Navigating joint ventures in the oil and gas industry

Navigating 

joint ventures in the 

oil and gas industry

Introduction 

Transaction trends in the oil and gas industry — the JV 

Oil and gas merger and acquisition activity was strong in 2010 and has continued in 2011, 

with credit markets opening and big oil flexing its financial strength. Total global industry 

transaction value topped US$266 billion in 2010, up 33% from 2009. The number of deals 

went up 13% and deal value rose strongly in each of the four industry segments, with total 

upstream transaction value reaching a record high. Transaction activity is expected to be 

similarly brisk in 2011. 

Furthermore, independent players in the capital-intensive oil and gas industry began 

partnering more vigorously with major oil companies. The past 18 months have seen a 

significant ramp-up in oil companies’ planned investments in unconventional oil plays, with a 

marked increase in joint ventures. The past year saw a dramatic uptick in Asian companies 

investing in North American energy projects. In 2010, public and national players from 

countries such as China, India and South Korea invested a total of US$17 billion in energy 

ventures — the majority of them joint ventures — in the United States and Canada. It is 

expected that joint ventures will continue to be extremely active for the remainder of 2011. 

Notably, 37% of oil and gas companies in the April 2011 Ernst & Young Capital Confidence 

Barometer indicated that they are seriously considering a JV in the next 12 months. 

Today’s joint venture transactions, however, come in so many shapes and sizes that it can 

be difficult to decide on the optimal arrangement. For example, private equity partners have 

come into play — several funds are dedicated to the oil and gas industry — small independent 

oil companies are partnering with one or many major oil companies, and public and national 

oil companies from all over the world are entering the US oil and gas market. All offer exciting 

combinations of resources, assets, capital, expertise and labor. The right joint venture can 

optimize these to shape a dynamic growth strategy. 

In this paper, we explore the rationale behind utilizing a joint venture (JV). We look at the JV 

lifecycle and, in particular, what JV partners need to do to ensure that the JV process is a 

successful one for the partners and for the JV itself. Also highlighted are new and proposed 

US federal income tax laws that will dramatically affect the US oil and gas sector, including 

negating some of the benefits of entering into a JV transaction.

Why consider a JV? 

JVs are a well-established feature of the oil and 

gas industry. They are typically less risky and are 

easier to unbundle than full organizational mergers. 

With the scale of organizations within the oil and 

gas industry, antitrust concerns and the importance 

of national energy security, JVs are a useful way 

of gaining the benefits of collaboration without the 

economic and political risk associated with a merger 

or other business combination. 

There are a number of drivers behind why JVs are used so 

extensively within the US oil and gas sector: 

• Capital intensive: upstream projects can be too big for a single 

company (even a super-major) to finance on its own. Many of the 

larger liquid natural gas (LNG) and deepwater projects fall into 

this category. 

• Risk concentration: the risk profile attached to large-scale 

exploration and production (E&P) projects is such that no single 

company may wish to take full exposure. 

• Access to technology: complex or frontier developments may 

require proprietary technology that requires the owner to have 

a stake. 

• Access to resources: the legal owner of resources may not 

have the capital or technological ability to develop them to their 

maximum potential. Entering into a JV may also allow access to 

complementary assets or reserves. 

• Supply chain optimization: downstream supply chains may be 

optimized across disparate geographies by pooling assets. Many 

of the refining JVs are based upon supply chain and market 

supply optimization for the various participants. 

• Market positioning and portfolio optimization: pooling assets 

may allow the JV to develop a market-leading position in a 

particular geography (downstream) or product (chemicals) 

and enable a portfolio to be optimized across both asset pools, 

generating a value uplift from prioritizing larger assets. In an 

increasingly cost-focused climate, economies of scale are critical 

to success and partnering may help achieve this. 

• Regulatory requirement: some countries require foreign 

companies to partner with local entities if they are to enter 

that market. 

• Political sensitivity or energy security: this means that 

JVs — as opposed to acquisitions and takeovers — may be 

more appropriate. 

Navigating joint ventures in the oil and gas industry 1

Past, current and future trends 

The past few years have seen high numbers of oil 

and gas JVs being entered into, particularly in 

the upstream segment, where the cost, risk and 

technology issues clearly favor a collaborative 

approach on the largest projects. 

Oil and gas JVs 2008 – 2011 

Number of JVs 

70 

60 

50 

40 

30 

20 

10 

0 

2008 2009 2010 2011 

through 

Upstream JVs Midstream JVs 

15 May 2011 

Downstream JVs 

Source: IHS Herold 

Oilfield services 

The increase in the number of JVs in the last 18 – 24 months could 

be attributed to a number of different factors, including, in part, 

the recovery in oil prices, increased access to the credit markets, 

advances in technology and an increased global emphasis on 

exploration and development. 

