Black Swans, White Swans, Shell’s shale, Waste Management and biofuels

What could be more alluring than a colossal opportunity in the biggest game of all — energy investing?

So goes the siren song.

But in the real world of chasing black swans, we may be overlooking the wonders of the white ones.

In the world of venture capital, black swans are a big deal. For example, Khosla Ventures in describing “what we look for” refers to its continuing search for “black swan ideas with significant upside or a significantly better mouse trap…Black swans are high-impact innovations that are beyond the realm of normal expectations.”

A descriptive of ancient origin, it was re-popularized via the Nassim Taleb book, “Fooled by Randomness,” which details the “disproportionate role of high-profile, hard-to-predict, and rare events that are beyond the realm of normal expectations in history, science, finance, and technology.”

In practical terms, it refers to the practice of continuous thrill-seeking in the world of investing. Holy grails, big killings, the next Big Thing. In energy terms, we’ve all seen the trend-hoppers, jumping from fuel cells to hydrogen to ethanol to battery technologies to algae to natural gas. You can set your watch by the moving of the targets.

In the chase of black swan technologies, you’re as likely as anything to be swamped by the real black swans. That is, the overwhelming setbacks delivered by unforeseen events.

Shell’s can’t-miss, er, miss

Take for example the cautionary tale of Shell’s foray into US shale and tight oil, the unconventional energy that has been so much in the news of late.

Shell CEO Peter Voser told the Financial Times this week that the failed bet was a low point in his tenure as CEO. “Unconventionals did not exactly play out as planned,” Mr Voser said. The $24B+ investment has led, so far, to a $2.1B write down, and the company has put some of its shale assets up for sale as part of a strategic review for the company. He also noted that, in this time of record oil prices, Shell’s US upstream business is losing money.

I know, you’ve heard that natural gas is “the play of the decade”. Beware.

Trial by expectations

Remember the hoo-hah earlier this year when the INEOS Bio plant just couldn’t seem to complete its commissioning? The problem, as it turned out, had virtually nothing to do with the core technology. It had to do with getting reliable power supply from Florida Power & Light. FPL struggled to meet the needs of a biorefinery — an industrial customer — in the middle of what otherwise was an agricultural and residential community.

Who would have thought that a national conversation about cellulosic biofuels production shortfalls would be driven by something as mundane as electricity supply? Precisely what makes it a black swan, of course.

The problem of the unreliable partner

There it is. The problem of the unreliable partner. Even more dangerous than the known adversary: the presumed supporter who, at a critical juncture, fails to follow through.

Bad enough the “epic fail” that results from a partner’s change in strategic direction, or resource availability. Good partner management skills can help manage that trouble. But worse? The partner who fails to follow through despite best intentions.

A pair of orphaned Waste Management bins — semi-enduring symbol of the unreliable partner.

Residing outside our front gate at home, are two large Waste Management collection bins. This past summer, our residents’ association changed vendors, and three months after the change-over we simply can’t get Waste Management to come and pick the old bins up.

Persistence, cajolery, begging, flattery, nothing works. From the inaction, our best guess is that they wish us to toss the bins into a landfill and stop bothering them. Ah, the irony.

In this case, Waste Management became an unreliable partner despite its best efforts. There just isn’t a company more committed to “recycle and reuse” than WM. They love picking up trash and ultimately finding value-add things to do with it. But even great organizations, with all the best intentions, have difficulties translating those intentions into daily realities.

Whether it is the Department of Energy, strategic investors, downstream offtake partners, EPC partners, feedstock partners — or others — the black swan in your path from idea to IPO is often not embedded in your technology: it is the surprising underperformance of a partner whose reliability was overestimated.

It takes many forms. The capital you relied on, the market access in terms of flex-fuel vehicles or E85 pumps, the sufficiently low-cost enzymes, the harvesting or dewatering technologies that were hoped for or expected, the pipeline system to move product to market.

The problem of pests

Black swans came to mind this past weekend while preparing for combat with our resident ground squirrel, Gogo. We are at battle over the use of a lawn — which he prefers to use as a salad bar and for re-creations of Boston’s Big Dig.

Reminding us to think beyond black swans, competitors, and predators – to consider, in ventures as in nature, the problem of pests.

Gogo, prince of pests.

You see, Gogo is simply using the same resources of land and nutrients — and employs a strategic vision and technologies all his own.

When investors turned to biofuels in the mid-2000s, they spent time focused on black swan technologies, and the possible responses of predator oil companies and competitive technologies.

Had they focused more on the problem of Gogo — which is to say, the problem of unrelated technologies already active in the same geography — they might have better prepared for the threat of food vs fuel, the threat of indirect land use change, and the impact of a whole lot of natural gas previously thought impossible to tap at feasible rates.

In their own way, those problems formed the real black swans. Which is to say, the unforeseen events that drag on project timelines, dampen enthusiasm in the supply chain, and frustrate the process of capacity building. Global financial crises come and go — bad as they are, they pass. But the role of pests is enduring.

The vital importance of white swans

In a world where energy is everywhere — and demand is soaring, and capacity is tight, black swans abound. Swans that cut capacity, create shortages, cause failures in planned capacity expansion.

The black swan — by its nature — is the argument for energy diversification. Safety in numbers, as it were. Working on all fronts at all times.

Some say “the internet” was a black swan. But it was nothing without the simultaneous advance of tangentially-related technologies — the broad advance of digital — the flock of white swans. Bandwidth costs, encryption advances, the distribution of PCs, the birth of the web.

Dreaming of black swans? Dial a new dream. Instead, seek the diversification and safety in white swans. Think portfolio, seek broad fronts, not salients. Else you may find yourself looking the wrong way, busy making other plans, tied to locations you shouldn’t be, in jams you might have avoided, trapped by self-imposed expectations.