The motivations behind the joint venture
The Joint Operating Agreement (JOA) is extremely critical process of the documentation of oil and gas transactions. JOA regulates the duties and rights of the parties in the Joint Venture (JV). Now, JV is among the most critical element in the successful completion of the complex and risky projects of the oil and gas industry (Wood, Nwaoha and Towler 2012). Almost all the major projects in energy sector require massive capital and labour investments that enhance the risk level in a major way. Joint ventures are key component in the oil and gas sector, as around 71% of the total upstream investment has made though joint venture. The energy sector organizations participate in JV to accumulate the required level of capital, assets and unique expertise so that all the requirements of the projects can be completed successfully. The report focuses on joint venture agreement made between two prime oil and gas organizations namely Mobil and NNPC. Both these organizations have participated in joint venture process to fulfil the upstream requirements in Nigeria. NNPC holds 60% of the equity interest while Mobil holds 40% of the equity interest of the entire project (Aigboduwa and Oisamoje 2013). In this report, the focus would be provided on the identification of the factors that induce this joint venture agreement between NNPC and Mobil. It would also try to highlight the benefits and challenges of the joint venture procedure on the successful completion of the project. The report would also focus on providing effective recommendation to enhance the efficiency of the joint venture process in the oil and gas industry.
As illustrated by Anthony (2012) several factors contributes to the decision making process for joint venture agreement in oil and gas sector. Now, NNPC have faced massive criticism at the initial stage due to joint venture contract with the global multinational corporation Mobil. Many have raised their concern over the outsourcing of energy with the inclusion of global organization. Aron (2013) have highlighted the fact that defects in the Nigerian arrangements are not intrinsic with joint ventures. Still, increasing demand in the market has induced NNPC to focus on utilizing help of foreign multinational corporations for ensuring the energy demand of the economy are fulfilled in an effective way. The motivational factors behind the joint venture between NNPC and Mobil are illustrated as follows:
In the present time, all the projects related to oil and gas industry are too much capital intensive. Therefore, it induces organizations to invest massive amount on the onset project development. Specifically, upstream process carry highest burden that creates huge difficulties for a single organization to handle (Tordo et al. 2013). For that reason, organizations look to use joint venture strategy to segregate the requirements of the operational procedure. Moreover, JV allows organizations to divide the entire investment into parts, which enhances the performance level of the operational procedure. Now, increasing demand for energy resources has induced NNPC to invest massive amount for the fulfilment of the operational procedure. For that reason, it has developed agreement with one of the largest oil and gas organizations in globe namely Mobil for handling all the requirements.
Capital intensive
Upstream process of oil and gas industry involves huge amount of risks that can affect the day-to-day operation process. The risk in oil and gas sector includes both risk of lives and risk of infrastructure. As a result, organizations often have to perform different safety measures for avoiding any unnecessary incidents. However, the development of safe environment requires lot of efforts from the organizations, which eventually enhances the complexity of the operational procedure. Ruqaishi and Bashir (2013) have highlighted tragic incident of Macondo blowout in Gulf region of Mexico. The incident has cost 11 lives with the wastage of more than 4.9 million barrels of oil. It has cost British Petroleum around $42.2 billion (Teka 2012). For that reason, proper utilization of JV strategy is critical for providing more safety to the environments and infrastructure.
In the present time, effective utilization of advance technology is critical for the successful fulfilment of all the requirements. In fact, the energy sector is slowly drifting away from the conventional technological process for keeping up with the increasing challenges in the market (Keil 2014). Now, Nigeria is not considered as one of the technologically progressive country. Therefore, it had to take assistance from one of the top multinational organizations to fulfil the upstream responsibilities. It has been assessed that majority of the top oil and gas sector organizations invested massive amount on the research and development activities. Therefore, joint venture with Mobil has allowed NNPC to overcome the challenges associated with the technological limitation.
