60 well program
Tesoro will provide a capital carry exchange for 50 % of EP energy’s working interest in joint venture wells.
Tesoro will purchase all the oil production of the joint venture wells
According to the share distribution EP Energy’s net share of capital is expected to be around $64 million, the working capital interest of EP energy is 80% and 20 % of Tesoro Corp.
EP Energy will have operation control over the assets of the joint venture (Sheldon 2014).
According to the signed sanctions, the two companies have agreed on multiyear supply of crude oil wax to Tesoro’s Salt Lake City refinery.
The main reason behind the joint venture was to fund oil and natural gas development in Altamont development program. Apart from that the other motivation behind the joint venture included
One of the reasons behind the joint venture was capital constraints, EP Energy’s project at Altamont, Utah was a huge project and it needed funding, the development program was huge and in order to meet the requirements of the project the EP Energy had to implement the joint venture strategy, so the company joined hands with Tesoro Corp.
Huge projects have huge risks, there are certain complexities related to the projects like, in the drilling ventures there are many risks, financial risks, accidents occur in the site. These accident are hazardous, they not only affect the workers at the site, drilling machineries, the deck but also affects the environment, like the oil spills of Chernobyl, which affected numerous aquatic life. These hazardous situations cause legal battles and the reputation of the Organization is tarnished. The risk here is very huge and no company would want to bear that risk alone so one of the reason of Joint Ventures in this sector is risk concentration, and it is also applicable for the joint venture of EP energy and Tesoro Corp.
Complex development programs or projects require many technologies that is not accessible by all the companies, Tesoro is an independent refiner and marketer of petroleum projects, it operates seven refineries in western USA which have a capacity of 895,000 barrels per day. EP energy on the other hand is well known for its strategies for enriching the lives of the people, they are also known for their strategic presence in the country through their unconventional resource areas in North America. EP energy and Tesoro can use their resources and their accessibility to different technologies, and for a drilling project, it the strategic decision to join a company like Tesoro (Beamish 2013).
Optimal use of the resources is very important for the huge projects, because in lack of optimization of the resources, there will not be effective supply chain management and the project will incur lot of cost. One of the motivations behind the joint venture was the optimization of operation through pooling assets and complementary services so that the synergies can save some costs. Tesoro agreed to purchase all the oil products from the Joint venture wells (Beamish 2013).
Geographic location is another reason why the two giants agreed upon the venture, geographical location of the project and the companies facilitates pooling of assets and other complementary services for the success of the project. The companies are located in USA, Tesoro is in Texas and EP energy is in Houston, the development program site was at Utah therefore it was very convenient for pooling of the assets and other related services (Beamish 2013).
As per the regulatory requirement of the organizations both the companies where located in the same country, considering the type of project, it was stationery so both the companies were required to be near to the location of the drilling site (Beamish 2013).
Political issues in joint ventures between the companies of same countries are very less, there were not much of regulatory concerns, altruist and national energy security issues (Beamish 2013).
Joint ventures facilitates test run by working with another organization’s resources and capabilities without the concerns or risks of capital and acquisition, this can also be said as one of the reasons of joint ventures between EP Energy and Tesoro Corp (Beamish 2013).
According to the Chairman, President and CEO of EP Energy in Altamont field there is a deep inventory that has drilling opportunities of high returns and according to Greg Goff Chairperson, CEO and President of Tesoro the joint venture will enhance the value chain in Rockies through support of waxy crude oil production in Uinta Basin. Therefore, both the companies have their own reasons for the Joint venture, which acted as the motivation behind the Joint venture (Beamish 2013).
The existing wells are drying at a rapid speed, and this is the biggest problems faced by the oil corporations, all businesses are finding new sources, finding a new site for the drilling project is one of the most difficult tasks that the Oil corporations face. Carrying out the extraction and the drilling operations in new wells require advanced technologies, to operate these machineries and technologies skilled engineers are required and both technologies and skilled engineers require a lot of money. This creates a lot of pressure on the business (Reuer, Klijn and Lioukas 2014).
Like all the other projects, this project also had significant pressure from the Government for the reduction of carbon, meeting the target of carbon reduction is one of the biggest challenges that are faced by the drilling projects, reports have showed that drilling activities cause more pollution than the transportation sector in terms of carbon emission. The Joint venture also had difficult time in reducing the carbon emissions and not faces governmental, environmental and legal obligations (Reuer, Klijn and Lioukas 2014).
