What is a Non-Operator?

Non OperatorExploration and Production (E&P) ventures in the oil and gas industry  can be very complex and hugely expensive.  Joint Operated Ventures (JOV) are often formed between E&P companies. In order to spread the risk and to balance portfolios.

The dominant E&P company within the JOV is referred to as the Operator, while the junior partners are referred to as  the non-operators (NO).  . The working relationship between operators and NOs can be fraught, often because the NO has little contractual influence on managing the risks arising in the venture, even though the NO is directly impacted by the risks and may be a multi billion Dollar investor.

Some E&P Companies carry well over half of their Capital Expenditure (CAPEX) in JOVs ventures as non-operators, or in other words they are investing into ventures where they have little or no influence on the outcome. The majority of NO involvement in JOV’s is capital financed by the EP companies directly, because the risks are far too high for direct investment by traditional investors.

Venture Risk Ltd understand the complex relationship between investors, operators, non-operators, vendors, NGO and activist groups and can help the NO to focus on those risks which may impact it directly.

 

When and how to step into a JOV as a NO.

An E&P venture passes through “identify evaluate, define, execute, operate and abandon” stages.  Most of the risks are strategic in the early stages while as the venture progresses the risks become more operational in nature.  Some risks such as reputational risk can change very little throughout the venture. An EP company has to decide at which stage to “jump on the bandwagon” as a NO to gain maximum reward. This is usually at an early stage in the venture.

E&P companies have two main routes to gain access to reserves as a NO.

  • as the successful bidder in a JOV in a tendering round for blocks of exploration acreage hosted by a host government.
  • by buying a share of the exploration acreage already awarded to a successful bidder.

The operator, but not normally the NO, is expected to enter into a production sharing agreement (PSA) with the host government once a commercial discovery is made.

Venture Risks Ltd will run risk-based audits of a potential Operator before the decision is made by the NO to include the venture in their portfolio.

 

Time and changing Risks

The level of risk and control varies during portfolio planning and the subsequent decision to join a JOV. Most risks are strategic in nature in the early stages of the opportunity when the EP company is aligning its portfolio, however once a decision has been made to join a JOV the focus shifts to the management and control of risks.

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In keeping with our core principles of simplicity and relevance, Venture Risks Ltd, will advise NO's how to manage the risks as the venture progresses; when and with the minimum of cost and resources.

 

Careful who you jump in bed with

Various risks face a JOV throughout its life and also in specific stages.  The management of these risks is highly dependent on the contractual relationship between the operator and the NO.  Ideally a risk management system should be a defined deliverable within the JOA. If not, Risk management should be part of effective project management and governance systems, to create and protect value for all member of the JOV.  This can be achieved by: providing JOV governance and assurance, and supporting the operator in managing the venture risks.

Venture Risk Ltd will design risk based intervention systems to ensure your venture stays on track. Various drivers define these systems such as: the competency of the operator; the risk maturity of the JOA partners, the Risk Appetite and Tolerance of the JOA partners and major suppliers, but most importantly, the acceptance and treatment of risk by the project managers and senior board members.

 

 

De risking Joint Operating Ventures (JOVs) from a Non Operators Viewpoint

Some E&P companies may have many NOVs on the books, but which ventures are the riskiest? In the early stages of the JOV the risk may be fairly well known, but as the relationship develop the risks may become more complex. In keeping with our core principles of robustness and simplicity, we work with NOs to identify exactly where the risks are in the JOV. Once the risks are known they can be treated within, and sometimes outside of, the confines of the Joint Venture Agreement (JOA) in order to add value to the JOV and protect the NO from loss of value.

Venture Risk Ltd has developed risk-based audit methods and stress testing to complement the management of JOVs from the perspective of NOs.