Cooperation in Times of Social Distance: A Closer Look on JVs

Cooperation in Times of Social Distance: A Closer Look on JVs

As joint ventures (JVs) involve two or more businesses pooling their resources together, their goals as well as their risks become also commonly shared. However, overshadowed by the COVID-19 crisis in addition to a global oil price war, oil and gas JVs are under the growing pressure from shareholders, governments, and the general public to adjust their business models and transparently compete in a new energy landscape.

Oil and gas companies typically form a JV to expand into new markets, particularly overseas. This provide companies with more resources, greater capacities, increased technical expertise, access to established markets and distribution channels. But as travel restrictions still remain in place to curb the spread of the virus, JVs do in fact have to rethink their agendas and business models.

“JVs, regardless of their geography and location, have one thing in common in their set up and that is the amount of patience required. The overall quantity of patience required has only been increased by the COVID 19 pandemic,” Hugh Fraser, Managing Director of HFI Consulting International, told Egypt Oil & Gas.

The Elephant in the Zoom: JVs in a Crisis

According to the multinational law firm Freshfields Bruckhaus Deringer llp, the new work environment imposed by the pandemic will inevitably strain the ability of boards to maintain governance and control while they work remotely. Currently, JV boards are making a great effort to ensure that accurate daily reports are maintained – if not enhanced.

Some JVs began to create COVID-19 committees to accelerate decision-making, authors from Freshfields Bruckhaus Deringer llp wrote on Lexology. These committees are receiving so much attention at this critical time; however, the law firm warns that directors should be mindful that any decision taken during the pandemic will be judged afterwards. Thus, JV risks and good governance should be carefully assessed.

“The longer the pandemic continues, questions of future strategy will need to be tackled when approving new business plans and budgets. These discussions will provide plenty of room for disagreement between shareholders, particularly as to capital allocation and distribution policies. Early and constructive engagement with partners could help,” the authors said on Lexology.

The authors recommended that an emergency funding for JVs should be intact to streamline source funding from individual shareholders. This way, shareholders will be able to guarantee that any prescribed processes and deadlines are strictly met without risking that the emergency fund becomes a burden later on.

Cross-border JVs

The Managing Director of HFI Consulting International explained to Egypt Oil & Gas that “there is a degree of chemistry in finding the right JV partner and our advice has always been to find trusted intermediaries who know the locality, and the players in that sector, well, rather than trying to find local partners from scratch. I see this becoming even more important when travel is restricted.”

“It is a time of great opportunity for cross border JVs and not just in oil and gas. Energy transition technologies are developing in parallel; solar, wind, carbon capture and storage and hydrogen will all be key to a sustainable future for businesses – as well as for the planet.  There will be no quick economic fix for some areas of the globe and its eminently sensible for businesses which are facing unprecedented trading conditions to look to cross border JVs. A JV business model is best for combining international technologies and know-how transfer with local skills, localization and market connectivity,” he added.

Fraser also stated that “a bridgehead cluster venture approach where several synergistic, non-competitive companies collaborate to penetrate a new market is a JV model which we are likely to see increase in a post COVID 19 world. This gives end clients a much more interesting and attractive collective offering of technologies. The collaborating partners benefit from significant cost sharing and thus it is a highly attractive model for small and medium-sized enterprises (SMEs) which need to adapt quickly. In addition, it is a model which will not compromise the principle of operational independence and sole operational risk.”

Liquidity Challenges and Risks

According to a report by international law and tax experts from CMS international law firm, previous oil price lows have caused JV issues such as: cash calls; insolvency; failure to agree work programs and budgets; and disputes concerning payments under decommissioning security deeds. Thus, oil and gas JVs should inevitably put in mind coventurer risk.

