Energy Innovation Could Rescue California

California venture capitalists and the Obama administration spent, collectively, $30 billion, over the past four years on energy tech investments to replace oil, coal and natural gas. Odds are that won’t happen again. One reason: All that money didn’t yield one energy company that made last month’s Wall Street Journal list of Top 50 startup companies.

Not one out of a 5,900-company survey? Global spending on energy tops $6 trillion a year. That’s a rich target for investors and innovators. What happened? They looked in the wrong places.

Energy innovation abounds, but most of it hasn’t been in alternative energy. The locus of innovation has been in hydrocarbons, and in Houston, not Silicon Valley. For proof, don’t look to embarrassing episodes like California’s Solyndra or Boston’s A123.

While few were paying attention, innovation has yielded stunning gains in oil and gas drilling efficacy, and safety and cleanliness too. Energy productivity of oil and gas wells has improved 300 percent in just four years, more than the productivity improvement in solar cells over the past four decades. More hydrocarbon tech progress is on the horizon. Just visit R&D shops in, well, Houston.

The U.S. is now the world’s fastest-growing hydrocarbon-producing region. We’re a net exporter of refined petroleum products for the first time since 1949, and applications to ship natural gas overseas are piling up. Forecasts show that America will soon surpass Saudi Arabia in oil production.

The technologies that give hydrocarbons their innovative edge come largely from the info-tech world: better materials engineering, sensors, controls and information-related systems. Wildcatters don’t have to be so wild these days. They don’t drill many dry holes, and their sensor-laden steerable drills can follow the black gold underground. A typical oil or gas field generates so much data that IBM estimates petroleum engineers spend one-third to 60 percent of their time on data mining. There’s an even bigger gusher of data coming from the rest of the hydrocarbon fuel cycle, from processing to transportation.

And while the era of giant fields of cheap oil has passed, there remains a lot of oil in deeper wells, deeper water or deeply embedded in the geology itself from sands to shales. These are all places where technology makes the difference. Petroleum engineers today have computer-enabled eyes and ears unimaginable a few decades ago, epitomized by the game-changing horizontal, information-centric drilling, that is combined with the very old technique of hydraulic fracturing. This tool, abbreviated as "fracking," would surely ignite less worry if it were simply called, say, smart drilling, because that’s what it is.

There are those in Silicon Valley who were hyperventilating over prospects for telecom-type "disruptive innovation" in the enormous energy markets. But the world of molecules and motor vehicles is not the world of bits and YouTube. We will remain oil-centric for a long time yet. Hydrocarbons will supply 60 to 80 percent of global energy for decades to come, so productivity gains are important. So if you want to innovate, you go where the money is. That’s what most venture capitalists forgot – an unusual misstep.

But Silicon Valley VCs are on the right energy track now even if some don’t know it. Half the companies in the Journal’s Top 50 innovators list are Cloud-centric. The next big thing in energy will come from the Cloud, from software, and predominantly from California. Companies like IBM and Teradata, and a host of Cloud startups, are targeting this sector. Some will likely make future Journal innovator lists, companies like Metamarkets and Neos, the latter where Bill Gates is an investor.

A crazy thought for California: Get Silicon Valley talking to Sacramento (and Washington, since federal jurisdiction matters) to convince regulators to help, not impede, industries to use the power of the Cloud to unleash 21st-century clean hydrocarbon production in California. California’s enormous coastal and central oil shale fields were identified by the U.S. Geological Survey 100 years ago, for goodness sake, containing much more oil than even Texas.

California still produces 200 million barrels of oil per year. But it used to be nearly 400 million, and now it could be even more than that. The tax royalties and broad economic benefits would be enormous. And they could come soon. If California let the Cloud help unleash the hydrocarbon industry, that would be innovation.