Creating truly interdependent and effective partnerships
Partnerships and joint ventures have long been a characteristic of the oil and gas business, serving vital risk and cost sharing roles. Of late, a newer form of joint venture between international oil companies (IOCs) and independent exploration and production companies (E&Ps) focused on unconventional natural gas opportunities has emerged. Such partnerships, which explicitly state the desire to access and leverage new capabilities for growth in new unconventional areas, represent a significant shift in traditional joint venture intent. We expect the drivers for these sorts of new relationships – access to limited, preferred opportunities and to scarce capabilities – to continue. Yet these new joint venture types are likely to face significant governance issues.
Upstream oil and gas is one of the few remaining global industrial sectors in which structural competitive advantage can still be secured through positional assets. As the E&Ps made the ‘first move’ into unconventional natural gas resources they secured for themselves low cost, large resource positions that are economically advantaged and cannot be replicated. Further, these E&Ps capitalised on this position by developing specific capabilities to economically produce the asset. Although such capabilities can be duplicated, such efforts are difficult and often costly.
Despite these first mover advantages, many E&P companies have been struck hard by the combined effects of weakened demand and gas prices and more limited capital availability. In some instances, the very focus that had allowed certain E&Ps early success became a burden due to the lack of an oil position and a large debt burden from financing first mover investments.
Conversely, many IOCs did not participate significantly in the initial pursuit of unconventional natural gas resources. In many cases, this was because the size of the assets in question was not sufficient to ‘move the needle’ for a company more attuned to multi-billion dollar projects. Now, the financial strength of the IOCs with their large diverse asset and commodity base, strong balance sheet, and resilient cashflow, provide them with exceptional flexibility. And given that the potential scale of unconventional natural gas has been proven, it is a natural place to apply this financial flexibility.
Steering the venture
However, there are reasons to believe unconventional focused joint ventures will be challenging to effectively steer towards productive outcomes. First, the IOCs enter the partnerships with a specific focus on leveraging the capabilities of the E&P. This is a dramatically different strategic intent than traditional joint ventures in the O&G sector that focused primary on capital and risk sharing. Also, although most of the current joint ventures are focused on specific basins, as partnerships are created to jointly pursue future opportunities including international plays, the partnership’s governance mechanisms must allow sufficient flexibility to identify and act on the opportunities that represent the best interest of both partners.
Booz & Company has identified ten best practices necessary to form and manage effective interdependent partnerships:
- Define a clear rationale, objectives and scope.
- Select a compatible partner – balance needs and capabilities.
- Ensure that a strategic alliance is the appropriate enterprise model.
- Evaluate and focus on expected benefits.
- Seek equivalent contributions for equivalent compensation.
- Manage the strategic alliance process systematically (creating a strategic alliance is not an event but rather a business process).
- Prepare proactive ‘pre-venture integration’ to gain speed.
- Ensure continuity of senior management support – expect them to spend a lot of time working on the joint venture.
- Deal with cultural issues – take time to build a strong level of trust.
- Have pre-established rules for disengagement or broadening of scope.
Strategic partnerships between IOCs and E&Ps in unconventional natural gas opportunities offer significant potential. The combination of advantaged assets, capabilities, and financial strength represents a significant competitive advantage. Effectively structured partnerships can realise these objectives and reward the interest of both venture partners.
Author: Andy Steinhubl, Justin Pettit, Chris Click, Booz & Company.