Alternative Energy Economics for Iran March 2005

1
Alternative Energy Economics for Iran Options
Definition and Evaluation
2
Scope of Current Analysis

• I Market vs. indigenous fuel supply options
• II Iranian energy resource review
• III Cost of selected nuclear facilities
• IV Alternative investments - natural gas sector
• V Alternative investments - refining sector
• VI Conclusions of analysis

3
Background

• June 14, 2003 Letter to U.K parliament from
  Ambassador of Iran
• Iran concludes its need for 7000 MWe via nuclear
  power by 2020.
• Based on VVER-1000 at Bushehr, assume additional
  (6) power reactors of the same type (total of 7)
• IAEA BOG Report GOV/2003/75 - chronology in which
  Iran has taken steps to possess a front end fuel
  cycle
• Ongoing EU3/Iran negotiations to persuade Iran to
  discontinue uranium processing and enrichment
• Suspension and resumption of enrichment, referral
  to UN

4
Section I

• Nuclear Fuel Resource Constraints and Comparison
  of Market vs. Indigenous Nuclear Fuel Supply
  Options

5
Typical Annual Material Inventory in the Nuclear
Fuel Cycle for a VVER-1000 Reactor1

• Mining 405,000 tons of uranium ore _at_ 553 ppm
  (0.05)2
• Milling 262.5 tons of U3O8 , (223 tons natural
  U)
• Conversion - 328 tons UF6 , (222 tons natural U)
• Enrichment - 32.8 tons UF6 , (22 tons 4.4 LEU)
• Fuel Fabrication 25 tons UO2 , (22 tons 4.4
  LEU)
• Assumes enrichment 4.4, 75 ton initial UO2 fuel
  load, 36 month fuel residence time3

1 Based on material balances from The Economics
of the Nuclear Fuel Cycle, OECD 1994, and Nuclear
Energy Economics and Policy Analysis, 3/29/04,
MIT, and The Future of Nuclear Power An
Interdisciplinary Study, MIT.
2 Ore data from Atomic Energy Organization of
Iran www.aeoi.org.ir
3 VVER-1000 data from Rosenergoatom
http//eng.rosatom.ru
Results shown include 0.5 losses per stage and
have been rounded for ease of display
6
Iranian Uranium Resources1
(in metric tons natural U )
Reasonably Assured Resources (RAR) 2
Estimated Additional Resources (EAR) Category I
2
Estimated Additional Resources (EAR) Category II
Speculative Resources
1 From Uranium 2003 Resources, Production and
Demand, NEA No. 5291, OECD 2004.
2 In situ resources
7
Fuel Usage Scenarios

• Known Conventional Resources (RAR EAR-I)
  1,427 tons U
• Undiscovered Conventional Resources (EAR-II SR)
  13,850 tons U
• Total Resources 15,277 tons U
• Assume 1000MW-VVER burns 22 tons of LEU annually
  and all reactors come online simultaneously
• Known Conventional Resources w/7 reactors less
  than 1 year
• Total Resources w/7 reactors less than 10 years

8
Fuel Resource Constraints 2006-2026

• Known uranium will be exhausted by 2010 with only
  two operational reactors.
• Total uranium resources will be depleted by 2023
  with all reactors far short of their 40 year
  design lifetime.

9
Cost of Recovering All Uranium Resources Vs.
Market Price
Purchasing uranium from the market would provide
a total cost savings between 460 million and
1.22 billion based on the cost (high/low) of
uranium recovery.
1 From UX Consulting Company L.L.C. as of Mar
28,, 2005
10
Estimated Annual Fuel Costs 7000 MWe

• Iran could save 130 - 240 million per year by
  purchasing fuel from abroad.

