Diversification of risk underpins successful partnerships

Nov 12, 2019
4 min read
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Partnership strategists said diversifying risk and focusing on individual strengths is key as oil and gas companies look to extract the most value in start-ups.

During ADIPEC’s Global Business Leaders Session titled ‘Innovative partnerships to enhance and de-risk traditional business models,’ Michele Fiorentino, Chief Investment Officer at ADNOC said on Tuesday that a successful partnership has at its basis the distribution of all types of risks on entities that are best capable to absorb it.

“When you do everything on your own, you take three risks; commodity risk, risk of owning steel to make things and country risk, which depends on where you spend your money,” Fiorentino said.

“We’ve reallocated this to put the risk on people best positioned to bare that risk - this way you build a platform of collaboration. Companies who better understand drilling are therefore better able to absorb that risk,” he added.

Fiorentino said that ADNOC develops investment opportunities overseas by combining strengths of different companies. It has partnered with BlackRock and Eni, whereby ADNOC takes on commodity risk, BlackRock handles financial risk and Eni brings technical capabilities.

“When you take these together you can go to another country with a value proposition.With the kind of platform we are creating, we can go anywhere,” he said.

In India, which is a major customer for its crude, ADNOC partnered with entities for downstream projects, which effectively will drive demand for more crude.

“Cash is available cheaply today but our cost will reflect the commodity risk we are willing to take on. It’s about creating more better opportunity,” Fiorentino said.

ADNOC in recent months has shifted its business development focus to target partnerships, which unlock new value, bring in foreign investment and have innovative structures.

ADNOC’s group-wide transformation and value creation strategy comes in response to an evolving energy landscape. This is also meant to ensure ADNOC remains a resilient and flexible company that can take full advantage of market opportunities.

Meanwhile, Bakheet Al Katheeri, CEO, Mubadala Petroleum said the company utilises its government-to-government relations to make investments outside the UAE, acting like an international investment arm of the national energy company.

Mubadala Petroleum has partnered in Thailand with PTT Exploration & Production for exploration and production and operates four offshore production sharing contracts, while in Malaysia it has a partnership with PETRONAS in development and exploration, whereby it is the operator of Block SK 320 with 55 percent working interest.

Al Katheeri said that trust and transparency is fundamental in achieving successful partnerships.

Brian Worrell, Chief Financial Officer at Baker Hughes meanwhile, says the most important element of a successful partnership is flexibility.

“The key to winning these days is making a partnership outcome based. We figure out what we want to achieve first … the structure of partnerships we put in place works for one project but not necessarily for another because it is all outcome based, which is relative,” he said. “Aligned incentives and being outcome based is the key to successful partnerships.”

In October 2018, Baker Hughes signed a strategic partnership with ADNOC, whereby it acquired a 5 per cent stake in ADNOC Drilling - the transaction was valued at approximately US$11 billion.

“The partnership agreement with ADNOC was easy because it came together where both parties knew what they wanted - both sides were motivated,” he said.

“There was a base level of trust with ADNOC - but it needs the right ‘tender loving care.’ The leadership team spends time on it to make sure the new entity nurtures well,” he added.

Eduard Ruijs, Managing Director at BlackRock said an important factor in partnerships is focusing on yield. “By investing in a company, we can release capital that can pay for new exploration and drilling. You have to think about how to unlock value and make your capital attractive because shareholders usually don’t want sell a part of their company,” he said.

Meanwhile, Umberto Carrara, Executive Vice President, Refining, Eni said the company employs strong capital disciplines buts looks at long-term investments. These focus on new energy supply in terms of contribution to the energy world. “For Eni, we lead by minimising capital cost,” he said.

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