Management of JVs is both risky and time-consuming. Significant 

research has been carried out on the subject of JVs and their 

performance. The results are mixed, with many studies suggesting 

that they have high failure and inefficiency rates: e.g., 30 – 70% 

of JVs have problems of inefficiency and bad performance, and 

about 50% of the JVs fail due to high cost (Kogut, 1988; Bleeke 

and Ernst, 1993). Other studies, however, show a failure rate of 

30 – 61%, and show that 60% failed to start or faded away within 

five years (Osborn, 2003). Properly structured, however, JVs offer 

exciting combinations of resources, assets, capital, expertise and 

labor, and the right JV can optimize these to shape a dynamic 

growth strategy. 

2 Navigating joint ventures in the oil and gas industry 

Oil and gas companies can be positioned somewhere along each of 

the following four continuums: 

Asset/reserve seekers Asset/reserve holders 

Low access to capital High access to capital 

Lagging technologists Leading technologists 

Low appetite for risk High appetite for risk 

If an oil and gas company is on the right-hand side of all four 

continuums, then it may have no need to partner and may wish to 

proceed with a project as a sole venturer. If, however, it is positioned 

toward the left-hand side of any of these continuums, then it may 

well be appropriate or even necessary for it to partner. 

In general, during a downturn and/or a flight from risk in the capital 

markets, companies may move significantly to the left on the capital 

access continuum, and may also have a low appetite for risk on the 

continuum. Conversely, as has been the case during the last 18 – 24 

months, companies have moved significantly to the right on both 

the capital access continuum and the appetite for risk continuum. 

The recovery in the oil price to around US$100 per barrel has 

generally meant that there are now a broader range of potential 

projects that have become economically viable. These projects are 

in locations remote from the markets that they will supply, and, 

consequently, large-scale capital investment is generally required 

to develop and commercialize them. Again, these types of projects 

favor a collaborative approach. 

These factors likely have provided the necessary stimulus for JVs to 

return to the levels that we have seen in previous years. In the April 

2011 Ernst & Young Capital Confidence Barometer, it was revealed 

that 37 % of oil and gas companies are seriously considering a JV in 

the next 12 months.

The oil and gas sector is no 

stranger to joint ventures. 

Today’s JVs, however, come in 

so many shapes and sizes that 

it can be difficult to decide on 

the optimal arrangement. 

3

JV types 

JVs typically utilized within the oil and gas industry broadly fall into 

one of three categories: 

• The full asset JV 

• The full business JV 

• The marketing alliance 

Full asset JV 

A JV entered into with regard to a 

specific set of existing asset(s) or to 

develop asset(s). These have tended 

to occur around upstream JVs, 

pipelines, refineries and increasingly 

now with LNG projects. The upstream/ 

full asset JV is the most commonly 

occurring type. 

Exploration Development 

Upstream 

Production 

oil/gas 

Pipelines LNG liq./re-gas 

Refining 

Petro- 

chemicals 

Midstream 

Transportation 

Distribution 

Downstream 

Distribution 

Retail/ 

wholesale 

Retail/ 

speciality 

Full business JV 

A JV entered into to combine the 

resources of entire businesses to 

create marketing, supply chain, 

production and scale synergies. These 

have historically tended to occur with: 

• Downstream, chemicals and 

midstream businesses 

• Oil field services companies within 

the upstream sector 




Petro- 

chemicals 

Upstream 

Production 


Midstream 


Distribution 

Downstream 

Distribution 

Retail/ 

wholesale 

Retail/ 

speciality 


These types of JVs tend to occur in specific areas within the oil and 

gas sector. The lined boxes within each JV category highlight the 

areas that are more prevalent within the three main subsectors, 

upstream, midstream and downstream. This can be summarized in 

the graphic below: 

Marketing alliance 

A JV entered into with the intent of 

jointly marketing product(s), e.g., 

motor fuels retailers and convenience 

stores joining forces to combine their 

consumer offerings. 


Upstream 

Production 




Downstream 

Petro- 

chemicals 

Midstream 


Distribution 

Distribution 

Retail/ 

wholesale 

Retail/ 

speciality

JV phases and issues 

If JVs go wrong, then JV partners may lose money, credibility, 

proprietary technology, assets and management focus. In the 

following sections, we look at some of the key areas to focus on 

at each stage of the JV lifecycle to ensure that the major pitfalls 

are avoided. 

