By Velda Addison, Hart Energy
Challenging times in the oil and gas sector could give some companies reason to ponder forming partnerships to share risks while maximizing rewards.
Such joint ventures (JV) could save companies money in their pursuit of profits along with other advantages, but a recently released report shed light on a few drawbacks of such relationships.
EY studied more than 300 oil and gas projects and found that 79% of the JVs experienced schedule delays compared to 63% of non-JVs. It also revealed that 68% of the JVs analyzed had cost overruns compared to 59% of the non-JVs.
“JVs add both value and complexity to a project. Companies tend to invest the most time and resources into pre-signature due diligence but often fail to properly maintain investment and oversight once the JV commences,” Axel Preiss, global oil and gas advisory leader at Ernst & Young (EY), said in a press release. “This is where most problems begin.”
The firm pointed out that oil price volatility and geopolitics have already challenged companies.
However, there is potential for additional obstacles when more stakeholders are in the mix, especially if the partners are an unsuitable match from the get-go, have misaligned priorities or trust issues. And these can no doubt lead to delays, especially when it comes to decision-making. One partner may have the money and willingness to invest, while the other—or others—may not have either.
But the report was not all bad news.
When ideal partners come together, the advantages are plentiful and really outweigh the negatives.
“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,” according to EY. “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.”
And although projects undertaken by JVs were more likely to have cost and schedule overruns, the report showed that they fared better on the completion costs overruns. Non-JVs were on average 107% over their target project completion costs, while JVs were 84% above.
Don’t call that one a positive—an overrun is an overrun, and that is not a good thing when commodity prices are still below $50/bbl, compared to more than $100/bbl last year.
But JV partnerships can provide access to technology and other resources, such as skills; supply chain optimization; risk mitigation; and better positions in the market, EY noted.
The firm also offered up some advice for JV companies, and others that may become one, to reduce the risk of failure:
- Clearly define JV boundaries from the asset and operational perspectives;
- Include both positive and negative scenarios in financial and tax planning;
- Start operational planning early, and don’t forget to include the allocation of key resources;
- Clearly establish each participant’s contribution and how to monitor the “health” of the JV;
- Consider potential exit scenarios and an agreement that provides for all of the above and
- Have a dedicated team to oversee the implementation and governance of the JV.
“Too often there is a failure within the JV to maintain trust and alignment of strategic objectives between partners. This creates even greater performance challenges,” Preiss said. “Project developers must effectively set up and manage JVs on an ongoing basis to preserve support and investment in these large capital projects.”
Being honest, transparent and sticking to agreed-upon goals and arrangements are also crucial to the success of JVs. And that is advice that non-JVs can use as well.
Velda Addison can be reached at email@example.com.
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