Drivers for the Joint venture……………………………………………………4
Benefits of the joint venture……………………………………………………6
Potential issues with the joint venture…………………………………………8
Joint ventures have become increasingly common in the energy sector where companies come together with the aim of combining resources in order to succeed in undertaking projects. This has come about as a result of the high costs and risks that are involved with undertaking projects in the energy sector. Through joint ventures, partners have a high chance of succeeding in undertaking the big energy projects as opposed to each of the companies undertaking the project on its own. This is because the two companies are able to share the costs that are incurred in the project as well as coming up with an effective strategy to oversee the project by working with personnel and managers who have varying background and extensive experience. This paper explores the joint venture between Pakistan Petroleum Limited (PPL) and Orion Energy which was aimed at exploration and investment towards drilling of power which would be receiving gas from the Kandhkot gas field. The agreement was signed by the MD and CEO of PPL Asim Murtaza Khan and CEO and Director Orion Energy David M. Thomas on June 28, 2013.
This joint venture has been chosen as it involved two well established companies in the energy industry with different backgrounds. Orion Energy is based in UK while Pakistan Petroleum Ltd is based in Pakistan. The two companies have varying strengths which made them well placed to contribute significantly in the venture. The joint venture was also significant from the fact that it demonstrated the interest of UK based companies for offshore exploration where the venture welcomed and approved by the British government. PPL on the other hand has a strategic advantage given the fact that it is based in Pakistan where the project was being undertaken. The fact that the two companies have a different background will help to identify some of the benefits that come about from the venture as well as the challenges that are likely to be experienced. The venture will also help to identify some of the key factors that make such ventures successful and how the managers can be able to overcome the challenges that they experience (Edwards, 2010).
Drivers for the Joint venture
There were various drivers that led to the joint venture between Pakistan Petroleum Limited (PPL) and Orion Energy. The key driver for the joint venture can be said to have been the desired to invest in an income generating project which would offer return for both companies. Joint ventures are aimed at a common goal of earning maximization as the shareholders in both companies want nothing less than returns on the capital that they have invested in the company. The fact that undertaking a project on its own could be a too complex and risky affair for a single companies lead them to forming joint ventures. This has been the case with Pakistan Petroleum Limited (PPL) and Orion Energy where the two companies have identified an opportunity that they can take advantage of in order to maximize their returns. In order to reduce the risks involved and increase the chances of success, the two companies have formed a joint venture in order to carry out the project together (Choo, 2002).
The need for technical expertise was also a key driver for the joint venture where Pakistan Petroleum Limited (PPL) needed the technical assistance of Orion Energy to undertake the project. The Pakistan market is not as established as Britain which means that Orion Company has an added advantage in terms of technical expertise for its staff. The company also has had extensive experience in undertaking other similar projects in different parts of the world and Pakistan Petroleum Limited (PPL) needed this kind of technical expertise in order to undertake the project and this led to the joint venture. Orion Energy key driver in engaging in the joint venture was to take advantage of the opportunities arising in the offshore market (Craig, 2003).
This has been a trend with most of the western energy companies which get into ventures with companies in foreign markets where there are opportunities for investment. This is as a result of the limited market and opportunities in their local markets which force them to seek opportunities elsewhere. The venture between Pakistan Petroleum Limited (PPL) and Orion Energy for instance was aimed at exploration and establishment of a power plant in Pakistan which would enable the two companies operate supply energy to Pakistan. There are limited opportunities within Britain and with the high competition in the market the company has sought for opportunities elsewhere (Jones, 2012).
The fact that the project was costly to be undertaken by one company was a driver as it would require a high capital outlay. The Pakistan Petroleum Company PPL as such was not in a position to undertake the project on its own as a result of limited financial capability. Undertaking the project jointly would therefore minimize the capital invested by each of the companies. It is for this reason that the company opted to get to a joint venture with Orion Energy an established company in UK which will help to provide additional capital in order to undertake the project (Bern, 2011).
Benefits of the joint venture
There are various advantages that are likely to come about from the joint venture as outlined below;
- Reduced cost of investment
One of the key benefits that come up with the joint venture between Pakistan Petroleum Limited (PPL) and Orion Energy is the reduced cost of investment for each company. Project in the energy sector normally require a high capital outlay where a company may not be in a position to cater for all the cost of the venture. In this case for instance, Pakistan Petroleum Limited could not have the financial ability to solely undertake the project despite being in close proximity to where the project was being undertaken. By undertaking the project jointly the two companies were able to share most of the costs involved which made it possible to undertake the project without financial constraints. When projects are undertaken jointly there is likelihood of there being a higher capital outlay as opposed to one company undertaking the project on its own. The increased capital investment in this case means that the scope of the project can be expanded to bring about higher returns that it would have been the case if the project was undertaken with limited capital (Cole, 2007).
- Risk diversification
Risk diversification is another critical factor when undertaking projects in the energy sector. There have been many instance where the projects undertaken did not materialize or bring about the expected outcome. If this is the case then it means that there was total loss of the capital invested in the particular project which can be disastrous if it was being undertaken by a single company. Joint ventures however are advantageous as they ensure that if the project fails then one company does not have to incur all the loss. With the high capital investment that comes about with the joint ventures, there is normally extensive research done before undertaking the project and this helps to minimize cases of the project failing. The minimal capital investment in the joint ventures mean that each of the individual companies will have finances left which it can use to invest in other projects that generate income as opposed to investing all the capital in one project which could fail and result to total losses for the shareholders (Martin, 2010).