The four key phases in the JV lifecycle can be summarized 

as follows: 

JV planning 

Define the commercial 

rationale and 

identify partner(s) 

JV formation 

Build the legal and 

commercial structure 

JV operation 

Operate and manage 

the JV on an 

ongoing basis 

JV dissolution 

Wind up the JV 

37% of the oil and gas 

executives surveyed believed 

that they would be making 

an increased number of 

strategic alliances over the 

next 12 months. 


JV planning 

Once a decision has been made that a JV is the 

appropriate vehicle for a particular project or asset, 

there are a number of stages and processes that 

should be gone through. 

Defining the scope of the JV 

The first step is to clearly define the scope of the assets that will 

be the subject of the JV. Where the asset is upstream acreage or a 

particular oil/gas field, this step may be relatively straightforward. 

However, if the assets are a collection of existing businesses that 

form part of a broader business or supply chain, defining the scope 

may be more complex. It is, however, critical that the boundaries of 

the JV arrangement are clearly articulated and are understood by 

all of the JV partners and contained within the JV agreement. This 

process should include not only the definition of the physical assets 

but also the definition of the markets and potential customers that 

the JV is aiming to serve. This is especially important where a JV 

could potentially be in competition with the venturing partners’ 

other business interests. 

6 

Navigating joint ventures in the oil and gas industry 

Commercial analysis of the JV 

Commercial analysis and modeling of the JV is a key step and 

should contain a number of scenarios with sensitivity analyses 

around key variables. These variables can be, in part: 

• Financial (i.e., oil price, interest rates, inflation) 

• Production/recovery-related (i.e., bpd, throughput) 

• Geopolitical (i.e., implications of a change in government, 

tax regimes) 

By thorough modeling of the financial implications of a range of 

scenarios, JV partners will understand the possible implications for 

the JV in terms of net present value and internal rate of return. This 

will help ensure that all partners are aware of and have considered a 

range of potential scenarios for the JV and are realistic about their 

expectations. By considering and discussing upside and downside 

scenarios in an open and honest manner, partners can anticipate 

potential difficulties and discuss how they would respond if that 

scenario should occur. These scenarios and anticipated outcomes 

can even be built into the legal agreement and can provide 

protection against future litigation, which may be costly for all sides 

and damaging to the business. 

Defining the legal, tax and financial structure 

Consideration needs to be given to the appropriate legal, tax and 

financial structure that the JV will assume. Prospective JV locations, 

jurisdictions, legal and tax-efficient operating structures should be 

evaluated to discover, at an early stage, operational restrictions 

imposed by applicable laws and regulations. If multiple options are 

being considered, such due diligence can be utilized to assess the 

pros and cons of each of the proposed locations and jurisdictions 

to produce a tabular comparison, with risk rating scores and 

weightings. Part of this process should involve a consideration of the 

tax implications for both the JV and the venturing partners, where 

the JV will be domiciled for tax purposes and where its main centers 

of operation and management will be located. This analysis should 

also include an assessment of the tax implications of the potential 

legal structures under consideration.

Defining the business strategy and plan 

A business strategy and development plan should be prepared 

for early discussion with potential JV partners. The plan may 

change over time as a result of discussion and negotiation with 

JV partners, but it is important that there is a clear, early view 

of the assets, geographies, markets, outstanding commitments, 

investment case/timings and growth targets on which to base 

discussions with JV partners and potential partners. This plan 

should also cover areas such as the proposed JV governance model 

and decision-making process. It is critical to get the balance right 

between allowing JV management enough autonomy to effectively 

manage the business while allowing the JV partners to maintain 

control over the operations and effectively determine the longerterm 

strategy and commitments of the JV. 

Partner identification and selection 

JVs are often complex, long-term arrangements. Trust, therefore, is 

critical to the success of the relationship. The early signs of whether 

your company and its partners are compatible will be evident during 

the negotiation process. 

Partner selection is a critical step and one that will determine the 

success of the JV. When JVs fail, it is often because of a breakdown 

in the relationship between the JV partners. This can be caused 

by a lack of trust, differing strategic objectives, and unrealistic 

or nonaligned expectations of what partners can expect from 

each other. Clarity and thoroughness of planning at this and the 

JV formation stage can mitigate the risk of disagreement in the 

JV operation stage. This is especially true when international oil 

companies are partnering with National Oil Companies (NOCs). Each 

needs to be aware of the others’ aims and limitations. Shareholders 

and governments may have very different strategic aims and views 

on an investment, i.e., NOCs may well have social welfare obligations 

that may seem alien to an international oil company. 

The number of partners in a JV can be a critical determinant of the 

success. Smaller numbers of partners make it easier to manage the 

decision-making process and to align objectives and the strategic 

direction of the JV. 

