettlesome problems?
After the 2013 disaster in Lac Mégantic, when an unattended freight train carrying crude oil from North Dakota rolled down a hill and derailed, causing a massive explosion that killed nearly 50 people, Burgess was awarded a research contract by the U.S. Department of Transportation to help it better understand what went wrong.
It was then that Burgess, who by age 24 had already graduated from Harvard with a PhD in Applied Physics, was first exposed to crude oil quality testing. It was also where the first of many iterations for Validere’s underlying technology was born. “After a while I started to realize there was a big problem in the oil and gas industry,” Burgess said.
A key finding in his research was the crude oil’s vapour pressure in the rail car tanks was off-spec — essentially the oil in the tanks shouldn’t have been there in the first place.
Shortly after completing his work in 2014, Burgess met Ahmad, who had just recently exited a successful fintech startup focused on life insurance. A coffee here, a conversation there, and soon they agreed there was an opportunity in crude oil quality testing. “At the start we worked together without any formal agreements,” Ahmad said. “It was a time for us to explore whether we were capable of working together.”
They then entered a pitch competition at Harvard to work out their business plan, and yearning to return home, they then looked north to Toronto’s Creative Destruction Lab (CDL) — a seed-stage program for “massively scalable, science-based companies.” CDL is unique in that it employs a mentoring process, with the goal of maximizing equity-value creation.
Here they met Canadian tech investor T. Chen Fong. “From pretty well the moment we met Chen, he has been an invaluable adviser to us, and was one of our first significant investors,” said Ahmad, a former investment banker who immigrated as a child with his family to Canada.
They also met senior M&A lawyer turned Parkland Fuel Corporation executive Pierre Magnan. “CDL is great at bridging the gap between industry and academia,” said Magnan, who runs Parkland’s considerable Caribbean holdings from Grand Cayman. “And the Validere story is as much about gritty hard work as it is innovative tech.” Magnan sits on Validere’s board and was also an early investor.
Flash forward to October 2018 when Validere announced a $7-million round of financing led by Houston-based energy private equity firm Sallyport Investments, the family office for renowned U.S. energy executive Doug Foshee.
“In the six years we’ve been in business, close to 2,000 deals have come across my desk,” Managing Director Kyle Bethancourt, who came to Sallyport from the Blackstone Group, said. “In that time, we’ve only invested in thirteen deals. Validere being one of them.”
Ahmad and Burgess’s focus for the past several years has been to iterate Validere’s underlying technology, listen to the needs of their customers, and prime for scalability. “Now we’re at the stage where we can focus on growth rather than survival and build out the business,” Ahmad said.
Validere has successfully completed six platform deployments with large Canadian oil and gas clients, and now has more than 20 employees, with offices in Toronto, Calgary and Houston. The Toronto office is staffed with the company’s tech talent — a reflection of Toronto’s status as a global hub for artificial intelligence. The Calgary and Houston offices are staffed by Validere’s energy experts.
The market Validere is going after is global. “In Canada alone, every producer, midstreamer, and refiner wants to know the quality of the crude oil they’re buying and selling,” Fong said. A senior crude oil trader working for a Calgary-based midstream company agrees. “We blend our crude oil all the time and so we need to know what the composition is. To have that information in real-time would be tremendous.”
The same can be said for the United States’ energy industry — and that’s before considering the value of Validere’s technology to other hydrocarbons like natural gas and natural gas liquids. There are 18 frequently measured properties of crude oil — vapour pressure, colour, density, and so on. These properties, or variables, dictate the quality of oil being tested and its value.
“It is hugely important that the variability of crude oil stream characteristics is as well understood as possible,” said Tony Mate, a twenty-ﬁve-year veteran of Canada’s energy business with experience spanning ﬁnance, accounting, communications, and trading.
Mate currently works as CFO of Outlier Resources, a Calgary based private natural gas producer. “It can be a challenge to have the best possible data when extracted in extreme conditions, and any automation like this would certainly be worth a look.”
Success hasn’t come with challenges however, many of which are still on the horizon. “The sophistication and disruptive nature of their technology requires patiently educating their market,” said Fong. “That is their greatest challenge to scaling up, since they really don’t have any direct competitors.”
Not to say there aren’t competitors, however when Validere does compete for a client’s business, it’s typically over a feature here and there. “Never do we fully compete over our full suite of technology, and the insights we’re capable of producing,” Ahmad said.
But educating the market takes time, especially since Validere’s technology involves mission critical business decisions. “We’re certainly not operating in the consumer tech space where adoption tends to occur much faster,” Burgess said. “The more we demonstrate how our technology can save as much as $15 per barrel in lost revenue, in the field, in real time, adoption should occur in any business climate.”
But for the duo, one of the most satisfying aspects of their journey has been to help make the life of field operators that much easier.
“After my first trip into the field, I came away with a profound appreciation for how difficult many field operators’ jobs are,” said Burgess. “We exist to help those guys, and anyone along the crude oil supply chain, make smarter business decisions based on the quality of crude they are trading.”