Oil and gas sector requires huge number of both skilled and unskilled professionals for performing all the responsibilities in an effective manner. Therefore, most of the organizations often face challenges in providing required amount of resources for fulfilling all the responsibilities. Therefore, it induces organizations to look for external help for handling challenges associated with the resource scarcity in an effective way. Moreover, joint venture allows organizations to provide jobs to the employees as per their resource allocation. Therefore, it helps the project to enhance its efficiency in major way. Hence, joint venture with Mobil has allowed NNPC to enhance the production up to 1000,000 bpd (Ghandi and Lin 2014). As a result, it has helped Nigeria to avoid any challenges related with resource scarcity.
As described by Ciarreta and Nasirov (2012) effective utilization of JV allows organizations to combine all the process for successful completion of all the requirements within the given timeframe. Thus, it allows organizations to handle challenges with upstream, midstream and downstream process simultaneously. Moreover, JV allows organizations to look into the details of all the process that eventually enhances the overall performance level in a major way.
Risk mitigation
As illustrated by Killing (2012) many rich oil and gas countries does allows organizations to explore energy or oil directly. In fact, many legislative jurisdictions have been implemented on the oil exploration process that restricted unethical exploration of energy. Thus, it eventually enhances the complexity of the upstream process. Therefore, organizations often require professional assistance from other organizations that increases popularity of joint venture. It has been assessed that joint venture helps organization to create separate team for handling legal activities that eventually enhances the cost of the operational procedure. Therefore, it can actually enhance the pace of project completion in a major way.
The above highlighted factors are the prime reason for the increasing popularity of joint venture practices in oil and gas industry. With increasing demand for energy sources across the globe has enhanced the complexity of the process. Therefore, it will eventually require more professional assistance from different other business entities. Otherwise, it can damage the overall effectiveness of the operational procedure. Hence, joint venture is likely to be used more frequently in near future for completing all the requirements associated with the complex oil and gas projects.
As per the article by Hu and Xu (2013), joint venture reflects a strategic alliances between two or more business entities for engaging in specific project undertaking process. It describes a commercial enterprise where at least two organizations join their forces to gain strategic and tactical edge in the market. Now, join venture can be of different forms including insider joint venture, outsider joint venture and marketing joint venture, which are common in the energy sector. Now, NNPC have developed joint operating agreements (JOA) for performing the responsibilities of the operational procedure. The JOA has also allowed sharing every resource for performing all the provided responsibilities. However, joint venture can have benefits and challenges in overall performances of the operational procedure that are discussed as follows:
Organizations utilized joint venture strategy to perform specific tasks of a project. Now, collaboration with other organization reduces the need of capital resources like machinery and technology largely (Mitchell, Marcel and Mitchell 2012). As a result, it provides organizations the opportunity to perform all the responsibilities of the project without investing too much on the operational procedure. Hence, joint venture process helps energy sector organizations to increase the profit at the expenses of limited cost. Therefore, it eventually enhances the profit level of the organization in an appropriate way. For instance, Mobil has taken many critical responsibilities in upstream project of Nigeria, which reduces the burden for NNPC. It has allowed both NNPC and Mobil to achieve consistent profit in the market.
Technology limitations
According to Pinkse and Van den Buuse (2012) energy sector organizations works in specific operational procedure. However, partnership with another business entity allows organizations in oil and gas sector to increase the flexibility in the operational procedure. It has been assessed that utilization joint venture procedure has allowed organizations to move from conventional operational procedure for fulfilling all the responsibilities. For instance, joint venture with Mobil has provided NNPC the opportunity to introduce new technologies and capacity for performing all the resources in an effective way. In addition, added flexibility in the operational process also helps upstream process to mitigate any challenges with the operational procedure.
As mentioned earlier, majority of the oil and gas project requires large-scale investment, which might create challenges at the beginning of the project. However, joint venture reduces the risks associated with the operational procedure of the oil and gas industry (Hiatt, Grandy and Lee 2015). As a result, it helps to provide initial push for any projects that eventually play a critical role for the successful completion within the provided timeframe. It has been assessed that initial push also helps to restrict the cost of the project near to perceived estimations.