11
Section II
Iranian Energy Resources
12
Iran 2004 Depth of Resources

• Oil
• 125.8 billion barrels proven reserves
• Roughly 10 of worlds total
• Natural Gas
• 940 trillion cubic feet proven natural gas
  reserves
• Worlds 2nd largest supply, 15.5 world total
• Electric Power
• 31 GW installed capacity (36 GW expected 2005)
• 75 Natural Gas, 7 Hydro, 18 Oil

13
Iran Energy Reserves by Type
1005.8
729.6
41.5
6.7
Energy equivalence used 1070 BTU/ft3 natural
gas, 5.8e6 BTU/barrel oil, 11,000 BTU/lb. coal,
4.41e11 BTU/mton U-235. Source Nuclear
Engineering Theory and Technology of Commercial
Nuclear Power Knief. Energy data from March
2005 U.S. EIA Iran Country Analysis Brief.
14
Iran Reserves to Production Ratios
220.0
88.4
0.9
9.9
Note 1 - Oil production 2004, gross natural gas
production 2002 from EIA Note 2 - Nuclear fuel
production based on requirements of 7000 MW
nuclear with a once through fuel cycle
15
Section III

• Review and Capital Cost Determination of Selected
  Nuclear Facilities

16
Iranian Nuclear Facilities1
Note 1 From IAEA GOV/2003/75
17
Facilities of Interest
18
Nuclear Facility Information

• Natanz Enrichment Facility
• 54,000 centrifuges
• Estimated P2 SWU/centrifuge facility is nearly
  large enough to support two VVER-1000 nuclear
  fuel loads per year
• Estimated P1 SWU/centrifuge facility support only
  one VVER-1000
• Cost estimates from American Centrifuge, National
  Enrichment Facility, Georges Besse II, and
  Resende
• Estimated cost 260 million based on P2
  technology. 187 million - P1.
• Esfahan Conversion Facility (UCF)
• Conversion UOC to UF6, enriched UF6 to UO2,
  depleted UF6 to UF4, conversion of enriched
  uranium metal and depleted uranium metal total
  5 lines
• Estimated cost 30 million

19
Scaled Cost per SWU Natanz Estimate
20
Nuclear Facilities (continued)

• Arak Nuclear Complex
• 40 MW Iran Nuclear Research Reactor (IR-40)
  similar to Indias 40-MW CIRUS built in 1960 new
  comparable research reactors 100-200 Million
• Initial Heavy Water requirement 85,000 kg _at_
  254/kg 21.6 million
• Heavy Water Production plant (16 tons annually),
  based on unit cost of operating heavy water
  plants in India approximately 10-25 million
• Separation facilities based on GA contract with
  Thailand - 25 million and CRL manipulator prices
• Arak investment conservative 200 million
• Esfahan Fuel Manufacturing Plant (FMP)
• Designed with preliminary annual throughput for
  40 MTU/yr and planned for 140 MTU/yr
• Designed for both light water reactor and heavy
  water reactor fuels
• Estimated investment 30 - 80 million

21
Nuclear Facilities (continued)

• Saghand Mine and Ardakan Milling Plant
• 1,550,000 tons of ore reserve _at_ avg. 553 ppm
• 120,000 tons of ore annually, approx. 50 tons U
• Estimated investment 39 million
• Gchine Mine and associated milling plant
• Variable, low grade ore
• Design capacity of 21 ton U annually
• Estimated investment 19 million
• Total selected facility capital investment 600
  Million

22
Section IV
Evaluation of Alternative Investments in the
Natural Gas Sector
23
Natural Gas Flare/Vent Rates
Annual Flare/Vent Rates of Various Middle East
Countries, 2002
7.00
6.00
5.00
4.00
Middle East Avg. 3.26
Flare/Vent Rate, of Gross Production
3.00
World Average 2.26
2.00
North American Average 0.53
1.00
0.00
Saudi
Qatar
U.A.E.
Syria
Kuwait
Oman
Iran
Arabia
Data from U.S. EIA International Energy Annual
2002, Table 4.1
24
Natural Gas Data

• World Average (2002)1 2.26
• Iran (2002)2 6.78
• Assume Iran moved to world average (2.26)
• Save 193 billion ft3 annually
• Equivalent to
• 1.60 billion (Market price 7.78/MMBtu)3
• 2783 MWe (Combined Cycle Gas Turbine)4
• Assume Iran moved to North American Average
  (0.53)
• Save 267 billion ft3 annually
• Equivalent to
• 2.22 billion (Market price 7.78/MMBtu)3
• 3850 MWe (Combine Cycle Gas Turbine)4

