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Qatar Risk Analysis - Enterprise Risk Management, SMU

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Qatar Risk Analysis - Enterprise Risk Management, SMU - Presentation Transcript

  1. Qatar Managing risk through quantification Risk Management Analysis March 2009 Ben Pua | Matthias Cheong | Mikaela Kramer | Daniel Leong
  2. Preamble • The scope of our presentation covers the Oil, LNG, and Construction industries in Qatar • There are 3 main risk factors that affect the economy: Strategic, Operational and Country • The country’s economy is still highly susceptible to oil price shocks • These effects are examined in the course of our presentation Qatar Risk Management Analysis
  3. Agenda Country Overview and Macroeconomic Risk Oil Sector Risk Analysis LNG Sector Risk Analysis Construction Sector Risk Analysis Qatar National Cement Case Study Recap Qatar Risk Management Analysis
  4. Qatar is the second smallest country by population in the Middle East Partial World Map Iraq Iran Kuwait Middle East Qatar Region Saudi UAE Arabia Oman • Official Religion: Islam • Government: Absolute Monarchy • Population in 2008: 825,000 • 60% of population are expatriates Source: CIA World Factbook Country Overview and Macroeconomic Risk
  5. Its citizens have the second highest GDP per capita in the world World GDP per Capita Rankings 2008 Figures in US$ thousands Rank 1 118 2 101 3 85 4 70 5 61 Qatar is one of the most developed countries in 6 58 the region and possesses 7 world-class infrastructure 57 and high living standards 8 54 9 52 10 48 Source: CIA World Factbook Country Overview and Macroeconomic Risk
  6. Qatar’s economy is driven by the Oil, Gas, and Construction industries Qatar GDP Contribution by Sector 2007 Figures in US$ billions 19.2 22.7 24.7 28.5 32.8 = 100% 37 40 Other Industries 40 42 42 6 6 7 7 7 Construction 58% of 57 Oil & Gas GDP in 54 53 51 51 2007 2003 2004 2005 2006 2007 Source: IMF Country Overview and Macroeconomic Risk
  7. Oil and Petrochemical products are the key drivers behind Qatar’s export growth Composition of Qatari Exports and Value Total Figures in US$ millions, Components in % 44,025 4 Others 35,083 Plastics Fertilizers CAGR 5 Organic Chemicals 31% 26,121 52 Non-Oil Petrochemical Exports 5 49 Refined Petrol Products 18.950 LNG 13,583 Propane & Butane 6 Condensates 11,422 46 2 49 Other Petrochemical pdts 5 44 48 46 46 49 Crude Oil 45 49 49 Source: Qatar Central Bank, Qatar Petroleum, IMF Country Overview and Macroeconomic Risk
  8. Asian markets are a key destination for Qatari exports Destination of Qatari Exports, 2007 Rest of the world, 4.2% Arab Countries, 5.3% Americas, 1.0% Saudi Arabia Bahrain Europe, 4.6% Jordan Total 2007 Rest of Asia, 15.5% Exports: Japan, 40.6% India US$ 44 bn Thailand Taiwan Singapore, 11.3% Total Asian Exports = 85% South Korea, 17.5% Exposure = US$ 37.4 bn Source: Qatar Central Bank Country Overview and Macroeconomic Risk
  9. The majority of Qatar’s imports are in machinery and manufactured goods Composition of Qatari Imports and Value 22,002 Raw Materials and Total Figures in US$ millions, Components in % Commodities 13 Mineral Fuels, Lubricants and 16,440 Chemicals 13 Foodstuffs and Animal & Vegetable 53 Oils 10,060 52 Machinery and 16 Transport 6,005 Equipment 4,897 49 4,052 16 20 Manufactured 23 56 34 Goods 47 35 47 35 30 33 27 Source: Qatar Central Bank, Qatar Petroleum, IMF Country Overview and Macroeconomic Risk
  10. Approximately half of Qatar’s imports come from developed Western countries Origin of Qatari Imports, 2007 Total Western Imports = 47.3% Exposure = US$ 10.4 bn Other Asian Countries, 23.8% Europe, 35.9% Japan, 10.0% Total 2007 Imports: US$ 22 bn Arab Countries, 15.6% Rest of the world, 3.3% USA, 11.4% Source: Qatar Central Bank Country Overview and Macroeconomic Risk
  11. There are several common risk factors in Qatar which affect all businesses and industries Strategic Security Operational Natural Reputational Disaster Financial Country Market Source: Team analysis Country Overview and Macroeconomic Risk
  12. Common risk factors -- Strategic Risk Strategic Strategic risk Risk Operational • Volatility in oil prices Reputational Likelihood: High Impact: Moderate Country Exposure: Export revenues from oil 2007 = US$ 19.4 bn Financial Mkt. • Volatility in import duties and prices on construction materials Nat. Disaster Likelihood: High Security Impact: Low Exposure: Value of construction related imports = US$ 10 bn Source: EIU, Team analysis Country Overview and Macroeconomic Risk
  13. Common risk factors -- Operational Risk Strategic Operational risk Operational Risk Operational • Supply shortages in materials causing delays in LNG and Reputational construction projects Likelihood: Low Country Impact: High Exposure: Cost of delay = US$ 1,28 bn per month Financial Mkt. • Safety issues Nat. Disaster Likelihood: High Impact: Moderate Security Exposure: Revenues from oil, gas and construction = US$ 32 bn Source: EIU, Team analysis Country Overview and Macroeconomic Risk
  14. Common risk factors – Reputational Risk Strategic Reputational Risk Reputational risk Operational • International criticism for lack of workers’ rights Reputational Likelihood: Moderate policies Impact: Low Country Exposure: Exports to Western countries in 2007 = US$ 2.5bn • Government comes under pressure for human rights abuses Financial Mkt. • Political parties are banned • Restrictions for journalists reporting on government Nat. Disaster Likelihood: Moderate (or low? They’re a key US ally) Security Impact: Low Exposure: Exports to Western countries in 2007 = US$ 2.5bn Source: EIU, Team analysis Country Overview and Macroeconomic Risk
