Analyzing the Mobile – NNCP Joint Venture projects in Oil and Gas Exploration
Question
Task: What are the key motivations, challenges, and benefits associated with the Mobile – NNCP Joint Venture projects in oil and gas exploration, and how can the venture be improved?
Answer
Introduction
Expansion to new markets or locations that offer more resources is something every organization focuses on achieving. Some business ideas tend to come with limited risks while others such as the oil and gas industry attract more risks but also bigger profits. Oil and gas exploration companies will usually take the initiative on oil exploration projects to locate new oil and gas wells which they can claim rights to and exploit at a later stage. But the exploration, securing the oil drilling and pumping rights, equipment and logistics all attract high investment costs (Derman 1992).
In addition to the high costs, certain fields also attract high volatility attract political as well as other risks. In such situation and location oil exploration and mining companies tend to prefer entering into Joint Venture projectss which help reduce the project investment costs, associated with failure of locating credible oil and gas reservoirs.
In addition to this, it also helps reduce the political risks such as political instability, law changes, and conflict which may erupt and disrupt operations or see the oil and gas companies needing to evacuate the oil and gas fields altogether. For this report, we shall be analysing mergers and Joint Venture projectss between the (NNPC) Nigerian National Petroleum Corporation and independent oil and gas giant Mobil that explores and mines crude oil and gas on various oil and gas fields in Nigeria (Ariweriokuma 2001).
The Motivations behind Joint Venture projects
A Joint Venture projects among companies is formed due to the attraction a variation of internal, external and strategic reasons (Nguyen 2009). Each organization will have its own reasons for entering into a Joint Venture projects but on this report, only important reasons influencing Mobil decision to enter into a Joint Venture projects with NNPC shall be discussed.
Investment Cost Spreading
Mobil has opted to enter into an oil and gas exploration and mining Joint Venture projects with NNPC to spread or reduce investment cost into the projects (Rao 2015). By solely entering into the project Mobil would be obligated to incurring all the investment costs and still need to pay the NNCP revenue for the extracted crude oil and gas. Entering into a Joint Venture projects will help distribute investment cost as well as deliver a bargaining leverage to mobile which can request for a lower revenue rate due to being an investor in the project.
Access to New Technological Approaches and Tools
NNCP has also opted to enter into Joint Venture projectss with global oil exploration and extraction companies due to many of the companies having new and sophisticated technologies. This eliminates the requirement for the NNPC to invest on the technologies and professionals since the Joint Venture projects partners will provide the technologies and tools to explore, drill and extract the fuel sources (Lichtenthal & More 2014, p. 76).
Improved Project Stability and Security
An important reason for Mobil entering into Joint Venture projectss with the NNCP with regard to oil and gas exploration and extraction is due to it delivering more stability and security to the project. Securing solo rights to explore and my oil and gas fields usually attract negative sentiment among the local communities. By involving a government authority to the project the public cannot narrow down and point a finger at Mobil since they also need to question the government authority which in most cases has a higher investment stakes on the projects (Martinelli & Pirozzi 2015). In Nigeria, the Joint Venture projects between the NNCP and Mobil attract a 60:40 partnership with NNCP having a majority thus placing them in the position to respond to any public grievances.
Protection from Political Instability
Entering into a Joint Venture projects with the NNCP means mobile has entered into the agreement with a government authority thus delivering political immunity to the company. This helps protect both partners involved in the Joint Venture projects due to the NNCP needing to provide investment security to Mobile in exchange for a smooth production of oil and gas from the allocated fields (Chow 2002). Failing to provide security will result in mobile withdrawing its investment, tools, equipment, and technology which would result in NNCP incurring huge losses thus the Joint Venture projects also delivers security which is vital for any industries stability.
Challenges and Benefits of the Mobile – NNCP Joint Venture projects
Joint Venture projectss attract both benefits and challenges and it's critical to understand both so as to develop an effective Joint Venture projects that addressed each stake holder’s needs and expectations (Chatterjee & Gray 2013).
Challenges:
The abundance of Competitors: one of the biggest challenges companies like Mobil have experienced while entering into Joint Venture projectss with NNCP has been the influence competitors have on the JV terms and conditions. Shell, Mobil, Chevron, Agip, ELF, and Texaco are all major oil companies already extracting oil in Nigeria (Cortes 2012). An abundance of competitors delivers a major challenge to Mobil while negotiating JV terms with NNCP since NNCP has alternative companies who also make their offers and always looking to undercut Mobile proposal. This results in Mobile needing to agree to terms favouring NNCP so as to secure oil and gas field exploration and mining rights.
Mining Rights In Exchange For Partnership: another major concern linked to the JV between NNCP and mobile is the direct exchange of mining rights for a majority partnership on the project. This means that Mobil surrenders 60% of the partnership to NNCP yet Mobil is expected to make all investments on the project. This results in NNCP making no investment on the project and only offering mining right, political protection, and representation towards the project (Luo 2012). Unlike most other Joint Venture projectss involving two organization, the JV between NNCP and Mobil is one sided due to oil and gas being the natural resource which is well preserved naturally and in high demand across the globe. With high demand, many customers and naturally preserved delivers the perfect recipe for NNCP to dictate the terms.
