First Reserve bets big on oil, cleantech

Recently, energy-focused LBO shop First Reserve Corp. sealed two deals that highlight an increasingly eclectic strategy that encompasses alternative and traditional sources of power.

In one deal, First Reserve committed about $35 million to Plasco Energy, a Canadian company that converts garbage into energy, and which operates a test facility outside of Ottawa. First Reserve also pledged an additional $135 million in 2008 to build new conversion stations in Canada, the United States and Europe, says Glenn Payne, the First Reserve director who led the deal and who oversees investments in alternative energy.

In the second deal, First Reserve pumped $350 million into Cobalt International Energy, a Houston-based offshore and deep-water drilling company that extracts fossil fuels from beneath the sea floors of the Gulf of Mexico and the Atlantic Ocean. In October, Cobalt spent $211 million in a U.S. government-run auction to obtain the rights to explore and extract oil from 53 blocks of acreage beneath the Gulf of Mexico.

Overall, First Reserve has dedicated 10% of its newest $7.8 billion fund to alternative energy, and the Plasco deal follows First Reserve’s 2006 investment in Ingenco, another waste-to-energy company. But Plasco differs from just about every other waste-to-energy company in that it doesn’t just vacuum up methane gas produced by landfilled garbage and pump the gas into power-producing turbines. Rather, Plasco prevents the trash from entering the landfill in the first place, Payne says.

In that sense, Plasco is a true green play, he adds, since the company’s technology holds out the possibility of eliminating trucks that haul large amounts of trash from landfill-clogged big cities to rural areas with open spaces and emptier landfills.

Plasco’s facilities will most likely play best in Europe, where land scarcity has made new landfills almost impossible to permit, as well as in big cities in North America.

With Cobalt, First Reserve’s $350 million investment places it alongside a high-profile roster of backers, including Goldman Sachs Group and Riverstone Holdings. The firm has kept an eye on Cobalt since the oil company launched two years ago as a partnership among several former industry executives, says Hardy Murchison, the First Reserve managing director who led the deal.

Cobalt was a surprise participant in the October acreage auction, the largest since 1983, and won the highest number of highly contested bids, Murchison says. Now that Cobalt owns the rights, it will search for drilling prospects in the allotted acreage. Eventually it will rent enormous deep-water rigs capable of drilling through 8,000 feet of water and as much as 30,000 feet of earth before reaching the oil reserves. “This is like the technology [used in] the space program,” Murchison said. “It’s hugely expensive on the front end, but the operating costs of pumping are actually quite low.”

He adds that worldwide deep-water reserves are just beginning to be explored, positioning Cobalt for years of growth. Traditional energy investors such as First Reserve are counting on Cobalt to build up an asset base and lease holdings that would make the company an attractive candidate for a public offering or for an acquisition by a big oil company. —Jeremy Harrell