Critical Risk Factors of Joint Venture Projects in the Oil and Gas Industry

The Oil and Gas (O&G) industry is one of the riskiest, most dynamic and challenging industries and plays a vital role in every nation’s economy. Like any other major industry, O&G is exposed to a host of both predictable and unpredictable risks. Joint venture projects (JVP) are often regarded as a risky business as there is a high failure rate among them because of the complexities involved. This paper aims to identify the critical risk factors (CRFs) of JVPs for O&G between Malaysia and Thailand. Via systematic literature review (SLR) the risk factors for O&G and JVPs around the globe are identified and a set o f questions relating to them were designed and used in a p ilot study. A total o f 15 respondents from different background e xperiences w orking i n O &G JVPs were requested t o a nswer t he designed questionnaire during the pilot study. The questionnaire survey passed the required Cronbach Alpha value of 0.6 with a score of 0.98. The data collected involved 170 respondents currently working or have worked in O&G JVPs. The relative importance index (RII) for each risk factor’s (RF) value was quantified and the RFs ranked based on the value. A RII value exceeding 60% is considered to have agreement and of importance to the respondents. The RII value can be used as an indicator to rank the RFs from the most to the least critical. The CRF categories determined in this study are environmental, cultural and social, and organisation. Under environmental, the main CRFs are losses due to fluctuations in exchange rates/interest rates. For cultural and social, the main CRFs are problems associated with cultural differences and cooperation. Organisational issues related to organisational fit, incompetent project management team, difficulty in finding and keeping skilled workers, and low worker productivity. All the listed RFs underwent a comprehensive study on their impact and probability of occurrence to determine the best processes, methods, and tools for managing the risks. It is recommended that key players in the O&G industry consider all the RFs of JVPs during the risk management evaluation stage.


INTRODUCTION
The earliest recorded oil find in Malaysia was made in July 1882 by the British Resident of the Baram region in Sarawak. Actual exploitation of the oil business in Malaysia began in 1910 when the Anglo-Saxon company received the rights for petroleum exploration from Sarawak Shell in the town of Miri. Oil exploration in Miri was the beginning of the route and there are still vast land areas that remain untapped and unexploited as the focus is in the oceans and the high potential of the seas. In 1954, marine exploitation research was carried out and offshore petroleum upgraded and successfully improved. In 1962, the first oil exploration was reported in Sarawak and later in Peninsular Malaysia.
In 1974, Petroliam Nasional Bhd (PETRONAS) was officially formed and the Petroleum Development Act (PDA) announced to secure the national reserves after the oil embargo in 1973. PETRONAS is entirely possessed by the Government to secure all the oil and gas reserves of the country and to find more resources for exploitation. O&G is the foundation of the Malaysian economy and PETRONAS plays a significant role in its development. Malaysia has the 25th largest oil reserves and the 14th largest gas reserves in the world (Jin, Kar Ong & Teh Chi-Chang 2013). One example of a JVP in oil exploitation is that between Malaysia and Thailand involving a memorandum of understanding (MOU) signed between the two governments in 1979 on the exploration of gas reserves in disputed areas. This mutual commitment was started by the agreement (Malaysia-Thailand Official Joint Authority 2019).
The number of studies on O&G JVPs is limited and there is not enough data regarding them and their risk factors. The few studies done have shown the low success rates and failures due to high costs and lack of commitment by stakeholders (Bamford et al. 2004). According to a KPMG (2011) report, even though JVPs create significant opportunities in the O&G industry to acquire their strategic goals, 80% of them ended in failure. Problems in the O&G industry also impacted several other industries due to supply needs. Therefore, this paper aims to investigate the CRFs of JVPs in the O&G industry as a means to help them achieve their goals. The findings of this research can be used to effectively and efficiently plan and establish similar cases in other regions and with other JVPs.

OIL AND GAS INDUSTRY AND THE RISK FACTORS (RFS) OF JOINT VENTURE PROJECTS (JVP)
The purpose of JVPs is to take advantage of the political, social, and economic conditions of a country in boosting the O&G industry to achieve higher income levels. Adnan (2014) found that 52% of oil companies plan to establish new JVPs in the near future. Although the number of JVPs in operation is considered high, their success rates do not exceed 55% within two decades (Bamford et al. 2004).
International companies are keen to sign JVPs with Malaysian companies because of the nation's political stability, economic growth, moderately low cost of labour, and other resources (Adnan 2014). The complexities of O&G companies are all-encompassing and have various social, political, and technical ramifications. There is a strong and constant demand for the products of O&G companies worldwide. The number of JVPs in O&G has been expanding because of new potential resources and unknown reserves. The industry needs significant investments and strategies for risk identification and management.

Market
Technological/Operational Risks constituting the market RFs. This shows that studies on RFs related to O&G and JVPs are important in order to identify and manage such issues properly and to achieve business success.

RESULTS AND DISCUSSION
The pilot study involved 15 SMEs in the O&G industry that have experience working in JVPs. Based on the pilot study, the Cronbach Alpha is 0.98, indicating that the designed questionnaires have high internal consistency in data set and reliable for actual data collection. A total of 183 questionnaires were distributed through a web-based survey and on-site distribution to get opinion-based feedback on the listed RFs as to whether they are suitable or not for JVPs in the O&G industry. A total of 170 completed responses were received with 20% of the respondents having more than 11 years of experience in O&G and numerous JVPs. All the listed RFs have RII values of more than 60% indicating that all are agreed upon and considered important by the respondents as mentioned earlier in subsection III.
To select the most CRFs for each of the nine categories of the JVPs in the O&G industry, only RII which recorded more than 80.0 were selected following the suggestion by Poh (2016). For the financial RF category, the main CRF is losses due to fluctuations in exchange rates/interest rates. Under the political category, two RFs are considered critical, namely bureaucracy and policy changes. For the management RF category, only one RF was defined as necessary, that is, inappropriate project feasibility study. Four RFs figured under organisation, namely, organisational fit, incompetent project management team, difficulty in finding and keeping skilled workers, and low productivity of workers.
Consequently, the average RII value for each category was quantified and ranked. The most CRF category is environmental with an average RII value of 79.72% thus supporting the results of (Cort 2014; Vallner 2015; Li 2017) and in line with current global concerns over sustainable development. The second CRF category is cultural and social followed by organisation, technological and operational, management, political, and financial categories.

CONCLUSION
To conclude, the O&G industry is unique and risky. The involvement of many parties and complexity of the industry make JVPs in the O&G sector riskier. As risk is defined as a probability of an event and its consequences, the RFs should be identified to ensure that all necessary process, methods and tools for managing CRFs are addressed as part of the risk management practice. In this paper, 79 RFs were identified via SLR and used in the development of a survey questionnaire. At a value of more than 60%, all the responses to the RFs questions in the survey agreed on the importance of the RII. The RFs were ranked from the most to the least critical based on the calculated RII value. The ranking shows that the environmental category is the highest CRF owing mainly to greater awareness of sustainable development issues. Key players interested in JVPs in the O&G industry should consider these RFs as part of their risk management activity. As for further research, the effects of these CRFs should be examined and the probability of their occurrence determined to better capture their importance and role in the overall risk management scenario.