Benefits:
Political Stability on Investments: West Africa is well known for its political instability and most of the countries in the regions are experiencing civil war and terrorism related issues. Nigeria itself faces major security concerns from religious conflict and the terrorist group Boko Haram thus making it a volatile region for investors (Henisz 2002). But high-risk investments also deliver huge returns thus securing rights to oil and gas fields in Nigeria is an offer major oil exploration companies cannot turn down. Making a solo entry to the industry thus attracts serious risks thus Mobil has opted to only secure oil and gas field exploration and striction rights in Joint Venture projectss with the NNCP. Involving the NNCP on the projects helps deliver immunity and protection from the public, rivals, and threats that may have ties with the government and authorize thus benefiting from the JV.
Easy Approval of Projects: another major benefit associated with Joint Venture projectss and a major reason many companies like Mobil enter into the JV is the easy approval of projects under Joint Venture projectss agreements. This is especially true when dealing with government projects since in many situations the government lacks the financials, many power, and expertise to exploit certain resources (Triantis 1999). On certain situations such as the oil and gas field in Nigeria, the government cannot manage the vast number of oil fields and projects across the country thus prefer entering into Joint Venture projectss and simply collecting revenue generated from the projects. This makes government authority Joint Venture projectss proposals have a much higher approval rate to the private sector since the government invites the public, businesses and corporate sector to invest on such projects and exploit the resources while also generating revenue for the government.
Joint Venture projectss Attract Knowledge and Ideas:
Joint Venture projectss such as the one between Mobil and NNCP tend to gather or bring together knowledge from different sources and professionals. This helps with problems solving which is a major requirement in all industries and having different professionals contributing towards problems is likely to deliver better results (Marr 2009). On many Joint Venture projectss, one partner may have the expertise, knowledge, experience and equipment& tools to exploit to undertake the project while the other may have access to the raw materials. The same is being experienced on the Joint Venture projects between Mobile and NNCP where the oil extraction companies have the knowledge, experience, and equipment to explore and mine the oil and gas fields while the NNCP has access to the Raw materials and resources which can be exploited to generate income.
Supporting Examples about the Chosen Joint Venture projects
The oil and gas industry is flourishing globally and this due to the high demand for petroleum products across the globe. Oil and gas exploration is also distributed among certain nations which have access to oil and gas wells but a major difference in oil exploration strategies adopted by different countries is adopted. Countries in the Middle East tend to offer their oil exploration rights to OPEC which undertakes the exploration, extraction, storage, and sales (Mohammed 2015).
In most situations, this does not require for the country or company to enter into a Joint Venture projects as OPEC dictates the terms and me responsible for all oil producers in the region. This results in oil producing companies depending on OPEC to produce and sell the crude oil to them which they can transport to their own markets, refine and distribute to their customers. The same can be observed in other countries like China, Russia, and India which also produce raw crude oil but will prefer assigning mining rights directly to one company and collect revenue from the project.
In countries which are unstable oil companies avoid making their full investment and are always searching added security thus they welcome Joint Venture projectss. In most situations, the volatile nations also lack proper funding to explore and extract the oil reserves which results in them needing the oil companies to intervene and invest on their projects so as to exploit the resource.
While some Joint Venture projectss offer direct terms between the partners, other tend to attract complex relationships and may involve many different companies and services which are coordinated and delivered o each of the stake holders. An example of one such venture is between China and Kenya, the two countries recently entered into a Joint Venture projects which saw China offer is funding, expertise, and knowledge towards exploring for oil and Gas in the region at their own risk.
After discovering the reservoirs, chine immediately turned around to offer to provide certain project development proposals to Kenya s as o secure rights over the oil reservoirs. In addition to Oil and gas field exploration, China was also able to identify important mineral reserves in the region which delivered additional interest towards investing in the region. Today China and Kenya have developed multiple agreements based on the initial Joint Venture projects which has seemed several large Chinese companies enter Kenya and begin major road and civil constructions projects (Adem 2016).
How the Joint Venture projects Can Be Improved
Every Joint Venture projects has a scope for improvement and this includes the Mobile and NNCP Joint Venture projects. The first and most concerning area which requires improvement is the partnership rates which are unfair considering Mobil has had to make the majority of investment towards the projects (Huu Le 2009). This can easily be observed on the below image which clearly demonstrates NNCP dictates the partnership terms on all oil companies entering the region.
Source: http://www.nipc.gov.ng/venture.html
On each of the Joint Venture projectss NNCP has taken up 60% shareholding and the NNCP does not make the investment towards the projects. This over dominance over the partners is mainly linked to each oil company attempting to enter in t agreement with the NNCP individually which gives the NNCP leverage to dictate the terms.
Instead, all oil companies operating I n the region should enter into an agreement and work as a single unit like the OPEC which would deliver a combined power and which would help change the negotiation terms to the oil company’s favour. In certain citations scenario such as Nigeria where there are certain obstacles but still many interest companies, it’s important that the oil companies cooperate which would help improve their bargaining power as opposed to approaching NNCP individually (Porter 2008). Later mutual agreements can be developed amount the state holders with regard to oil and gas field exploration rights but ensure him delivery of better terms in favour of the oil companies.
Conclusion
Joint Venture projectss remain as a powerful tool most businesses turn to in situations where they may not have adequate funding or may be facing a higher investment risk. This also makes it vital for stake holders to closely evaluate and more importantly avoid sharing their weakness with the Joint Venture projects partner before or during negotiations.
This is because exposing the weaknesses is likely to deliver an advantage to their other partner who may turn to use this opportunity to dictate unfair Joint Venture projects terms and conditions. The secret of any successful Joint Venture projects is demonstrating one's knowledge and understanding of the project and seeking a partner without showing them any kind of weakness which allows the main partner retain control over the terms and conditions for the Joint Venture projects.
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