It is important for JV partners to carry out due diligence on each 

other across a range of areas, including key financials, credit 

status, technical capabilities, management strength, existing 

commitments, outstanding litigation and prior JV performance. 

When a number of partners are being considered, it may be 

appropriate to have a scoring process covering all of the required 

partner criteria to assist in the selection process. 

A business strategy and 

development plan should be 

prepared for early discussion 

with potential JV partners. 

Don’t overlook the cultural 

aspects of a JV. Culture isn’t 

restricted to countries. 


JV formation 

The JV formation process will see the development, 

negotiation and finalization of many of the outputs 

of the JV planning phase. 

Detailed location planning 

Planning and implementation reports on the chosen, or short-listed, 

tax and legal environment(s) that will host the JV will need to be 

completed. Reports should cover aspects such as: 

• Required licenses 

• Necessary regulatory approvals 

• Environmental impact assessment requirements 

• Governing law 

• Corporate law and compliance requirements of any JV company 

and any shareholders or stakeholders in a JV 

• Local employment law analysis 

• Local asset, property and land ownership rights and requirements 

• Applicable company law stipulations (such as nationality of 

general manager, board voting and shareholder voting and 

retaining of profits in-country) 

Financing of the JV 

Details of the JV financing will need to be discussed, agreed upon 

and finalized. This will include: 

• Exact definition of contributions from each partner 

• Value of contributions from each partner 

• Capital structuring of JV (e.g., use of debt) 

The implications of the proposed financing will need to be assessed: 

• Does the proposed jurisdiction allow the contemplated form 

of financing? 

• What is the tax treatment of debt financing? 

• Does a limited resource project financing model work under the 

legal system? 

• Is leveraged financing possible? 

• Does the applicable law allow the free and easy taking of security 

in certain properties? 


• Can security be enforced in theory? In practice? 

• Is there, in fact, a working, transparent, local banking system that a 

foreign investor can keep working capital in without fearing for it? 

• What are expropriation laws, protections and remedies? 

All of these questions will need to be considered and addressed. 

Financial reporting for the JV 

The integration of the JV financial reporting with the partners’ 

statutory reporting requirements will need to be considered. 

There may be a need for the JV to provide local accounts for 

statutory reporting purposes, International Financial Reporting 

Standards (IFRS) and US or other Generally Accepted Accounting 

Principles (GAAP) accounts to meet the reporting requirements of 

the JV partners. The proportion of the JV investment and operator 

responsibilities of each of the venturing partners will determine 

whether the JV will need to be treated as an equity investment or 

consolidated within the partners’ accounts. Clearly the need for 

consistency with the JV partners’ accounting requirements will be 

greatest where the accounts need to be consolidated. 

Critical reporting issues, such as oil and gas reserves recognition by 

the various partners, will need to be discussed and clarified and the 

principles, if not the quantities, agreed. 

There may be critical areas of the JV that are of particular 

interest to the partners that may require additional due diligence 

to be carried out on behalf of some/all of the partners. One such 

example is the production management processes and output of 

a production sharing agreement. Where such issues exist it may 

be necessary for partners to consider putting in place additional 

assurance processes and mechanisms, such as a Statement of 

Standards for Attestation Engagements No. 16 (SSAE 16), to 

provide all JV partners with a high level of comfort regarding the 

robustness of the process and output.

Management of legacy risk issues 

Where the JV is formed from existing assets, there will need to 

be a clear mechanism for ring fencing liability, risk issues, and tax 

contingencies that pre-date the formation. These items may include 

ongoing litigation, environmental cleanup liabilities and outstanding 

human resources (HR) liabilities (pension funding, redundancy 

costs, etc.). These legacy items will need to be attributed to the 

appropriate JV partner who “owns” the potential liability and 

detailed within the JVs legal agreement. 

Use of proprietary technology 

Where the JV will use proprietary technology owned by one of 

the partners or the JV itself, the legal agreement between the 

partners should cover the usage of this technology. In addition to 

any patents or trademarks that exist, the agreement should identify 

the licensed users and the geographies where this technology can 

be deployed. Suspicions over perceived or real intellectual property 

theft are a common cause of friction between partners, but by 

dealing with these issues in a pre-emptive, thorough manner, the 

risks in this area can be largely mitigated. 

Dispute settling mechanism 

It is important that there is a clear dispute escalation and resolution 

process understood and agreed to by all of the partners. This may 

include defining escalation mechanisms in the JV itself, involving 

the partners as stakeholders and also referencing local and 

international laws. 

