Structuring the Business to the Project Opportunity

Structuring the Business to the Project Opportunity

By Charl Buys

Introduction

The world constantly provides us with a myriad of challenging and exciting business opportunities. Whether you are an entrepreneur developing the opportunity or it is being developed by the business development department of a major corporation, the focus is normally on the capital asset development portion of the project. Many a time developing the business to fit the project opportunity is neglected or left too late.

While most organisations follow some form of stage-gate process for the asset development portion, very few organisations do the same for preparing the organisation for the new business.

Both the entrepreneur creating a new organisation and the large corporation need to follow the same steps to optimise structuring the business to the opportunity.  These steps form the basis of this insight article.

The Structuring Process

The normal process for structuring a new business is summarised below:

  • Industry and systems analysis: Execute an industry strategic analysis using models such as PESTLE or STEEPCOIL.   PESTLE is a framework used by marketers to analyse and monitor the external marketing environment factors that have an impact on an organisation. STEEPCOIL is an acronym used by Steyn (2018) to identify risks associated with a new venture. Then conduct a business systems analysis using models such as Porter’s 5 Forces, Industry Trends Analysis, Industry Driving Forces or Industry Key Success Factors;
  • Business strategy definition: Develop a compelling Vision that will align and direct all the stakeholders. The vision should take into consideration the corporation’s value statement towards government, the environment and society. The corporation’s view towards employees, suppliers and its investment should also be considered.  Define the Mission of the company to enable it to achieve the vision.  Decide on the Product line that the company will produce to satisfy a specific need in the identified market segment.  Finally, do a SWOT analysis to understand the company’s unique position or Competitive Advantage (Kim & Mauborgne, 2009);
  • Business support strategies: Develop marketing, operations, organisational development and financial strategies in support of the business strategy; and
  • Create the correct delivery system: The creation of the correct delivery system means structuring the business for best fit with the project opportunity.  See also the article by Bennett et al (2000) entitled: The organisation vs. the strategy – Solving the alignment paradox.

For the purposes of this article, it is assumed that the first three steps have already been completed and that the traditional buy, make and sell business process as depicted in Figure 1 has been developed.

Figure 1: Traditional business process model

The question now is how to create the correct foundation for development?  This question has many subsections and includes the design of the company, how to structure the governance and control processes, how to manage suppliers, customer and partner agreements, and lastly, how to design the work processes and organisation structure.

To answer these questions, we will take a closer look at how the operations and organisational development strategies will be executed. To ensure an integrated flow, the following process considerations are proposed:

  • Shareholders;
  • Strategic alliances;
  • The Board;
  • Business processes to be governed;
  • Management structure;
  • Commercial & Legal;
  • Human resources processes;
  • Customer relations; and
  • Business Operations.

Each of the nine process considerations listed above is discussed in more detail in the following section.

Discussion of the Process

Shareholders

Decide the current and future distribution of ownership, how the founding partners should be rewarded and develop the shareholding policy for initial employees, future employees, advisors, board members, 1st and 2nd round investors.

Strategic alliances

Decide on whether the new business will be wholly owned by the mother company, or whether a joint venture or other strategic alliance is more appropriate.

Consider strategic alliances with major feedstock and technology suppliers as well as one or two major customers. Other strategic alliances that can be considered are: business associations, resource sharing communities, purchasing associations, market collaboration and industry cluster associations.

The Board

Select the appropriate members of the board and/or advisory board for your specific case such as an economist, banker, entrepreneur, industry expert, client, technical expert, employee organisation representative, politician, IT, marketing or HR and communications expert.

Ensure that the selection of board members, and specifically appointment of the chairman of the board is in accordance with the King IV requirements.

Business processes

Defining the main business processes to be governed is a crucial step in structuring the business.  According to Bizmanualz (2018), there are ten core business processes, namely four business drivers, five business operations processes and management responsibility to be defined and mapped, as depicted in Figure 2.

Figure 2: The main business processes (Bizmanualz, 2018)

Management structure

From an analysis of the main business processes above, an estimate of the number of personnel and the required span of control of an organisation structure needs to be addressed.  Figure 3 depicts the typical organisation structure for the buy-make-sell business process and can be utilised in this regard.