One of the biggest challenges that the companies might face will be maintaining high level of performance so that they can attract the investors. Problems arise in maintaining high level of performance in the area of operations, leadership, organizational change and teamwork, so that the joint venture could get the most out of the workforce (Reuer, Klijn and Lioukas 2014).
Improvement of Safety standards is one of the challenges common to all the oil and gas companies, in this project the company had to ensure that the safety standards were maintained so that there are fewer accidents. Oilrigs are dangerous places and accidents do keep happening in the rigs. In such case project required lot of speculation and inspections of the drilling machineries, the companies had to make sure that they ensure the safety of their employees and the environment, causing no harm to the lives in the surrounding of the site (Reuer, Klijn and Lioukas 2014).
Another big challenge for the joint venture drilling project will be to adapt to the changes, these changes are shortage of skills and the evolution in the drilling techniques, the different types of hydrocarbons and the unpredictable behavior of new reservoirs (Reuer, Klijn and Lioukas 2014).
Another challenge of Joint ventures are HR challenges, in joint ventures two companies agree to contribute equity capital for funding the project, this projects takes many years, companies join with another companies as a strategic move, in such cases there are certain regulatory concerns of the organizations (Taylor 2014).
Joint ventures requires trust among the companies, it also requires high degree of clarification in the agreement clauses, unclear agreements later creates conflicts among the partners, so maintaining trust is one of the challenge that the company can face (Sheldon 2014).
The joint venture can face challenges related to the projects due to pressure from the local communities, the communities also show interests in the projects, the communities like the Governments are worried about the environmental concerns and the sustainability factors, often projects are delayed because of the local community pressure and interferences. Allocation of resources and pooling of assets are also a challenge for the companies. The project needed staffs for repair and maintenance of the assets and the machinery, this kind of project require 24 hours of inspection which if not maintained would lead to severe damage to the properties of the organization, lot of cost is involved in setting up of these machineries. Joint ventures often face conflict of interests, in this kind of projects that lasts for several years because of the nature of the project there are chances that there might be conflict between the synergies. The Joint ventures for the success of the project therefore needed to resolve all their conflicts, which can often become a difficult task (Reuer, Klijn and Lioukas 2014).
Delivering the projects in the right time is one of the major challenges that is faced by the project authorities, the nature of drilling projects often demand a lot of time because of the complexity related to the operations (Seelke et al. 2015).
Both the companies has their mutual benefits from the joint venture, they had their own reasons for the joint venture, EP energy had deep inventory in the Altamont field which will give them high returns, through the drilling projects. The CEO believes that the joint venture will facilitate increase in well- level returns and high capital efficiency. EP got an opportunity to keep its two rigs active in Uinta Basin. Another benefit they see is the long-term relation with Tesoro Corp as basin refinery partner, which was listed among top 100 companies in the fortune list (Khan, Shenkar and Lew 2015).
Tesoro can enhance their integrated value chain in the Rockies by supporting the growth of wax crude oil production in Uniata Basin, which will allow the company to secure their additional supply of advantaged crude oil for optimization of their operations in the Salt Lake City refinery (Kaup 2014).
The joint venture is going to drill 60 wells in Uniata Basin. As per the agreement, Tesoro will give a capital carry in exchange of 50% of EP Energy’s working interests in the wells, Tesoro is going to purchase all the products from the Joint venture which will benefit both the companies. Both the companies can strategically expand, grow and look forward to new opportunities in the future (Hu and Xu 2013).
The joint venture will surely reduce the risk of the two companies because both the companies will now share the risks involved in the failure of the project, as per the nature of the joint ventures both the companies will share the financial burden, which is the major constraints of this kind of projects (Hiatt, Grandy and Lee 2015).
The project will be beneficial for the people and the society, the oil and gas products will be used in the industries as a source of energy. Successful delivery of the projects and environmental consciousness will help the synergies gain a reputation in the market that can help them in being engaged to many big projects, they would become most preferred partners by gaining advantage over their rivals. Successful delivery of the projects by joint ventures with big firms increases the share prices of both the synergies resulting in the companies gaining a better position in the market. The companies will also have better financial position in terms of turnover (Brown 2014).
Aggressive estimates of the projects often questions the assessment of the project performance to cost and schedule targets like, whether the target set is feasible or not, exact estimation of costs and the targets is one of the most difficult tasks of the financial managers of the project (Beamish 2013).
