With China's increasing energy needs and the headline “record high oil prices” becoming a regular feature of news bulletins over the last few months, venture capitalists like what they see in the energy sector

In October 3i's director of oil and gas, Graeme Sword, told a local newspaper in Aberdeen, Scotland, that he expected to see an increased deal flow in the oil and gas industry.

The following month Scottish Equity Partners (SEP) proved Sword's point and announced that it had led a £7.4 million round of venture funding to ba ck MTEM, a company pioneering a new technique for surveying underground oil reservoirs.

MTEM, which stands for “multitransient electromagnetic”, will use controlled pulses of current to determine the resistance of underground liquids. In this way, oil companies will be able to ensure that they do not waste time and finances drilling for salt water. David Sneddon, Director of SEP's Energy Related Technologies team, says that the technology is potentially worth £500 million a year.

SEP is no stranger to the sector, having made 14 investments there during the 1990s. However, its interest has stepped up of late, and it currently has three investments in energy companies: MTEM; AmGas, a new natural gas detector; and Arkex, an aerial surveying technique to find possible sources of oil, gas and other minerals.

Current oil prices are providing the oil industry with funds to invest in technology and expansion. But the longtermist VC industry hasn't just been attracted by increased oil prices: one partner at SEP called current prices a “temporary blip”.

Sword, who earlier this year worked on the buyout of upstream oil business Vetco, notes that the inherently conservative oil business is budgeting on an expectation of $25 per barrel rather than the $50 seen recently.

However, the rush of VC interest is certainly one of the causes of higher prices. “A big issue at the moment is expansion,” explains Sword. “Oil companies are producing more oil than they are finding, and reserves are shrinking. So there's a big market for seismic technology that can help find oil and extract it more efficiently.” Sneddon at SEP agrees: “The gap between supply and demand is very narrow; you need to find more supplies just to stand still.”

Investments made in today's high price environment should pay off for VCs even if prices fall again, as oil companies search for cheaper and more efficient supplies. And with demand for oil unlikely to fall any time soon, the VC energy boom may be only just beginning.