Carbon Finance and Oil and Gas Context Paul Soffe

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Carbon Finance and Oil and Gas ContextPaul
Soffe Senior AdviserAfrica Oil and Gas
Conference April 2004
NOT AN OFFICIAL UNCTAD RECORD
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1) What is the opportunity?
The owners of sustainable assets in energy,
natural resources, and environmental technology
have the potential to develop, capture and sell
rights to the positive environmental performance
they engender. The monetization of these
environmental benefits is a rapidly growing
business opportunity.

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1) Opportunity An additional value from clean
sector projects
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Types of qualifying projects in the energy sector

Modification/ replacement of existing plant, equipment, infrastructure practice or process E.g., fuel switching, energy efficiency, methane capture

Construction of new power plants to meet a growing demand for power
Retrofits
Greenfield
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All things equal, carbon trading would enhance
competitiveness of clean energy technologies
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• Opportunity Monetizing carbon credits
• can increase project IRRs

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A Fugitive Methane Project Example
BLUE Indicates Extra Debt Capacity
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1) Opportunity Leverage investment in clean
sectors

• Carbon capital could leverage a much larger
  amount of investment in the real assets

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3) The carbon market What is it and where is it
?

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3) Market CO2 market and environmental
regulation (to 1998 only)

• Forestry projects, to 1998 only. Source Moura
  Costa Stuart 1998

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Carbon market volumes (Source Point Carbon
Global Market Outlook, 2003)
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The greenhouse gas emissions trading market is
expected to grow from 300 mm today to 15
billion annually by 2012
Estimated size of the market for
GHG emissions trading
25,000
20,000
Other Services
15,000
US millions
Transaction Fees
10,000
5,000
Carbon Transactions
0
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
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Secondary markets and liquidity
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3) Markets Existing Buyers

• Kyoto compliant
• World Bank Prototype Carbon Fund (PCF) and BCF
• Dutch Government ERUPT and CERUPT Programme JI
  CDM
• Dutch government IFC and PCF funds
• Obligated companies under the UK ET Scheme,
  under EU ET programme (2005) and other trading
  schemes
• Private sector companies in Europe, Japan and
  Canada
• Non- Kyoto compliant
• US schemes, states and cities (Seattle, Oregon,
  Massachusetts, Chicago) and federal levels
• Canada BC Hydro
• Australia

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3) Markets Current price range

• Kyoto compliant
• PCF U 2.5 to 3.5 / t CO2
• ERUPT first round 5.00 to 9.00
• ERUPT 2 and CERUPT expected max 4.00
• Private sector investors U 3 to U 4
• Non- Kyoto compliant
• U 0.50 to U 2.00
• EU trading system
• 13-15 / t CO2 estimated

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4) Rules for participation How does it work,
and what are the requirements

• Additionality
• Host country approval
• Sustainable development benefits
• Project cycle

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4) Rules Additionality and Baseline
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4) Rules CDM project cycle
Pre-investment phase
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5) Sectors and Project Types under the CDM

• Energy Supply Side - Renewables, Technological
  Upgrades, Biomass, Fuel Switching
• Energy Demand Side - End Use Efficiency
• Fugitive Methane Emissions Control - Landfill
  Gas, Coal Mine Methane, Water Treatment,
  Anaerobic digestion Agriculture Wastes
• Sinks - Forestry, Land Use Change, CO2 Scrubbing,
  Long Term Sequestration

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Oil Gas Options

• 1. Energy Efficiency
• E.g., BP Shell have used carbon trading as
  driver to improve energy efficiency (oil gas
  processing and delivery)
• E.g., Rang Dong, oil production, gas flaring
• Why? Saves money, makes money, makes sense.
• 2. Clean Technologies Renewables
• E.g., Petroleum Company of Jamaica wind
  project
• E.g., - Fiji Electricity Authority building
  wind, hydro, geothermal plants
• Why? Increasing cost of oil, security of supply,
  national interest, environmental concern, carbon
  finance

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The Economics of waste to energy projects are
especially attractive
Wind farm project 20 MW installed
capacity 50,000 t CO2 ERs p.a.(10
years) Project costs US20m () Carbon
value _at_ 3/ t CO2 1.72m _at_ 5/ t CO2
2.87m Proportion of project costs _at_ 3/ t CO2
8.6 _at_ 5/ t CO2 14.35
Waste to energy project 2 MW installed
capacity gt50,000 t CO2 ERs p.a.(10
years) Project costs US3.5m Carbon value
_at_3 /t CO2 1.72m _at_5 /t CO2 2.87m
Proportion of project costs _at_ 3/ t CO2
49.1 _at_ 5/ t CO2 82.0
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NovaGerar Landfill gas-to-energy Project Brasil

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Jamaican Wind Project

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Olkaria geothermal project in Kenya

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Pipeline Transactional Services
Project Country Type CO2e(t/yr)
Status Okaria 3 Kenya Geothermal
75,000 LOI with World Bank Felda
Malaysia Biomass 50,000 in
negotiation PhilBio Philippines
Anaerobic Dig. 150,000 In negotiation Licorcia
Nicaragua Anaerobic Dig.
100,000 Patagonical Argentina Landfill
500,000 AT Biopower Thailand Biomass
200,000 LOI with IFC VM Brazil
Biomass 1,000,000 ERPA with IFC EEN
El Salvador Biomass
30,000 SWI Thailand Anaerobic Dig.
250,000 In negotiation Nobracel
Brazil Biomass 100,000 Buyer term sheet
signed. Unidos Brazil Forestry
100,000 NovaGerar Brazil Landfill
300,000 ERPA agreed with World Bank
t
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In summary

• Flexibility mechanisms have the potential to
  provide a substantial boost to clean energy
  sector
• The market for ERs will be in the U billions,
  leveraging even more in other forms of capital
• There is the potential for a large number of good
  projects to be developed
• Need for policy certainty
• Need to support entrepreneurial early movers
• Need to support small scale projects

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For further information, please
contactpaul_at_ecosecurities.com 01862
297489www.ecosecurities.com
EcoSecurities Group Ltd.
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Paul Soffe at EcoSecurities

• 5 years employment since leaving EcoSecurities
• Difficult market risky how risky Russian
  ratification or EU Burden sharing agreement
• Activities policy analysis development,
  project development structuring. Particular
  interest in transaction side of the business
• Recent Activities
• EcoSecurities Standard Bank London Carbon Fund
  for European Government
• Spoke last week in Moscow at Carbon Forum
  Illarionov!
• Finalising Jamaica CDM Wind Project Executive
  Board and buyer.
• Capacity building guidelines for a bank,
  workshops in ACP countries
• Fiji hydro project CDM development

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A Wind Project Example
BLUE Indicates Extra Debt Capacity