Figure 3: A typical organisation structure

It must also be taken into consideration that the capital project organisation will be structured for execution of the project. Many of the personnel that will operate the plant in the end will, during the project execution phase, be employed as part of the project owner team. According to van Heerden, Steyn & van der Walt (2015), a typical project owner team consists of the following members, as depicted in Figure 4. Depending on the project complexity and size, the owner team can consist of anywhere from 10 to 200 people.

Figure 4: A typical owner project team (van Heerden et al, 2015)

Commercial & Legal

The next step is to address the legal and contractual issues.  There are various contracts to be drawn up and signed depending on the type of business being developed.  It is important to consider the major decisions about the company prior to engaging with a lawyer to ensure that this resource can be directed correctly.

In this regard, we consider the following agreements:

  • Client agreements: General sales agreements, order confirmation notes, service agreements, license and or royalty agreements;
  • Supplier agreements: General purchasing terms, procurement contracts, rental and or lease agreements, insurance agreements;
  • Product or services agreements: This includes disclaimers, knowhow, trademark and copywrite protection;
  • Shareholder agreement: The shareholder agreement defines the rights, shareholding, conduct, conditions for entry and exit, and compensation of shareholders;
  • Confidentiality agreements: Confidentiality or non-disclosure agreements with partners, suppliers and contractors;
  • Partnership agreements: Distribution contracts, agency agreements, collaboration agreements, co-branding agreements and joint venture agreement; and
  • Employee agreements: Employment contracts, bonus agreements, incentive schemes, share options or warrant programs.

Customer relations

After completing the commercial and legal landscape, the interface between the company and its customers is developed. To do this, a stakeholder influence diagram is prepared to determine the best influencing lines (Morphy, undated). From this the company network diagram can be developed which forms the basis for the marketing strategy. The next step is to develop the sales network and outbound logistics process, followed by the public relations and communications strategy and lastly, the branding strategy.

Human Resources processes

From the organisation structure developed under Management structure, above, a job description needs to be developed for each position. The roles and responsibilities of each position should be uniquely defined, with reporting requirements and decision authority allocated to the position.

The performance management and recruitment processes also need to be developed. Lastly, the succession planning process is addressed.

Business Operations

After completing all the stakeholder management processes, that is the client, supplier, shareholder and employee, the internal business processes can be developed to support all the stakeholder management processes.

The financial analysis, reporting and capital asset management processes, as well as the IT, business systems and knowledge management processes need to be developed to support all the stakeholder management processes.

Concluding remarks

In a competitive market, where time, money and resources are of the essence, one is constantly striving to optimise processes and procedures. In this endeavor, it is often the case that business owners and or project managers may overlook the essentials of comprehensive planning and structures. It is therefore imperative to ensure that a proven stage-gate model is followed in developing the organisation that must accept, own and operate the new facility. In fact, it is just as imperative to use a stage-gate model to develop the organisation as it is to develop the capital asset.

It is also crucial to make sure that the business is sufficiently developed to support the correct decision-making processes during project development and to prevent rework due to new stakeholders joining the business. On-boarding new stakeholders invariably brings new requirements to the business or project. If the business is sufficiently developed the requirements will be fixed and aligned and the project can simply execute these requirements.

References

Bennett, J.W., Pernsteiner, T.E., Kocuorek, P.F. & Hedlund, S.B., 2000, The organization vs. the strategy: Solving the alignment paradox in strategy and competition.  Available from https://www.strategy-business.com/article/14114?gko=9918e.  Accessed on 31 August 2018.

Bizmanuals, 2018, Critical business process, policies and procedures.  Available from https://www.bizmanualz.com/improve-business-processes/critical-business-processes-policies-and-procedures.html. Accessed on 27 August 2018.

Kim, W.C., & Mauborgne, R., 2009, How Strategy Shapes Structure.  Available from https://hbr.org/2009/09/how-strategy-shapes-structure.  Accessed on 31 August 2018.

