Sustainable Development Through Energy Management in a Prototypical Small Gulf State – Engineering Research Paper
Abstract – This paper studies sustainable economic development through energy management with special reference to Qatar. It raises the question on the factors that have propelled growth in the region. There
is a need to identify the problems facing a fast paced economy and the measures that should be taken to sustain economic development. Furthermore, natural resource-based growth has largely tied regional development to oil price and revenue fluctuations, and has stymied efforts at economic diversification. Globalization is expected to dismantle barriers in information and communication technologies, but the corresponding opportunities that these advances may bring have not yet been fully exploited, though efforts are being made now.
A platform of priorities for action identifies the key challenges that must be addressed, to enhance efforts towards sustainable development in Qatar, during the coming ten or twenty years.
Introduction
a.Energy Scenario in the Global Perspective
Energy has been playing an important role in the economic development all over the world. World population is expected to double by the middle of this century, and economic development will continue at a faster pace in the developing world than that in the developed world. The likely result is a 3-5 fold increase in the world economic output over the next 5 decades. By 2100, per capita income in most of the currently developing countries will have reached, and surpassed levels characteristic of the developed countries today, making current distinction between the two totally obsolete. Energy availability and universal access to energy will play a major part in this growth. However, resulting from this rapid economic development, it is not certain that adequate energy services will become available to every citizen in the next hundred years. Demand for energy will continue to grow. Even though focus will shift from primary energy to final energy form, it is expected that primary energy requirement will increase globally by 1.5 to 3 fold by the year 2050.
According to a World Energy Congress (WEC) study, energy services will move towards more flexible, convenient and clean fuels reaching the consumer. High quality energy forms will become transitional fuels of choice. Thus, there will be an obvious shift towards electricity and towards higher quality fuels, such as, natural gas, oil products, Methanol and eventually hydrogen. Environmental considerations will hold the key to the future consumption patterns of energy.
b.Economy of Qatar
One easily notices the rapid growth of Qatar’s economy in all sectors. Qatar’s gross domestic product (GDP) was over US$ 20 bn last year and it is expected to be close to US$ 22bn by the end of the current year. Such accomplishments are the natural outcome of huge investments in oil, gas and petrochemicals. When investments in huge developmental of projects of firms such as QatarGas and RasGas start bearing fruit, the already buoyant economy is expected to get a further boost by the end of the current decade. This rapid economic growth has enabled it to rank as one of the highest per capita income countries’ in the world within a very short period. Qatar has emerged as one of the world’s wealthiest states since discovery of oil in the 1970s and much later, natural gas. Thus, Petroleum products have continued to be, the cornerstone of Qatar’s economy for over 30 years and accounts for more than 60% of total government revenue, more than 30% of gross domestic product, and roughly 80% of export earnings. The Qatari economy’s vulnerability to oil price movements, as well as its limited crude oil resources has led the Government, in the early nineties, to explore Qatar’s huge reserve of natural gas by making a strategic business and investment decision to commercialize natural gas reserves by developing the Liquid Natural Gas (LNG) sector. This led to the establishment of two major projects, namely RasGas and QatarGas, which are now major suppliers of LNG to world markets and contribute significantly to the State’s revenue. Also, Qatar has promoted investments in petrochemicals and fertilizer industries namely, QCHEM, QAFCO, QAFAC etc. Qatar has also promoted industries in the non-oil sector of the economy including Manufacturing, Construction, Finance, Insurance, Trading, Services and more recently Tourism. With such diversification in investment opportunities, production and export of natural gas in the form of LNG, pipe line gas, GTL and petrochemicals and fertilizers have registered a steady growth of Qatar economy during the last few years.
The world demand for energy has been increasing. Table 1 below shows that Qatar’s oil and natural gas production has been increasing to cope up with the world trend.
Table 1: Comparison of Qatar’s overall GDP contributors
(Source: 2003 edition of the Middle East Economic Review)
Overall Percentage Contribution to GDP (%)
1999 2000 2001 2002 2003
Oil & Gas Sector 45.76 60.43 57.00 57.61 59.79
Non – Oil Sector 54.24 39.47 43.00 42.39 40.29
A study of GDP growth trend as above shows the following factors which contributed to such growth:
• The price of Qatar’s crude oil increased from year to year over last five years. During year 2003 the crude oil price was $27.9 p/b against corresponding price of $24.5 p/b as in 2002 registering an increase of 13.9%.
