Academic journal article The McKinsey Quarterly

Alliances in Upstream Oil and Gas

Academic journal article The McKinsey Quarterly

Alliances in Upstream Oil and Gas

Article excerpt

There are at least five different kinds of alliance. All can work

Consolidation deals in North America could unleash $25 billion in shareholder value

Players should learn from HP, Lotus, and Xerox

Oil and gas alliances are set to unlock many billions of dollars of shareholder value in years to come, generating new growth for the industry. Already, Shell and Amoco have pooled most of their west Texas oilfields to become the first majors to combine operations across an entire region. Shell and Mobil are doing the same on the west coast. Amoco has linked its Austin Chalk seismic data and resources position in Louisiana with Union Pacific Resources Group (UPR). And in the deep waters of the Gulf of Mexico, Texaco and others have established the Deepstar consortium to cut costs and cycle times.

According to most oil companies, alliances will play an important role in reshaping the industry over the next five years. In a recent survey, we found that 84 percent of senior managers from leading US and Canadian oil companies expect alliances rather than internal operations to be the main source of performance improvements (Exhibit 1). Alliances are often preferred to acquisitions and divestitures because they bypass or reduce the valuation, tax, and regulatory issues associated with outright changes in control, and allow both parent companies to retain oil reserves as a hedge against price increases.

For some participants, alliances are a way to build strengths, shore up weaknesses, extract latent value from assets, and make preemptive moves to retain or regain leading market positions. For others, they offer an opportunity to improve performance when the scope for cutting internal costs and reengineering business processes has been exhausted.

[TABULAR DATA FOR EXHIBIT 1 OMITTED]

Whatever their purpose, alliances hold out the promise of attractive financial benefits. In North America alone, alliances could unlock about $40 billion in shareholder value: $25 billion from consolidation, $10 billion from partnerships between majors and specialists, and $5 billion in outsourcing. Other regions such as the North Sea also show substantial potential.

Yet despite alliances' compelling economics and growing popularity, only 20 percent of oil companies believe they are skilled at matching different types of alliance to specific objectives, and less than half believe they have tailored their alliance approaches to particular oilfield assets or geographic business units (Exhibit 2). This is bad news, because these are exactly the skills oil companies need to harness the shareholder value at stake.

[TABULAR DATA FOR EXHIBIT 2 OMITTED]

Five emerging types of alliance are especially relevant to the upstream oil industry (Exhibit 3):

* Consolidation joint ventures

* Alliances with specialists

* Enhanced supplier relationships and outsourcing alliances

* Advantaged networks of producers and suppliers

* New operated-by-others (OBO) relationships.

Consolidation joint ventures

The consolidation joint venture combines parent companies' assets across a wide area of activities. Potential benefits include greater efficiency in the use of equipment and infrastructure, lower labor costs, an extended life for oilfields and increased recoveries from them, more bargaining power with suppliers, and the sharing of best operating practices. At their best, such ventures enable majors to maintain or reclaim a structural advantage over specialist companies with lower operating costs or distinctive skills. As North American oilfields mature, companies that move quickly to form effective alliances may enjoy enhanced staying power and new opportunities for growth.

Consolidation ventures are most appropriate in regions where production has peaked and ownership and operating structures are fragmented. …

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