Morphy, T., Undated, Stakeholder analysis, project management, templates and advice.  Available from https://www.stakeholdermap.com/stakeholder-analysis.html.  Accessed on 31 August 2018.

Steyn, J.W. 2018, Insight article 045: Introduction to project risk management: Part 1 – Planning.  Available from http://www.ownerteamconsult.com/introduction-to-project-risk-management-part-1-planning/. Accessed on 30 August 2018.

van Heerden, F.J., Steyn, J.W. & van der Walt, D., 2015, Programme Management for Owner Teams – a practical guide to what you need to know.  Available on Apple Books and Amazon.  OTC Publications, Vaalpark, RSA.

 

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The Need for Southern African Liquid Fuels Production

The Need for Southern African Liquid Fuels Production

By Anton Putter

Introduction

The last significant supply changes to the liquid fuels industry in southern Africa occurred 25 years ago when the PetroSA synthetic fuels facility, close to Mossel Bay, was commissioned, and when Sasol discontinued synthetic fuel production at its original Sasolburg site soon after.  During that same 25-year period, the demand for liquid fuels in South Africa increased by well over 50% from 16 million m³ per annum to 25 million m³ per annum.

This increasing shortfall in local supply of liquid fuels is clearly illustrated by Figure 1, below, which indicates the growing imports of final liquid fuels over a recent 10-year period.  By 2015, these imports of final liquid fuels into South Africa had increased to 6,9 million m³ per annum.

Fig 1 - Supply and demand

Figure 1: Supply and demand of petrol and diesel, 2002 – 2013

These growing final liquid fuel imports, together with the existing substantial imports of crude oil, exert substantial pressure on the South African balance of payments.  Of South Africa’s total imports valued at $85,7 billion in 2015, oil products constituted the single largest import category, representing 15,7% of total imports.  Crude oil imports totalled $7,7 billion and liquid fuel products $4,7 billion.  However, 2015 was a year of low oil and fuel prices.  Oil products would typically represent 20% to 30% of South Africa’s imports.

Strategically, South Africa is also becoming increasingly dependent on imported oil and fuel.  Crucial sectors of the economy such as the transport industry and the defence force, are extremely dependent on liquid fuels.  This substantial economic impact of oil as well as the growing dependence on imports for a strategic commodity, is putting increasing pressure on the South African government to establish additional fuel production capacity in South Africa.

Background on South Africa’s oil industry

There are four crude oil refineries in South Africa as listed in Table 1:

Table 1:  Crude oil refineries in South Africa

Table 1: Crude oil refineries in South Africa

 

bpd = barrels per day of crude oil processing capacity

These crude oil refineries are old.  The first of these refineries were built in the 1950s and the latest refinery, Natref, was commissioned 45 years ago.  It is becoming increasingly difficult for these refineries to survive within the modern global oil refining industry.  They are hampered by high maintenance costs, old technology, as well as small scale and escalating fuel quality demands.

In addition to the crude oil refineries, there are two synthetic fuel facilities in South Africa, listed in Table 2:

Table 2:  Synthetic fuel facilities in South Africa

Table 2: Synthetic fuel facilities in South Africa

 

bpd = barrels per day of final liquid fuel product

These facilities face their own challenges with the ageing of the Sasol facility (commissioned early 1980s) and the PetroSA facility running out of natural gas feedstock.  It is important to note that the capacities of the synthetic fuel facilities are not comparable to the capacities of the crude oil refineries.  Whereas the synthetic fuel capacities denote final liquid fuels capacities, the crude oil refinery capacities denote crude oil feedstock capacities.  Apart from the Natref refinery, which has a volumetric efficiency of close to 90% (volume of liquid fuels as fraction of crude oil volume), the other refineries have lower efficiencies of 80%, or less.

Over the 20-year period since 1990, petrol demand in South Africa has increased by 35%, while diesel consumption grew by over 80%, with diesel demand volumes now approaching petrol demand volumes.  This discrepancy is also putting pressure on the fuel producing units, which are geared towards the traditional petrol/diesel ratio.

