Non-Operated Joint Ventures: Does Asset Team Size Matter?

   

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What our benchmarking data says about non-operated asset team size, and the factors that should drive asset team sizing – but rarely do.

Non-Operated JVs Does Asset Team Size Matter Image.jpgNON-OPERATED ASSET TEAMS are under assault. Staring into low commodity prices, non-operated asset teams in petroleum, minerals, and other natural resource sectors are under pressure to reduce team size. Attempting to shelter their teams – and make a fair and fact-based determination of the right team size – many non-operated asset managers and executive sponsors lack the data and perspectives to do this well.

It doesn’t have to be this way.

The purpose of this memo is to share some new insights and data on non-operated asset team size in the natural resource sector. Drawing on our experience – and backed by asset team size benchmarking data from more than 250 non-operated assets – we show some notable patterns in asset team size, and also introduce a way for companies to more holistically consider and assess team size in non-operated ventures (an asset class that accounts for 20-50% of many companies’ current production and capital investments).

This memo builds on Part 1 in this series, where we introduced our Standards of Non-Operated Management Excellence, and made the case that asset team profile – including size, composition, reporting, location, and other factors – has an enormous bearing on a company’s ability to influence the operator, and generate and preserve value for the company.

WHAT THE DATA SAYS ABOUT NON-OPERATED TEAM SIZE

Over the past seven years, Water Street Partners has collected and synthesized data on team size in more that 250 non-operated assets across the natural resources sector, and supplemented this data with numerous interviews to understand asset team size, structure, and other factors that affect organizational design decisions. This research is part of a larger effort to provide non-operating partners with tools and data to better manage this critical, and growing, class of assets. The ventures within our non-operated asset team size study are drawn from six continents and generally range from $500 million to $10 billion in total capital investment.

Overall, our analysis reveals some interesting patterns:

  • Non-operated asset team size varies widely, with benchmarked team size ranging from 0.1 to 76.0 Full Time Equivalents (FTEs) (Exhibit 1)
  • Average team size is 6.4 FTEs, with 2.0 and 8.1 FTEs marking the 25th and 75th percentiles respectively
  • Non-operated upstream oil and gas asset teams are notably larger (average 7.2 FTEs) than those in mining, chemicals, and other natural resource based industries (average 4.9 FTEs)
  • Asset teams in JV OPCOs – i.e., incorporated joint venture companies operated by an independent management team rather than by a partner company – are smaller (average 4.6 FTEs) than those ventures that are partner operated (average 7.1 FTEs) (Exhibit 2)

Exhibit 1: Asset Team Size by Industry

Exhibit 1 Asset Team Size by Industry.png


Exhibit 2: Asset Team Size by Operating Model

Exhibit 2 Asset Team Size by Operating Model.png

Some of these patterns are understandable. For example, 2.2 and 2.0 FTEs mark the 25th percentile of asset team size within the upstream oil and gas and mining sectors respectively. This resourcing level can be seen as an industry “minimum baseline” for non-operated asset team size among large international players – i.e., that it takes two people to perform basic Operator oversight and assurance, manage internal reporting, and approve operator-proposed workplans and budgets. Teams that are larger than this are either inefficient or, more likely, focused on additional influencing activities, including conducting independent analysis to challenge or support the operator.

Similarly, it is unsurprising that oil and gas companies have larger non-operated asset teams (average 7.2 FTEs) than other industry peers (average 1.1 to 6.3 FTEs). After all, oil and gas companies have had far larger portfolios of non-operated joint ventures – both in terms of pure numbers and value – for far longer. For example, each of the oil supermajors have dozens of material non-operated ventures, and count on these ventures for 34% to 55% of production. This scale and history has led many companies to appreciate the value associated with taking a more active assurance, risk management, and influencing posture. At the same time, the risks associated with mega-projects (such as Kashagan, a joint venture between Exxon, Shell, Eni, Total, CNPC, and Japan’s Inpex, along with Kazakh state oil company Kazmunaygaz), complex wells (like Macondo, a joint venture in which Anadarko and Mitsui were non-operating partners), difficult geo-political environments, and other factors are also likely responsible for larger team sizes within oil and gas.

But the news is not all as expected. An area of notable concern is JV OPCOs, where asset teams are notably smaller (average team size of 4.6 FTEs) than for partner-operated assets (average team size of 7.1 FTEs). While each non-operated venture is unique, we believe that JV OPCOs, as an asset class, tend to be more exposed to risks and untapped value profile compared to partner-operated ventures, especially compared to assets operated by an industry major. The 2015 tailings dam failure at Samarco, a Vale-BHP Billiton JV OPCO, and Buncefield, a Chevron-Total JV OPCO in the UK that experienced a major explosion a decade ago, underline the risks of this structure. At the same time, non-operating partners in JV OPCOs tend to have stronger contractual rights and avenues of influence than companies in partner-operated ventures. All this, when combined with a tendency for JV OPCOs to underperform over the long-term, suggest that asset teams should be larger in JV OPCOs.

RIGHT SIZING NON-OPERATED ASSET TEAMS

Both the benchmarking data as well as our own experience suggest that non-operated asset team size is often decided without sufficient deliberation, leading to inconsistencies across the portfolio – and making it far too easy to reduce team size in the absense of arguments to the contrary. For example, when we analyzed the non-operated assets within one oil and gas major, we found that team size varied wildly – and correlated only with remaining reserves, rather than any of a dozen more appropriate factors. At another IOC, we observed extreme size fluctuations over time among the same asset teams despite no change in the asset’s profile, as the company’s non-operated asset teams proved highly vulnerable to corporate reorganizations and aggressive staff trimming in low commodity price environments.

Ideally, non-operators would engage in a process that begins with benchmarking – but then goes further, in search of the context and nuance necessary to differentiate assets otherwise similar on paper, and to enable companies to identify situations where greater resourcing might generate real value – or where no amount of expertise will ever shift the Operator’s path. We believe this calls for a greater focus on three things that provide a more holistic understanding of the asset and the implications of more or less resourcing: Value, risk, and influence (Exhibit 3). 

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