strategic alliances between national and international oil ...€¦ · strategic alliances between...

Strategic Alliances Between National and International Oil CompaniesRobert A. James Pillsbury Winthrop Shaw Pittman LLP

October 3, 2009Lansdowne Energy Conference

Overview

How NOCs and IOCs deal (and have dealt) with one another

Problems with the current allocation of roles

The NOC/IOC strategic alliance concept

Potential structures for alliances

Where is the “sweet spot”?

2 | NOC IOC JVs

NOCs and IOCs in the oil industry roster

3 | NOC IOC JVs

Other playersGovernments (civil service, ministries, legislators, judges), nations and regions, NGOsCentral banks and international financial institutionsOilfield service, EPC and technology licensing companiesIndependent sources of capital (now including private equity and sovereign funds)Owners of downstream businesses (refining, marketing and transportation)

The InternationalOil Companies (IOCs)

Majors and supermajors

Independents

International trading andinvestment companies

The NationalOil Companies (NOCs)

Resource owners, custodians ormanagers in their home countries

International developers and financers abroad

Arms of the government, with revenue,hard currency, employment, infrastructure

and social service roles

Independent power centers

Upstream (exploration & production)

Production sharing agreement (PSA) or concession

Production services agreement with in‐kind compensation

Operating agreement for fee

Downstream (refining,marketing & transportation)

Refinery operating, throughput ortoll processing agreement

Pipeline operating or throughput &deficiency (T&D) agreement

Patterns of distribution systems

Patterns of trading (import andexport) and marketing

Contemporary models of oil asset control

4 | NOC IOC JVs

Auxiliary businessesMineralsShippingTransportation infrastructurePetrochemicals, LNG and biofuelsPower, retail

IOC reserves and presence

Ernst & Young, 2009

The internationalization of NOCs

Ernst & Young, 2009


Resource holders


Resource holders

Resource seekers

The financial resources of NOCs

Retained earningsSaudi Aramco, Kuwait Petroleum Company, Abu Dhabi NOC, Sonangol

Equity marketsCNOOC, Petrobras, KMG EP, PTT

Debt marketsCNOOC, PDVSA, NIOC, Pemex, Petronas, CNPC/Petrochina

Joint venturersKMG, Petronas, Sonatrach, CNOOC, Petrobras

Production sharing contractsNIOC, NNPC, SOC/MOC (Iraq)

Dr. Valérie Marcel, Foreign Policy & KPMG 2009

The historical record

Second Wave: resource sovereignty of governments(1950s‐1980s)

Government control of reserves and productionIOCs driven toward production sharing rolesNOCs given carry, production sharing in some fields, custodial roles in others

12 | NOC IOC JVs

First Wave: prevalence of IOCs(1900s‐1960s)

1970: IOCs held 85% of world reserves (O&GJ 2/2/09)

Third Wave: expansion of operationaland financial NOCs (1990s‐today)

2008: IOCs hold 6‐8% of world reserves(O&GJ 2/2/09)IOCs driven toward technology, projectdelivery, capital, downstream rolesNOCs active operators at home and competing developers abroad

Problems with the current allocation of roles

Inefficient allocation of prospectsAd hoc allocation of asset control and investment decisionsFormal tenders interfere with custom solutionsHost governments not always focused on profit or production goalsUnderuse of NOC and IOC strengthsNOCs: resource and production controls in national interest; development of national human resources and technology transferIOCs: access to markets and capital, downstream assets, technology, international, HR development, project discipline, infrastructure capabilities

13 | NOC IOC JVs

Potential for NOC/IOC alliances

Precedent with limited ventures for specific projects and areas of mutual interest (AMI)

Examples—BP/Statoil 1990‐1999, Aramco in midlife, Motiva/Star Enterprise, LUKoil/ARCO and LUKoil/ConocoPhillips; TNK‐BP, Shell/Gazprom?

