e & p joint ventures – governing for value december 11, 2012 presented by: girish shirodkar,...

E & P Joint Ventures – Governing for Value

December 11, 2012

Presented by:

Girish Shirodkar, Global Partner and Managing Director

Petron 2012

Agenda

• How Partnerships hinder value creation in E&P JVs

• Governing for Full Value

Agenda

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

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

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

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

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

Divergent views

Divergent views

Operators Viewpoint


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

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


ConflictAlignment

Conflict

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


ConflictAlignment

Conflict

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

Agenda

• How Partnerships hinder value creation in E&P JVs

• Governing for Full Value

Agenda

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

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

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

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

Phase Two spells out what’s possible.


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’


The third phase sets out commitment to action.


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


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’

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

Thank You

e & p joint ventures – governing for value december 11, 2012 presented by: girish shirodkar,...

Documents

bn npv

capabilitiesjv partners

kazmunay gas

largest gas

value agendapage

value creation

pohokura gas nz

rated production capacity