Joint ventures (JVs) are an increasingly popular form of business partnership on renewable energy projects, and play an important role in the energy transition process. In this blog post, we consider the involvement of oil and gas majors as JV partners on renewable energy projects, the risks JV partnering can give rise to, and the steps that can be taken to mitigate them.
The context
The JV model allows businesses to tap into their collective resources, including funding, know-how, technology, network and knowledge of the local market. JVs typically take the form of a special purpose vehicle (the project company) which is incorporated to enter into the principal contracts for the project and own the resulting assets.
A number of oil and gas majors have announced ambitious plans to focus on renewable energy. In recent years, these players are forming some of the largest consortiums in the renewable energy sector, in some cases partnering with smaller partners brought in for strategic reasons – for example their technological expertise – or financial sponsors.
The majors are also able to leverage their own expertise to propel alternative renewable energy technologies. For example, the broad experience of offshore activity in deep water, harsh environment operations and floating structures, along with their access to vast funds, is spurring further growth in offshore wind farms.
Risks of JV partnering on renewable energy projects
While JV partnering presents clear benefits, interested parties should be aware of potential risks and mitigating measures. In the context of renewable energy projects, some of the key risks to consider are as follows:
- Renewable energy projects often involve novel and innovative technology and processes (see our blog post on this topic), which will likely be the result of significant capital expenditure. The treatment and protection of intellectual property (IP) is therefore a crucial consideration. The JV agreement should clearly address issues such as the retention of ownership of pre-existing IP, the support services to be supplied in relation to technology, the scope of ownership of IP advancements during the course of the project, whether the IP rights expand to use of technology in potential expansions of the project and the specific steps to be taken at the end of the project (or on termination of the JV) in relation to ownership of IP and return of confidential information.
- Disputes can arise between JV partners absent a clear allocation of risk and delineation of responsibilities in connection with the project’s scope of work. This is particularly relevant on renewable energy projects, where untested technology may increase the risk of cost overruns and delay. Setting out rights and obligations clearly in the JV agreement, as well as efficient expert referral and dispute resolution mechanisms, can go some way to mitigate this risk.
- It is common on renewable energy projects for one of the JV partners (or an affiliated company) to be a supplier, operator and/or contractor on the project, particularly where it provides the technology. Where this is the case, a conflict may arise, for example if the contractor’s works cause delay to project completion and delay damages need to be triggered. Accordingly, the JV’s decisions need to be carefully managed, eg via the use of a non-conflicted JV committee and/or an efficient deadlock resolution mechanism. The dual role of a JV partner also leads to questions on whether the interests in the JV and the other roles undertaken in the project could be transferred separately or should be transferred together after a certain lock-up period.
- Where there is a significant disparity in the financial firepower of the JV partners, the JV agreement must clearly set out the mechanism for funding, and (if relevant) the recovery of payments made by one partner (often the partner with deeper pockets) on behalf of the JV. This could be, by way of example, a payment made by a JV partner pursuant to a guarantee or other form of security provided to a third party project participant. Where there is the potential for asymmetric funding of the JV, parties may want to consider including anti-dilution protections in the JV agreement, such as catch-up rights.
- It is common in the renewables sector for state-owned/affiliated entities to partner with private companies or financial sponsors. In some jurisdictions the state entity may be required to obtain internal/governmental approvals beyond those that would normally be required by a private company, for example before agreeing to an arbitration clause or agreeing to a settlement proposed between the JV and a project party. Time should be built into the process to allow for this. Parties should also be aware that decision making by state entities has the potential to be impacted by political considerations, which can change over time (for an example of this, see our blog post on government incentives).
Conclusion
While the exact pace and magnitude of effort required for the energy transition is hard to measure, the end goal of a low-carbon energy system is certain. Oil and gas companies’ dedication to the energy transition through the diversification of their investment portfolios marks an important step to addressing climate change. JV partnering may well be key to unlocking more of this potential.
This is part of a series of blog posts exploring the potential impacts of energy transition and climate change on global projects. Click here to see other posts in the series.
