Friday, May 25, 2012

A Day in Ras Laffan


Today's post will be neither about legal nor about finance issues. Instead, I would like to tell you a short story of my recent visit of Qatargas' Raz Laffan LNG gas production facilities in Qatar which was part of my HEC EMBA Major in Energy in Doha this week.


It is Tuesday, May 21 2012. A few minutes past 12 am, I find myself in a small bus driving from Doha 60 km to the north. After leaving Doha, the landscape becomes desert. In the bus, it is getting hotter and hotter. Admittedly, the bus is old; and the air conditioning system is simply not strong enough to counter the 46 degree Celsius outside.

At 1.25 pm we arrive at a first security check. Actually, this check point resembles more a highway paying office than a factory gate. This first security check takes about half an hour. 4-5 security officers discuss and count our group. Formulas change hands. This procedure is repeated several times.

Once in the facilities, the first excess-gas burning towers start appearing. Along the road, I can see 10 huge pipes. Their labeling is clear: These pipes transport seawater for cooling purposes.

Qatargas Operating Company

At 2.20 pm, we finally arrive in front of a beige building. On top of the 5 or 6 floors, I can read “Qatargas Operating Company”. This is the Qatar Petroleum subsidiary operating the Ras Laffan gas production facility.



After a group photo in front or the headquarters and under the ever shining sun, we move inside the building and its main conference room. This room is scarcely furnished: The ceiling is low and the walls are not decorated; only Sheickh Hamad bin Kalifah Al Thani and his son, Sheickh Tamim bin Hamad Al Thani, are watching over us.




It's now time for the safety instructions. More specifically, everybody gets a gas mask in case of emergency. I learn 2 things: First, our instructor has himself difficulties putting the mask which is not very reassuring indeed. Second, in case of alarm, we should walk either cross or up the wind, but never with the wind. Later on, we will see red vanes on top of every facility indicating the current flow of the wind.

I look at my gas mask and can read the label “Dräger Safety / Lübeck / Made in Germany”. Thinking briefly about “German Mittelstand” and “Deutsche Qualität”, I feel safe again.

After a warm welcome by our instructor, its time for some figures:

  • Qatar has the world's third largest gas reserves (13.6 %).
  • I am about to visit the world's largest LNG liquefaction facility (69.2 MMtpa capacity) of the world.
  • Qatar's offshore North Field hosts 6 % of the world's natural gas reserves.
  • The Ras Laffan facility is about 80 km long and about 50 km large.
  • The gas storage tanks have a capacity of 64 MTPA.
  • The LNG production in Ras Laffan is carried out by 5 separate legal entities, i.e. Qatargas 1 (commissioning in 1996), Qatargas 2 (commissioning in 2009), Qatargas 3 (commissioning in 2010), Qatargas 4 (commissioning in 2011) and Laffan Refinery (commissioning in 2009).
  • I also learn that the capacity of Qatargas' LNG trains has increased significantly, from 1.1 MTPA in 1964 to 4.8 MTPA in 2006. I will learn more about these famous mega trains later.

Finally, our instructor describes the liquefaction process. At this stage of the presentation, I am unfortunately lost. After all, I have only a legal and MBA background....

The liquefaction facilities

At 3h15 pm, I am standing again in the blistering heat in front of the office building waiting for the bus that gets us to the field visit. In the bus, I get lucky. I sit next to a very friendly colleague who is working at Ras Laffa. Now its time for me to catch up with my technical understanding of the gas liquefaction process. My colleague is wonderful. He explains patiently how the natural gas flows into the train at the top and, by flowing downwards, separates into CH4 (This is the LNG that is exported.), C2H2, 2C3H, H2S (S and 2H2O), and CO2. My great moment comes when I hear H2O: “Sure, I know what that is... water, and this must flow into the sea, right?”


However, its only after my colleague made this small drawing that I begin making sense of all the huge pipes that I can see up until the horizon.

Nevertheless, I am still looking for the trains. Our instructor seemed to be so proud of Qatargas' trains, but where are they? When I finally take all my courage and ask my colleague, he starts smiling: “No, there are no trains, its the liquefaction facility itself that is called a train. Now I feel definitely stupid. Fortunately, I haven't asked this question in public.... Obviously, every industry needs its own jargon. It reminds me my first LBO transaction in which it took me weeks to ultimately understand that “NewCo” is not the real name of the purchaser!


In between the labyrinth of tubes, I can see only a few workers in yellow overalls (Yellow overalls for the contractors' employees, orange overalls for QP's employees). Their preferred means of transportation is bicycles.


 The main control room (MCR, for insiders like me!)

It is 3h35 pm when we arrive at the main control room, the heart of the facilities. The main control room is situated in-between 2 mega-trains. From outside, the building resembles a bunker. I cross 3 thick and hermetic doors and arrive in a small and rather dark room. The brown PVC flooring and walls turn me back to the 70s, although the plant has been inaugurated much later. The very low ceiling creates a somewhat depressing atmosphere. Pictures of the Qatar's sheickhs are again reminding the people whom they are working for; a yellowed tag reminds QP's mission, vision, and values.

The working atmosphere in the control resembles pretty much the trading room of my bank: People sitting in front of an ever increasing number of computer screens looking at figures and graphs. The difference is that people all wear orange overalls and don't shout, neither on the floor nor over the phone.