  15. Common risk factors – Country Risk Strategic Country risk Country Risk Operational • Political risk: Efforts to open up the economy are slowed by merchant and royal family interests Reputational Likelihood: High Country Impact: Moderate Exposure: FDI in 2007 = US$ 1.1 bn Financial Mkt. • Consumer price inflation discourages foreign investors, average inflation of 15,1% in 2008 Nat. Disaster Likelihood: Moderate Impact: Moderate Security Exposure: FDI in 2007 = US$ 1.1 bn Source: EIU, Team analysis Country Overview and Macroeconomic Risk
  16. Common risk factors – Financial Market Risk Strategic Financial Market Risk Operational • Commodity Price Risk • Forex Risk Reputational Likelihood: Low Country Impact: High Exposure: Total GDP = US$ 32bn Financial Mkt. • Credit Risk Nat. Disaster Likelihood: Low Security Impact: High Exposure: Total national debt at 2007 = US$ 47bn Source: EIU, Team analysis Country Overview and Macroeconomic Risk
  17. Common risk factors – Financial Market Risk Strategic Natural disaster riskRisk Financial Market Operational Reputational • Liquidity risk: Refinancing risk due to credit crunch Country Financial Mkt. Likelihood: High (especially in non-petrochemical sectors) Financial Impact: Moderate Exposure: Total foreign debt at 2008 = US$ 0.5 bn Nat. Disaster Nat. Disaster Security Source: EIU, Team analysis Country Overview and Macroeconomic Risk
  18. Common risk factors – Natural Disaster Risk Strategic Natural disaster risk Natural Disaster Risk Operational Reputational • Oil platforms damaged • Delivery of oil and gas affected • Construction sites affected Country Likelihood: Low Financial Mkt. Impact: High Exposure: GDP at 2007 = US$ 32bn Nat. Disaster Security Source: EIU, Team analysis Country Overview and Macroeconomic Risk
  19. Common risk factors -- Security Risk Strategic Security risk Security Risk Operational •Terror attack on Qatari soil Reputational Likelihood: Low Impact: High Country Exposure: GDP at 2007 = US$ 32bn Financial Mkt. •Attack from a neighbouring country Nat. Disaster Likelihood: Low Impact: High Security Exposure: GDP at 2007 = US$ 32bn Source: EIU, Team analysis Country Overview and Macroeconomic Risk
  20. Risk elements are not isolated and can influence other types of risks Strategic Risk Financial Market Risk • Volatility in oil prices affects • Commodity price risk government expenditure • Credit risk • Continued high demand for Operational Risk • Liquidity risk oil, LNG and construction • Safety issues • Forex risk • Infrastructure Development • Technical problems in • Securing labour infrastructure development • Supply shortages and higher costs Security risk Natural Disaster Risk • Delivery failures in exports could • Terror attack lead to legal and reputational risk • Attack from neighboring • Delivery affected • Oil fields and country construction affected Reputational Country Risk • Workers’ rights • Royal family interests slow opening • Environment of economy • Inability to complete • Cost of handling settlements and development projects on time trade agreements/regulations • Protectionism & tariffs • High inflation rate discourages foreign investors Source: EIU, Team analysis Country Overview and Macroeconomic Risk
  21. Qatar’s major risk drivers are associated with oil, safety and political influence Common Risk Types Likelihood Х Impact Strategic High Х Mod Operational High Х Mod The main risk Mod Х Low drivers are: Reputational High Х Mod Strategic Country Operational Financial Mod Х Mod Country Natural Disaster Low Х High Security Low Х High Source: Team analysis Country Overview and Macroeconomic Risk
  22. …which is mitigated through a host of measures Protectionism & Foreign Trade Policy Economic Policy Laws and Regulations Tariffs •Generally open • Protective of local • Government is •Since 2000, foreign policy despite slight industries diversifying the investors are allowed increase of economy away from to own 49% of equity protectionism since • The GCC has oil in any project entering the GCC Common External Tariff set at 5% • Qatar’s exchange •Labor laws provide •Member of the rate is pegged to firms with enormous Gulf Cooperation • Individual the US$, protecting leverage on work Council (GCC) and negotiations with it against currency force The World Trade the govt. are risk Organization crucial in securing •Strikes are (WTO) import duty • Foreign exchange forbidden in vital privileges assets (US$ 60bn) industries like oil and •Foreign investors give strong cushion gas need local sponsor against drop in oil to set up business and gas prices Source: EIU Country Overview and Macroeconomic Risk
  23. Key Takeaways • Oil and petrochemical products Qatar’s economy is are the key drivers behind Qatar’s driven by the Oil, Gas, exports and Construction industries • The majority of imports are construction related • Strategic Risk (volatility in oil prices) While there are several common risk factors, • Operational Risk (safety issues) there are 3 main ones • Country Risk (political interests) •Policies Qatar mitigates its risk through a host of •Protectionism measures •Regulations Country Overview and Macroeconomic Risk
  24. Agenda Country Overview and Macroeconomic Risk Oil Industry Risk Analysis LNG Industry Risk Analysis Construction Industry Risk Analysis Qatar National Cement Case Study Recap Qatar Risk Management Analysis
  25. There are 2 parts to analyzing risk in the Oil Industry Oil Industry Overview and 1. Value Chain Risks, Quantification and 2. Mitigation Oil Industry Risk Analysis
