12 minute read
OIL & GAS
STRATEGIC ALLIANCES
A win-win for oil and gas operators and suppliers
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Let’s be frank. The oil and gas industry excels at many things but getting operators and suppliers to trust each other and work closely for mutual benefit is not one of them. Business cycles drive relationships, with the price of oil at their heart.
BY KEARNEY CONSULTING*
Yet, strategic alliances pose real benefits for oil and gas (O&G) companies and partners, especially as they tackle new challenges on the road to becoming energy companies with new suppliers in areas such as wind turbines, solar panels or customer and software solutions. Wouldn’t it be great if their relationships were decoupled from oil prices and based on win-win outcomes instead?
There are good reasons to pursue strategic alliances now. For operators, 70% to 80% of their cost base lies with suppliers, and there is a wealth of value to be found there. Traditional contracting offers limited opportunity to uncover additional value, and companies need more innovative and collaborative ways to work with the supply chain that go beyond reducing costs.
Most would agree the industry could operate better with fewer silos – not to mention an efficient request for proposal (RFP) process. Plus, managing suppliers for value could be a competitive edge in an increasingly complex and tightening market.
Strategic alliances are an excellent way to reach the next level of performance by working differently with suppliers. We have seen a 10% to 25% reduction in the total cost of ownership when operators and suppliers work collaboratively to fully tackle value and costs. We’ve also seen value unlocked in a multiple order of magnitude.
1 2 3
Typical approach by procurement has revolved around encouraging competition among suppliers, creating short-term benefits but a lack of long-term relationships.
Many categories risk getting positioned on
the top left with “hot” markets increasing their supply power and buyers not having room to manoeuvre.
The ideal end goal is to explore shifting the category dynamic to the top-right quadrant,
leverage longer-term supplier relations and seek joint advantage with the suppliers, such as through strategic alliances. High
Supply power KEARNEY’S PURCHASING CHESSBOARD
Innovation breakthrough
2
Risk management
Respecification
Technical data mining Value chain management
Integrated operations planning
Co-sourcing Commercial data mining Tendering
Demand management
Low
Low
Figure 1. Strategic alliances are a good approach when demand and supply power are high. Volume bundling Globalisation
Demand power
3
Value partnership
Cost partnership
Supplier pricing review
1
Target pricing
High
For example, delivering a well 20% quicker at 20% lower cost produces more benefits than simply a few days and dollars saved as production accelerates in a now viable project. This benefit grows as improved delivery continues over the longer term (three years or more) and can make borderline or uneconomical projects attractive again. Finally, companies can improve project delivery (completion timeframes) by 15% if they team more closely with third parties.
WHAT WIN-WIN LOOKS LIKE
Strategic alliances work best when power is high for both the demand (operator) and supply sides. Referring to the Kearney Purchasing Chessboard, procurement encourages competition among suppliers, leading to short-term benefits rather than longterm relationships, as shown in the lower right-hand quadrant of Figure 1.
Many categories risk being positioned at the top left, where hot markets increase supply power, limiting buyers’ room to manoeuvre. The ideal end-goal with a strategic alliance is to shift the category dynamic to the top right by leveraging longer-term supplier relationships and seeking joint advantage.
1. Base cost
- “True” costs (no margins based on best historic delivery achieved)
1
Short-term goals
2. Risk and inefficiencies
- “True” costs for inefficiencies and lost time - Incurred as cost or accrued as margin driving efficient delivery and continuous improvement
3. Fixed fee
- Fixed fee to ensure income margin is always captured, capping downside risk for alliance members (10% to 25% of typical margin)
Accrual mechanism as check and balance
4. Performance margin
- Margin based on non-time-related performance levers (floating mechanisms)
Agreed “fair” % margin for average performance
2 3 4
Long-term goals
5. Long-term incentives
- Additional margins split members on reaching key project or yearly milestone(s)
5
Key concepts and guiding principles for commercial framework
Fosters a one-for-all, all-forone spirit among partners (win or lose together)
Incentivises the long term while still rewarding short-term performance
No scenario in which alliance (non-operator) members incur a loss - Transparency on cost and margin (open book, true cost) - Step-change improvement margins are multiple times normal margins (win-win-win) - Average performance results in lower-than-average margin (improvement is needed)
- Balance of long-term and short-term incentives (weighted towards the long term) - Incremental improvement >>incremental margin uplift, step-change improvement >> step-change margin uplift - Accrual mechanism (#2) to incentivise faster delivery, linked to performance margin (#4) as a check and balance to ensure outcomes in performance (such as HSE or quality) - The upside (and value potential) for suppliers is not capped - Suppliers never lose money (floating fixed-fee mechanism to ensure this)
Figure 2. The commercial framework needs to drive win-win outcomes and the right behaviours. [Note: HSE is health, safety and environment]
Having a commercial framework that drives win-win outcomes is paramount (see Figure 2). It can incentivise for the long term while rewarding short-term performance. It supports step-change improvement margins that are multiple times normal margins (a winwin-win) while seeking to improve average performance that renders a lower-than-average margin.