• The production volume of Qatar’s crude oil registered a steady growth. In 2003 the production was 714,000 bpd against 640,000 bpd in year 2002 showing a growth of 11.6%.
• The production of natural gas was increasing from year to year since its discovery. In 2003 the production of gas increased by 12.9% from the production of 2002. The production in 2002 registered a growth of 1.9% over the production of 2001.
• The export of LNG was rising. In 2003 the export of LNG stood at 14.4 million tons against 13.5 million tones in 2002 showing a growth of 6.7%.
• In real terms, the Non-Oil sector of the economy registered a growth, but its contribution as percentage of total GDP showed decline in growth because of rapid growth of the economy resulting from high contribution from oil and gas sector.
(Note: 2004 statistics are not given as the price of crude oil and natural gas is too volatile to provide accurate statistics).
It could be observed that contribution of Oil & Natural Gas Sector to Qatar’s GDP has been growing steadily in the recent past. However, volatility of the price of crude oil and natural gas makes the Qatari economy quite vulnerable since revenues generated by energy exports becomes less insecure under such situations and also since the need for revenue is likely to be a source of competition for market share in future.
1. Objective of the Study
This study analyzes the operating performances of Qatar Energy Industry under the present business environment for identification of the key result areas (KRAs) that are essential for strategic decision making. The report would cover the KRAs for improving upon business results and decision making as also how funds generated could be employed for sustainable development of socio economic condition of the Country. This is crucial for improvement of the living conditions, dignity and welfare of the people of Qatar.
The project report will analyze past performance and the business environment to determine the world trend of business. After a SWOT-analysis, the report aims at preparing a holistic plan for sustainable development and growth of the energy industry in Qatar for its contribution to the society.
2. Methodology
Since the growth in the non–oil sector correlates with the growth of the oil and gas sector, analysis of historical Balance Sheets and Profit & Loss Accounts of the companies in the oil and gas sector would generate statistical data for determination of trend in the businesses. In modern process industries and in oil and gas production industries, capacity utilization, wastage minimization and cost reduction and cost control, besides energy conservation play a crucial role in improving productivity, quality and profitability in addition to growth. Continuous innovation in technology and management is a matter of necessity for survival in a liberalized economy. In the absence of in-house R&D facilities in the areas of respective line of technology, it is essential to embark upon innovative management for identification of diversification areas matching with the line of business.
Assuming the hydrocarbon in the world cannot last for very long the researchers have since embarked upon technology to develop clean energy from renewable sources. Already commercial exploitation of such technology and renewable sources has taken place. Attempts are already being made to develop eco-friendly bio-fuel to meet with ever-increasing demand for energy. A mega-research project for production of hydrogen as a fuel is already underway. All such innovation in science and technology will act as competitors to hydro-carbons. However, the results of these futuristic researches may not be applicable to the next couple of decades in this world. Accordingly, attempts must be made to make the best of the available resources in the coming decades. It is essential in the long run to slowly but steadily de-link the economy of the country purely based on exploration of hydro-carbon to a process of sustainable development in line with the movement of the world. However, it is required to develop indices to be closely monitored so as to ensuring optimal utilization of the available resources during the coming decades.
2.1 Fund Flow and Ratio Analysis
The process of determining KRAs will involve analysis of historical operating performances. This could be done initially from the audited annual reports. However, for in-depth analysis, a study may be required to be made at various levels in operating areas.
For illustration purposes, the audited annual report of QAFCO (Qatar Fertiliser Company) for the year 2003 was studied against the audited balance sheet for the financial year 2002. The fund flow statement has been prepared as shown in Table 2.