Dissolution options 

The JV partners need to be clear about what the JV dissolution 

strategy and options should be. There is a range of mechanisms 

that exist to enable partners to buy each other out should the 

need arise — e.g., “Russian roulette” or “Texas shoot-out” clauses 

(see page 13). However, other scenarios should be considered and 

included within the legal framework of the JV. These scenarios 

could include, in part, the following: 

• The inability of one or more of the partners to meet a cash 

call or unanticipated liabilities 

• A number, but not all, of the partners wanting to sell the 

JV in its entirety 

• Putting the JV into liquidation should the need arise 

Implementation of a partner review process 

As part of the ongoing JV review process, partners should 

consider the implementation of a regular review process where 

the performance of the partners is discussed and appraised in the 

context of the management of the JV. This will enable issues to be 

discussed, raised and resolved on a timely basis — as opposed to 

going unsaid and potentially escalating into larger issues that lead 

to a breakdown in the working relationship. 

The JV partners need to 

be clear about what the JV 

dissolution strategy and 

options should be. 


JV operation 

Ensuring that the JV is structured and set up 

correctly is critical to the success. However, it is 

equally important that the JV performs in line 

with the partners’ plans and expectations. Many 

of the problems that occur with JVs stem from 

performance issues that undermine the initial 

rationale for creating the JV. 

Organization design 

Creating the new JV management structure, policies, procedures 

and culture will be critical to success. Where the JV involves 

the combination of existing assets and organizations, this will 

involve decisions regarding whether to harmonize around the 

partners’ existing policies, procedures and cultures or instead 

create a completely new set. The organization design needs to 

be sympathetic to the employees and ensure that they all feel 

part of the new organization. Change should be managed and 

communicated proactively. This will be more difficult where there 

are overlapping or duplicated roles and a need to simplify and 

reduce the structure and number of employees engaged in the 

business. Positioning senior and middle management from all the 

partners within the new organization is a critical activity. If one 

organization is seen to dominate the new management structure 

with little senior representation from the other partner, this may demotivate 

and destabilize staff from that partner. It is important to 

recognize and understand corporate culture differences within the 

partners’ organizations. This will help the new leadership team to 

effectively manage and communicate with the new organization. 

It is important to bring the new leadership team together, 

create a shared identity, vision and purpose, and then 

focus on communicating and sharing this with all levels of the 

new organization. 

Where the JV is a new organization, starting with a blank piece 

of paper can potentially avoid legacy issues and inefficiencies. 

However, designing and populating the organization will 

consequently be more time consuming, and there may well be 

protracted partner discussions as to the appropriate operating 

structure and candidates for the key leadership roles. Where part 

or all of the JV’s management is provided by the venturing partner, 

due consideration needs to be given to either the duration and 

type of secondment or the transfer of employment contracts and 

employer obligations. Where management secondments to the 

JV are in place, succession planning for key roles needs to be an 

integral part of the HR management processes. 

10 Coal seam gas: broadening the energy mix 

Design/harmonize business processes, 

technology and infrastructure 

Where the JV is a combination of existing assets, decisions will 

need to be made regarding whether there are overlapping assets in 

terms of office locations, information technology (IT) applications/ 

infrastructure and business processes. Where the JV businesses 

will operate relatively discretely from each other, this may be less 

of an issue — i.e., the combination of a sales and a production 

organization into a new JV may simply require that interface 

processes are put in place but the core processes, systems and 

office locations may remain unchanged. 

Where there is a need to integrate two vertically integrated 

businesses to realize synergies, certain issues will need to be 

addressed early in the JV operation phase. The combination of 

two vertically integrated organizations will result in a potential 

overlap in a number of areas: functional support (e.g., HR, finance, 

IT, legal, real estate management, procurement), IT applications/ 

infrastructure, office space, supply chain, suppliers and contractors. 

Such overlaps will need to be identified and plans put in place to 

rationalize the new organization and consolidate the overlaps. 

Where the JV is a new organization, however, all of these areas will 

need to be either developed or provided by the partners. Where 

the partners will be providing services to the new JV, contracts for 

the provision of these services and remuneration/consideration will 

need to be agreed upon, put in place and monitored. 

Creating the new JV 

management structure, 

policies, procedures and 

culture will be critical to the 

JV’s success.

Meeting partners’ financial and tax 

reporting requirements 

The JV partners are likely to have different reporting requirements 

and time frames for fiscal and tax reporting. The JV partners 

may also have Sarbanes-Oxley, IFRS or other regulatory 

reporting requirements that, even though they may not be 

specifically relevant or necessary for the JV itself, need to be 

taken into consideration. All of these requirements will need to be 

communicated to both the other JV partners and the JV itself. 

As previously mentioned, there may be key areas of the JV’s 

operation that may need to be subjected to additional assurance. 