1,2 Data From U.S. EIA International Energy
Annual 2002, Table 4.1 3 Market
Price U.S. EIA Natural Gas Weekly Update 7/13/05
4 CCTG 7200 BTU/kw-hr heat rate, 85 capacity
factor, 1070 BTU/ft3 natural gas
25
Natural Gas Infrastructure and Growth

• Three cities with the highest growth rates over
  the last 20 years are closest to major gas
  refinery and treatment facilities
• Mashhad
• Ahvaz
• Shiraz

Map Data from Collection of University of Texas
Maps Population Data from Statistical Centre of
Iran
26
Notional Investment Scenarios
Investment Scenario 1
Investment Scenario 2
27
Investment Cash Flow Model

• Construction outlays for 5 year period 1.0
  Billion
• Net revenues based on price of electricity 315
  Rials/kwh (3.56/kwh)1,2
• Annual OM costs of 3.5 capital expenditure
• Project Lifetime (30 years) IRR 18
• Payback Period, i _at_ 7 4.59 years

1- Data from World Energy.org, based on 1999
price and subsidy, average of all sectors 2 -
Using February 05 exchange rate 1USD 8863 IRR
28
Section V
Evaluation of Alternative Investments in Oil
Refining and Gasoline Production
29
Iran 2002 Energy Trade Balance1
1 Energy Information Administration, 2002
Iran Country Energy Data report
30
Iranian Gasoline Imports

• In 2001, Iran was importing 8.5 million liters of
  gasoline per day
• Gasoline represented more than 85.5 of total
  petroleum imports
• In 2004, Iran was importing 40 of their daily
  gasoline needs, or 22 million liters of gasoline
  per day1
• EIA estimates Iran importing 160,000 bpd in 2004
  or approximately 25 million liters per day2
• Government paid 2800 rials per liter (1.19/gal)
  in 20041
• Approximately 2.5 3.0 billion for 20042
• Annual demand increasing at around 9 per year2
• Gasoline imports could potentially cost Iran 4.5
  billion for 20053

1- Iran Daily News 9/28/04, 12/16/04, 2- EIA
Country Analysis, 3 - Iran News 5/10/05
31
Iranian Refinery Capacity

• Current Iranian refining capacity is 1.47 million
  BPD
• Nine refineries
• 240,000 BPD gasoline capacity
• Consuming 400,000 BPD gasoline
• At current gasoline refining yields (Iran 16
  per barrel), a nearly 1,000,000 BPD capacity is
  required to eliminate 160,000 BPD of gasoline
  imports.
• With 46.7 (Feb. 05 U.S. refinery average) yield
  of gasoline per barrel of oil, require
  approximately 350,000 BPD additional refinery
  capacity

32
Refinery Output Comparison
33
Refinery Cost Basis
2
Avg. w/ U.S. 10,938
5
1
3
Avg. w/o U.S. 9925
6
4
34
Cost Sensitivity to Refinery Gasoline Yield
35
Approx. Iran Petroleum Balance - 2004
(Changes from 2001)
Crude Production
3724
Export _at_ 34.62/bl
28.16 B
2229
1500
Net Revenue 28.01 B
Refining
Export 197
2.84 B
- 2.91 B
Refined Products
Consumption 1471
Gasoline Imports 160.00
36
Iran Petroleum Balance 2004 With Low Yield
Refinery, No Gasoline Imports
(Changes from baseline 2004)
Crude Production
3724
Export _at_ 34.62/bl
15.53 B
1229
2500
Net Revenue 29.51 B
Refining
Export 1037
14.07 B
Refined Products
Consumption 1471
Gasoline Imports 0
37
Section VI
Conclusions of Analysis
38
Conclusions of Analysis

• Irans uranium resource is not commensurate with
  the scale of its declared nuclear program.
• Cost of indigenous uranium and fuel production
  appear substantially greater than market sources.
• Front-end (uranium and fuel facilities) do not
  provide independence.
• Indigenous non-nuclear energy resources represent
  centuries of potential energy supply at current
  R/P ratios.
• Cost of selected front-end nuclear facilities is
  at least 600 million dollars.

