TriStone Holdings Ltd is a non-operator working within the oil and gas industry. But what does that actually mean? To the layperson, it has the potential to sound like a vague and ambiguous title. The kind of phrase that says a lot whilst actually saying very little. It’s another one of those terms that bogs the industry down, and more often than not prevents the O&G sector from becoming as accessible as it perhaps could, or should be.
That’s why we’ve taken it upon ourselves, here at TriStone Holdings Ltd, to be that educating force; to help establish some clarity around what many people consider to be a considerably ‘shady’ global industry. In reality, however, this couldn’t be further from the truth! In fact, the stringent regulation which surrounds the industry necessitates a much greater level of transparency and accountability than most other sectors are required to display.
Everybody Knows Their Role: The Operator
For a non-operator to exist, logic dictates that there must first be an ‘operator’. What’s an operator, we hear you ask? Well, operators form a crucial part of any joint venture (JV). Joint ventures are amongst the most common business agreements within the O&G sector, and so understanding the roles within them is therefore crucial. The popularity of these JVs has risen in recent years, so much so that joint ventures are becoming increasingly common in sectors other than oil and gas, as well.
Unsurprisingly, given their title, ‘operators’ carry out the operations on behalf of the consortium. Looking at an oil context, then, operators are the companies which carry out the drilling itself, focusing on production at various stages of the oil cycle, from upstream through to downstream. It is the duty of the operator to fulfil the obligations under the joint venture’s agreements.
The Non-Operator (That’s Us)
The non-operating role within a joint venture, or Joint Operating Agreement (JOA) is where we come in, here at TriStone Holdings. Within these consortiums, non-operators most typically provide the financial contributions – it is the non-operators who fund the venture. The interest taken by them in the venture is primarily equity-based. They are the backing upon which a huge number of oil production companies rely.
Why Choose A Joint Venture, In The First Place?
We touched upon it just then, the idea of risk. It’s something that has kept investors up at night since market exchanges first opened all those years ago. Does the potential reward outweigh the risk? Is the chance of profit secure enough to look past the potential loss? In the world of investment, there’s no such thing as a guaranteed profit. Anybody who tells you they can mitigate risk, absolutely, is undoubtedly trying to scam you. What you can do, however, is make smart investing moves. You can eliminate risk where you can in the way that you invest. And whilst joint ventures are still deemed speculative, risk is mitigated to a degree, when compared with other investment types. This presents itself in various ways:
- Easy portfolio diversification.
- A reduction in fixed costs.
- Faster payback.
- Lower investment required.
Finally, these ventures are fantastic for us here in Britain, wanting to invest in opportunities abroad. The diversification of processes that a joint venture offers (i.e. being split between an operator and non-operator) means that our company, for instance, is easily able to pursue valuable assets in the US, that may otherwise have been unavailable to investors.
The Operating Committee (OpCom) – The Importance Of Balance Within A Consortium
It’s imperative that the agreement between both parties in a joint venture is structured in a balanced and even manner. In this way, risk is much better mitigated (on both sides). Because the operator handles things, day-to-day, once production is up and running, it can be easy for the non-operator to increasingly feel like it’s being pushed to the side-lines. Interestingly, disputes between the two parties most often arises from a subjective, emotional clash, as opposed to misaligned business interests. Ensuring that roles, processes and operations are clearly outlined from the very off is imperative. It will help make sure that disputes, or rifts, don’t start appearing.
Similarly important is the ability for the venture to display adaptability in a changing world. If this year has shown us anything, it’s that the businesses most likely to succeed, are the ones who are agile enough to be flexible and change according to new challenges and situations. Joint ventures already have the edge in this department as, when compared with other investment types, they already afford much more flexibility than most. If the two parties, the operator and non-operator, are not in constant communication with one another, however, then they go from being able to take what the industry throws at it in its stride, to instead being constantly blindsided by it. And that is when tempers and emotions most commonly begin to flare up.
Here at TriStone Holdings Ltd, we place an emphasis on clear communication and transparency so that, wherever possible, such disputes never bubble up. If they do, it’s imperative that the OpCom has a framework in place to resolve issues in as a mutually beneficial manner, and as promptly, as possible.