This may take the form of a SSAE 16, JV partner right of audit or 

annual rolling audits with each of the JV partners taking turns to 

assure a specific process/output. 

A clear program of audit and reporting requirements, formats 

and timings will need to be agreed to and established. The timings 

of cash calls and distributions will also need to be carefully 

considered and agreed to in relation to the partners and the JV’s 

reporting timetable. 

Appropriate involvement of partners in 

decision-making process 

JV partners will need to establish clear rules for maintaining 

control over the strategic direction of the JV and over key 

operational decisions that will significantly impact the JV. However, 

they must allow the JV management enough freedom to manage 

the organization on a day-to-day basis and not be weighed down by 

an overly bureaucratic and cumbersome decision-making process. 

This can be a difficult balance, and there will need to be a clear and 

well-understood delegation of authority between the JV partners 

and JV management. 

The JV partners need to establish a regular series of governance 

oversight meetings with both the JV management team and 

with each other to monitor progress, track performance against 

strategic goals and review and update the agreed upon strategy. 

Partner capital management 

Where the JV receives capital funding from the partners in terms of 

either capital injection or assets, there needs to be a clear plan for 

the proposed timings and values of the partner capital investment 

in the JV and proposed timings for capital repayments. 

The capital repayment obligations need to be carefully evaluated 

against the cash flow projections for the JV to ensure that they are 

realistic and achievable. 


New US federal income tax laws 

may affect the US oil and gas sector 

Proposed US federal income tax legislation 

may have a negative impact on the industry 

(including JV transactions within the US oil 

and gas industry) 

The US Government’s proposed budget for fiscal year 2012 

(Proposed Budget) includes the proposed repeal of certain 

federal income tax incentives currently available to certain 

oil and gas companies. On February 14, 2011, the Obama 

Administration released its Proposed Budget, which incorporated 

a number of provisions that, if enacted, would significantly affect 

the US oil and gas industry, and could dramatically affect JV 

transactions within the US oil and gas industry. In part, these 

provisions would: 

• Repeal expensing of intangible drilling and development costs 

• Repeal percentage depletion for oil and natural gas wells 

• Repeal the domestic manufacturing deduction for oil and 

natural gas companies 

• Increase the geological and geophysical amortization period 

for independent producers to seven years 

• Repeal the exception to passive loss limitations for working 

interests in oil and natural gas properties 

In addition to provisions that would directly affect the US oil and 

gas industry, the Proposed Budget includes certain provisions 

that, if enacted or eliminated, may have a negative impact on the 

financial condition and results of operations of certain oil and gas 

companies, including, in part, the reinstatement of the Superfund 

taxes, repeal of the last-in/first-out method of accounting for 

inventories, modification of the rules for dual-capacity taxpayers 

and certain other international reform measures. 


As many of the aforementioned incentives currently available 

to investments in US oil and gas plays play an integral role in 

a project’s overall return, the repeal of all or a portion of the 

incentives could dramatically impact JV transactions within the 

US oil and gas industry. The US oil and gas industry was on the 

defensive for the better part of the 111th Congress, fighting 

numerous congressional attempts to eliminate tax provisions 

that benefit the industry in order to offset the cost of other 

provisions. Although the repeal of such measures has not 

been provided for in recent legislation, the situation requires 

continued monitoring to determine whether such proposals may 

be included in future legislation. 

New bonus depreciation provisions 

aim to spur growth by encouraging 

capital investment 

On December 17, 2010, President Obama signed into 

law H.R. 4853, the Tax Relief, Unemployment Insurance 

Reauthorization, and Job Creation Act of 2010 (the Act). 

Although it affects all industries, the Act generally extends and 

modifies the bonus depreciation provision under Section 168(k) 

of the Internal Revenue Code of 1986, as amended (the Code), 

and provides for the temporary 100% expensing of certain 

qualifying capital expenditures. These provisions have — and will 

continue to have — a significant effect on the capital–intensive 

US oil and gas industry. The Act adds Section 168(k)(5) to the 

Code, under which certain taxpayers may qualify for a first-year, 

bonus depreciation percentage of 100% — effectively allowing 

immediate expensing — with respect to qualified property if certain 

requirements are met. The Act also extended the application of 

the 50% bonus depreciation allowance for certain properties. 

It is expected that cost recovery incentives relating to bonus 

depreciation should accelerate plan and equipment purchases in 

2011 to take advantage of the 100% first-year bonus depreciation 

allowance. The changes should also provide some assurance to 

companies and act as a catalyst to spur growth by encouraging 

capital investment.

