Joint ventures, compliance and the oil and gas industry
Joint-venture operations are becoming increasingly prevalent across multiple markets and industries as organizations look to improve their business by leveraging the expertise and resources of other participants.
Particularly when certain projects are too multifaceted and difficult for a single organisation to successfully operate on their own, joint ventures are often considered a favourable means for two or more parties to distribute resources, share knowledge and reduce costs. This can be by way of having greater access to technology, optimisation of supply chains and better market positioning, without the requirement of a time-consuming and considerably expensive full-scale acquisition.
While these are all great benefits, joint ventures can generate numerous challenges when it comes to aligning standards, risk appetites and risk-mitigation procedures. Too often in the development of a joint-venture agreement there is too much focus on the commercial aspect without consideration for the management of the risks which might be present in a joint-venture operation.
In this article we will analyse a hypothetical scenario of a joint venture in the oil and gas industry, and take a look at the risk elements and compliance components which must be given careful consideration. Further, this article will seek to extract the key strategic initiatives that compliance leaders must adopt in such situations.
To provide context in the discussion of best-practice compliance in a joint venture, we will use the fictional scenario of a natural gas exploration company, “Elgood”.
Elgood is a multinational corporation listed on the London Stock Exchange. Elgood is well known internationally for not only its financial success, but also its clean track record when it comes to legal and ethical matters. As part of its corporate strategy, Elgood is seeking to go into a joint-venture agreement with LenTar, a state-owned entity of the island nation of Lenstrom.
Lenstrom is by definition an emerging market nation, with a small population and considerable mineral wealth. Until recent democratic elections, Lenstrom was ruled by a military dictator for 40 years, which has left a legacy of low literacy rates, poor infrastructure and an underdeveloped economy.
Elgood is seeking its joint venture with LenTar to perform liquid natural gas exploration and extraction activities.
Clearly there are many additional facts missing, but this hypothetical situation is no doubt familiar to companies all over the world and in all sorts of industries: a major multinational corporation looking to establish a foothold in a high-risk zone.
The following are some steps which should be taken by compliance officers who wish to contribute to the success of a joint venture with an entrenched but efficient compliance programme.
Compliance risk identification
In any joint venture there is an element of risk. What the risks are depends on the type of industry and engagement – whether it is non-performance, health and safety, intellectual-property infringement, information security or even a breach of bribery and corruption laws. In the oil and gas industry, for example, there must be contemplation of a catastrophic disaster impacting numerous parties. But purely on a compliance front, parties to a joint venture must look closely at each other’s existing position on various risk elements.
Looking at our hypothetical scenario, there would automatically be a number of sticking points for any compliance officer, predominantly to do with the geo-political makeup of Lenstrom. Low levels of education throughout the population, an under-established civil system and a regime new to democratic principles and freedom are the hallmarks of a zone which poses a high risk of corruption.
The priority of a compliance officer associated with this prospective joint venture is to identify all potential risks. These might include strategic, operational, financial and compliance risks. Unless there is a full and comprehensive brainstorming or risk analysis performed, Elgood is potentially exposing itself to a number of factors which, without proper management and mitigation, could devalue the joint venture, or, worse, jeopardise the opportunity entirely.
Communication and discussion
Assuming clarity is gained on what risk concerns need to be addressed, frank and open communication with the co-venturer needs to take place. There needs to be a dialogue of setting standards and expectations; it will be impossible for both parties to come to terms with the on-going commitment of a compliance programme unless a mutual understanding exists of the benefits of a particular course of action. Take for example a major mining company who is looking to enter into a joint-venture agreement with a state-owned body in an emerging market (similar to in our hypothetical scenario). In most cases such as this there will be a differing stance on what constitutes ethical conduct as well as an imbalance in the tolerance towards illegal behaviour in the performance of a project.
In the hypothetical scenario, the compliance department of Elgood would no doubt be harbouring concerns about the stance of its prospective joint-venture partner when it comes to compliance-related issues. Elgood would need to firmly establish what its position is when it comes to risk factors such as antitrust, bribery and corruption, and obtain LenTar’s buy-in on the importance of upholding such principals in the coordination of the joint venture. It would be largely ineffective if Elgood were simply throwing their weight around and insisting on a certain compliance programme to be adopted – LenTar need to understand and agree on the importance of investing resources in effective risk mitigation.
Compliance plan development
Developing and implementing a compliance programme can be difficult at the best of times, and even more so when two very differing organisations need to align efforts and possibly start from scratch (as often occurs in oil and gas joint ventures). Having established a clear understanding of what risks are present to joint-venture operations, and having communicated expectations and agreeing on what position needs to be adopted when it comes to implementing compliance, joint-venture parties must dedicate resources to construct a programme which targets the risk elements that are potential threats to the operation.
In our hypothetical scenario the joint-venture parties would need to commence developing the core components of their compliance programme, such as policies, procedures, awareness campaigns, communication plans and training – all of which are specific to the nature of the joint venture.
Too often a joint venture will simply adopt the existing compliance programme of one of the participants. Whilst this might save on time and money, it is more than likely destined for failure. Elgood may already have excellent core aspects to its programme globally, but unless adapted to a particular scenario the joint venture is likely to struggle to embrace the main aspects of its compliance programme.
Materials specific to the joint-venture operation and an implementation strategy which provides context to the different people involved are the hallmarks of a best-in-class programme for a joint venture.
In this article we have seen an example of a common scenario found across multiple industries: two diversely different companies embarking on a joint-venture operation in what is unfamiliar territory to at least one of the parties. Obviously the factual scenario is simplified heavily from what is found in real life, but it is based on the common features of a joint venture. More importantly, it highlights the crucial foundation of a compliance programme in a joint venture: it needs to be built from the ground up and directly relate to the specific functions of that joint venture.
In any compliance programme, buy-in from a company’s senior management is arguably the most crucial aspect in getting a competitively-advantageous compliance programme. With a joint venture, the buy-in from all participants is equally important. Without it there is no mutual understanding of the key concerns and risk factors which could undo the joint-venture operation itself. To gain optimum results from the joint venture, sustained and open communication between parties in these areas is an absolute must.