Opportunities and Perils in Green-Black Alliances
Oil and natural gas are hot. In fact, they are far hotter than renewables, as much as we would like to have otherwise. Instead of complaining about this situation, however, wise biomass companies should be looking at ways to make lemonade. Working with an oil or natural gas company to deploy your technology could provide a number of benefits, including more rapid commercialization and access to capital and expertise. Heresy? Perhaps, but some might also call it a wise strategy to survive and thrive.
Examples of the aforementioned include LanzaTech’s agreements with BaoSteel and Petronas; Gevo’s offtake with Total; Flint Hills and SG Biofuels; Benefuel and Edeniq and Synthetic Genomics and Exxon Mobil. Other examples include companies using biobased processes to clean up fracking waste water, and utilizing flared natural gas to produce fertilizer for agricultural uses. Before booking that plane ticket to Houston or Williston, N.D., however, plan your joint venture with Big Oil carefully.
In any joint venture, who controls it is one of the first issues discussed. Usually, but not always, it is dictated by which party brings the most cash or other assets to the JV. Control encompasses who is on the board, staffs key officer positions, has the power to fire and hire management, and decides what happens if there is a major disagreement as well as how to add a new party to the JV.
Closely connected to control are partnership contributions to the JV. Cash, intellectual property, hard assets such as equipment, plant assets, management time and the always popular, “assets to be named later,” are normal contributions to a JV. Parties that contribute hard assets—ones that can be readily valued by an accountant—will usually try to value those assets more than soft assets such as patents, unpatented intellectual property, licenses, and management time. Usually, this puts the small partner— such as your biomass company—at a disadvantage. Be sure to have a good rationale for why your soft assets are just as, if not more, valuable to the future success of the JV, than their old, already-paid-for hard assets. What if the JV needs more money? Are the partners required to contribute additional cash? If so, what amounts? What happens if one party cannot or does not contribute?
Next up is division of the spoils, usually a direct reflection of the contributions of each partner. However, sometimes one party has interests beyond their share of any revenue, such as tax credits, depreciation allowances or even non-financial benefits. Valuing ongoing contributions to the JV, such as a management agreement, can also make this more complicated.
What happens after the JV is signed and your big oil partner wants to find another young biomass company to support? What if you find another, more suitable partner? Can either party be part of a competitive business? What if the partners have already discussed similar opportunities with others before the JV is formed? How will past opportunities be handled— through each company, or through the JV?
What about intellectual property, especially jointly developed IP? Usually the largest contribution by a biomass company to a Big Oil/small biomass JV, IP needs to be handled appropriately to preserve the value of the IP brought to the JV, but also to enable to JV to commercialize the jointly-developed IP.
For a biomass company, teaming up with a Big Oil or natural gas company can create many opportunities. When deciding to sleep with the enemy, however, it is critically important to honestly address the above issues up front, because while teaming with a powerful company can be exciting, it can be dangerous.
Author: Todd Taylor
Attorney, Fredrikson & Byron
612 492 7355