  26. The basis of the oil industry is the ability to derive numerous useful products from crude oil Qatar Oil Industry Value Chain Hydrocarbon Exploration Shipping Refining Storage Distribution Marketing Institutions, Production Consumers Fractional Distillation Process Output Usage Example The separation of crude Refinery Gas Used as Fuel oil into various components by heating Petrol Used in Cars to different boiling Naphtha Chemical Production points Kerosene Jet Fuel Diesel Oil Fuel for Diesel Engines Heated Crude Oil Residue Lubricating Oil Source: Qatar Petroleum Oil Industry Risk Analysis
  27. Qatar’s state-owned oil industry has historically been a key contributor to government revenues Qatar Govt. Revenues by Sector Amounts in US$ billions 19.2 22.7 24.7 28.5 32.8 = 100% 36 34 29 36 40 Other 6 9 8 9 Gas 64 60 61 56 51 Oil 2003 2004 2005 2006 2007 Source: IMF Oil Industry Risk Analysis
  28. It has several partnerships with International Oil Companies Oil Projects across Qatar Illustrative Not drawn to scale, List is not exhaustive Al-Shaheen 200,000 b/d Al-Khalij Persian Gulf (ocean) 80,000 b/d ISND 100,000 b/d Dukhan Oil Maydan Mahzam 400,000 b/d 100,000 b/d Qatar ISSD 17,000 b/d Source: Simmons & Co Intl Oil Industry Risk Analysis
  29. Qatar is a minor player in the global oil industry… Global Oil Production Barrels per day 104 countries with 3% share or less Canada, 4% Mexico, 4% Selected Sample: China, 4% Iraq 3% Iran, 5% Angola 2% Total Global United Production: Qatar 1% States, 86 mm 10% bbl/day Indonesia 1% Saudi Arabia, Oman 1% 11% Russia, 12% Source: CIA World Factbook Oil Industry Risk Analysis
  30. …and is highly susceptible to market shocks Qatar Govt. Oil Revenues v. Historical Crude Oil Prices Prices in US$, Revenues in US$ millions 120 Asian Financial Crisis Invasion of Iraq 25000 ‘97-’98 YoY Price Change: US$ 6 ‘02-’03 YoY Price Change: US$ 4 100 20000 80 Revenues are closely tied to crude oil prices and can be 15000 60 adversely affected if prices plunge 10000 40 5000 20 0 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Sources: Qatar Central Bank, US Department of Energy Oil Industry Risk Analysis
  31. This may severely impact how Qatar is able to fund development for the rest of the economy Sources of Government Revenue Uses of Government Revenue 2007 Amounts in US$ bn, Components in % Amounts in US$ bn, Components in % 32 32 14 40 Other 44 44 4.8 9 Gas 100 15 13.2 51 Oil 41 51 2007 Available Current Capital Surplus Funds Expenditure Expenditure A fall in oil revenues can significantly affect current expenditure Source: IMF Oil Industry Risk Analysis
  32. The second part of our analysis covers specific risks in detail Oil Industry Overview and 1. Value Chain Risks, Quantification and 2. Mitigation Oil Industry Risk Analysis
  33. The Oil industry’s activities expose it to several elements of risk Qatar Oil Industry Value Chain List of Risk Exposures is not exhaustive Hydrocarbon Exploration Shipping chain risk map Value Refining Storage Distribution Marketing Institutions, Production Consumers •Strategic •Operational •Financial Market Risk •Operational •Reputational •Natural Disaster •Security Source: Qatar Petroleum, Team analysis Oil Industry Risk Analysis
  34. These risks relate to each other in different ways Strategic Risk Financial Market Risk • Bets on oil prices • Commodity price risk • Supply (regulations, margins) • Credit risk • Capabilities (infrastructure, Operational Risk • Liquidity risk regulations, IT) • Ability to attract skilled labor • Safety issues (maintenance) • Delivery (supply chain) Security risk • Terror attack Natural Disaster Risk • Neighbouring • Delivery affected country attack • Drilling platforms affected Reputational • Workers’ rights • Environment Country Risk • Not able to complete projects on time •Political • Protectionism/nationalization •Legal •Inflation Source: Team analysis Oil Industry Risk Analysis
  35. The Qatari government concentrates most of its exposure in hydrocarbon production and refining Value Chain Annual Exposure in 2007 Amounts in US$ millions, Chart not drawn to scale % Exploration 7 515 1 Hydrocarbon 6 10,877 39 Production 5 480 2 Shipping Refining 4 2,643 54 Storage & 4 3 1,079 Distribution Marketing 2 46 0 Total Exposure 1 15,640 100 Source: Qatar Petroleum Oil Industry Risk Analysis
  36. Our risk quantification for the oil industry focuses on 3 specific types of risk Strategic Risk Quantification Operational Risk of Risk Financial Risk Oil Industry Risk Analysis
  37. Strategic Risk -- Reduced foreign participation in Oil industry Strategic Risk Situation Risk Distribution Participation in Partnerships • Qatar currently participates in numerous Joint Ventures with International Oil Companies • It may choose instead to reduce foreign participation and pursue opportunities unilaterally 1 2 3 4 5 6 7 8 9 10 11 Distribution Exposure • Highly skewed Left • Full Value of Entire Oil Value • High startup cost and expertise required Chain: USD122,024mm • High possibility of hitting empty wells Source: Team analysis Oil Industry Risk Analysis
  38. Strategic Risk – Decreasing Oil sales Strategic Risk Situation Strategic Risk Potential Loss Amounts in US$ millions Decreasing Oil Production 500 120.00% • Size of oil reserves is finite 99.5% Daily VaR in 2009 450 US$ 139 mm 100.00% • Qatar may seek to decrease 400 current oil production in order to 350 secure greater profits later 80.00% 300 • With fluctuating market prices, delayed production now could 250 60.00% translate to greater value later 200 40.00% 150 Exposure 100 • Value of oil reserves: 27 20.00% thousand mm barrels at 2007 50 0 0.00% Source: Qatar Petroleum, Team analysis Oil Industry Risk Analysis