Table 2: Fund Flow Statement for QAFCO for the Financial Year 2003
Source of Fund Application of Fund
Brief Particulars Qatari Riyal Brief Particulars Qatari Riyal
Increase in Paid up Share Capital 100000000
Increase in Investment in Property, Plant and Equipment 522743745
Increase in Legal Reserves 20072377
Increase in Dues from Shareholders and Related Parties 96242101
Increase in Availability of Fund for Payment of Dividend 250000000
Increase in Accounts Receivable 29867635
Increase in Syndicated Loan 651560000
Increase in Other Receivables and Prepayments 25558104
Increase in Accrual of Employers’ Service Benefit 2461760 Increase in Cash Balance and Bank Balance 426388445
Increase in Accrual of Minority Interest 12217130 Reduction in Accounts Payable and Accruals 83100445
Increase in Dues to Share Holders and related Parties 42596559
Increase in Provision for Pension Liabilities 2548042
Reduction in Value of Inventory 22805252
Increase in Retained Earnings 79639355
Total 1183900475
Total 1183900475
An analysis of the important financial ratios worked out from the said annual report is presented in Table 3.
Table 3: Financial Ratio Analysis of QAFCO for the Financial Years 2002 and 2003
Brief Particulars of the Ratio 2003 2002
Return on Investment 31.09% 13.65%
Margin on Sales 45.43% 26.54%
Profit/Fixed Assets 22.82% 11.22%
Sales/Fixed Assets 50.24% 42.26%
Sales/Current Assts 32.11% 29.33%
Inventory/Sales 0.0715 0.0725
Debtors/Sales 0.0415 0.0328
Material/Sales 11.46% 13.45%
Employment Cost/Sales 8.47% 12.34%
Depreciation Cost/Sales 8.45% 12.34%
Value Added Per Qatari Riyal Employment in Riyals 9.44 6.19
Increase in Sales 46.74% —
Increase in Material Cost 26.42% —
Increase in Employment Cost 1.85% —
Increase in Investment in Projects 24.82% —
From the study of the Tables 2 and 3 the following could be observed:
• Increase in turn-over in 2003 over 2002 was 46.74% with corresponding increase in material cost and employment cost at 26.42% and 1.85% respectively. The increase in investment during 2003 on productive fixed assets registered a figure of Qatari riyals 522,743,745 which is 24.83% more than that during 2002. Again employment cost which was 12.34% of sales in 2002 became 8.45% in 2003 when the sales registered a growth of 46.74%. This establishes that the employment cost was not KRA for this company.
• With 46.74% growth in sales, the material cost increased by 26.42%. Again material content of sales, which was 13.45% in 2002 dropped to 11.46% in 2003. This suggests that there are avenues in operations to reduce the material content of production. Ratio analysis in the table above shows that the inventory holding was for 3.77 weeks of sales which was reduced to 3.72 weeks in 2003. Therefore, not much benefit could be obtained from inventory management. This suggests that attempts should be made for price reduction of material, increase in yield of material and material wastage reduction for optimizing material content of production.
• It is noted that against an increase in investment in productive assets of 24.82% the growth of sales registered a figure of 46.74%. The ratio analysis shows that asset turn over ratio increased from 42.26% in 2002 to 50.24% in 2003 and the margin on sales increased from 26.54% in 2002 to 45.43% in 2003. This shows that capacity of the existing plant and machinery could not be utilized fully in 2003. As the company is highly technology intensive, cost of modernization from time to time may push up the fixed cost which might raise the break-even volume of sales at current price. This suggests a detailed analysis of the operations and also a detailed audit of the cost structure. The strategy adopted may be either low volume of production with high margin on sales if the market so permits. Alternatively, high volume of production at low price strategy could be adopted to cover more market share and ultimately become a monopolist. This practice has been adopted by the Chinese manufacturing industry which has ultimately become the production center of all manufactured goods in the world today.
• The fund flow statement shows that increase in investment on property, plant and equipment amounting to Qatari riyal 522,743,745 was financed principally through increase in syndicated loan amounting to Qatari riyal 651,560,000, although there was increase in cash balance and bank balance to the tune of Qatari riyal 426,388,445 which represent 81.57% of the increased in investment. This might have reduced net profit and hence the retained earnings. Subsequently, a look at the capital structure of the company may yield results in terms of reduction in liabilities and increase in return on investment.