Current status of liquid fuels industry

The members of the Southern African Customs Union (SACU) include Botswana, Lesotho, Namibia, South Africa and Swaziland.  This region is totally integrated in the fuels market with almost all fuel originating from South Africa, via production or via imports.  Hence, any discussion on markets and imports must include the total SACU region.  At the same time, it must be noted that South Africa dominates the SACU fuel market as a result of its consumption of almost 90% of the fuel in the region.

The current fuels supply situation in SACU is dominated by the increasing volumes of final fuels imports as seen in Figure 1.  This is putting increasing pressure on fuels import infrastructure and has necessitated the construction of a new fuels pipeline (NMPP) from the main import port, Durban, to the main consumption area, Gauteng.  The volume of liquid fuels imports is now close to 7 million m³ per annum with the bulk (around 4,5 million m³ per annum) represented by diesel.

At the same time, more than 2 million m³ per annum of fuel components are exported from South Africa, indicating net imports of liquid fuels into SACU at close to 5 million m³ per annum.  These component exports are a strong indication of the increasing difficulties experienced by the crude oil refineries to meet the changing needs of the local market.

The global drive towards cleaner liquid fuels is also impacting South Africa.  In 2006, new fuel specifications, known as Clean Fuels I specifications, were implemented in South Africa.  The main changes to specifications were the reduction in allowable sulphur levels in diesel from 3 000 parts per million (ppm) to 500 ppm and the prohibition of lead addition to petrol.  All the fuel producers in South Africa had to adapt and spent the requisite capital to adhere to these specification changes.

In 2012, South Africa gazetted proposed new fuel specifications for implementation by 2017.  These specifications, amongst others, proposed reductions in allowable sulphur levels in both diesel and petrol to 10 ppm.  Adherence to these specifications will be prohibitively expensive for all fuel producers (an initial estimate by SAPIA [South African Petroleum Industry Association] indicated capital needs of $6 to $7 billion) and negotiations between the oil industry and the government on the potential funding of these capital investments are ongoing.  The proposed implementation date of 2017 is not achievable anymore and a new date will be set once these government/oil industry discussions are concluded.

The government is under pressure from environmental groups and the motor industry to change the fuel specifications, which necessitates these changes in the future.  It might not be economically feasible for all the crude oil refineries to adapt to the new specifications.  Under greatest threat of potential closure are the Enref and Calref refineries.  If one of these refineries had to shut down today, SACU would have to import an additional 3 to 3,5 million m³ per annum of liquid fuels, or between 6 and 7 million m³ per annum additional if both refineries shut down.

Expansion of oil/fuels production

Since there are no projects currently under construction, no additional major fuel production will be added in the SACU region over the next five years.  By 2020, SACU will then be importing approximately 10 to 15 million m³ per annum of liquid fuels.

Figure 2, below, is a graph depicting the fuels balance for SACU over the period 2010 to 2025.  Please note that this shows net import figures, i.e. fuel imports minus component exports.  Most of the component exports are diesel-range fractions (meaning that the actual diesel import figures are substantially higher than shown here).  The main assumptions underlying Figure 2 is a GDP growth rate of 2% per annum over the period and the closure of one crude oil refinery in 2018.

Fig 2 - Overall SACU fuel balance

Source:  OTC model for prediction of SACU liquid fuel supply/demand

Figure 2: Imports and exports of liquid fuels, 2010 – 2025

Over the past five years, two projects were considered in the region:

  • Mthombo crude oil refinery at Coega: The capacities mentioned for this project by PetroSA varied from 200 000 to 400 000 bpd.  This project has lost most of its momentum over the past few years, especially after the unsuccessful attempted acquisition of Engen by PetroSA.  It was never clear how Mthombo, which would essentially be a small-scale export refinery (with all crude oil coming in via sea and the bulk of the products dispatched via sea), could be competitive.
  • Mafutha coal to liquid (CTL) facility in Waterberg: This project by Sasol would have had a capacity of 80 000 bpd with all final fuel product being diesel.  This project was discontinued approximately three years ago, reportedly due to a lack of water in the Waterberg area and the inability to sequestrate the carbon dioxide emissions.

