Types of Joint Ventures: Incorporated and Unincorporated

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Managing Joint Ventures in Oil and Gas

In the oil and gas and petroleum sector, international joint ventures are very common. A joint venture is an alliance in which two or more companies, individuals or organizations operate jointly owned properties. Most companies are willing to take partners for large-scale investments in high-risk oil and gas ventures for the following reasons:

• Overcome a budgetary constraint
• Develop a prospective area owned jointly
• Accelerate the development
• Spread the available budget over more wells and areas
• Sharing of risk capital
• Assist in building a closer relationship with a local company

With over 71% of upstream investment spent through alliance or joint venture agreements, it is known that joint ventures work extremely well for oil and gas. Oil and gas organisations are able to gain access to proprietary technology, seen through the Quantum Energy and RS Energy Group JV, while also gaining new expertise through the combined resources and technical knowledge. Recent examples of notable joint ventures include the Sensia JV, an alliance formed by Rockwell Automation and Schlumberger.

With challenging market conditions, intense competition and growing complexity of projects, organisations are looking for new ways to effectively deliver on their projects. Among these challenges, organisations are seeking to share risks on major capital projects, and JVs are and will continue to be the way to do so for the near future.

TYPES OF JOINT VENTURES

The two main structures under which a joint venture may be established are:

• Incorporated joint ventures
• Unincorporated joint ventures

• Incorporated joint ventures

For incorporated joint ventures, the parties involved set up a new company (i.e. JV company) for the purpose of the joint venture operations. This form of joint venture is not popular in the petroleum industry and is generally introduced at a mature stage of the venture.

Features of this type of contract include:

• Having a predetermined percentage interest share in the JV company
• JV company operates as a separate legal entity from shareholders
• Contract is held by the JV company which is responsible for all financial and commercial risks
• JV company owns all the assets and receives the revenue by sale of products by the venture
• JV company is subject to fiscal legislation and payment of taxes
• Corporate profit after taxes is divided between the shareholders of the company in the form of dividends.
• For international operations, the limited liability company and the relationship between shareholders, management, and board members are fixed

• Unincorporated joint ventures

Unincorporated joint ventures are contract-based and does not involve the creation of any new legal entity. Shares are held in undivided interest by each company, i.e. each company owns an undivided interest in the venture. Assets used in the venture are jointly owned and each acquires its own share of the production and is responsible for payment of taxes on its share of profit. Business decisions are made by a joint operating management.

However, the main disadvantages of an unincorporated joint venture are:

1. All crude oil is sold by the joint venture company, which means prices and customers have to be agreed among the shareholders. Under an undivided interest set-up, each participant acquires its own share of production and is free in the disposal of the share, subject of course to the requirement of the applicable legislation and the concession or contract.
2. Under the corporate route, the participants get their share of the benefits of the joint venture in the form of dividends. The dividends policy is thus a matter that must be settled in mutual agreement.
3. Setting up new contractual rules (i.e. management procedures and contractual terms) that are agreeable to both parties.

Managing Joint Ventures in Oil and Gas is a 2-day training course held from 30-31 March 2020 (Kuala Lumpur).  This course aims to discuss and provide an understanding of the principles & ideas to influence your JVs to be more aligned and constructive. Also learn how to maximize value and find the best solution for the overall partnership for both parties.