Joint venture allows oil and gas organizations to share the cost with other parties in an effective manner. For instance, tactical joint venture allows organizations to work as per their specialization, which enhances the performance level of the operational procedure. For instance, joint venture has allowed NNPC to utilize advance technology and mapping capacity of Mobil to explore required amount of oil and other energy resources for the fulfilment of the operational procedure.
Joint venture also allows employees of different organizations to enhance their knowledge regarding the best possible way to perform all the responsibilities. For instance, employees of NNPC have the opportunity to interact and work with individuals coming from different geographical and cultural background (Anomohanran 2012). As a result, it helps to acquire new skills for performing all the roles and responsibilities of the operational procedure. Therefore, it will help to enhance the efficiency of the operational procedure in long run.
As illustrated by Ovadia (2012) too much flexibility in operational process of upstream project can create major confusion. In fact, upstream project in oil and gas industry often requires proper coordination among different departments. Therefore, joint venture can actually create challenges in handling balance between conventional approach and flexibility for performing all the requirements of the operational procedure. Therefore, leaders of the organizations have to take more responsibilities to avoid any possibility of confusion within the operational procedure that eventually enhances the challenges associated with the oil and gas projects.
Resource limitations
Joint venture induces employees from both the organizations to utilize capital resources of each other. However, asset involvement often also creates confusion regarding the claim of other parties (Adewuyi and Oyejide 2012). As a result, it induces organizations in oil and gas sector to utilize royalty and confidentiality contract in order to avoid any legal trouble associated with the legal claim. Thus, it actually increases the complexity of the operational procedure in a major way.
As per the article by Shuen, Feiler and Teece (2014) organizations working in different work culture expected to have differences in their moral, values and though process. Now, joint venture induces employees from different organizations to work together for the successful completion of the project. However, differences in culture and values can actually create challenges for the organization in maintaining coordination among the employees. Therefore, it can also create major impact on the effectiveness of the operational procedure. Culture differences can also create communication gap with the workplace that can create different type of unwanted situations. For instance, Nigerian people working NNPC likely to have completely different though process compared with the employees of Mobil. Hence, organizations dealing in the energy sector will have to remain extremely careful for avoiding any type of unwanted internal situation within the workplace.
From the above illustration, it can be assessed that joint venture strategy does play a significant role in successful completion of many complex oil and gas projects. Effective utilization of joint venture strategies can allow organizations to perform many complex responsibilities in an effective way. However, it also has certain limitations or challenges that organizations have to deal with in a professional manner. Firstly, both the organizations participated in the joint venture procedure has to provide some level of training to all the employees so that they can able to overcome the challenges associated with the cultural and geographical differences. The training procedure needs to include information about the way people working from different locations tend to express their thoughts and perspectives. Leaders also have to provide with proper guidelines for handling diversified team in an effective way (Rahim and Liwan 2012). Secondly, organizations need to evaluate the capacity and offerings of other organization before developing any type of agreement. It is essential for any organizations to assess the exact amount of support other organization will provide for performing all the responsibilities of the operational procedure. Thirdly, employees from different organizations working on similar projects will have to be provided with the similar type of benefits. Otherwise, it can create major internal conflicts, which eventually will affect the performance level.
Combining subsectors
Conclusion:
With time, oil and gas projects have become more complex that in turn creating difficulties for the organizations to perform all the responsibilities. The complexity induces organizations to look to for specialize capital and resources so that the entire requirements of a project can be completed within given period of time. As a result, joint venture practices are becoming very common in oil and gas industry. It has reduces the amount of money needs to be invested by a single business unit in a major way. Hence, it reduces the risk level in conducting different megaprojects in oil and gas sector. It also helps oil and gas sector organizations to add capital or resources for performing specific activities of projects. However, it also can create different types of challenges for the organizations. Still, it had to be said that joint venture is an extremely creative strategy for oil and gas projects, which will continue to increase its popularity in future.
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