  39. The Qatari oil industry is subject to several types of Operational Risks Operational Risk Drivers Consequences • Poor Asset Allocation • Loss in Production Processes • Failed Prospecting • Loss in Throughput • Poor Maintenance • Delays • Poor Regulations • Illegal black markets for oil People • Workplace Accidents • Injuries / Death • Lacking Skilled Labor • Poor Equipment Utilization • Poor Industry • Unable to support capacity Systems Infrastructure requirements • War • Production stoppages Macroeconomic • OPEC reductions • Delays • Natural Disasters Any combination of these risk drivers can lead to potential reputational damage or even reduced GDP Source: Qatar Petroleum, Team analysis Oil Industry Risk Analysis
  40. Operational risk is quantified using modified guidelines based on Basel II for banks Operational Risk Potential Loss Amounts in US$ millions 600 99% Daily VaR 500 US$ 124 mm 400 300 200 100 0 Methodology • Adopted Basel II Ops Risk Requirement of 20% of revenue (for banks) + 20% safety margin Exposure • US$ 122 mm (Daily revenue from crude oil in 2009) Source: Qatar Petroleum, Team analysis Oil Industry Risk Analysis
  41. Our analysis of Financial risk focuses on Commodity Price Risk Commodity Price Risk • Exposure: All revenue within the value chain • Actively traded and susceptible to HIGH fluctuations • Value of reserves Currency Risk • Exposure: Total Trade payable and receivables • Gross profit from sales out of LOW Qatar • Riyal peg to USD Source: Team analysis Oil Industry Risk Analysis
  42. The upside from yearly volatility is greater than that for monthly volatility Percentage Price Change v. Time 1.5000 Percentage, Time denoted in years 1.0000 0.5000 0.0000 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 -0.5000 -1.0000 Source: Qatar Petroleum, Team analysis Oil Industry Risk Analysis
  43. Commodity Price Risk – Daily VaR Daily VaR 450 120.00% 400 100.00% 350 300 80.00% 250 60.00% 200 150 40.00% 100 20.00% 50 0 0.00% Exposure Results US$ 139 mm 99.5% CI Daily VaR: US$ 13.2mm 99% CI Daily VaR : US$ 10.2mm 95% CI Daily VaR : US$ 5.9 mm Source: Team analysis Oil Industry Risk Analysis
  44. Commodity Price Risk – Monthly VaR Monthly VaR 250 120.00% 100.00% 200 80.00% 150 60.00% 100 40.00% 50 20.00% 0 0.00% Exposure Results US$ 3,009 mm 99.5% CI Monthly VaR: US$ 1,286 mm 99% CI Monthly VaR : US$ 1.133 mm 95% CI Monthly VaR : US$ 633 mm Source: Team analysis Oil Industry Risk Analysis
  45. Commodity Price Risk – Yearly VaR Yearly VaR 200 120.00% 180 100.00% 160 140 80.00% 120 100 60.00% 80 40.00% 60 40 20.00% 20 0 0.00% Exposure Results US$ 36,118 mm 99.5% CI Yearly VaR: US$ 19,282 mm 99% CI Yearly VaR : US$ 18,824 mm 95% CI Yearly VaR : US$ 14,448 mm Source: Team analysis Oil Industry Risk Analysis
  46. Qatar has 3 major avenues for risk mitigation Membership in OPEC • Ensuring the stabilization of prices in international oil markets • Eliminates harmful and unnecessary fluctuations Financial Reinvestment of Revenue Risk • Allocates a portion of the revenue generated from oil to a wealth fund Partnerships with IOCs • Reduction of profits and mitigate cost of loss Operational • Structure project phase development • Ensuring the stabilization of prices in Risk international oil markets Source: Team analysis Oil Industry Risk Analysis
  47. Agenda Country Overview and Macroeconomic Risk Oil Industry Risk Analysis LNG Industry Risk Analysis Construction Industry Risk Analysis Qatar National Cement Case Study Recap Qatar Risk Management Analysis
  48. There are 2 parts to analyzing risk in the LNG Industry LNG Industry Overview and 1. Value Chain Risks, Quantification and 2. Mitigation Oil Industry Risk Analysis
  49. LNG’s differentiating factor from oil is the need for specialized shipping and re-gas terminals Qatar LNG Industry Value Chain Exploration Storage and Liquefaction Shipping Distribution Marketing Institutions, & Production Re-gasification Consumers Source: Qatargas, Princeton University LNG Industry Risk Analysis
  50. The Qatari government is diversifying the economy from oil and LNG is a big part of this Qatar Govt. Revenues by Sector Amounts in US$ millions 8,439 15,128 18,045 23,643 32,360 = 100% 36 34 29 36 From almost 40 nothing 4 years Other before, Gas 6 9 8 contributed a 9 Gas sizable portion of revenue at 64 60 61 almost 10% in 56 2007 51 Oil 2003 2004 2005 2006 2007 Source: IMF LNG Industry Risk Analysis
  51. Qatar has the world’s 3rd largest LNG reserves and is the No. 1 exporter by volume Proven Natural Gas Reserves 2007 LNG Exports by Volume 2007 Figures in trillion cubic feet Figures in billion cubic meters 1 Russia Russia 1,680 1 Qatar Qatar 39 2 Iran Iran 974 2 Malaysia Malaysia 30 3 Qatar Qatar 911 3 Indonisia Indonesia 27 4 S. Arabia UAE 240 4 Algeria Algeria 25 5 USAArabia Saudi 204 5 Nigeria Nigeria 21 6 UAE States United 199 6 Australia Australia 20 7 Nigeria Nigeria 182 7 Trinidad & … Trinidad 18 Source: Oil & Gas Journal, Shell LNG Industry Risk Analysis
  52. World LNG demand is projected to grow significantly over the next few years… Forecasted World LNG Demand Figures in Million Tons per Annum (MTA) 1.8x 410 330 249 224 202 182 164 148 120 133 2003 2004 2005 2006 2007 2008 2009E 2010F 2015F 2020F 2003 2004 2005 2006 2007 2008 2009 2010 1 2015 1 2020 Source: Qatargas LNG Industry Risk Analysis
  53. …and Qatar is increasing production to achieve 30% market share by 2010 Global Market Share Qatar Projected LNG Production Percentage Figures in Million Tons per Annum (MTA) 35% 90 80 30% 70 25% 60 20% 50 15% 40 30 10% 20 5% 10 0% 0 2003 2004 2005 2006 2007 2008 2009 2010F 2003 2004 2005 2006 2007 2008 2009 2010 E Source: Qatargas LNG Industry Risk Analysis