Three options exist for greenfield fuel production in SACU and neighbouring countries:

  • CTL: Throughout the region there are substantial coal resources that could support a world-scale CTL facility.  Prime candidates would be the Waterberg or Mpumulanga in South Africa, the Tete region in Mozambique or eastern Botswana.
  • Crude oil refinery: A new crude oil refinery designed according to the latest clean fuel specifications, on the logistics route (possibly Durban, Richards Bay or Maputo) to the main market in the region, Gauteng, could be economical.
  • GTL (gas to liquids): With substantial new natural gas finds at Rovuma in the north of Mozambique and potentially in the future in the Karoo basin of South Africa, world-scale GTL plants have become a realistic option.

The other route that could add substantial fuel volumes to local production, would be expansion of one or more of the existing facilities.  In the short to medium term, the only possible candidate for this option seems to be the Sapref refinery.

Oil refining versus synthetic fuel production

From the above it is clear that fuel production capacity needs to be added, urgently, in the SACU region for economic and strategic reasons.  The question then arises as to whether crude oil refining or synthetic fuel production would be the preferred route to follow.  For both economic and strategic reasons, synthetic fuels seem to be the obvious choice.

The main economic reasons for preferring synthetic fuels over crude oil refineries are:

  • In the case of crude oil refining the import saving is primarily only the refining margin of approximately $8 per barrel, but the crude oil must still be imported at a cost of around $50 to $70 per barrel. On the other hand, there will be no import cost of crude oil or liquid fuels in the case of synthetic fuels facilities.
  • Modern synthetic fuels facilities predominantly produce diesel as product and typically no petrol. This suits the SACU conditions very well as the main fuel imported is diesel.
  • South Africa is the only country, worldwide, where both CTL and GTL facilities operate on commercial scale. The technology, know-how and skills are available to construct either or both of these technologies locally, a unique advantage worldwide.
  • There are large coal deposits in southern Africa and now also natural gas in the north of Mozambique. Large volumes of the coal are either exported or are stranded, and the only option currently pursued for the natural gas is LNG (liquefied natural gas) exports.  For these reasons both the coal and the natural gas should be available as synthetic fuels feedstocks at very competitive prices.

From a strategic perspective, it is clear that synthetic fuels are preferable to crude oil refining.  The reason is that SACU will still be dependent on an imported commodity in the case of crude oil refining, in this case crude oil, rather than liquid fuels imports, for the operation of strategic sectors of the economy.  It could even be argued that crude oil imports would leave SACU in a worse strategic position than liquid fuel imports, since crude oil is available from a limited number of sources (also noting that crude oil refineries are typically designed for specific crude oil feedstocks), whereas liquid fuels could potentially be sourced from refineries anywhere in the world.  This was evidenced by the negative impact on South African refineries as a result of the recent embargo on crude oil imports from Iran.  Synthetic fuels have none of these drawbacks.

The three main factors that must be addressed for synthetic fuels investments are:

  • High capital investment needs as compared to similar capacity crude oil refineries. This makes the efficient financing and economic justification (as briefly discussed under the next bullet) for synthetic fuels facilities crucial for the success of these projects.
  • The economics of synthetic fuels facilities are completely different from crude oil refineries. Whereas the economics of crude oil refineries are mostly independent of the absolute crude oil price, the economics of synthetic fuel facilities are heavily dependent on the crude oil price.
  • The higher carbon dioxide emissions from synthetic fuel facilities, have to be addressed. In this regard, CTL plants present a bigger challenge than GTL plants.

Concluding remarks

It is imperative for South Africa, and SACU in general, to relieve the economic pressure of oil and fuel imports on the balance of payments.  Local production of fuels must be pursued urgently.

Fuel is an essential input for certain strategic sectors of any country’s activities.  The only way to reduce the increasing reliance on imported oil and fuels for these strategic sectors, would be to construct synthetic fuels facilities.

Apart from the strategic advantages of synthetic fuels facilities over crude oil refineries, there are also techno-economic advantages in pursuing synthetic fuels facilities, rather than crude oil refineries.  The only caveat here is that the crude oil price must be sufficiently high to justify the capital outlay on synthetic fuels facilities.

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