![Energy Partnerships: Don’t Settle for ‘First Person that Comes Along’](/sites/default/files/styles/hart_news_article_image_640/public/image/2024/05/partnership-concept.jpg?itok=_2wqAUHS)
(Source: Shutterstock)
Entering a business partnership can be a little like dating—from the trial and error of “kissing frogs,” to building and evaluating trust, all while keeping a close watch out for red flags, such as overly controlling behavior.
Collaboration in the energy business involves the same principles—though no actual amphibian kissing—as energy executives look for lasting and fruitful partnerships.
“It’s sometimes uncomfortable to have those difficult conversations upfront,” said Rens Valk, a venture capitalist for Shell Ventures. “But if you don’t, it’s really not helping anybody.”
These days, companies of all sizes and ages are coming together in pursuit of lower emissions, scaling technologies and profit, among other goals. Small renewable energy startups are hooking up with large oil and gas companies, utilities are pairing with shale players and other unlikely relationships are forming regularly.
But how does a company know whether it’s a good fit with another? How are such partnerships structured? What if a third-party enters the picture? What warning signs signal a breakup ahead?
Valk joined executives from KPMG, NextEra Energy and Sage Geosystems at KPMG’s recently held energy conference in Houston to provide insights into the inner workings of collaborative partnerships, risks and opportunities.
Setting expectations up front, trust and communication appeared to be at the core of successful partnerships, the executives said.
“There’s a large amount of capital that’s being deployed. There’s a large amount of resources, and then many of these agreements are 5, 10, 15 years,” said Bradford Pete-Hill, executive director of origination for NextEra Energy. “So, you have enough time to fall in love, get mad at each other, fall out of love,” and get back together, he said. “So, setting expectations around capital, around risk, [around] who is responsible for what is key to success.”
Not doing so could lead to missed targets—and a breakup.
Risks, rewards
Project collaboration and sharing risks are among the opportunities Sage Geosystems Cindy Taff sees in partnerships. Among the risks, she said, is working with partners that “don’t necessarily manage their money the same way as you do.” Some partners may be spendthrifts, spending big for something not on the radar of an original project.
How such partnerships are structured depends on the end goal, panelists agreed. That involves looking into what each company wants to achieve and ensuring all parties are onboard with decarbonization plans, including executive teams and boards of directors.
NextEra, for example, is partnering with a food distribution company with a goal to electrify 35% of its fleet, Pete-Hill said. The company is in the process of signing a decarbonization agreement.
“As we know, there are many companies out there with decarbonization plans, but execution is the hardest part. ... We’re working with them on committing to renewables, and they’re doing all of this while they’re electrifying fleets at the same time,” Pete-Hill said. “So, the partnership agreement has to fit into their existing goals, their existing operations, and not slow them down, but rather be an accelerator.”
Taff looks at partnerships more broadly, seeing partners in vendors, universities and investors. “Partnering with them [investors], of course, they bring us capital, but they also give us access to ecosystems.”
They could mean providing a testing ground to demonstrate new technology.
Shell Ventures aims to help smaller companies grow, giving them opportunities to deploy their technologies according to Valk. “We’re not trying to insert control … [or] limit them,” he said.
Red flags and flight tests
One of the building blocks for collaborative relationships is trust.
Valk recalled what a colleague refers to as the intercontinental flight test to gauge trust. “Would we be willing to sit next to this person [or] company? … There’s a lot of due diligence that goes into making investments,” he said.
There is a chance that red flags can appear before even entering a partnership.
“You got to kiss a lot of frogs,” Jafri said when asked about backup plans and picking the right partner. KPMG runs a process that helps clients determine what type of partner they would be. To help determine whether the fit is good between companies, be it for a global partnership or a single contract, it also brings together both parties together for a one-day workshop, for example, to determine whether strategic and cultural alignments exist. Other partnerships, she said, are more formal in that the deal points are in the contract.
“But either way, ideally you would want to run a process rather than just get in partnership with the first person that kind of comes along,” Jafri said.
For NextEra, existing relationships—such as with a customer that has made an electricity or natural gas purchase—can lead to the best partnerships. “We get a sense of how they do business, how they improve deals” and their management style, Pete-Hill said.
The first face-to-face meeting is crucial, Taff added, noting the company also takes into consideration who introduced it to the potential partner.
Informal relationships can be a red flag, according to Taff. “We’ve seen people come across … trying to be friends rather than business partners.”
