Joint ventures for oil and gas megaprojects
On projects with delivery challenges, maximizing the positive potential of a joint venture (JV) is likely to be a critical component of project success, having a key impact on schedule performance and ease of access to capital.
However, when these relationships go wrong, they can be extremely disruptive, particularly to project schedules and key decision points. Aside from the disruption of the core business, arbitration and legal proceedings relating to any failure can be costly, time-consuming distractions for the management of both the JV and the parent organizations.
We took a close look at joint ventures as part of our oil and gas capital projects series.
Why do we see more projects delivered through JVs?
JVs can provide the benefits of collaboration and risk sharing while maintaining corporate independence and avoiding the economic and political risk associated with a merger or acquisition. This risk sharing and additional route to capital funding is particularly attractive to oil and gas companies as they attempt to deliver major capital projects in an environment of increasingly uncertain geopolitics and market price instability.
Reasons for entering a JV relationship
|Capital intensity: Projects can be too big for a single company to finance on its own, both in terms of access to funding and cost exposure in the event of overrun.|
|Risk mitigation: Single companies may not wish to assume full exposure to a speculative investment or invest into a new region, or unproven reserve or technology.|
|Access to technology: Owners of proprietary technology may restrict or limit access to projects where they are invited to participate within a JV-style agreement. Similarly, project developers may seek to partner with technology owners where project success (and potentially competitive advantage) is predicated on access to technology or expertise.|
|Access to resources: The project developer may need the help of a JV participant with the capital or skills to develop the resources to its maximum potential.|
|Supply chain optimization: Supply chains can be optimized across disparate geographies by pooling participant's assets. For example, distribution costs can be reduced dramatically if participants with similar manufacturing requirements contract manufacture for one another in geographically dispersed locations.|
|Market positioning and scale: Pooling the assets of participants or leveraging collective political influence may allow a JV to develop a marketing-leading position in a particular geography, thereby providing advantages that no participant could attain working alone. Similarly, where a company wishes to de-risk a project or its portfolio, a JV may be used to reduce exposure and the ongoing investment required, without having to consider full exit/divestment.|
|Regulatory requirements: Some countries require foreign companies to work with local entities to participate in their markets.|
|Political sensitivity: JVs, as opposed to acquisitions or takeovers, are sometimes more palatable to governments, labor groups and communities.|
Different types of JV
|Operational JVs: Two or more companies create a new entity that holds the full complement of operating assets and capabilities necessary to develop and execute the project.|
|Risk-sharing JVs: Two or more companies create a JV primarily for the purpose of sharing risk or finance. One of the participants typically runs the entire operation, with the others contributing only funding and, potentially, input on strategy-level decisions.|
|Capability-sharing JVs: The JV conducts business by leveraging a combination of capability from the parents. For example, our parent may bring engineering and manufacturing capabilities, while the other brings political influence and resource in certain countries. In this instance, the JV itself may have limited operational assets; it coordinates a mix of capabilities held by the various participants.|