Strategic alliances are dynamic and require continual crosscompany alignment and co-development to keep projects moving forward at every phase. Having an objective referee oversee the coming-together of partners at every phase is essential. At Kearney, we have found it very effective to bring all parties together in a room for a joint scrum to collectively work the needs and drive consensus and alignment on objectives, identifying the value case and principles everyone can work toward from the outset.
BENEFITS OF A WIN-WIN
• It delivers mutual value from partnerships. C-level heads on the operator and supplier sides will both be dedicated to making things work. • It improves the teams’ productivity by focusing on standardised processes, value-added work and a one-team mindset. Both parties will ask, “If we were one company, how would we solve this problem?” Then, they’d do it. • It leverages data tools to develop value opportunities for all parties and stress-tests the framework to ensure win-win outcomes. • It uses common language and promotes transparency on performance and activities. Partners must be willing to have an open book with no hidden margins. • It creates the potential for end-to-end value optimisation.
A BREAKTHROUGH ALLIANCE
Strategic alliances can be valuable for a wide range of projects, including drilling and well services, offshore wind, operations management (such as turn-arounds) and infrastructure.
IN PLAIN SIGHT
The opportunity to form strategic alliances in the O&G industry has been there for years. Enduring mindsets – and perhaps being comfortable doing things the way they’ve always been done – have kept companies from exploring the benefits. A tightening market may trigger some to collaborate now, but it is also a smart move for thinking five to 10 years down the road. Finding partners through strategic alliances ensures operators have the help they need and presents an opening for shaping what the market looks like in the future.
GROWING SA’S ECONOMY
Petroleum Agency SA
Petroleum Agency SA has been designated by the government as the official agency responsible for the promotion and regulation of South Africa’s petroleum resources. The Agency regulates and monitors exploration and production activities and is the custodian of the national exploration and production database for petroleum.
Petroleum Agency SA (PASA) is South Africa’s state-owned company established through a ministerial directive in 1999. The Mineral and Petroleum Resources Development Act (MPRDA) came into operation in May 2004 and in terms of this Act, the Agency received its mandate to operate. The Agency is responsible for the promotion and regulation of exploration and development of South Africa’s oil and gas resources. The Agency archives all data related to oil and gas exploration and develops the local upstream industry for the benefit of all South Africans.
In terms of strategy, the Agency actively seeks out technically competent and financially sound clients to whom it markets acreage, while ensuring that all prospecting and mining leases are for the longterm economic benefit of South Africa. By application of appropriate technology, the agency improves the understanding of the commercial potential of South Africa’s natural oil and gas resources to attract investment, both locally and internationally.
By facilitating the process of attracting qualified international explorers to invest in the oil and gas sector, PASA can further grow the South African economy and contribute to the aims of the National Development Plan 2030. The plan envisages that by 2030 South Africa will have an adequate supply of electricity and liquid fuels to ensure that economic activity and welfare are not disrupted, and that at least 95% of the population will have access to grid or off-grid electricity. Both the National Development Plan and the Integrated Resource Plan call for natural gas to contribute a far greater percentage to South Africa’s primary energy supply mix.
Previous challenges affecting investment decisions, such as the low oil price and the uncertainty introduced by the MPRDA amendment bill, are now a thing of the past. The MPRDA amendment bill has been withdrawn from parliament. Both President Ramaphosa and Minister Matashe have explained oil and gas exploration will be governed by separate legislation, and no longer grouped under general mining legislation. South Africa is on the brink of major developments in the upstream industry and the next few years will be key in determining its future energy profile and how oil and gas contribute to the greater energy mix.
