The deal was supposed to happen in December. Then came the warnings it might be delayed into the new year. Now, Cenovus Energy Inc. says it has no date for wrapping up an oil sands transaction that could bring in, bankers estimate, $1-billion to $3-billion.
Yet to those who have worked through the kind of complicated joint venture deal Cenovus is contemplating, the delay is no surprise. The company wants to sell off a partial interest in some of its oil sands holdings, and says it has extended the process because it has engendered so much interest.
Joint ventures have become the most popular channel for new dollars to flow into the Canadian oil patch today. The past few years have seen a torrent of these deals, as Chinese, South Korean, Japanese, Malaysian and other overseas investors spend billions to lock up parts of the West's enormous reserves of oil and gas.
They can, however, be enormously complicated – so much so that they don't always work. Last year, for example, Encana Corp. announced it had been unable to complete a $5.4-billion deal with PetroChina that would have formed the largest Chinese energy investment in North America. And while people close to that deal suggested it had more to do with business than legal reasons, its failure illustrates how things can fall apart in negotiations of intense complexity.
"Joint venture deals have been the unmaking of any CEO I've ever met," one banker said. "You're talking about establishing a 30-year relationship. And those relationships aren't as simple as 'I love you and you love me.' We have input costs, capex, governance deadlocks. These are a nightmare."
One important aspect is to structure clear decision-making. "These projects are so big that stalemate isn't usually an acceptable result," said John Cuthbertson, a Calgary lawyer with Burnet Duckworth & Palmer, who has worked on a number of joint ventures.
Deals have a habit of producing reams of paperwork, and marathon negotiating sessions. The deal between BP PLC and Husky Energy Inc., which set out joint work on both an oil sands project and a refinery, fills up a linear foot worth of paper. Mr. Cuthbertson remembers a 48-hour sleepless negotiating session in the days before the Penn West Petroleum Ltd. deal with China Investment Corp. was announced.
"I thought, 'What are we going to do here if we have some horrible screw-up?'" Mr. Cuthbertson said. "You never want a doctor operating on you when they've been up for 24 hours. I kept thinking about that."
The teams got through, without major incident, on "lots of coffee and lots of adrenaline."
Joint ventures are not, of course, new to the industry. Complicated agreements underlie numerous major energy undertakings, including oil sands miner Syncrude Canada Ltd., which is split between seven owners; Albian Sands Energy Inc., owned by European and U.S. supermajors, and offshore platforms like Hibernia.
What's new is the volume of such deals. Faced with enormous new reserves, in both the oil sands and the huge natural gas fields of northeastern British Columbia, Canadian companies are turning to major overseas partners to share the risk and provide capital to speed development. Joint ventures also allow some buyers, such as state-owned Chinese enterprises, to get in without triggering the concern stoked by outright takeovers.
But a good financing model can easily turn into torment.
"When you're spending as much money as this and it's going to be such a long-term arrangement, you pay more attention to the details than you do on a $100,000 deal," said Rob Desbarats, an Osler lawyer who has worked on deals between Nexen Inc. and Japan's Impex; Talisman Inc. and South Africa's Sasol Ltd.; and Penn West and CIC.
The complications are legion, and have to do with the multitude of individual agreements stuffed into a typical joint venture. Often, the money flows in a combination of cash and a "carry," which sees the buyer pay a large portion of future work costs. For tax reasons, some set up corporate partnerships. Joint operating agreements, which stipulate how money and decisions flow, are especially complicated, because they often govern many years of work – and because there isn't yet a standard form for such arrangements.
Other tricky questions, especially difficult when one partner doesn't have much of a presence in Canada: Who will process the gas or crude and then sell the physical commodities? Cultural differences don't help, either. Those who have negotiated deals tell of stories where foreign partners quibble over dollar amounts that are rounding errors in huge deals.
But those who have done the deals say it's worth spending the time to hammer them out, even if that means negotiations stretch across many months.
"You can either invest a whole bunch of time up-front establishing alignment and values – and in some cases, a cultural alignment on the issues – or you can pay later, either by your deal not happening or taking much longer," said Keith Luft, general counsel at Penn West. "It's fundamentally different than an acquisition."