In view of the foregoing, for identifying the key result areas it would be necessary to study the following particulars:
Desk Research:
(a) Annual reports of the company since its inception.
(b) Annual Economic Review of the Government of Qatar for the last 5 years.
(c) Audited Annual Reports of the competitors in the world since last 5 years.
(d) Currency fluctuation statistics between Qatari riyals and the currency of the importing country for the last 5 years.
(e) The present market segment of the company.
(f) Proposed market segment of the company.
(g) Statistics of gas and oil price fluctuations in Qatar for last 5 years.
(h) Indication of areas of alternative investments of excess funds generated keeping in line with socio economic development goals
Field Research:
(a) Study of the operation of the plant.
(b) Study of the technology and performance of the plant.
(c) Study of cost structures and establishing of a management information system.
(d) Market research on a global basis.
(e) Determination of a techno-commercial model with variation in quantity of sales, price per unit, cost per unit, operation at different percentage of plant capacity utilization, foreign exchange fluctuations and oil price fluctuation in OPEC.
Both the above studies must be made for all the companies in the oil and gas sector in Qatar.
Above mentioned ratio analysis is an analytical tool for analyzing the performance of a firm. “While ratios are easy to compute, which in part explains their wide appeal, their interpretation is problematic, especially when two or more ratios provide conflicting signals. Indeed, ratio analysis is often criticized on the grounds of subjectivity that is the analyst must pick and choose ratios in order to assess the overall performance of a firm.” [refer Feroz E.H.et.al.] Accordingly, we apply Data Envelopment Analysis (DEA), which is basically an application of repeated linear programs, on the historical data on input and output to reinforce the study based on ratio analysis.
2.2 Introduction to DEA
DEA is commonly used to evaluate the efficiency of a number of producers. A typical statistical approach is characterized as a central tendency approach and it evaluates producers relative to an average producer. In contrast, DEA is an extreme point method and compares each producer with only the “best” producers. By the way, in the DEA literature, a producer is usually referred to as a decision making unit or DMU. Extreme point methods are not always the right tool for a problem but are appropriate in certain cases.
A fundamental assumption behind an extreme point method is that if a given producer, A, is capable of producing Y (A) units of output with X (A) units of inputs, then other producers should also be able to do the same if they were to operate efficiently. Similarly, if producer B is capable of producing Y (B) units of output with X (B) inputs, then other producers should also be capable of the same production schedule. Producers A, B and others can then be combined to form a composite producer with composite inputs and composite outputs. Since this composite producer does not necessarily exist, it is sometimes called a virtual producer.
The heart of the analysis lies in finding the “best” virtual producer for each real producer. If the virtual producer is better than the original producer by either making more output with the same input or making the same output with less input then the original producer is inefficient. Some of the subtleties of DEA are introduced in the various ways that producers A and B can be scaled up or down and combined.
The procedure of finding the best virtual producer can be formulated as a linear program. Analyzing the efficiency of n producers is then a set of n linear programming problems. The following formulation is one of the standard forms for DEA. Lambda (?) is a vector describing the percentages of other producers used to construct the virtual producer. X and Y and are the input and output vectors for the analyzed producer. Therefore, ?X and ?Y describe the virtual input and output respectively. The value of theta (?) is the producer’s efficiency.
DEA Input-Oriented Primal Formulation
s.t.
? free, ? ? 0
It should be emphasized that an LP of this form must be solved for each of the DMUs. There are other ways to formulate this problem such as the ratio approach or the dual problem but this formulation is the straightforward. The first constraint forces the virtual DMU to produce at least many outputs as the studied DMU. The second constraint finds out how much less input the virtual DMU would need. Hence, it is called input-oriented. The factor used to scale back the inputs is ? and this value is the efficiency of the DMU.
The data required for application of this model are the historical data on input and output of a particular company. However, if this model is used for determination of the relative efficiencies of a particular company vis-à-vis its peers/competitors, then the input and output of all the companies are required. If historical input and output data are available, then trends of the relative efficiencies of the companies could also be easily studied.
The format for data to be collected for implementing this model can be described as shown in the Table 4 below.