  54. Qatar’s competitive edge is economies of scale through “world-scale” facilities Liquefaction Trains Ras Laffan Port Super-size LNG Ships • Trains 6 and 7 at the RasGas • Port designed for processing • Q-Flex and Q-Max class LNG II Project are the largest LNG and other gas products Tankers are the largest ships in trains in the world the world • Largest facility of its kind in • Each of them is able to the world • Each one has an increased produce 7.8 MTA, equivalent capacity of 50-90% over to 4% of 2007 world LNG • Able to accommodate wide conventional LNG ships demand range of vessels including Q-Flex and Q-Max class ships; • Qatar is in the midst of building • Lower unit production cost not every port can do this 50 of these large ships than conventional trains Source: Qatargas, Ras Laffan Port, RasGas LNG Industry Risk Analysis
  55. The second part of our analysis covers specific risks in detail LNG Industry Overview and 1. Value Chain Risks, Quantification and 2. Mitigation LNG Industry Risk Analysis
  56. The LNG industry’s activities expose it to several elements of risk Qatar LNG Industry Value Chain List of Risk Exposures is not exhaustive Exploration Shipping Storage and Institutions, Liquefaction Distribution Marketing & Production Re-gasification Consumers •Strategic •Operational •Financial Market Risk •Operational •Reputational •Natural Disaster •Security LNG Industry Risk Analysis
  57. These risks relate to each other in different ways Strategic Risk Financial Market Risk • Bets on LNG demand growth • Commodity price risk • Bets on liquefaction train • Credit risk investments Operational Risk • Counterparty • Viability of reserves • Supply shortages • Liquidity risk • Capabilities (technology) • Higher costs of raw • Refinancing materials • Ability to attract skilled Security risk labour • Terror attack Natural Disaster Risk • IT problems • Attack from • Safety issues • Delivery affected neighboring • Oil fields and country construction affected Reputational • Workers’ rights • Environmental Country Risk protection • Political • Ability to deliver on time • Legal at contracted amounts • Currency (Inflation) Source: Team analysis LNG Industry Risk Analysis
  58. Our risk quantification for the LNG industry focuses on 3 specific types of risk Strategic Risk Quantification Operational Risk of Risk Financial Risk LNG Industry Risk Analysis
  59. Strategic Risk -- Lost export revenues due to uncertainty of gas reserves Strategic Risk Situation Map of Qatar and • The structure of the North Field is such that large expanses of the North Field field are non-homogenous Not drawn to scale • The government has been conducting geological surveys since 2005 to assess if planned exports are in line with long term objectives for North the North Field’s usage Field • They have imposed a moratorium on new projects until 2010 • Qatar is holding off participating in regional gas pipeline projects which would greatly increase their pace of gas exports • Iran has been posturing Qatar’s neighbors to sell natural gas to them Qatar instead Qatar’s strategic choices have opened the way for other countries to supply the needed gas Source: Petroleum Economist, EIU LNG Industry Risk Analysis
  60. Strategic Risk -- Lost export revenues due to uncertainty of gas reserves This Strategic Risk situation presents Qatar with two alternatives Size of Gas Reserves close to or more than Size of Gas reserves less than that of current current estimates estimates Digital Distribution Digital Distribution Qatar loses out on Qatar loses out on potential revenues; it future revenues; current is able to reserves will be accommodate depleted faster than production planned for Delay building Build pipelines Delay building Build pipelines pipelines to neighboring pipelines to neighboring countries countries Downside: Loss of potential revenue from Downside: Loss of the field’s utility in a pipeline projects shorter number of years Source: Petroleum Economist, EIU, Team analysis LNG Industry Risk Analysis
  61. Operational Risk -- Extraction and Liquefaction downtime Strategic Risk Situation Risk Distribution and Exposure Extraction and Liquefaction Downtime • Qatar’s extraction and liquefaction plants have very high utilization and low downtime rates • However, a Shell study done on 9 LNG sites from 2002-2007 shows 1 2 3 4 5 6 7 8 9 10 11 Distribution that most operate only at 87% utilization • Skewed Left • Downtime causes incremental costs • This is mostly due to technical • High potential downside based on length or failures and resulting outages magnitude of delay Exposure • Annual Revenues: US$ 32 bn in 2007 Source: Shell, Brunei LNG, Team analysis LNG Industry Risk Analysis
  62. Operational Risk -- Shipbuilding Cost Overruns Strategic Risk Situation Risk Distribution and Exposure Delays in Shipbuilding • Qatar’s LNG industry hinges on its ability to deliver contracted LNG quantities across oceans • South Korean shipyards that build Qatari ships are subject to fluctuations in raw material costs 1 2 Distribution 3 4 5 6 7 8 9 10 11 • Skewed Left • 23 Q-Flex and 14 Q-Max ships are • Construction delays cause incremental costs due for delivery by mid 2010 • High potential downside Exposure (approx 1 year, till mid-2010) • Estimated cost of remaining fleet being built: US$ 9.8 bn Source: Bloomberg, Team analysis LNG Industry Risk Analysis
  63. Financial Risk -- Lost earnings due to fluctuations in contract and spot prices Financial Risk - Potential Loss in Earnings Frequency of % change v. % Change in Earnings 40 Exposure at Dec ’07 35 Monthly Income from Gas: US$ 53 mm 30 99% CI Monthly EaR: US$ 11.2 mm 25 20 15 10 5 0 0% Methodology • Qatar exports gas in two ways: Long-term contract and spot • Monthly revenue derived from combined value of LT-contracts and spot trades • Net profit margins from peer group of gas companies used for comparison Source: Team analysis LNG Industry Risk Analysis
