Negotiations play a pivotal role in the oil and gas sector – whether it’s agreeing the acquisition price for an asset or brokering the terms of an upstream contract or licence, the economic value can live or die on effective negotiation.
With negotiations experience counts. Success depends on the integration of technical, commercial and legal disciplines, and very few people in the industry transcend the full range. Although technical understanding of the opportunity is at the very heart of the matter, most technical managers are not experts in negotiations. That’s simply because they don’t get all that much practice – most will only occasionally get involved in negotiations once or twice in their careers.
At Rockflow we defy the average. Most of us have 30 plus years’ industry experience and have had direct involvement in negotiations. As a team we are often called upon to assist clients in negotiations, whether that’s assisting with PSC contracts, oilfield service contracts, commercial deals, or resolving all manner of commercial disputes. When negotiations fail, we also have vital experience in Expert Determination, and act as Expert Witnesses in arbitration and litigation.
We’ve learned that effective negotiation is both an art and a science. While you can’t turn the entire process into a formula, there are some key principles that can tip the scales in your favour, and this is often a matter of knowing which questions to ask:
1. Are we strategically aligned as an organisation?
Before you enter any negotiation, you want to know what the boundaries of a successful negotiation are, what are your alternatives and their consequences, and whether your organisation is aligned on these points. You don’t want to spend time and effort on a deal that won’t be finalised because it no longer fits with the wider commercial strategy.
A well-defined strategy will give you direction on which objectives to pursue, and, equally importantly, which outcomes to avoid. To do this effectively you’ll need to understand where value and risk intersect, and how a good agreement will enhance your value chain – you don’t want to buy a great asset but be without the capital to invest in it. You need to know what to say no to.
These boundaries help mitigate our unconscious bias. Often, we are judged by getting a deal done rather than walking away and this personal victory combined with sunk cost fallacy of money and effort spent to get to the negotiating table can often result in getting a deal done despite no longer being a strategic fit for the company.
2. What will be the most compelling value proposition?
How you present your proposal matters. We talk about win-win deals, but there are always some asymmetric aspects that will be seen as win-lose. Without skewing or being selective with the data, you want to highlight how what you propose is a good opportunity for both parties to the deal.
At the heart of negotiation is a strong technical understanding of the data. Both parties will have done their homework, and come to the table with their expectations. Based on the data they will have their point of view. You will have yours. There are likely to be differences, and those differences create the negotiation space that you must successfully close.
Rather than simply trying to rebuff the analysis of the other party, it is vital to consider the context and the other party’s objectives and perspectives. Effective framing can influence the negotiation process. I often think of myself metaphorically walking around the poker table looking at everyone’s cards to see what the outcome could be. Put yourself in their shoes—what can you offer that meets their goals without compromising your own?
If you can do this effectively, you can present a case that is a value creating opportunity for the other party, rather than as a value compromise.
3. Have we defined the negotiation space?
The “Zone of Potential Agreement” (ZOPA) is where the positions of negotiating parties overlap. This represents the range within which a deal can be reached. If you can’t meet in the ZOPA, the deal will fail. A seller won’t sell, or a buyer won’t buy.
However, within this range, you don’t necessarily want to aim for the middle. In a simple price haggle, this is a common outcome, but upstream deals are far more complex than that. In an uncertain world, there are many dimensions that trade off value creation with risk mitigation. It is the asymmetry in the different parties’ capacity for risk that offers the potential for one side or the other to capture value in return for carrying more risk.
The complex interactions of the terms of a PSC are a good example. A lower rate of tax, for instance, is not a loss for a government if it results in more investment and ultimately a bigger pie to share. An “R factor” in a PSC is a mechanism for the government to capture the upside when oil prices are high, yet provide protection for the Contractor when prices fall.
Understanding the price that the other party will accept is also important. There is no point in bidding at a higher price than the other party is willing to trade at – yes you may be the winning bidder, but you may have left too much value on the table. This is the zero sum part of a deal. For instance, understanding that you are the only buyer in the market gives you more negotiation leverage and you should be trying to get the seller down to the base threshold of what they’re prepared to sell for.
Again, you also need to put yourself in the shoes of the other party – What is their motivation for selling? Why are they interested? Is it a test of the market or a fire sale? What is their priority and where would they be prepared to make tradeoffs?
4. Have we identified all the parts of the process that matter?
If you were to strip out all of the details of the asset from the negotiation, and simply focus on the process, do you know what the rules of the game are and how that will factor into your approach?
Understanding the process will help you structure the bid. Some elements ought to be nailed down – how you will structure the conversation, involve stakeholders and manage deadlines. All of this – especially the timeline, and how long you have to look at the data and ask questions – can impact the outcome.
Similarly, if you’re doing a licence round, you’ll need to know what the host government’s priorities are. Are you competing on your minimum work programme or on your signature bonus? How important is local content or technology transfer? How will the bids be judged?
Usually the government will have multiple complex objectives and the winning bid will need to create the most attractive combination of investment promise and potential tax revenue – while at the same time leaving your company with an attractive economic proposition to invest in.
5. Are we asking the right questions of the fundamental analytics?
Not all data is equal. Every buyer looks at the data that’s available to them, but you need to understand which data moves the value of the assets.
For example, let’s say you’re a buyer entering a data room that has large amounts of well data but limited seismic interpretations. But you’ve done your homework and you know that:
- a) All that well data in the ageing shallow oilfield doesn’t move the needle much for the value of the asset.
- b) The seismic is where the greatest uncertainties lie – the deeper prospectivity in the unexplored thrust belt.
- c) The imaging and depth conversion of the seismic has the largest potential to swing the value.
If you go in armed with this information, you’ll be able to focus your attention to the areas of the highest value, and not necessarily most data.
So ask yourself: What are the biggest opportunities and risks for the asset? How do you capture or mitigate them? Have you structured the commercial metrics to maximise value and mitigate the technical risks? For more on how to analyse data when facing a negotiation, see our article on how upstream oil and gas companies can navigate disagreement.
6. Have you taken human psychology into account?
So much has been written about the psychology of the deal, and human motives and behaviours, we can’t possibly cover it all here, but more than anything else, the best negotiators are the ones who pay careful attention to the motives, incentives, priorities and frailties of their counterparty.
How you handle the counterparty, and yourself, is critical for overcoming entrenched positions, objections and misunderstandings that could break a deal. This is particularly true when you are negotiating your way out of commercial or potentially legal disputes. To paraphrase Sun Tzu: “Know thyself, and know thy counterparty”.
The Rockflow team is highly experienced at identifying data with the greatest uncertainties in terms of risk and value, and we can help you to concentrate your efforts where they count. So if you’re looking to get favourable terms on a tight deadline, take a look at our commercial, negotiation and dispute resolution services.
