Joint ventures and other forms of partnership continue to retain their popularity in the Oil & Gas sector – lower risk and faster access to markets or technology among the reasons for their appeal. Capital constraints and legal or political necessity are also common drivers in the creation of joint ventures.
The reasons why joint ventures’ are formed are well understood. What is perhaps less well known is the impact that they are having on today’s competitive landscape for the industry, and their potential to alter the balance of power across the value-chain.
In several different parts of the world, national oil and gas companies (NOCs) are no longer seeking ‘equal’ partners – even supermajors are being approached as providers of technology or project management skills, meriting only minority partner status or sometimes even contracted on a consulting-fee-per-barrel basis. At the same time, the dynamics of the industry are being altered, as companies that have previously been regarded only as ‘contractors’ are now being considered as joint venture partners.
It is important not only to recognise these trends but also to respond accordingly when approaching joint venture opportunities. For example, how should oil and gas businesses differentiate their propositions to a much more diverse and more assertive selection of potential partners – especially when their competitors may be much less familiar? In addition, is the current prevailing approach to joint ventures fit for purpose in today’s more volatile competitive environment and able to create and protect value from a minority shareholder position?
Today, many oil and gas companies seem to be failing to evolve their approach to joint ventures in a number of ways. First, there is often no understanding of potential benefits to both parent companies stemming from the joint venture. For example, if one parent company is also acting as a supplier to the joint venture it may benefit from economies of scale or stronger negotiating positions with its own suppliers. Industry majors will increasingly need to be able to understand such factors when negotiating with new potential partners and assessing unfamiliar opportunities outside their comfort zone, such as helping NOCs to expand their businesses beyond their home countries.
To protect value and ensure influence in minority joint ventures, greater care also needs to be taken to look at the broadest spectrum of potential issues. Individuals with operational experience can provide the practical detail needed to ensure proposals can be implemented.
There is also a need to get personnel, to devote sufficient time and attention to understanding the cultural differences, aspirations and agendas of the joint venture partner organisation, and understanding the partner’s perceptions of your organisation.
Working with those embarking on new joint ventures in the industry has given KPMG great insight into how big these challenges can be. For example, a relatively small business needed to work with a partner to exploit its major new field. Taking a robust approach to understanding the range of different deals available and the range of potential partners put the small company in a much more powerful position to negotiate improved terms, using a variety of technical, operational, regulatory, economic and financial options and arguments.
The race to combine commercial acuity and technical expertise with ‘softer’ skills including self-awareness, flexibility and relationship-building will be a demanding challenge for this changing industry. But the rewards for the winners could be transformational.
Marc Van Grondelle
Partner, UK Head of Joint Ventures, KPMG
+44 (0)20 73114984