There are currently plans for massive gas production off South Africa’s coast. South Africa expects TotalEnergies SE to submit a production plan to utilise a prolific offshore gas discovery that will form a major part of increasing investment in the sector. South Africa lacks
commercial oil and gas production, leaving it reliant on imports of the fuel. Its search for domestic resources has encountered unprecedented opposition in recent months by communities and activist groups who have successfully blocked exploration activities by companies including Shell Plc.
“As the Petroleum Agency, we acknowledge that South Africa’s upstream oil and gas industry has become litigious,” CEO of PASA, Phindile Masangane says. “Steps are being taken to enhance the guidelines around local consultation, which have been criticised by groups in court, while the regulator looks to increase activity.”
Production from the newly discovered Block 11B/12B could revive PetroSA’s Mossel Bay gas-to-liquids plant which ordinarily produces 45 000 barrels a day but has run out of feedstock. (PetroSA is South Africa’s national oil company and is separate from Petroleum Agency SA.) South Africa also plans to use the fuel to transition away from coal, which is used for South Africa’s electricity generation.
Most of the coal consumed locally is utilised not as a final energy product but as feedstock, primarily for electricity and synthetic fuel production; coal supplies about 77% of the total primary energy market in South Africa. It is government’s stated objective to diversify the energy mix and environmental pressures suggest that at least part of this demand be met by a clean source such as natural gas.
If TotalEnergies meets the requirements, obtains environmental authorisation and starts the development, output could potentially begin as soon as 2026 says Masangane.
Eco Atlantic Oil & Gas Ltd and its partners have hired a rig to start exploration in Block 2B, which is offshore South Africa. Masangane says that processes leading to the activity have been followed properly.
The demand for energy has surpassed supply and alternative energy sources are being sought to deal with the ever-growing demand. Petroleum Agency SA, together with the Council for Geoscience and the Department of Mineral Resources, is conducting extensive studies into South Africa’s potential shale gas resources. Natural gas has been discovered off the west coast of South Africa in the Atlantic Ocean (Ibhubesi gas field) and off the southern coast in the Indian Ocean (F-A, E-m and other fields of the Bredasdorp Basin). Both areas have great potential.
South Africa has also returned its attention to the Karoo, a gas-rich semi-desert region of the country where several wells were planned almost a decade ago by Shell and other explorers before environmental concerns and legal uncertainty saw activity diminish.
Regulations were published in July 2022 for public comment by the environment minister around hydraulic fracking, a drilling technique that raised concerns over water use in the Karoo.
The government will conduct seismic activity by the end of 2022 to determine which blocks to license after the rules are finalised, according to Masangane. She says that groundwater and geological studies are being conducted in the biodiversity-rich areas.
Other operations of interest include exploration of the deep water and ultra-deep water of the southern Orange Basin. There is continued interest in the ultra-deep water of the northern sector. The deep water of the southern offshore, soon to be tested by Total, holds exciting potential for large oil reserves.
In addition to well-developed air and rail links, South Africa has 750 000km of roads and over nine-million registered vehicles. South Africa thus represents an important world market for petroleum products and this market is expanding rapidly. Since over 60% of current demand is met by imported crude there is a ready local market for any indigenous hydrocarbons that are discovered in South Africa.
Oil and gas remain the most critical of energy resources, and Petroleum Agency SA is in full support of those entering the South African oil and gas exploration and production industries. The Agency is fully committed to ensuring that our government and policymakers sustain the sector for the benefit of all involved and will do everything in its power to advance the industry.
There is an excellent case to be made for investment in South Africa’s burgeoning oil and gas exploration and production sector.
CEO OF PETROLEUM AGENCY SA
Dr Phindile Masangane is arguably one of the best-qualified women in the South African energy sector. She holds a PhD in Chemistry, an MBA from Wits Business School and a Bachelor of Science degree. Dr Masangane has overseen the development and commercialisation of all CEF Group renewables, alternative and new technology advancements through strategic partnerships with private and public sector entities. She has vast experience in developing, deal structuring and financing of renewable energy projects. She has participated in national energy policy development, including for biofuels, renewables and the gas programme.