JV dissolution 

JV dissolution may be a planned milestone event 

when a certain JV goal has been achieved or it may 

be a response to circumstances. Either way, it should 

be an event that has been foreseen, the options 

considered and provision for it contained within the 

JV’s legal framework. 

There are a number of scenarios or options that the JV partners 

may have to consider. 

Sale to a third party 

This is perhaps the most straightforward of the options: the JV 

partners agree to sell the JV in its entirety to a third party. Where 

the JV is a stand-alone entity, the impact on the partners will be 

minimal. Where the JV has significant linkages into one or more of 

the JV partners’ businesses, it will be more complex. These linkages 

could involve the provision of certain services (e.g., technical 

support, research and development, IT) to the JV, or the JV could 

be integrated into the supply chains of one or more of the partners. 

The nature of the business relationships between the JV and the JV 

partners will need to be carefully assessed and planned for in the 

sale process to ensure that the sale does not damage either the JV 

partners’ businesses or the JV itself. 

Legal assistance will be needed in the sales process, as there will be 

a suite of documents to provide for the share sale and purchase, the 

transfer of obligations, possible renegotiation of the joint operating 

agreement, possible amendments to the finance agreements 

and an assignment of guarantees, support documentation, direct 

agreements and rights and obligations. 

Separation of the JV with a 

return of assets and business 

to the JV partners is 

potentially the most complex 

JV dissolution mechanism. 

Sale to one of the partners 

Sale to one of the partners is a common outcome with many JVs. 

Often the sale process is governed by a “Russian roulette” or a 

“Texas shoot-out” clause. A Russian roulette clause allows one 

JV partner to make an offer for another partner’s share of the 

business, but the partner that has received the offer may then 

purchase the other partner’s share under the same terms as those 

that were offered for the purchase of its share. A Texas shoot-out 

clause initiates a process where JV partners submit written sealed 

bids for the purchase of the JV and the highest bidder wins. 

Once again, consideration will need to be given to how integrated 

the JV is with the JV partners’ businesses and how ongoing 

relationships between them should be governed. 

Separation of organization with sharing of 

assets to partners 

Separation of the JV with a return of assets and business to the JV 

partners is potentially the most complex dissolution. The longer the 

JV has been operating, the more likely it is that there will have been 

a “blurring” of the JV partners’ original inputs. 

There will need to be discussions and subsequent agreement 

around which assets (people, technology, licenses and property) go 

to which partners, valuation of those assets, and the appropriate 

settlement mechanism. These are likely to be complex and 

time-consuming negotiations. Again, where the businesses are 

integrated within the partners’ businesses, the process will be more 

complex, and partners will need to consider the potential impact on 

their core businesses of reintegrating the JV’s assets back within 

their organizations. 

Consideration of this option should be part of the partner 

discussions, and provisions for how it would be managed should be 

contained within the JV agreement if there is more than a remote 

likelihood that this is a potential dissolution scenario. 


Summary 


JVs are an inherent part of the oil and gas industry and are likely to remain so for the 

foreseeable future. When managed well, they can deliver real value to all stakeholders. 

However, when things go wrong, they have the potential to destroy shareholder value, 

with arbitration and legal proceedings being a costly, time-consuming distraction for the 

management of both the JV and the partners. 

There are a number of critical success factors for JVs: 

• Transparency, openness and honesty between the partners 

• Thorough financial and tax planning 

• Consideration of all potential dissolution scenarios 

• A robust legal agreement that contains provision for all of the above

Ernst & Young’s JV services 

Ernst & Young has significant experience supporting 

JVs throughout the JV lifecycle. An overview 

of the services we provide in each of the phases 

is contained below: 

JV planning Ernst & Young services 

Defining the scope 

of the JV 

Commercial analysis 

of the JV 

Defining the legal and 

financial structure 

Defining the business 

strategy and plan 

Partner identification 

and selection 

Financial, operational, commercial and tax 

due diligence 

Valuation 

Financial and business modeling 

Financial, commercial and tax due diligence 

Tax structuring 

Supply chain optimization 

Organization and governance 

Financial and business modeling 

Transaction integration 

Dispute advisory expertise with regard 

to clarity of business plan 

Coordination of the partner 

selection process 


Detailed location 

planning 

Market risk and quantitative 

advisory services 

Financing of the JV Debt advisory 

Capital markets advisory 

International tax structuring 

Financial reporting Financial reporting and IT advisory 

for the JV 

Statutory audit and reporting 

Tax compliance and advisory 

SOX/J-SOX*/internal controls advisory 

Management of legacy Environmental, financial, tax and human 

risk issues 

resources due diligence and advisory 

Dispute settling 

mechanism 

Dispute advisory 

Dissolution options Transaction carve-out services 

Transaction integration services 

Environmental, financial, tax and human 

resources due diligence and advisory 

Implementation of a 

partner review process 

*Japan’s Sarbanes-Oxley 

Internal audit 

Risk advisory 


Ernst & Young’s JV services (continued) 