Potential for expansion to broader alliances

REGION—portions of the home country (e.g., neutral zone production) or of other regions (e.g., West African offshore)

SEGMENT—subsectors of the industry (e.g., deep offshore exploration)

FUNCTION—efficient organization with right people for each role

OBJECTIVE—defined shared objective as maximization of profit, or production, over a given time period

14 | NOC IOC JVs

The NOC’s take on alliances

ADVANTAGES

Diversification

Vertical downstream integration

Efficient development of national resource base

Reduction of administrative expenses

Rationalize selection process for opportunities

Efficient allocation of R&D roles

Political cover for unpopular decisions

DISADVANTAGES

Foreign equity is contrary to traditional nationalist laws and popular sentimentBlunt traditional “national resource”immunities Picking a winner precludes competition on home front (or IOC front)

15 | NOC IOC JVs

The IOC’s take on alliances

16 | NOC IOC JVs

ADVANTAGES

Reserves, reserves, reservesAccess to frontier, large‐scale productionPriority for new projectsEconomies of scaleGreater use of IOC’s technology, project management and downstream resourcesPossible reduction of expropriation risk in ongoing venture

DISADVANTAGES

Loss of control of internal organization within alliancePutting too many eggs in one basketPossible increase of expropriation risk at end or threatened end of relationshipPolitical ramifications in home country, corruption issuesDifficult to sell to investment community, disclosure issuesConcerns with host country politics and unrest (e.g., Alien Tort Claims Act)

Potential structures for NOC/IOC alliances

Alternative 1: Broad Joint Venture between NOC and IOCFORMATION

Broad functional scope (exclusive and non‐exclusive zones)Broad geographic scope (exclusive and non‐exclusive zones)IOC provides technology, capital, downstream business accessNOC provides reserves, access to local projects, local assets, entitlements

OPERATIONOngoing contributions: IOC obtains recovery of capital, IOC and NOC allocate operating expensesExport, tax/regulatory and profit distribution policiesSole risk and non‐consent rightsManagement and staffing

CONTROLVotes, audits, disputes and deadlocks

EXITTransfers, withdrawals and removals for default or otherwise

17 | NOC IOC JVs


IOCInternational Oil

Company

NOCNational OilCompany

PREFERREDSTOCK

ASSETS AND PROJECTS


Alternative 2: IOC Equity for NOC Assets and Prospects

New series of preferred stock in publicly traded IOC issued in exchange for existing property interests and prospective projects of the NOC or government

Earnings like common, but stated liquidation and dividend preference

Class vote on fundamental changes

Board representation, some approvals for executive and committee placements

Restriction on resale of preferred stock for specified time periodconversion to common stock when sold to third party

Restriction on acquisition of common shares; standstill agreement

Automatic adjustment of voting and earning rightsdownward if country is confiscatoryupward if expected earnings or host country investments not met

19 | NOC IOC JVs

Challenges for NOC/IOC alliances

Shareholder vote for IOC (NYSE and other standards)

Central bank, IMF and lender issues

CFIUS and related national approvals for foreign investment

FCPA and OECD anti‐corruption issues

Antitrust and competition law issues

Finesse auxiliary issues by using such alliances outsidethe borders of the NOC’s host country?

20 | NOC IOC JVs


Structuring the (inevitable?) exitPut and call rights for NOC’s or IOC’s interest, on defined events or at stated intervals?In sale of IOC, NOC has veto right or call on portion of company? Or unscramble omelet by returning the NOC’s assets and prospects?Change of control or merger of IOC still possible?Impact of exit on reserves booked by IOC?

Opportunities for NOC/IOC alliances

Goldilocks conditions

Not too small—need economies of scale, alignment with success of other partyNot too big—neither party should be controlled by the other or beoverly dependent on one country or region

Where is the “sweet spot”?

DEEPWATER OFFSHORE EXPLORATION—IOCs still have critical technology and project skills; NOCs have prospects?LNG—challenged economic environment for international movement of gas?HEAVY OIL—NOCs still need IOC technology and downstream abilities?ALTERNATIVE ENERGY and trading of carbon emission credits?

Despite all the challenges alliances face, what are the alternatives?

23 | NOC IOC JVs

Opportunities for NOC/IOC alliances

24 | NOC IOC JVs

“IOCs must learn to package the elements of their core value proposition—technology, financial resources, access to markets, project execution expertise, and vertically integrated offerings—in innovative ways that are customized to each market. … [T]hose who are willing to adapt … will maintain their competitiveness and viability.”

—Rob Jessen, Ernst & YoungOil & Gas Journal 2/2/09

Robert A. [email protected] (San Francisco)1.713.276.7689 (Houston)

Terry M. [email protected] (San Francisco)

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