With each occurring event, corporate boards, industry executives, and commentators have come to wonder aloud whether the JV structure was somehow a root cause. For us, these events raise two broader and more fundamental questions: Do joint ventures have a different risk profile than wholly-owned operations? And does this risk profile differ based on the JV operating model and operator type?
Exhibit 1: Sample of Major HSE Incidents in the Natural Resources Industry
* At the time of the incident
** Conoco transferred operatorship to CNOOC in 2014
*** Serious injuries
Source: Public filings; Water Street Partners’ analysis
To answer these questions, we looked at: i) whether joint ventures are more or less prone to major HSE incidents relative to wholly-owned operations; ii) within the joint venture structure, whether JV OPCOs present a disproportionately higher risk than single company-operated JVs; and iii) whether the risk of a major HSE incident is lower if a JV is either operated by a major / tier one company, or such a company is a non-operating partner.
To perform our analysis, we identified 130 large HSE incidents in the oil, gas, and mining industries that occurred between 1960 and 2017. The incidents were principally selected based on the number of fatalities, but we also included incidents with significant environmental impact and no direct deaths. Because of the disproportionately high fatality rate in the coal mining sector, we limited our data set to only include the very largest HSE incidents, as measured by fatalities, in the coal industry.
We then classified the 130 incidents by the operating model of the asset involved to understand the distribution of incidents: (i) between wholly-owned operations and joint ventures; (ii) within joint ventures, between joint ventures operated by one partner and joint ventures structured as independent OPCOs; and (iii) within joint ventures, between those operated by a major / tier one company, and joint ventures operated by other types of companies.
In summary, our analysis reveals that joint ventures present a proportionately equivalent – and arguably lower – risk of a major HSE incident relative to wholly-owned operations. It also shows that JV OPCOs do not appear to be disproportionately higher risk than single company-operated JVs, and that the risk of a large HSE incident does not seem to be lower if a major / tier one company is the operator, nor if a major / tier one company is present as a non-operator. 1
KEY FINDINGS1. Joint ventures present a proportionately equivalent – and arguably lower – risk of a large HSE incident relative to wholly-owned operations
Of the 130 largest HSE incidents in the last 60 years within the petroleum and mining industries, joint venture structures were involved in 39% of events (Exhibit 2). Broken down by industry, 58% of the HSE incidents in oil and gas occurred in JV structures, while 16% of the HSE incidents in mining were in JVs. Since 70-90% of an oil major’s upstream assets are held in JVs (operated and non-operated), and material JVs alone account for 21% of the assets of a mining major (with the number higher if we include smaller JVs)2, JVs do not seem to be proportionately at higher risk – and indeed appear to be at lower risk – of a major HSE incident relative to wholly-owned operations in these sectors.3
This is counter to what many executive teams and corporate boards within the petroleum and mining industry have traditionally thought about JVs – which is that working with partners introduces additional risks and that full control is better than shared control.
But this finding is consistent with recent regulations in the UK, Norway, and other geographies, which instinctively recognize the value non-operating partners can bring to natural resource projects, especially with regard to better management of risks.4 When the partners are working well together, JVs should be safer than wholly-owned operations since, by definition, JVs have multiple partners, most of whom have substantial experience developing and operating assets and have the right and ability to provide an additional level of HSE and risk management assurance to the asset.
2. JV OPCOs do not appear to be disproportionately higher risk than single company-operated JVs
Breaking down the figures by operating model, 29% of the JV-related HSE incidents in oil and gas occurred within JV OPCOs (e.g., Colonial Pipeline and Buncefield) versus 71% within single company-operated JVs (e.g., Macondo and Piper Alpha). In mining, 33% of the JV-related HSE incidents occurred within JV OPCOs (e.g., Samarco) versus 67% within single company-operated JVs (e.g., Grasberg) (Exhibit 3). As JV OPCOs represent approximately 25-30% of the JV assets (by number) in oil and gas and around 35-40% of the JV assets (by number) in mining5, JV OPCOs do not appear to be disproportionately higher risk than single company-operated JVs.
After the mining incident at Samarco, a Brazil-based 50:50 iron ore joint venture operating company co-owned by BHP and Vale, BHP CEO Andrew Mackenzie publicly indicated a preference for the single company-operated joint venture model, implying that formally allocating operational responsibility to one of the partners was lower risk than Samarco-type operational independence. While our analysis does not indicate that JV OPCOs are inherently riskier, it does show that 27% of the JV-related incidents across mining and petroleum occurred within JV OPCOs – reinforcing the need for some level of shareholder oversight of the HSE and risk management functions even in JVs operated as independent companies... To Continue Reading click below.
1 NOTE: This analysis contains a limited data set and did not look at next level HSE data, including prevalence of non-catastrophic HSE incidents (e.g., injuries, lost time, smaller environment incidents), level of controls, and other HSE indicators. In addition, we are further analyzing oil and gas industry data to gain a more accurate estimate of industry-wide usage on joint ventures, including in exploration, development, midstream and downstream and across major and non-major (including NOC) portfolios. As such, it should not be used as the basis for taking decisions, including those related to choice of operating model, partner, operatorship, or level of assurance and controls to put in place to manage risks in an individual project or asset.
2 See “Sizing the Prize: Assets and Earnings in Large JVs”, Joint Venture Exchange, August 2008.
3 Since the 130 incidents were selected mainly by publicly reported fatality data, a different sample set (based on other HSE indicators) might reveal a different picture.”, The Joint Venture Exchange, August 2009.
4 Norway’s HSE Regulations (2007) establish the duty of non-operators to “see to it” that operators are fully compliant with national legislation, including in health, safety, and environment matters – and to demonstrate how they have achieved their “see to it” duty. UK’s Offshore Installations (Offshore Safety Directive, 2015) has radically expanded the non-operators role in health, safety, and environmental protection. It expects non-operators to ensure that the operator is capable of satisfactorily carrying out statutory HSE-related functions and duties, and additionally, to take reasonable steps to ensure that the operator carries out these statutory HSE-related functions and duties.
5 Source: Water Street Partners’ Database of material JVs