Organization design Organization design advisory 

Governance advisory 

Risk advisory 

Design/harmonize Post-deal integration 

business processes, Supply chain and tax efficiency 

technology and 

Shared services planning 

infrastructure 

Finance transformation and consolidation 

Performance management 

IT effectiveness 

Cost reduction 

Meeting partners’ Financial reporting advisory 

financial and tax 

Tax advisory 

reporting requirements 

IT design 

Risk advisory 

SOX/J-SOX* advisory 

Appropriate involvement Risk advisory 

of partners in decision- Governance advisory 

making process 

Internal audit outsourcing 

Partner capital 

Debt advisory 

management 

Capital markets advisory 

*Japan’s Sarbanes-Oxley 



Sale to third party Valuation 

Investigations and dispute monitoring 

Environmental, financial, tax, operational 

and human resources due diligence 

and advisory 

Transaction carve-out service 

Sale to one of the Valuation 

partners 

Investigations and dispute monitoring 





Transaction carve-out services 

Separation of 

Valuation 

organization with sharing Investigations and dispute monitoring 

of assets to partners 





Transaction carve-out services


Ernst & Young’s Global Oil & Gas Center contacts: 

For more information about our service lines and our principal oil and gas-focused service 

offerings, please contact the below-referenced individuals, or your local Ernst & Young office. 

Dale Nijoka 

Global Oil & Gas Leader 

+1 713 750 1551 

dale.nijoka@ey.com 

Marcela Donadio 

Americas 

+1 713 750 1276 

marcela.donadio@ey.com 

Enrique Grotz 

Argentina 

+54 11 4515 2655 

enrique.grotz@ar.ey.com 

Russell Curtin 

Australia 

+61 8 9429 2424 

russell.curtin@au.ey.com 

Carlos Assis 

Brazil 

+55 21 2109 1606 

carlos.assis@br.ey.com 

Barry Munro 

Canada 

+1 403 206 5017 

barry.g.munro@ca.ey.com 

Raymond Ng 

China 

+86 10 5815 3332 

raymond.ng@cn.ey.com 

Sanjeev Gupta 

Asia-Pacific 

+65 6309 8688 

sanjeev-a.gupta@sg.ey.com 

John Avaldsnes 

Europe, Middle East, India and Africa (EMEIA) 

+47 51 70 67 40 

john.avaldsnes@no.ey.com 

David Barringer 

Middle East 

+973 3961 7303 

david.barringer@bh.ey.com 

Jeff Sluijter 

Netherlands 

+31 88 407 8710 

jeff.sluijter@nl.ey.com 

Alexey Loza 

Russia/CIS 

+7 495 641 2945 

alexey.loza@ru.ey.com 

James Newlands 

South Africa 

+27 21 443 0489 

james.newlands@za.ey.com 

Andy Brogan 

United Kingdom 

+44 20 7951 7009 

abrogan@uk.ey.com 

Ernst & Young 

Assurance | Tax | Transactions | Advisory 

About Ernst & Young 

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assurance, tax, transaction and advisory 

services. Worldwide, our 141,000 people 

are united by our shared values and an 

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How Ernst & Young’s Global Oil & Gas 

Center can help your business 

The oil and gas industry is constantly 

changing. Increasingly uncertain energy 

policies, geopolitical complexities, cost 

management and climate change all present 

significant challenges. Ernst & Young’s 

Global Oil & Gas Center supports a 

global practice of over 8,000 oil and gas 

professionals with technical experience in 

providing assurance, tax, transaction and 

advisory services across the upstream, 

midstream, downstream and oilfield service 

sub-sectors. The Center works to anticipate 

market trends, execute the mobility of our 

global resources and articulate points of 

view on relevant key industry issues. With 

our deep industry focus, we can help your 

organization drive down costs and compete 

more effectively to achieve its potential. 

© 2011 EYGM Limited. 

All Rights Reserved. 

EYG no. DW0101 

1106-1264588 

This publication contains information in summary form 

and is therefore intended for general guidance only. It 

is not intended to be a substitute for detailed research 

or the exercise of professional judgment. Neither EYGM 

Limited nor any other member of the global Ernst & Young 

organization can accept any responsibility for loss 

occasioned to any person acting or refraining from 

action as a result of any material in this publication. On 

any specific matter, reference should be made to the 

appropriate advisor. 

www.ey.com/oilandgas

Navigating joint ventures in the oil and gas industry

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