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E & P Joint Ventures – Governing for Value
December 11, 2012
Presented by:
Girish Shirodkar, Global Partner and Managing Director
Petron 2012
Page 2
Agenda
• How Partnerships hinder value creation in E&P JVs
• Governing for Full Value
Agenda
Page 3
Traditionally, JV partnerships are governed through a committee of owner representatives with voting rights.
Operator’s project team(may be supplemented with partner’s staff)
Owner Representative Body(JOC / ManCom…)
Operator’s Parent Company
Non-operating Partners’ Parent Companies
Request / receive funding approvalRequest / receive funding approval
Receive / approve project team recommendations and funding requests
Receive / approve project team recommendations and funding requests
Page 4
KashaganBrent Offshore
• 50% owned by Shell and Exxon MobilConsortia
Operator
Technical Complexity
Investment
Reserves
But, the environment of E&P has gone a complete transformation over the last decade.
*In 2012 dollars
• Operated by Shell UK
• Offshore reserve, at a depth of 140m. Exploited by 4 platforms, along with a 5th floating installation
• Total capex of $25bn*
• Recoverable reserves of about 3.2 billion barrels of oil
• KazMunayGas, Eni, Shell, Exxon Mobil, and Total own 16.8% each; ONGC owns 8.4% and Inpex owns 7.6%
• The consortium oversees all of the project’s activities, with EnI managing Phase 1 and Shell to manage Phase 2
• Recovery factor is relatively low (15-25%). Artificial islands created for oil extraction due to the harsh weather
• About $47bn invested so far, with production to begin only in 2013. Revised estimates indicate total cost of $187bn
• Ultimate recoverable reserves of 8 to 12 billion barrels of oil
Page 5
Lack of alignment between JV partners, led to a protracted legal battle in Pohokura Gas (NZ).
• Largest gas producing filed in NZ
• JV between Shell (48%, operator), OMV (26%) and Todd Energy (26%)
• Rated production capacity at Pohokura is 86 PJ pa
• Operator looked to maximise its value at the expense of minority partner
• Led to lengthy legal battle
• Option of joint marketing with full production was cancelled
Pohokura Gas Project
Value loss due to sub-optimal decisionsOther “swing” assets Preference
Shell Limited swing capacity
70 PJ p.a., leaving flexibility
OMV No swing capacity
70 PJ p.a., leaving flexibility
Todd Significant swing capacity
86 PJ p.a., flat out
• Lack of capacity to store gas in NZ
• Contracts with “swing” capacity are more valuable
• Pohokura field has potential to store gas
Contracts with ‘swing’ are more valued
Page 6
JV partners with differing value measures and funds constraints, are eroding value in the Kashagan field.
• Discovered in 2000 with 8 to 12 bn barrels of recoverable oil
• The field is in the north Caspian sea, which faces harsh winters - artificial islands have to be created since the shallow sea freezes in winter
• Initial estimate of $57bn has risen to $187bn
• Production timeline shifted from 2005 to 2013
• Estimated production of 370,000 to 450,000 barrels per day
• Increasing costs has killed trust and reduced faith in capabilities
• JV partners like KazMunay gas are seeing funding constraints (other partners have put in $1bn on its behalf)
• Value is no more the primary criteria
• Phase 2 plan shelved for now by Kazakh government citing high costs
• A 2 year delay would cut $8.5bn from the $79.8bn NPV of the project for the government, and $5.2bn from the $70.7bn NPV for the other partners
Kashagan field Revision in plans
Value loss due to sub-optimal decisionsReasons for Partner Conflicts
Page 7
Both operators and non-operators agree on the impact of different perspectives and the need for more open dialogue.
Divergent views
Divergent views
Lack of open dialogue in the partnershipLack of open dialogue in the partnership
Partners’ technical competencePartners’ technical competence
Increasing conflict
Different strategic objectives & driversDifferent strategic objectives & drivers
Different views of the opportunity Different views of the opportunity
Source; SDG survey
Operators Viewpoint
Non-operating PartnersViewpoint
ConflictAlignment
Conflict
Page 8
Divergent views
Divergent views
Operators Viewpoint
Non-operating PartnersViewpoint
Non-operators have additional concerns about the way choices are made (and executed) by the operator
Operator’s technical competenceOperator’s technical competence
Alternatives not being investigatedAlternatives not being investigated
Lack of transparency in operator’s decision-makingLack of transparency in operator’s decision-making
Increasing conflict
Source; SDG survey
ConflictAlignment
Conflict
Page 9
Divergent views
Divergent views
Whilst the operator gets more frustrated by slow parent company approvals
Slow corporate approvalsSlow corporate approvals
Increasing conflict
Source; SDG survey
Operators Viewpoint
Non-operating PartnersViewpoint
ConflictAlignment
Conflict
Page 10
All of the most critical concerns reflect the need for a strategic dialogue between partners and operator.