Table 4: Format for Data to be collected for DEA Model
(QAFCO, as a whole)
Year Input Units (Amount/Nos.) Consumed/Used Output Units Produced
Raw Materials # Employed Electricity Consumables Urea Ammonia
2003
2002
2001
etc.
For determining relative efficiency of each of the four trains of QAFCO, similar format for data collection as shown in Table 5 may be adopted.
Table 5: Format for Data to be collected for DEA Model
(for different Trains of QAFCO)
(For Year 2003)
Train Input Units (Amount/Nos.) Consumed/Used Output Units Produced
Raw Materials # Employed Electricity Consumables Urea Ammonia
1
2
3
4
(Repeat the same for other years like 2002, 2001, etc.)
For determining relative efficiency of many companies engaged in similar kind of operations, similar format for data collection as shown in Table 6 may be adopted.
Table 6: Format for Data to be collected for DEA Model
(For more than one company like QAFCO)
(For Year 2003, say)
Co. Input Units (Amount/Nos.) Consumed/Used Output Units Produced
Raw Materials # Employed Electricity Consumables Urea Ammonia
1.
2.
3.
Etc.
(Repeat the same for other years like 2002, 2001, etc.)
3. Research timetable
Activity Estimated Timeframe
Develop or adapt research objectives 1 day
Design research protocol 1 week
Recruit interviewers 2 weeks
Translate instruments into local language 1 week
Train interviewers (include pretesting and revising 2 weeks
instruments in training)
Collect data 2 weeks
Transcribe recordings 1 week
Translate transcripts 2 -3 weeks
Preliminary analysis in field 2 weeks
Prepare for presentation 1 day
Presentation 1 day
Complete analysis 2 weeks
Prepare report 1 week
4. References
1) Doing Business with Qatar – Philip Dew
2) Landmark Regional Review (Arabian Gulf) Booklet – 2003 Edition
3) Landmark Technical Review Booklet – March 2003 Edition
4) Doing Business in Qatar – Qatar National Bank, 2003 Edition
5) Qatar Economic Review – Qatar National Bank, April 2003 Edition
6) International Petroleum Encyclopedia – PennWell, 2003 Edition
7) Oil and Gas in the Middle East – 2002 Edition
8) Qatari Projects: Current and Forthcoming – Qatar National Bank, March 2004
9) Mash’al Magazine – QP in-house magazine, January to August 2004 Editions
10) Structured & Corporate Finance – Qatar National Bank, 2004 Edition
11) The LNG Industry – Andy Flower
12) Landmark Corporate Website (www.lgc.com)
13) RasGas Corporate Website (www.rasgas.com.qa)
14) Qatargas Corporate Website (www.qatargas.com.qa)
15) QP Corporate Website (www.qp.com.qa)
16) Official 2005 Business Plan for Dukhan Drilling – QP
17) Official 2004/2005 Dukhan Field Drilling and Workover sequence – QP
18) Business Plan for all QP Oil and Gas Projects – QP
19) Middle East Economic Review – 2003
20) RasGas Magazine No. 8, July-September 2004
21) Qatar Economic Review, April, 2004
22) Oryx, August 2004
23) Annual Report – 2003, Qatar Petroleum
24) Annual Report – 2003, Qatar Fertiliser Company
25) Annual Report – 2003, Shaping the Future
26) The Peninsula, Sunday, August 29, 2004
27) Gulf Times, Saturday, August 28, 2004
28) Feroz E.H.; Kim S.; Raab R.L.; “Financial statement analysis: A data envelopment analysis approach”; Journal of the Operational Research Society; January 2003, Vol. 54, No. 1, pp. 48-58 (11)
29) David Hawdon; “Efficiency, performance and regulation of the international gas industry – a bootstrap DEA approach”; Department of Economics & Surrey Energy Economics Centre, University of Surrey, Guildford, Surrey,. GUP 7XH, UK.
5. Literature review
Fetterman, D. M., Kaftarian, S. J., Wandersman, A., Eds. Empowerment Evaluation: Knowledge and Tool for Self Assessment and Accountability, Thousand Oaks, London, New Delhi: Sage, 1996
Patton, M. Q. Qualitative Research and Evaluation Methods. Thousand Oaks, London, New Delhi: Sage, 2002