APG Flaring Reduction Opportunities in the EBRD s Region Brussels, 8 th July 2013 Cristian Carraretto, Energy Efficiency and Climate Change
AGENDA 1. The EBRD and its Sustainable Energy Initiative 2. The APG Regional Strategic Study 3. The Bank s experience on APG projects 4. Some lessons learned, barriers and drivers for scaling up APG flaring reduction investments 2
The EBRD s Sustainable Energy Initiative (SEI) 3
THE EBRD Mandate and Region of operations AAA rated. Capital base of 30 billion 2011: 9.1 billion finance committed 2012: 9 billion finance committed Investing in changing lives Sound Banking Principles Transition Impact Environmental Sustainability International financial institution established in 1991 to promote transition to market economies in 30 countries from Central Europe to Central Asia Owned by 63 countries and two inter-governmental institutions (EU and EIB). Expanding in 2009 Turkey became a country of operations, currently expanding in Egypt, Jordan, Morocco and Tunisia after the Arab Spring. EBRD 2013, all rights reserved 4
EBRD s SUSTAINABLE ENERGY INITIATIVE (SEI) The SEI was launched in 2006 in order to: address the twin challenge of energy efficiency and climate change, mainstream energy efficiency into all EBRD operations across all sectors, scale up sustainable energy finance in the EBRD Region. Strategic and business relevance: from a country perspective: enhance energy security and sustainable economic development, improve international trade balance from an enterprise perspective: reduce operating costs and improve competitiveness 5
Signed SEI business volumes in 2006-2012 1. Industrial energy efficiency EUR 2.76 billion 2. Sustainable Energy Financing Facilities (SEFFs) EUR 1.88 billion 3. Energy and Natural Resources energy efficiency EUR 2.98 billion 4. Renewable energy EUR 2.05 billion 5. Municipal infrastructure energy efficiency EUR 1.35 billion 6
The EBRD s APG Flaring Reduction Study 7
Strategic and Business Development Studies Identification of emerging market/investment opportunities Preliminary profitability/implementation assessment Involvement of key market actors and technology suppliers Thermal Power Plants, Rehabilitation & Efficiency Improvement Oil Refineries study, Modernisation and Efficiency Improvements Associated Petroleum Gas Flaring Study Focus on EBRD Countries with significant flaring and venting: GGFA: Russia >35 bcm, Kazakhstan ~4 bcm, Turkmenistan ~1 bcm, Azerbaijan <1 bcm Mature technologies and markets Identification of projects that the EBRD can finance 8
APG Flaring Study for Russia, Kazakhstan, Turkmenistan and Azerbaijan Objectives Review and analyse the existing flaring situation Identify and analyse gas utilization options Develop bankable investment projects Disseminate the results of the study Tasks and timeline Review flaring situation in the four countries Establish collaboration with potential partners Economic and technical analysis of gas utilization projects Results dissemination Project Team Project Management 9
APG Flaring Study for Russia, Kazakhstan, Turkmenistan and Azerbaijan Work streams flaring sites identification (> 400) flare volumes estimation Mapping of existing infrastructure Development of case studies (bankable projects) Engagement with companies on investment plans etc.. 10
Gas flaring: is it decreasing? GLOBAL FLARING TREND (in bcm) ~ 145 Source: NOAA 2012, EBRD/CL analysis 11
Gas flaring trend in the Bank s region satellite images official reports KEY SOURCES OF DISCREPANCIES calibration of satellite evaluation different scope of coverage uncertainties on the on-site flaring evaluation Source: BP 2012, NOAA 2012, EBRD/CL analysis 12
Geographical concentration in the EBRD s region PERCENTAGE OF THE FLARING TOTAL VOLUME (2010) Source: EBRD/CL analysis 13
Number of sites (#) % of gas flaring volume Mainly small and medium flaring sites 240 200 160 Number of fields Proportion of the flare volume 40% 30% 120 20% 80 40 10% 0 0-50 50-100 100-250 250-500 More than 500 Annual Flaring Volume per field (in Annual mmcm) APG flaring (million cm) 0% Small scale Medium scale Large scale Re-injection (Storage/EOR) Mini GTL Local use in CHP Small-scale GTL Petrochemicals Methanol & Fertilizer prod. Power plant for Grid export CCGT Small-scale LNG/CNG Gas treatment - dry gas and NGLs Large-scale LNG New gas trunkline Wet gas export (to existing infr.) Gas processing (new/plant expansion) CLUSTERING 14
Current policies and regulations in the region RUSSIA President statement in 2007: APG utilization in 2012 should be 95% now about 80% Current legal basis fragmented, yet unsuccessful attempts to establish specific APG legislation 95% APG requirements established in 50% of all existing Licence Agreements, and in all new Flaring above 5% have large fines: 30-45 USD/tcm KAZAKHSTAN Flaring prohibited from 2006, strict enforcement New law in 2010 provides for more flexibility, but flaring only allowed after explicit permit granted Law on Gas Supply (2012) establishes significant state control on gas supplies, including APG utilization Charges and penalties for flaring, high in cases of permit violations. AZERBAIJAN Flaring and venting not explicitly covered by energy and environment legislation but still subject to general prescriptions Flaring and venting specifically addressed in Production Sharing Agreements (PSAs) TURKMENISTAN Flaring only allowed based on permit from competent authority Permit may be granted if APG utilization uneconomic Specific reporting requirements for flared gas 15