  64. Qatar has 3 major avenues for risk mitigation Continuous evaluation of drilling sites • The potential downsides from strategic risk are very large Strategic • Qatar is surveying hundreds of drilling sites in the North Field to assess its viability Risk Ensuring optimal performance of liquefaction trains • Analysis of operational breakdowns • Regular maintenance to ensure optimal production Operational Reducing risks in ship building Risk • Forming partnership consortiums to share risk • Long term leasing arrangements Source: Qatargas, Team analysis LNG Industry Risk Analysis
  65. Agenda Country Overview and Macroeconomic Risk Oil Industry Risk Analysis LNG Industry Risk Analysis Construction Industry Risk Analysis Qatar National Cement Case Study Recap Qatar Risk Management Analysis
  66. There are 2 parts to analyzing risk in the Construction Industry Construction Industry 1. Overview and Value Chain Risks, Quantification and 2. Mitigation Construction Industry Risk Analysis
  67. The Qatari construction industry is the largest GDP contributor in the non-hydrocarbon sector GDP Contribution from Non-Hydrocarbon Sector 2007 Percentage Rank 1 7.5% 2 7.1% 3 5.6% 4 5.0% 5 2.0% Source: IMF Construction Industry Risk Analysis
  68. It is the single largest source of employment and a key factor behind Qatar’s import mix Economically Active Population Composition of Imports 2007 Percentage Components in % 437,561 531,449 = 100% Other imports 27 24 Construction Total 2007 16 industries 55 Imports: 45 with average US$ 22 bn 76 73 share of 5% each Construction related imports Machinery 2004 2006 Raw Materials Source: IMF Construction Industry Risk Analysis
  69. The scope of industry services range from planning to demolition Qatar Construction Industry Value Chain Idea Program- Design Preparation Production Handover Maintenance Demolition Project ming Specify Prepare Construct Checking Taking care of Preparing Initiation Decide Solutions Production specified legal aspects building spot for other Content and solutions use Timeframe Source: Qatar Construction Association Construction Industry Risk Analysis
  70. Govt. capital expenditure is the single largest component of market value and has been rising Qatar Govt. Capital Expenditure Construction Industry Market Value Amounts in US$ bn Amounts in US$ bn, Components in % 11.1 119 104 9 Govt. Capex 9.3 9 91 Numerous 4.9 4.8 91 private and foreign 2.2 investments 2005 2006 2007 2008 2009E 2008 2009E Source: Business Monitor Intl, MEED, IMF, Team analysis Construction Industry Risk Analysis
  71. However, this is highly dependent on the strength of oil revenues Sources of Government Revenue Uses of Government Revenue 2007 Amounts in US$ bn, Components in % Amounts in US$ bn, Components in % 32 32 14 40 Other 44 4.8 9 Gas 100 15 13.2 51 Oil 41 51 2007 Available Current Capital Surplus Funds Expenditure Expenditure A fall in oil revenues can significantly affect capital expenditure Source: IMF Construction Industry Risk Analysis
  72. Amongst the remaining players there have been several notable projects The Pearl Lusail City New Doha Intl. Airport • US $5.5bn cost •US $5.5bn cost • US $5bn cost • Largest mega-yacht facility •2 marinas, golf courses, • Fully completed by 2015, in ME residential & commercial annual capacity of 50m • 5 Star hotels districts passengers • Luxury apartments, •Expected completion date • Initial phase to open in 2009 townhouses, villas, 2010 with capacity for 24m penthouses passengers, 750,000 tonnes of cargo Source: Team analysis Construction Industry Risk Analysis
  73. The second part of our analysis covers specific risks in detail Construction Industry 1. Overview and Value Chain Risks, Quantification and 2. Mitigation Construction Industry Risk Analysis
  74. Activities in the construction industry have different types of risk… Qatar Construction Industry Value Chain Idea Program- Design Preparation Production Handover Maintenance Demolition Project ming Specify Prepare Construct Checking Taking care of Preparing Initiation Decide Solutions Production specified legal aspects building spot for other Content and solutions use Timeframe •Strategic •Operational •Environment •Regulatory •Legal •Credit •Liquidity Source: Construction Industry Risk Analysis
  75. However, risk factors from the oil and gas industry affect those in construction as well Oil & Gas Price Risk Govt. Financing Risk • A fall in oil and gas • A decrease in government prices would cause revenues would lead to a government revenues smaller budget for capital to fall as well expenditures Construction: Strategic Risk • A smaller budget would force the government to prioritize and put less important projects on hold Asset Liquidity Risk Reputational Risk • Foreign investors co- • Other foreign investors operating with the may withdraw their government have their funds from the country funds held up in those due to a lack of projects on hold government support Source: Team analysis Construction Industry Risk Analysis
  76. Our risk quantification for the construction industry focuses on 3 specific types of risk Strategic Risk Quantification Operational Risk of Risk Financial Risk Construction Industry Risk Analysis
  77. Construction Industry -- Strategic Risk Drivers Risk Drivers Consequences • Permit Issued • Building goes ahead Permits • Permit Denied • Losses incurred in development stage • Internal Financing • Low hurdle rate, able to build low Credit • External Financing margin projects • High hurdle rate, forced to build high margin projects • Specialized Equipment • Unable to build variety of projects Systems • General Equipment • Mass market production, less focus on unique projects • Good economy • High demand, build more Macroeconomic • Bad economy • Low demand, cut production Source: Qatar Petroleum, Team analysis Construction Industry Risk Analysis