To swipe right or left?
Transparency and communication are paramount.
So, too, is an alignment of strategic objectives, according to Wafa Jafri, partner and co-lead of energy and natural resources strategy for KPMG UK.
“I think if that’s something that is not there from the very start, then that could cause a lot of issues down the line in terms of how quickly you want this done, what does the governance of it need to look like? What are the goals? What are the parties working toward?” she said, adding that’s one of the biggest risks that should be managed upfront.
Being prepared to communicate plans and build relationships with additional counterparties is also something to consider.
“We’ve seen an incredible amount of M&A activity in the oil and gas space where there’s lots of consolidation going on,” Pete-Hill said. At one point you’re working with one counterparty, only to realize you’re dealing with another counterparty. He recalled how NextEra built a 140-megawatt wind facility for an oil and gas producer that didn’t have interconnection to the grid. “We were going to have our turbines on there for years and years, and then they were acquired by a larger oil and gas producer. So, now we have to help our existing customer communicate their value to the new company and what we’ve achieved, and then also build this relationship with the new company. ... It’s not necessarily a bad thing,” but it alludes to the need for communication and transparency.
Challenges, checking in
Panelists also shared some challenges their companies have faced. Cultural fit can be a difficult area.
Jafri recalled an instance where an oil and gas company wanted to add renewables onsite as part of a global partnership. KPMG, which helps bring potential partners together, found a strategic match. “But then there is a massive difference in culture from the perspective of the pace at which one party can move versus the other one,” she said.
Oil and gas companies can be more cautious and slow-moving as they work through their own processes; whereas, a renewable development company can be more fast-paced, getting one task done and moving quickly to the next.
“There was some success in terms of a couple of assets that they were able to build … together,” she said. However, the partnership’s plans for global reach ended up being limited to one country. “The developer could not provide the resources or commit the resources for such extended periods of time given the pace and cultural differences.”
Taff looked on the positive side, pointing out that companies can also learn from each other’s cultural differences to grow. “As long as you have an open mind.”
If you sense an issue may emerge, get in front of it and communicate that with the partner, Taff said.
Valk also suggests “checking in early” to help build trust and let the other party know if a situation is not going as planned. “Structure around that can be can be helpful,” he said.
‘Seek to understand’
Working through issues comes back to transparency and communication.
“Seek to understand,” Taff said, “because you don’t always understand why they’re doing what they’re doing, which is making you upset. … If not, the tension will just get greater and greater over time.”
It may be as simple as saying: This isn’t working well. Why are you doing this? Is there something forcing you that way? she said.
“Understand who you’re getting into a partnership with. … Be aligned on what the goals are,” Taff added. Having a sense of urgency is another challenge. “We want to be working with somebody that just doesn’t want to just pull down a salary for the next three years. We want to actually deliver something and not just survive as a company.” Be aligned on what the company’s aspirations, she said.
Many businesses have expansion plans that require power, Pete-Hill said, referring to growth with data centers and in the Permian Basin. Power may not be where it’s wanted. He encouraged companies to let their partners in on their growth plans. “So, you can start to plan together, so they can put their assets in the place that you need them to be at the time you need them to be, to enable you to expand your portfolio.”
Recommended Reading
Eni Reports Discovery Offshore Mexico in Block 9
2024-07-10 - Italian energy giant Eni SpA announced a discovery at the Yopaat-1 EXP exploration well in the offshore Mexico Block 9 of the Cuenca Salina in the Sureste Basin, which potential up to 400 MMboe in place.
E&P Highlights: July 10, 2024
2024-07-10 - Here’s a roundup of the latest E&P headlines including TotalEnergies exiting South Africa to focus on opportunities in Namibia.
CNOOC’s Bohai Bay Well Achieves High Yield
2024-07-11 - CNOOC’s Bozhong 19-6 Condensate Gas Field D1 well, the first ultra-deep well in China’s Bohai Bay, is currently producing approximately 6,300 boe/d.
Goodbye Manual Control: Vital Energy’s Automation Program Boosts Production
2024-07-12 - Production, ESP efficiency soared when the company automated decisions with AI at the edge.
Southeast Asia NatGas Projects Could Unlock $100B Boom- Rystad
2024-07-17 - Southeast Asia's offshore gas industry is set for a $100 billion boom by 2028, driven by a flurry of final investment decisions by oil and gas majors and national oil companies, according to Rystad Energy.