When Do Drilling Alliances Add Value? The Alliance-Value Model

Abstract

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.