  78. Construction Industry -- Mitigation of Strategic Risks Risk Mitigation Risk Transformation • JVs with government • Political Risk Permits • Network with govt • Reputation Risk officials • Rights Issue • Interest Rate Risk Credit • Partnership with • Capital Risk capital investors • People Risk • Partnership/ JVs •Operational Risk Systems • Contingency Plans • Long-term contracts • Credit Risks Macroeconomic • Performance Risk Source: Qatar Petroleum, Team analysis Construction Industry Risk Analysis
  79. Construction Industry -- Strategic Risk Quantification Strategic Risk Situation Risk Distribution Projects postponed due to insufficient funding • Government may postpone projects due to insufficient funding or poor demand • Government also may choose not to issue permits Distribution Exposure • Fat-tailed distribution • Construction Contribution to • Equal probability of upside & downside GDP 2007: US$ 2.5 bn Source: Team analysis Construction Industry Risk Analysis
  80. Construction Industry -- Operational Risk Drivers Risk Drivers Consequences • Human Errors • Wrong data input/ calculations People • Lack of technical • Workplace Accidents knowledge • Execution Failures Information • Poor Data Security • Leakage of sensitive information Systems • System Failures • Production delays • Loss of software data Infrastructure • Insufficient Maintenance • Equipment breakdowns • Poor infrastructure • Stockout • Production Delays Intervening • Acts of God • Production Delays Activities • Terrorism • Production Delays Source: Qatar Petroleum, Team analysis Construction Industry Risk Analysis
  81. Construction Industry -- Operational Risk Mitigation Risk Mitigation Risk Transformation • Supervisory Checks • Reputational Risks People • Process Automation • Equipment Risks • Job Skills Training • Knowledge Risks • Process Reviews • Verification Controls • People Risks Information • Limited Restriction • Security Risks Systems • Outsource IT • Back-up Systems • Regular Maintenance •Liquidity Risks Infrastructure • Keep Safety Stock • Contingency Plans Intervening • FA Insurance • Credit Risks Activities • FA Insurance Source: Qatar Petroleum, Team analysis Construction Industry Risk Analysis
  82. Financial Risk Quantification Financial Risk Situation Risk Distribution Interest Rate risk on construction loans from domestic banks • Construction loans are usually of a duration of 3 yrs or more • They are exposed to monthly interest rate fluctuations due to floating interest rate component on loans Distribution • Fat-Tail Distribution Exposure • Small fluctuations in interest rates leads to huge losses/profits • Total domestic bank credit to construction sector 2007: US$ • Higher probability of getting extreme EAR 7.7 bn Source: Team analysis Construction Industry Risk Analysis
  83. Financial Risk Quantification Financial Risk Situation Risk Distribution Sand Commodity Price fluctuations • Sand is an important raw material in construction • Different types of sand used: Natural sand, quartz and granulated slag • Changes in raw material prices Distribution affects EAR • Fat-Tail Distribution • Small fluctuations in sand prices leads to huge losses/profits Exposure • Higher probability of getting extreme EAR • Trade Value of Sand Imports in 2007: US$ 4.5 bn Source: Team analysis Construction Industry Risk Analysis
  84. Agenda Country Overview and Macroeconomic Risk Oil Sector Risk Analysis LNG Sector Risk Analysis Construction Sector Risk Analysis Qatar National Cement Case Study Recap Qatar Risk Management Analysis
  85. We extend our risk analysis to a company within one of the 3 covered industries • Company Overview and Value Chain • Financial Analysis •Strategic Situation • Risk Analysis Qatar National Cement Case Study
  86. QNCC sells multiple types of cement and has a full value chain of activities QNCC Value Chain Clinker Production Storage and Institutions, Quarrying Marketing and Processing Distribution Consumers Key Products Usage Examples Water • Ordinary Portland • Reinforced Concrete Desalination Cement • Drainage & Storage • Sulphur-resistant structures cement *List is not exhaustive Qatar National Cement Case Study
  87. They are the market leader in Qatar’s cement industry and have annually increasing sales Cement Industry Market Value 2007 QNCC Annual Revenues Components in % Amounts in US$ millions Gulf Cement Co. 303 QNCC 24 235 Total Market 173 Value 2007: US$ XXX bn 124 82 76 2003 2004 2005 2006 2007 Source: Gulf Capital Group, Company financial statements Qatar National Cement Case Study
  88. It is highly comparable to its peers in terms of profitability and financial risk EBIT Margins at 2007 Total Liabilities to Equity at 2007 Percentage Ratio 45% 0.31 34% 31% 0.29 0.28 Sharjah QNCC Fujairah Sharjah Sharjah QNCC QNCC Fujairah Fujairah Qatar National Cement Case Study
  89. The company is liquid and able to meet its obligations Current Ratio Free Cashflow to Current Liabilities Ratio Ratio 6.47 1.94 1.12 2.21 0.80 2.01 2005 2006 2007 2005 2006 2007 Category 1 Category 2 Category 3 Category 1 Category 2 Category 3 QNCC is in a position of financial stability and is able to seek new opportunities for growth Source: Company financial statements Qatar National Cement Case Study