Divergent views
Divergent views
Increasing conflict
Different strategic objectives & driversDifferent strategic objectives & drivers
Alternatives not being investigatedAlternatives not being investigatedOperator’s technical
competenceOperator’s technical competence
Lack of transparency in operator’s decision-makingLack of transparency in operator’s decision-making
Slow corporate approvalsSlow corporate approvals
Partners’ technical competencePartners’ technical competence
Lack of open dialogue in the partnershipLack of open dialogue in the partnership
Different views of the opportunity Different views of the opportunity
Operators Viewpoint
Non-operating PartnersViewpoint
ConflictAlignment
Conflict
Page 11
In summary, the following issues need to be addressed by any new governance model.
• Address main areas of conflict within partnership
– Different strategic objectives & drivers
– Different views of the opportunity
– Lack of open dialogue
– Lack of decision transparency
• Focus on investigating alternatives and identifying value maximising options.
• Clarify roles and involvement of JOC/ManCom
– Recognise strategic from execution activities
Page 12
Agenda
• How Partnerships hinder value creation in E&P JVs
• Governing for Full Value
Agenda
Page 13
Capturing the value in major projects requires both “strategic” and “execution” decisions
Strategic Decisions
Examples
• Development pace and sequence
• Capacity & investment phasing
• Export infrastructure
• Contracting and risk sharing strategy
• Govt. / stakeholder relationship strategy
• Use of major new technologies
• …etc
Execution Decisions
Examples
• Project organization
• Annual budgets and work plans
• Design details (individual element capacity, layout)
• Well locations and drilling program
• Individual contract mechanisms
• Selection of contractor(s)
• …etc
Page 14
The traditional ‘let the operator operate’ model falls down when used for strategic decision making.
Operator recommends
Partners accept recommendations
Operator works efficiently, and unimpeded
Trust increases, project gains momentum
Advocatesolution
Partners challenge
Time /resourcesspent defendingsolution
Increasing time pressure-focus on schedule
Entrench aroundbase plan, incremental optimization
….until partners want to make rather than endorse strategic decisions
The ‘let the operator operate’ model works ….
Results in stalemateResults in fast execution
Page 15
We’ve used “Strategic Governance’ to incrementally build alignment through evolving insight.
Completeness of Analysis (Operator)
Par
tner
ship
Ali
gn
men
t (J
OC
/Ma
nC
om
)
Incrementally build alignment through evolving insights
‘Strategic Governance’ means finding out what really gets in the way of agreement and tackling these as fits
‘Strategic Governance’ means finding out what really gets in the way of agreement and tackling these as fits
Key strategic issues must be extracted and tackled separately from execution decisions
Key strategic issues must be extracted and tackled separately from execution decisions
Page 16
The first phase identifies what is critical from a partnership perspective.
Completeness of Analysis
Par
tner
ship
Ali
gn
men
t
At each interaction the partnership can build alignment
Decision Process
Phase 1:• Establish operator ‘rules of the game’ for
decision making; process, roles, metrics• Surface decision critical issues • Identify alternatives partners want explored• Simplify to the core
Phase 1:• Establish operator ‘rules of the game’ for
decision making; process, roles, metrics• Surface decision critical issues • Identify alternatives partners want explored• Simplify to the core
Page 17
Phase Two spells out what’s possible.
Completeness of Analysis
Par
tner
ship
Ali
gn
men
t
Decision Process
Phase 2:• Translate ideas into specific concepts• Verify do-ability, difference and
completeness • Agree methodology and workplan• Re-enforce ‘rules of the game’
Phase 2:• Translate ideas into specific concepts• Verify do-ability, difference and
completeness • Agree methodology and workplan• Re-enforce ‘rules of the game’
At each interaction the partnership can build alignment
Page 18
The third phase sets out commitment to action.
Completeness of Analysis
Par
tner
ship
Ali
gn
men
t Phase 3:• Insights narrow conflict to what is
decision relevant • Debate is focused on such conflict• Genuine divergence in objectives
stills leads to action
Phase 3:• Insights narrow conflict to what is
decision relevant • Debate is focused on such conflict• Genuine divergence in objectives
stills leads to action
Decision Process
At each interaction the partnership can build alignment
Page 19
Partner involvement must be appropriate for the type of decision that needs to be made.
Execution
Strategic
OperatorAdvocacy
PartnershipInclusion
Fra
me
Process
Likely stalemate
Desirable for efficient execution
Inefficient.A symptom of
strategic misalignment
‘Strategic Governance’
Page 20
We believe that Strategic Governance helps to address the critical issues.
• Address main areas of conflict within partnership
– Different strategic objectives & drivers
– Different views of the opportunity
– Lack of open dialogue
– Lack of decision transparency
• Focus on investigating alternatives and identifying value maximising options.
• Clarify roles and involvement of JOC/ManCom
– Recognise strategic from execution activities
Page 21
Thank You