In order to mitigate risks the company needs to have a proper planning before the start of the project. Cost estimation and forecasting for long projects is a complex task, the companies cannot have accurate budgetary estimates, what they can do is to make flexible budgets so that if there are unexpected expenses occurring in the process of the operations, it would not be a very big challenge to cope up with the sudden expenses.
Risks related to the accidents in the site which harms the employees and the environment needs to be reduced so that the scrutiny of the stakeholders is lessened. Environmental concerns like the excessive emission of carbon needs to be maintained in the drilling process. The companies based on the past project of the similar kind can forecast the budgetary costs of the project. In joint ventures it is very important for the companies to take care about the mutual benefits and interests, so there is very less conflict of interests among the companies. The technologies used for the drilling processes should be up to date so that there are fewer accidents in the site and oilrigs which are considered accident prone. Engineers hired for the drilling operations should be efficient enough to act in the contingent situations, they should know the steps that should be taken in case of scenarios like spills. Inspection of oilrigs and machineries should be done every day to avoid chaos situations and loss of lives at the site. There should always be contingent action plan and an alternate action plan taken in case of diversions from the desired plan. The synergies in joint ventures need to maintain communication and coordination and be very clear about the various clauses in the agreement between them. Environmental concerns, safety concerns, waste management and ethical considerations should not be ignored in any case. The companies should keep in mind that they are being scrutinized by the Government bodies, legal bodies and society at large. They need to fulfill the commitment they have made to the society. The companies of the joint ventures needs to deliver the projects in time so that the money, time and resources invested on the project are not wasted and the companies gain a good will in the market. Moreover, it will be very beneficial for them to gain a position in the market so that all major companies in the field of oil and gas look forward to be partner with these companies in the future.
Conclusion
The joint venture of EP Energy and Tesoro Corp is one of the famous joint ventures of Oil and Natural gas. The two companies have formed drilling joint ventures through their subsidiaries, in order to finance the oil and natural gas development in the program of EP Energy in Altamont, Uinta Basin of Utah. EP Energy and Tesoro signed a crude oil supply agreement for Yellow and black waxy crude oil supply to Tesoro’s Salt Lake City refinery. The drilling work will be started from July 2107.
References
Beamish, P., 2013. Multinational Joint Ventures in Developing Countries (RLE International Business). Routledge.
Brown, D.E., 2014. Africa’s booming Oil and Natural gas exploration and production: National security implications for the United States and China. Lulu. com.
Hiatt, S.R., Grandy, J.B. and Lee, B.H., 2015. Organizational responses to public and private politics: An analysis of climate change activists and US oil and gas firms. Organization Science, 26(6), pp.1769-1786.
Hu, D. and Xu, S., 2013. Opportunity, challenges and policy choices for China on the development of shale gas. Energy Policy, 60, pp.21-26.
Kaup, B.Z., 2014. Divergent Paths of Counter-Neoliberalization: Materiality and the Labor Process in Bolivia’s Natural Resource Sectors. Environment and Planning A, 46(8), pp.1836-1851.
Khan, Z., Shenkar, O. and Lew, Y.K., 2015. Knowledge transfer from international joint ventures to local suppliers in a developing economy. Journal of International Business Studies, 46(6), pp.656-675.
Reuer, J.J., Klijn, E. and Lioukas, C.S., 2014. Board involvement in international joint ventures. Strategic Management Journal, 35(11), pp.1626-1644.
Seelke, C.R., Villarreal, M.A., Ratner, M. and Brown, P., 2015. Mexico’s Oil and Gas Sector: Background, Reform Efforts, and Implications for the United States. Current Politics and Economics of the United States, Canada and Mexico, 17(1), p.199.
Sheldon, R.A., 2014. Green and sustainable manufacture of chemicals from biomass: state of the art. Green Chemistry, 16(3), pp.950-963.
Sun, S.L. and Lee, R.P., 2013. Enhancing innovation through international joint venture portfolios: From the emerging firm perspective. Journal of International Marketing, 21(3), pp.1-21.
Taylor, I., 2014. Chinese interest in Nigeria’s oil and the American context. Canadian Journal of African Studies/La Revue canadienne des études africaines, 48(3), pp.391-404.
Yan, A. and Luo, Y., 2016. International joint ventures: Theory and practice. Routledge.
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