By Raquel Jonathan & Bertha Tobias
The oil and gas industry remains a cornerstone of the global economy, where if properly managed, would provide substantial revenue and drive economic growth for both developing and developed.
While the world increasingly shifts towards renewable sources of energy, fossil fuels make up approximately 80% of the global energy mix, according to the Environmental & Energy Institute. For countries like Namibia, proven to hold an estimated 11 billion barrels of hydrocarbon potential, the oil and gas sector is essential for fast-tracking economic development.
As the country explores its hydrocarbon potential, joint ventures offer strategic opportunities to address specific industry challenges, while providing economic benefits for local entrepreneurs. JVs can facilitate collaboration between local entrepreneurs and international companies, thereby advancing growth in areas like supply chain management and technical services, and creating new avenues for local entrepreneurial development.
In light of the above, this article examines how joint ventures can navigate the complexities of the oil and gas sector in Namibia, focusing on their benefits for local entrepreneurs. It further explores the nature of joint ventures, the role of Joint Operating Agreements (JOAs), and the financial and operational challenges associated with these partnerships.
The nature of joint ventures
JVs in the oil and gas sector can take various forms, each tailored to specific project needs and partner capabilities. They can be broadly categorised into either incorporated or unincorporated joint ventures. Incorporated joint ventures involve each partner investing equity into a newly formed entity, with profits and losses shared according to ownership percentages. Incorporated joint ventures involve each partner investing equity into a newly formed entity, with profits and losses shared according to ownership percentages. A prominent example is BP and Det norske oljeselskap’s creation of Aker BP ASA, a major independent oil and gas company. Through their alliance, BP and Aker BP benefit from shared strategic technology and operational strengths, maximizing the value of their Norwegian assets while operating as a unified incorporated entity.
On the other hand, unincorporated joint ventures, which are more common in Namibia’s nascent oil and gas sector, are mainly characterised by the sharing of resources such as technical expertise and services, without a formal capital contribution. Further classifications include project-based joint ventures, which are established for specific undertakings like exploration or development. For the purposes of this article, focus will be made on these forms as they are the most applicable to the current local context.
Joint Operating Agreements (JOAs) in Namibia
A key element in the success of joint ventures is the JOA, which governs the relationship between partners. JOAs outline the roles and responsibilities of each partner, designating one as the operator of the joint venture. For local entrepreneurs, JOAs can serve as crucial mechanisms to protect their interests within joint venture. These agreements provide a structured framework that ensures their contributions are fairly compensated. However, JOAs are complex and subject to extensive negotiation between the different parties. The challenge lies in balancing the various interests of the partners. Issues such as unfavorable market conditions and uncertainty with respect to the applicable legal framework may complicate negotiations, often leading to prolonged discussions. Therefore, ensuring that legal rights and obligations are properly aligned between domestic laws and contractual agreements is essential to ensure the effectiveness of the JOA.
In Mexico, the Zama oil field offers a prime example of a Joint Operating Agreement (JOA) in the energy sector. The field, jointly developed by PEMEX, Talos Energy, and Harbour Energy, marks Mexico’s first unitization process, combining both private and national interests. This agreement includes collaborative project planning, an Integrated Project Team for operational coordination, and a commitment to balance private and state interests within regulatory frameworks, enabling the field’s effective management and development
Financing Joint Ventures in Namibia
More than nine out of ten (92%) of oil & gas projects run by JVs are exceeding their budget, compared to 83% of non-JV projects. Therefore, financing poses a critical challenge when establishing joint ventures, especially in the capital-intensive oil and gas industry. The volatility of the global oil market can severely strain capital mobility within the industry. For local entrepreneurs, participating in these ventures offers an opportunity to secure financial resources that may otherwise be inaccessible. However, when one joint venture partner fails to meet its financial obligations, it can lead to significant operational challenges. This failure can strain relationships within the joint venture, as partners may be forced to cover additional costs to keep the project on track. In Namibia’s emerging oil and gas sector, securing stable and long-term financing is essential to the success of joint ventures, ensuring that local businesses can thrive within these joint ventures.
Challenges for Non-Operators
In many joint ventures in Africa, including in Namibia, the operator is often a large IOC, while the non-operator is a national oil company, local entrepreneur, or smaller local firm. This dynamic can create challenges, particularly when the non-operator lacks the financial and technical resources of the operator. Such a situation is further complicated by the fact that JOAs often span the entire duration of a petroleum title, which can last for decades. As a result, agreements that seem favourable at the onset may become burdensome over time.
To ensure the long-term success of these ventures, it is crucial to establish joint venture agreements that fairly consider the interests of all parties, including non-operators. JOAs can serve as a protective measure for local entrepreneurs, ensuring that they are not overshadowed by larger international partners and that their interests are safeguarded throughout the life of a project.
Conclusion
As Namibia continues to develop its oil and gas sector, joint ventures will play a pivotal role in overcoming the challenges associated with capital intensive projects. These joint ventures offer a unique opportunity for local entrepreneurs to engage with international partners, gain expertise, and contribute to the country’s economic growth. However, these partnerships are not without risks. From the complexities of JOAs and financing difficulties to the challenges faced by non-operators, as has been explained above. Local entrepreneurs must navigate a complex landscape to ensure the success of their ventures. By addressing these challenges local entrepreneurs can harness Namibia’s hydrocarbon resources to drive economic growth and development.
*Raquel Jonathan is a Candidate Legal Practitioner attached at Shikongo Law Chambers. She holds an LLM from the University of Cape Town. Bertha Tobias is a Rhodes Scholar pursuing a full time Masters of Science in Environment & Enterprise at Oxford University, UK.
