Strategic Alliances: Managing Risks, Sharing Rewards
Authors: Imana Jose Luis , Podowski John , Stegemeier Dave 
Published: December 2007

Abstract
This paper presents an examination of the beneficial effects of aligned-interest alliances on overall project risk. Case studies in drilling and completion services demonstrate how alliances mitigate the risk of project cost overruns through joint planning, superior communication, and a clear understanding of work processes. Successful alliances emphasize common project goals and allow management responsibility for specific well operations and their inherent risks to be passed to the party with the most experience and knowledge.
A distinction is made between project risks (cost, schedule, safety, wellbore integrity) which may be assumed or shared by suppliers and project uncertainties (reserves, oil prices, weather) which should remain with the operator. As with any commercial transaction, prices for services must be linked to the terms under which they are offered. Typically, alliance contracts include bonus and penalty mechanisms. Other alternatives are also discussed. The risk- and reward-sharing characteristics of typical bonus/penalty contract provisions are examined and presented in detail.

Introduction
An alliance as defined in this paper is a long-term relationship, founded on mutual trust and commitment, between a service company and an operating company. The focus is on providing benefits for both parties and may include sharing risks and rewards. The cornerstone of any strategic alliance is open communication, which helps lead to a spirit of teamwork among participants.
The term "alliance" is used broadly to describe a variety of relationships. In the context of this paper. however, the term "alliance" refers to substantially increased involvement of contractors in project management roles, such as (1) lead-services contractors or (2) project-well engineering coordinators, during well construction (including drilling and completion), production enhancement, and production maintenance. Such alliances are based on the belief that by combining resources during these phases, operators and service companies can both be more successful.
Formation of aligned interests and achieving a better understanding of the factors that drive additional costs into the suppliers' system are two ways to enhance a relationship beyond that of a traditional arrangement. An essential component of these arrangements is to ensure that all involved parties have a complete understanding of the total system cost as opposed to the price of individual products and services. In addition, a variety of incentive options can be implemented to further optimize revenue, and performance should be measured to help ensure continuous improvement.
The most common types of commercial options available within an alliance approach include the following:–Lump sum-a fixed price is paid to the contractor. This option ensures project cost certainty but does little to align contractor and operator interests in long-term operating efficiency.–Incentive/penalty payments-in addition to the price of the job, an incentive is paid to the contractor if the contractor finishes ahead of the original goal, or the contractor pays the operator a penalty amount if the contractor fails to achieve the original goal. This option aligns operator and contractor interests and encourages a team effort. Project success depends on the activities of all parties.–Payment-related-to-production - the contractor is paid a per-barrel sum based on incremental production. This option aligns operator and contractor interests and provides a form of contractor financing.
P. 421