- Diversity in experience and expertise
This is another major benefit that comes about as a result of joint ventures in the energy sector where companies get to being together staff who have different expertise and experience. Combination of the knowledge, skills and experience by managers from Pakistan Petroleum Limited (PPL) and Orion Energy is likely to bring about better outcomes in the project work. The staff from the British origin for instance have wide experience on the global energy market while the staff from PPL have a good experience on the Pakistan energy market where the project is to be undertaken. The staffs from the two companies have been through different experience which makes them well placed to undertake the project jointly and successfully (Kohl, 2013).
Potential issues with the joint venture
There are various issues that are likely to come about in the process of undertaking the Joint venture project between Pakistan Petroleum Limited (PPL) and Orion Energy as follows;
- Differences in expectations and objectives
The fact that the two companies have a difference background and have been operating in different markets could result to differences in expectations and objectives. Each company has a different rate of growth and objectives towards achievement of its long term goals. The key stakeholders in the two companies such as the shareholders and top executives could be having different expectation from the joint venture. The variance in interests between the two companies could result to each of them making decisions that are more favorable for them without considering the interests of the other company. If the varying expectations are not met then this could result to the joint venture breaking up (Ireland, 2013).
- Poor planning
Poor planning is another issue that is likely to come about with the joint venture that is being undertaken by the two companies. For a project to succeed there has to be proper planning where the different roles to be undertaken are assigned to specific departments and people. Planning is also important in ensuring that there required resources for the project to be undertaken are availed at the right time to ensure that the project starts at the right time and that there are no stoppages. Poor planning could result to conflicts arising in the partnership when one of the partners blames the other as being the main cause for failure and this results to eventual breakup of the partnership (Gazzini, 2014).
- Governance challenges
Governance is another potential issue that is likely to arise with the partnership. The joint venture brings together managers from the two companies who are expected to work together towards the achievement of the final goal. A challenge could however arise when the managers from one of the companies feel that they are more powerful or influential because their company has contributed a higher capital in the venture. These kind of conflicts in management slows the productivity and achievement of the final goals (Roney, 2003).
- Complex decision making
The joint venture is likely to experience a challenge of complexity in the decision making process. The fact that there are managers drawn from the two companies that are required to oversee the project could result to lack of proper coordination in the decision making process. The fact that the two companies are located in different nations with Orion Energy being from the UK could slow down the decision making process especially if the top executives have to be consulted before the final decision can be arrived at (Gruner, 2013).
- Establishment of a governance and decision making model
To overcome the issue of conflicts in governance and complexity in decision making, the tow companies should establish a governance and decision making model. The model will offer details of the structure of leadership in the joint venture from the top executives to the lower level managers. The model should also state clearly the roles of each of the managers in the organization and the departments that they head. The individuals to hold the various positions should be selected before the onset of the project and communicated to all the members of the organization. This will help to reduce cases of conflict where some of the managers try to take responsibility over their colleagues without such authority being granted to them. The model will also ensure there is smooth decision making in the organization where it is clear on who is to give the final authorization for the decision to be effected. Effective decision making ensures that changes in the organization are made at the right time in order to take advantage of the opportunities that arise in the market. This recommendation has been ranked first as it will help to solve most of the other issues that come about in the organization. If there is a good management it becomes easier to manage the two partners and ensure that a balance is achieved between their interests and expectations.
- Taking time to understand and align partners goals
The variance in interests and expectations from the two partners in the joint venture arise as a result of failure of the partners to take time to understand the varying interests. If the partners take such time and understand why each of them is getting into the partnership, then it is possible to find a balance between the interests and expectations of the two companies. In this way a better working relationship is established where each partners does not focus own interests but also takes into consideration the impacts of decisions made on the other partners. Understanding and alignment of goals should be done on a continuous basis given that the interests of the partners will change from time to time. To enhance understanding of the expectations, there should be regular communication where the progress of the venture is assessed and decisions are made on any changes that need to be made. This recommendation has been ranked second as it is important but can only be achieved if there is a good management structure in place. If the managers are in constant conflicts and the decision making channel is poor, then there cannot be proper understanding and consideration of the partner interests.
In conclusion, joint ventures can be said to be a common undertaking for companies in the energy sector. The main reason for this is the high risk involved in undertaking projects and investment in this sector as well as the high risk. For this reason companies opt to get into joint venture with partners in the same industry and who have similar goal. One such venture is the joint partnership between Pakistan Petroleum Limited (PPL) and Orion Energy which was aimed at exploration and establishment of a gas energy plant in Kandhkot gas field in Pakistan. The key driver for the joint venture was to maximize revenues through investment in a project which would maximize the returns for the two companies. The venture was also aimed at reducing the cost of investment for each of the companies and the risk involved. The main benefits of the joint venture include the sharing of the capital investment which lowers the risk for each of the partners leaving them with capital to invest elsewhere. The venture also combined staff with expertise and varying backgrounds who could work together to offer greater value in achievement of a common goal. Some of the key issues that the joint venture is likely to face include the variation in interests and expectations from the two partners which could result to a break up. Challenges also arise in governance and decision making process or from poor planning and role assignment. To overcome these challenges, an effective governance and decision making model should be established as well as taking time to understand the expectations of each partner.
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