  90. QNCC has made a strategic bet that housing and raw material shortages will continue Housing and Raw Materials QNCC expanding production shortage in Qatar capacity • Housing demand exceeds • Suppliers such as QNCC are supply in Qatar very much in demand • Increasing rent is the largest • However they are already factor behind rising CPI operating at maximum capacity QNCC is taking a strategic bet that • The need for raw materials to • QNCC seeks to grow the housing build new projects is very production so as to capture shortage will strong more market share within continue • The government has imposed Qatar price caps on materials to ensure they do not get out of • QNCC opens a 4th plant in control Qatar to meet growing needs Source: Company financial statements Qatar National Cement Case Study
  91. QNCC faces a multitude of risks in carrying out its operations QNCC Value Chain List of Risk Exposures is not exhaustive Clinker Production Storage and Institutions, Quarrying Marketing and Processing Distribution Consumers •Strategic •Operational •Operational •Reputational •Political •Financial •Legal •Political Qatar National Cement Case Study
  92. Although marketing operations have the most exposure, they do not have the greatest risk Value Chain Annual Exposure in 2007 Amounts in US$ millions, Chart not drawn to scale Processing operations have 5 Limestone Mining 5 the second largest exposures and are the focus of risk management Transportation and 4 135 Processing Storage and 3 3 Distribution The cement industry as a 2 Marketing 388 whole is subject to price caps 1 Total Exposure 528 Source: Company financial statements Qatar National Cement Case Study
  93. In our analysis we have found that QNCC is exposed to 6 major types of risk Political Financial Operational Strategic Legal Reputational Qatar National Cement Case Study
  94. QNCC – Operational Risk Risk Drivers Mitigation Strategic • Shortages in raw materials • Long-term contracts with Operational • Plants have capacity, but suppliers no materials to process • Production has to be Political delayed or stopped • Backup generators Legal • Shortages in energy • Contractual arrangements for • Affects clinker kilns treated water to be shipped • Affects desalination over Reputational Financial • Shortages in clean water • Employee safety education Financial (equipment failure in Nat. Disaster desalinization) • Workplace safety Source: Company financial statements Qatar National Cement Case Study
  95. QNCC – Political Risk Risk Drivers Strategic • There are only 2 major cement Operational companies in the whole of Qatar • Degree of interaction with Political government officials will be very high QNCC has a low need to mitigate Legal • Companies need to secure good political risk relations with government Reputational Financial authorities for contracts Financial • QNCC is much bargaining power Nat. Disaster because the state owns a large equity stake Source: Company financial statements Qatar National Cement Case Study
  96. QNCC – Legal Risk Risk Drivers and Mitigation Strategic • Risk of getting sued by other Operational companies for not meeting production schedules and/or Political changing prices • Mitigated by Legal Reserves, QNCC’s level of Legal stipulated at 10% of net profit Legal Risk is low • US$ 49 mm in 2008 Reputational Financial • Low chance of incurring legal risk due to state involvement Financial Nat. Disaster • However, higher risk of fraud due to lack of transparency Source: Company financial statements Qatar National Cement Case Study
  97. QNCC – Reputational Risk Strategic Risk Drivers Mitigation Operational • QNCC incurs reputational risk • An independent board of if their products fall below ISO directors is needed to Political 9002 standards safeguard shareholders interests • They also incur Reputational Legal Risk if management is seen as • The Qatari government, as blindly acceding to the majority shareholder government policy should not be involved in Reputational Financial management aspects Financial Nat. Disaster Source: Company financial statements Qatar National Cement Case Study
  98. QNCC – Financial Risk: Forex Risk Strategic Risk Drivers and Methodology Operational Forex Risk •Exposures mainly in Euros Political •These are in the form of foreign exchange assets •30 years annual foreign exchange rate used •Resulting VaR chart is left skewed Legal •Exposure: Reputational •99.5% CI annual VaR: Euro 15.0 mm Financial •99% CI annual VaR: Euro 14.4 mm Financial Nat. Disaster •95% CI annual VaR: Euro 10.3 mm Source: Company financial statements Qatar National Cement Case Study
  99. QNCC – Financial Risk: Interest Rate Risk Strategic Risk Drivers and Methodology Operational Interest Rate Risk • Affects interest bearing instruments on QNCC’s balance Political sheet •Interest bearing instruments comprise of Short term Legal liabilities and Long-term liabilities Reputational Financial •Exposure: US$ 88 mm •EaR distribution is evenly distributed Financial Nat. Disaster •99% CI annual EaR: US$ 17.8 mm •95% CI annual EaR: US$ 13.5 mm Source: Company financial statements Qatar National Cement Case Study
  100. QNCC has taken adequate steps to mitigate its risk profile • Risk measures are adequate • Low financial risk, but high operational risk • Low risk in other factors attributed to large government stake • QNCC is unlike other companies such that the major concerns are reputational and operational rather than financial Qatar National Cement Case Study
  101. Agenda Country Overview and Macroeconomic Risk Oil Sector Risk Analysis LNG Sector Risk Analysis Construction Sector Risk Analysis Qatar National Cement Case Study Recap Qatar Risk Management Analysis
  102. Recap • Qatar’s economy is driven by the Oil, Gas and Construction industries • The country is heavily dependent on revenues from Oil and Gas to fund development through Construction • The country’s main risk drivers are Strategic, Operational and Country risks • However, the country is highly vulnerable to oil price shocks Qatar Risk Management Analysis

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