From the control room, the whole operation of the Ras Laffan liquefaction is carried out. According to our instructor, nothing in the large facility happens manually. Only 1,000 people are working on a permanent basis in Ras Laffan. The people that I have seen outside are only in charge of construction, cleaning, and some limited manufacturing.

Ras Laffan Port

At 4 pm, we are back in the bus driving the few kilometers to the sea. The Persian gulf shines in a mix of blue and green. I nearly feel on holiday were there not the industrial facilities all along the coast line.

On the way to the port, we cross 8 huge storage tanks. Upon arrival, we are lucky to see several LNG carriers that are currently charged with LNG. Depending on the temperate of the ship, it takes roughly 24 hours to load the carrier with LNG. The most impressive is clearly the “Al Wakrah”.


As a matter of fact, Qatargas operates the largest LNG carriers in the world.

Another loading point is situated 50 km offshore. It serves those ships which cannot reach the port because the sea is not deep enough for them.





At about 5pm we are back in the operating headquarters of the Raz Laffan LNG production site. After another lecture learning about energy fundamentals, we are driving back to Doha in the evening. Clearly, the illuminated facilities and excess-gas burning towers are even more impressive by night.



I promise, the next post will be about legal and finance again.

Monday, May 14, 2012

Cobald International Energy and the Extractive Industries Transparency Initiative (EITI) Rules



On April 16, 2012, the FT reported a possible conflict of interest / bribery between 3 powerful Angolan officials and the American company Cobald International Energy. As a matter of fact, the Angolan officials are blamed for holding unconcealed interests in a Cobald venture in Angola.

Besides mandatory American anti-corruption regulation, this case involves the voluntary code that has been developed by the Extractive Industries Transparency Initiative.

The Extractive Industries Transparency Initiative (EITI)

The EITI is a non-profit association set up under Norwegian law. Its members are
  • Governments
  • Oil, gas, and mining companies
  • Investors such as asset management companies and pension funds
  • Non-governmental organizations
As you may expect, every member of the association engages to support the objective of the EITI. As a matter of fact, a membership can be canceled if the member in question has conducted his affairs in a way considered prejudicial or contrary to the EITI Principles.

The major goals of the EITI are threefold:
  • Develop internationally accepted standards for transparency in the oil, gas, and mining sectors
  • Reduce corruption
  • Ensure that the standard of living of the population in resource-rich countries is ameliorated through the revenues from extractive industries
EITI is funded by contributions from its members and, in addition, by grants from bilateral and multilateral donors.

The EITI Rules

First and foremost, strictly, speaking, the EITI Rules are not enforceable by themselves. The only concrete sanction that is provided for in the EITI articles of association is a possible exclusion of a member in case he violates his obligations embedded in the EITI Rules. However, states (especially those who are members of the EITI) may adopt the EITI Rules and transfer them into national law making it, thereby, legally binding.

The EITI Rules consist of 5 parts:

  • Principles


  • Criteria


  • Requirements for EITI implementing countries

Such requirements specify the above principles and criteria. They describe, in a very detailed way, which actions governments of EITI member countries should take to be EITI compliant.

  • Validation Guide

The validation process assesses whether the above EITI requirements have been met. Its purpose is twofold: Promote a dialogue and learning at the country level and safeguard the EITI brand by holding all EITI implementing countries to the same global standard.

  • Policy Notes

Policy notes are issued by the EITI boards. Their goal is to strengthen the quality, consistency and sustainability of the validation process.


Resources:

  • FT “Unclear as oil” dated April 16, 2012
  • EITI Articles of Association
  • EITI 2011 Rules

Friday, May 4, 2012

Can financial markets measure management performance?



According to an interesting article written by Mihir Desai in the Harvard Business Review, the answer to this question is no. More specifically, the author argues that “[financial markets] can't easily disentangle skill from luck”.

To align the interests of managers with those of shareholders better, Mihir Desai suggests to identify the company's performance attributable to the manager's specific skills and strategic decision-making and to separate it from the company's performance that is due simply to luck. This should be done using the risk measure beta (which explains the risk profile of the company and, therefore, captures the normal performance of the company) and adjust it using alpha (which explains any superior performance of the company).

I was wondering whether and how this can work in practice.

Calculation of Alpha

Alpha is calculated using the following formula:

Alpha= (Rc - RF) - Beta * (Rm - RF)

whereas:

Alpha = the alpha for the company

Rc = the rate of return for the company (probably best captured by Total Shareholder Return)

RF = the average risk free rate of return during the period measured

Beta = the beta for the company = Cov (rJ,rM) / V (rM)

Cov (rJ,rM) = the covariance of the return of the specific security J with that of the market

V (rM) = the variance of the market return

Rm = the required rate of return for the market = the expected return of the market portfolio

Structure of a bonus compensation clause

In practice, you could structure the bonus compensation clause as follows:

Variable compensation

(1) The variable compensation depends on the company's performance as measured by [EBITDA / ROCE / etc.]. The variable compensation shall be [Formula depending on the chosen performance measure].

(2) The parties agree that the above defined variable compensation shall only be paid if alpha (as defined below) is above [positive threshold].


To conclude, I would guess that the practical application of such a clause should not cause major problems. Any of the above named financial ratios is widely reported in the financial press.


Resources:

  • Mihir Desai, “The Incentive Bubble” in Harvard Business Review 2012, 124 et seq.