The report further states that due to the current economic and financial climate, there is a high risk that JV operators will develop opposing views regarding work programs and budgets. This is a particular risk which arises due to capital expenditure (capex) intensive operations and coventurers simply prioritizing different assets. It is suggested that in order to settle on work programs and budgets, companies with immediate financial constrains will need to consider: directors’ duties in approving future spending commitments that may not be within the financial ability of the company and the risk that a work program and budget may be setting the company up for a greater loss.

Egyptian JVs’ Framework

According to a chapter on Egypt by the Oil and Gas Law Review, the Egyptian General Petroleum Corporation (EGPC) works as a holding company and shares in around 58 JVs with foreign partners including several major international companies. The EGPC manages its exploitation and production (E&P) operations through these JVs. The EGPC leads any negotiations with the other party on the terms and conditions of the relevant agreements. Moreover, EGPC or Egyptian Natural Gas Holding Co (EGAS), a subsidiary of EGPC, holds a 50% while the other shareholder holds a 50%. Both parties have the right to nominate four directors to its board of directors. It is important to note that whenever a decision, action or a proposal should be made, such decisions are taken by the EGAS or EGPC and the contractor jointly.

An overview on JVs in Egypt by Ingy Rasekh and Khaled Ragheb, AMERELLER Legal Consultants, also assured that JV agreements among Egyptian or foreign partners are a matter of mutual agreement, defined by their contract, not by a special law. Alternatively, the members of the JV can elect to formally incorporate a special purpose vehicle (SPV) which carries out activities realizing the JV’s purpose.

In terms of limiting member liability, the overview mentioned that one of the most essential pillars constituting a JV agreement is that all partners share the risks, losses and rewards of their venture. Furthermore, if the JV members do not equally incur risks, losses or rewards, the JV will be deemed void.

However, Rasekh and Ragheb further noted that JV members can regulate matters relating to the JV freely as long as it does not breach the mandatory legal provisions.

JVs COVID-19 Responses

In line with the Ministry of Petroleum and Mineral Resources’ COVID-19 Emergency Response Plan, many JVs in Egypt began implementing precautionary measures such as working from home or employee rotation, wearing masks, and sterilizing buildings, etc. Companies’ Corporate Social Responsibilities (CSR) and health, safety, and environment (HSE) teams were making headlines regularly.

On March 4, Badr El Din Petroleum Company (BAPETCO), a JV between EGPC and Shell, became one of the first petroleum companies in Egypt to suspend the fingerprint work system to ensure workers’ safety from any risks. BAPETCO measured employees’ temperatures before entering the company, as part of the precautionary measures to prevent coronavirus, and according to the directives of Tarek El Molla, Minister of Petroleum and Mineral Resources, to limit the spread of the deadly virus.

The company put antiseptics in across its buildings and examined foreign experts upon entry. In addition, the company sterilized employees ’offices, toilets, and company exits. Since March, it has sought to reduce the workers’ capacity and has formed the group necessary for the conduct of business while providing the necessary programs to work from home, especially for the groups most vulnerable to infection.

BAPETCO has topped the list of the 10 best Egyptian companies that have succeeded in taking all precautionary and preventive measures against this pandemic, protecting workers and maintaining production.

The Way Forward

According to Fraser, “Businesses, wherever they are located, have never needed to be more adaptable and have an ability to pivot their business model than now. I am sure we will find a more collaborative approach comes to the forefront in the coming months. The Middle East is in the enviable position of having the longest potential future in the oil and gas industry due to the large reserves and low production costs and so the next generation of business is secure, unlike in other regions. It could be a time of great opportunity for Egyptian JVs.”

“Regular and proactive communication between potential JV partners will continue to be vital, but this is now likely to become driven by virtual meetings. It’s a way of life for many of us who have worked in these territories for years, but for those who hope to expand or diversify in, or into, Egypt, developing relations virtually and working out how to avoid friction points will be a skill to be quickly developed. Egypt’s congestion problems can be mitigated by a radical change to working practices with digitalisation and technology which enables remote working. A move towards these technologies and ways of working will be vital for success,” Fraser concluded.

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