39
Conclusions of Analysis (2)

• Several plausible gas sector projects could be
  pursued for the cost of the frontend nuclear
  facility investment.
• Gas sector projects involving natural gas
  treatment plants, CCGT power plants, and
  supporting pipeline show very attractive rates of
  return at 18 (23) over 30 years and a 4.6 (3.2)
  year payback periods.
• Projects which add refinery capacity increase
  refined product exports, generating billion
  dollars per year in net revenue.
• Approximating the gasoline yield fraction of Iran
  results in a more attractive refinery project
  assuming all additional refined products can be
  exported.

40

• Backup Technical Detail

41
Nuclear Power Intensity as a Function of
Energy Resource Endowment - typical values
42
Nuclear Power Intensity as a Function of Energy
Resource Endowment Irans proposed program
relative to rest of world
43
Relationship Between Ore Grade and Cost

• Due to ore grade of 553 ppm (0.5 kg/ton), cost
  of uranium recovery unlikely in the 80/kg range
  and more likely in the 130/kg range
• Fractional Recovery based on mine type1
• Saghand 77 (underground)
• Gchine 81 (open-pit)

µ fractional mill recovery
Chart from Economics of Uranium Ore Processing
Operations, OECD 1983
1 From Uranium 2003 Resources, Production, and
Demand, OECD. Pg. 265
44
Potential Number of Cores

• Known Conventional Resources (RAR EAR-I)
  1,427 tons U
• Undiscovered Conventional Resources (EAR-II SR)
  13,850 tons U
• Total Resources 15,277 tons U
• 1000MW-VVER initial core fuel loading is 66 tons
  of LEU with fuel residence of 3 years
• Over 90 of potential cores based on Undiscovered
  Conventional Resources

45
Capital Cost of SWU Existing/Planned Facilities
Resende
NEF
AC
GBII
46
Iranian Major Natural Gas Infrastructure

• Six of the most populous cities have direct
  access to natural gas pipelines
• Tehran
• Mashhad
• Esfahan
• Shiraz
• Tabriz
• Ahvaz

Map Data from Collection of University of Texas
Maps Population Data from Statistical Centre of
Iran
47
Investment Cash Flow Model (2)

• Construction outlays for 5 year period 617
  Million
• Net revenues based on price of electricity 315
  Rials/kwh (3.56/kwh)1,2
• Annual OM costs of 3.5 capital expenditure
• Project Lifetime (30 years) IRR 23
• Payback Period, i _at_ 7 3.15 years

1- Data from World Energy.org, based on 1999
price and subsidy, average of all sectors 2 -
Using February 05 exchange rate 1USD 8863 IRR
48
Sensitivity of IRR and Payback Period

• IRR and payback period calculated by assuming
  CCGT (combined cycle gas turbine) plants would
  supply base load instead of nuclear power plants
  _at_ 85 capacity factor
• Due to quick start up and shut down rates, gas
  turbine power plants can be used to supply energy
  at a variety of times based on demand
• Therefore a variety of capacity factors exist for
  CCGTs and would effect IRR and payback period of
  investment

49
Sensitivity of IRR and Payback Period
Lower bound constraint _at_ 64 determined by load
curve
50
Iran Petroleum Balance - 2001
Crude Production
3724
Export _at_ 22.73/bl
18.49 B
2229
1500
Net Revenue 19.81 B
Refining
Export 250
1.98 B
Refined Products
Consumption 1330
- 600 M
Gasoline Imports 53
51
Iran Petroleum Balance 2004 With High Yield
Refinery, No Gasoline Imports
(Changes from baseline 2004)
Crude Production
3724
Export _at_ 34.62/bl
23.74 B
1879
1849
Net Revenue 29.03 B
Refining
Export 383
5.38 B
Refined Products
Consumption 1471
Gasoline Imports 0