Summary

A recent Gas Research Institute report details three previously unstudied aspects of alliances: specific measurable factors that improve alliance success, how a successful alliance should be structured, and when an alliance makes economic sense. For the purposes of this report, an alliance is defined by "technical process integration," which includes joint planning, execution and evaluation. Technical process integration shifts the definition of an alliance beyond a simple focus on the commercial terms. The most innovative tool to emerge from the report, the Alliance-Value model, addresses those aspects surrounding when an alliance makes economic sense.

The theory behind the Alliance-Value model is that the long-term viability of any drilling relationship hinges on its ability to create real value and achieve stability. Based upon the report's findings, the most effective way to form such an alliance is through a detailed description and integration of the technical processes involved. This new type of process-driven alliance is characterized by a value chain which links together a common set of technical processes, mutually defined bottom-line goals, and shared benefits.

Building a process-driven alliance requires time and people and therefore has an associated cost. The real value generated by an alliance must exceed this startup cost. The Alliance-Value model computes the net present value of the cash flows for four different operating arrangements:

  1. business as usual (conventional competitive bidding process),

  2. process-driven alliance (linking technical processes to accelerate production and reduce expenses),

  3. incentivized process-driven alliance (linked technical processes with performance incentives to promote stability), and

  4. no drill case (primarily used to gauge the market value of services).

These arrangements test different degrees of process integration between an operator and its suppliers. They can also help determine if the alliance can add enough value to exceed startup costs and if the relationship will be stable. Each partner can test the impact of the relational structure on its own profitability. When an alliance is warranted, all participants can benefit from real value generated in a stable relationship. However, relationships that focus on commercial terms, instead of on process linking, may be playing a zero-sum, no-win game.

Background and Statement of Problems

The Gas Research Institute (GRI) recently completed a study which investigates the link (if any) between drilling alliances and improved drilling performance. The study goal is to discover the circumstances in which alliances are most likely to increase the industry's total system efficiency, thereby increasing the viability of marginal reserves. If some degree of success were identified, the study was to focus on identifying the critical factors for success and determining the circumstances under which an alliance is warranted.

To answer these questions, the GRI study focused on three specific goals:1

  1. Identify the critical factors for alliance success. Where should drilling organizations focus efforts?

  2. Describe in detail how to form and operate successful drilling alliances. What is the "road map" to forming a process-driven alliance ?

  3. Determine when alliances make economic sense. When will these relationships most likely succeed?

The GRI report shows that, in the correct situation, properly executed alliances reduce drilling costs by 12% to 39%—even in mature areas. Of the 17 alliances studied in detail, however, only five could demonstrate quantified reductions in drilling costs; most of the alliances studied could not document improvements. In addition, the most successful alliances added value by improving technical processes; they used commercial terms only to provide stability to the relationship. These successful alliances can be termed process-driven alliances.

Critical success factors for the alliances were identified and analyzed, addressing goal one (see Appendix A). In addition, a process model was created to address goal (2), detailing the specific tasks necessary to create a successful alliance (see Appendix B). The most innovative tool to emerge from the study addressed the answer to question (3): When does an alliance relationship make economic sense?

The Alliance-Value model is that tool. It is based on current industry research and 53 interviews conducted by the GRI team. The purpose of this paper is to discuss the theory and practical application of this model.

Real Value and Stability: Theory Behind the Model

The long-term viability of any drilling relationship hinges on its ability to create real value and achieve stability. If the relationship does not add real value by either reducing system waste or loss increasing the value of production through acceleration, it cannot survive in the market. If it is not stable, at least one of the parties will choose to leave. These principles are termed the value chain and form the foundation for the Alliance-Value model.

Of the four findings in the GRI study, the most central is that "process definition and linking add demonstrable real value by reducing costs and accelerating production." In other words, the most effective way to form an alliance is through a detailed description and improvement of the technical processes involved. The organizations in the value chain are linked together with a common set of technical processes, mutually defined bottom-line goals, and shared benefits. Improving the technical process—not individual service designations—is the focus of the relationship.

To continue to succeed, the alliance must also be stable. All members must have incentives to remain in the relationship. If one party's profitability suffers as the result of the relationship, then the agreement will be unstable. Without stability, what appears to be an improvement may actually be only a shifting of profit from one partner to another.

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