How Terralliance's Billion-Dollar Bet Against Big Oil Failed

It's not a name known to many. But Terralliance Technologies, a California company started by former NASA engineeer Erlend Olson, briefly thought that it would trump widely-recognized names like Exxon and Occidental Petroleum, the latter of which has a $68 billion market capitalization.

In the process, it convinced famed venture capital firm Kleiner Perkins Caufield & Byers to invest, along with Goldman Sachs and other normally savvy investors. Singaporean sovereign wealth fund Temasek promised the company $1.1 billion alone, although by the time Terralliance was shut down, it had probably "only" spent about half a billion dollars.

The core idea behind Terralliance was sending low-flying planes over large tracts of land to find oil fields. By picking up a large variety of data -- geographical formations, electrical signals, trace chemicals in the air -- the company figured it could sense oil that bigger companies would never find with their stodgier technology.

To some, this description might scream out "snake oil", but the investors didn't think so; it was probably Kleiner Perkins' largest investment ever. As to why you (probably) haven't heard of Terralliance, both the company and the investors operated under strict secrecy. Adam Lashinsky at Fortune magazine is the only journalist who has bothered to dig for info on the company over the years.

On Monday, Lashinsky published his last big piece on Terralliance, a post-mortem examining Olson, the larger-than-life founder, and his profligate habits. Some snippets:

What is certain is that Terralliance's gambit to become a force in oil exploration ended badly. Despite Olson's high expectations, the unraveling began during those August 2008 meetings in New York... Before taking Temasek's cash, Kleiner and Goldman thought it was important to share concerns they had about Olson. Terralliance's globetrotting CEO may have been an oil industry neophyte, but he had spent like a Saudi prince. His shopping list ran the gamut from oil wells in Turkey and Mozambique to demilitarized Soviet fighter jets...

Excitement about a sure-fire way to find oil -- and all sorts of other valuable things -- isn't new, of course. "The real story, to boil it down, is as old as mankind: a charismatic individual with a compelling story you just want to believe," says [oil exec Joe] Foster, who says he lost several hundred thousand dollars of his own money in Terralliance. "My whole career I've been interested in alternative exploration tools. By force of personality, [Olson] convinced a lot of people. There's a real psychological story there. This was beyond numbers and contours." ...

One PowerPoint obtained by Fortune sheds light on Olson's technique. In an October 2007 presentation to Kleiner's partners, he proclaimed Terralliance a "Revolution in Oil and Gas Exploration." He declared that the company had 500 million acres in "oily places" under its control, more than Exxon Mobil, a claim that seems to have encompassed everything from partnership agreements to discussions with governments.

Today, the jets are on sale, and some of the investors are suing Olson, who was outed as CEO before the company fully gave up on becoming an oil giant. But is it still prospecting for oil? That question is left a bit unclear, at least from my reading.

Olson's original aim was to find underground water, not oil, so it's possible that Terralliance has gone back to that. But Joe Lacob, a Kleiner Perkins partner, is also quoted saying that Terraliance is, "arguably, stronger than ever".

That could just be damage control from a firm that lost its shirt -- especially since it still has vulnerable energy investments from the same era, like the secretive ultracapacitor maker EEStor and Bloom Energy. But outside the company and its remaining investors, nobody knows for sure; Terralliance could yet become the next big technological breakthrough in oil exploration.

[Image credit: Wikimedia Commons]