Restructuring Large Natural Resources Joint Ventures

Restructuring Large Natural Resouces

Using natural moments in the asset lifecycle to make needed changes to the JV model. How timely JV restructuring can unlock 10-30% economic upside
By Gerard Baynham, James Bamford, and David Ernst

 


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We were doing joint ventures long before joint ventures were cool.” – Ashland Chemical Executive 

INTRODUCTION

Despite 100 years of joint venture experience – and holding 60% of the world’s billion-dollar JVs – the natural resource industry has a JV problem. Our analysis suggests that one-quarter of the largest JVs in the oil and gas, alternative energy, metals and mining, chemicals, and power industries are in need of restructuring. Time and again, JV shareholders are slow to fully execute needed changes in the JV’s operating model, voting structure, delegations model, committee configuration, level of integration with nearby assets and infrastructure, shared service usage and pricing, board culture, and the like. 

The need for JV restructuring grows from three main forces. 

First are natural events across the asset lifecycle (Exhibit 1). As a JV moves from pre-feasibility into planning and construction, and from operations and expansion into decline management, it needs different skills, operating configurations, and ways of working with its shareholders. Prefeasibility stage JVs often have very light management structures – depending extensively on project teams, experts, and resources inside the shareholder companies – whereas more dedicated management teams need to be put in place by the beginning of operations. Likewise a mature operating JV – whether looking at new major capital investments or managing a declining production profile – will likely need to be run very differently than in the past.1 These transitions across the lifecycle create natural moments for restructuring. 

A second force driving JV restructuring are performance problems tied to the architecture of the JV itself. As we have written previously, sustained project and operational underperformance and missed growth opportunities in existing JVs, especially today’s largest capital projects, can often be traced back to an out-of-balance joint venture model. For example, a large Canadian oil sands and an LNG JV recently restructured their joint venture models after years of bottom-quartile operating performance. In both cases, the shareholders concluded that the JVs were too isolated from their parent companies – and thus not appropriately leveraging owner skills and scale. 

The need to restructure is affected by a third and more recent force: the increased complexity and scale of JVs (Exhibit 2). Today, many of the most important JVs in the natural resources sector are occurring on technological and geographic frontiers (e.g., ultra deep water, arctic, alternative energy, shale), with non-traditional partners (e.g., players from China or Russia; increasingly active state-owned resource companies), or at massive capital investment levels (e.g., in the Canadian oil sands, petrochemical projects in China or the Arabian Gulf). These and other market forces are driving an increase in the volume of interdependent JVs. 2 As companies find themselves in more of these structures – with less experienced partners, more dynamic strategic interests and diverse skill bases – there is a far greater likelihood that the JV will need course corrections in design, division of roles, processes and behaviors. 

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Mix all these forces together, and JVs become a dynamic cocktail that need to be restructured multiple times across their lifetimes. 

Unfortunately, many JVs get “stuck” – forced to operate under constructs, terms, and processes not fully optimized for current realities. The purpose of this article is to dimension the value available from timely restructuring of JVs, and to illustrate how other companies have successfully orchestrated what can be a politicallycharged process.

VALUE AT STAKE

In Italy, for thirty years under the Borgias, they had warfare, terror, murder and bloodshed, but they produced Michelangelo, Leonardo da Vinci and the Renaissance. In Switzerland, they had brotherly love, they had five hundred years of democracy and peace – and what did that produce? The cuckoo clock.” - Orson Welles, The Third Man (1949)

Stability is not necessarily a good thing for joint ventures. Our research has shown that top-performing JVs are twice as likely as less successful JVs to have been meaningfully restructured once operational.3 In many JVs, some restructuring invariably occurs across the lifecycle as a venture moves across project phases – from planning to construction to operations. But often, it does not happen in a timely or sufficient manner.

JV restructuring can unlock significant value. Our analysis of more than 100 JVs across industries shows that 10-30% improvements in operating income are common from JV restructuring. In the natural resources sector, this often translates into hundreds of millions – or billions – in lost or foregone value caused by sub-optimal JV constructs.

To bring this to life, consider the summary profiles of three natural resource JVs (Exhibit 3). Despite being at different stages in the venture lifecycle, an outdated JV operating model in each was causing significant problems and value loss.4 In the Australian mining JV, an independent analysis commissioned by the shareholders of proposed capital investments showed that the most economically-positive proposals over the previous five years had been stalled or killed because the shareholders could not agree on the specifics (e.g., choice of technology or contractor, how to conduct the feasibility study). The analysis also showed a $1.2 billion upside if the JV could overcome these differences and make the investments.

The shareholders and their advisors looked at multiple options – ranging from radical ownership changes to more incremental improvements in the governance and operating model (Exhibit 4). Investment banks suggested that either one partner buy the asset outright, or purchase a majority position with operating control. A related option was for the partner that operated a nearby mine that supplied the JV to consolidate the two assets, thereby achieving cost synergies and resolving commercial supply disagreements. These more radical ownership and control options were rejected – deemed financially unrealistic for certain partners. But the problems had reached a point where no partner was willing to accept the status quo. Instead, the shareholders chose to “build the next generation of governance” – and ultimately made a series of changes that vested more authority in the JV management team, who were then empowered to make the decisions to move forward with investing in the upgrades.

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