Some APG Projects the Bank has been/is involved in 16
APG projects within corporate operations CLIENT Irkutsk Oil and Gas, a Siberian O&G extraction and exploration company. PROJECT On-site energy production Re-injection of APG Dry-gas, LPG, condensate recovery. TECHNICAL ASSISTANCE donor-funded initial pre-fs carbon management assistance to register the project under the JI carbon credits mechanism. www.irkutskoil.com EBRD EQUITY AND DEBT EBRD equity investment EUR 55 m EBRD loan EUR 90 m new A/B facility under evaluation TOTAL CAPEX EUR 800m CARBON CREDITS GHG emission reduction: ~ 1 million tco 2 /year. JI successfully registered and initially contracted by EBRD-managed Multilateral Carbon Credit Fund. 17
APG projects within corporate operations Re-Injection wells 2nd Stabilization LPG Gas wells Gas Gas Cycling Power Plant APG Condensate Power for internal use Project developed and expanded in stages 1 st : on-site use & re-injection 2 nd : on-site maximisation 3 rd : products diversification & sale Oil wells Oil + APG Booster Compr sors Booster Oil Pumps APG Oil Oil wells Oil + APG Oil Treatment APG utilization Oil APG: > 1 bcm 18
APG projects via intermediaries CLIENT Monolit, a company specialised in downstream and logistics in the oil and gas sector, purchasing APG from oil companies and selling the products PROJECT FINANCE STRUCTURE Equity USD 90m Debt EBRD A loan USD 55m EBRD B loan USD 32m External finance USD 65m USD 242m CARBON CREDITS GHG emission reduction: 460 ktco 2 /year (2012-2020) JI registered and contracted by EBRD-managed Multilateral Carbon Credit Fund 19
APG projects via intermediaries Oil company A Project Company Oil company B Electricity Power Plant Electricity Oil wells APG Deep Gas Processing Stabilization APG Dry Stripped Gas Oil wells To market: LPG, Stabilised Gasoline APG: 0.4 bmc COMMERCIAL STRUCTURE Long-term off-take contracts with all related parties. Price adjustment mechanisms based on actual in/out volumes exchanged 20
Overview of EBRD projects positive impact GHG 1 3 tco 2 / tcm IRR 10 30% GHG 2 5% per oil bbl 1 bbl = 0.43 ton CO 2 21
Some concluding remarks 22
1) Scaling up APG flaring reduction requires significant investments 23
Overview of EBRD projects - CAPEX Mini Small GTL Reinjection Cluster of fields GTL + TPP Infrastructure 24
Outlook of investment needs (Russia) 1 Growth of the oil sector (official statistics) 2 Reduction of the flaring practices (assumption on flaring targets) 3 Assessment of CAPEX needs (assumption on mix of fields, infrastructure, technologies) 4 Qualitative estimation of mid-term total investment needs: Assuming 17 bcm flaring in 2012 EUR 15 bln (30% for old sites) Assuming 34 bcm flaring in 2012 EUR 30 bln (50% for old sites) Source: EBRD/CL analysis 25
2) APG flaring reduction projects often have significant technical challenges 26
APG volume APG volume Technical challenges Variable APG quality (pressure, composition, impurities) Limited and variable APG quantity (short-term fluctuations) (long-term profiles) days Often: Low volume per field clustering (this may involve multi-party projects) Long distances from off-takers Lack of existing infrastructure years 27
3) Regulations should provide clear, stable and transparent rules and stimulus for APG flaring reduction programmes 28
Regulatory barriers Regulatory/legal base deficiencies Political support for cost effectiveness The economics is very site-specific Investment cost changes a lot depending on existing infrastructure Operating margin can be anywhere between 0 and 60% 29
Regulatory barriers Regulatory/legal base deficiencies Political support for cost effectiveness (economics is site specific) Dialogue between authorities and operators Requirements and targets based on site-specific evaluations Do not underestimate the time for developing APG projects and infrastructures pushy independent operator: 3-4 years growing/isolated oil company: >4-5 years 30
Regulatory barriers Regulatory/legal base deficiencies Political support for cost effectiveness (economics is site specific) Dialogue between authorities and operators Clear and transparent rules for approval of flaring Clear rules and guidelines for monitoring, reporting and verification (MRV) Well-defined and predicable enforcement mechanisms Tighter environmental requirements are unavoidable and will push sector operators 31
4) Higher accessibility to the markets for the recovery products is needed 32
Market and structural barriers Existence of monopoly/incumbent positions Oil companies focus on oil development: Oil gross revenue = 1 APG gross revenue < 0.05 Structure of concessions/psa not obvious about APG reuse Low domestic prices for the recovery products (fuels, chemicals and energy) Export taxes do not always favour trading of recovery products Few fiscal incentives for the high investments required 33
5) But still, our experience and field evidence point to good business opportunities 34
The potential is huge Most technologies are proven Emerging technologies (mini/small GTL) are near-mature and can be game-changers Innovative business models (outsourcing of APG management): remove APG liability of oil companies; create good business opportunity for independent operators Big investment potential often at attractive returns The EBRD is committed to support APG projects: Strategic Study being extended to SEMED Good pipeline of investment projects 35
Thank you! Cristian Carraretto Energy Efficiency and Climate Change European Bank for Reconstruction and Development One Exchange Square, London, EC2A 2JN Email: carrarec@ebrd.com 36