ecosecurities group ltd. 2002 confidential carbon finance and oil and gas context paul soffe –...

EcoSecurities Group Ltd. 2002 CONFIDENTIAL

Carbon Finance and Oil and Gas Context

Paul Soffe – Senior Adviser

Africa Oil and Gas Conference April 2004

NOT AN OFFICIAL UNCTAD RECORD


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 thepositive environmental performance they engender.

The monetization of these environmental benefits isa rapidly growing business opportunity.


$$$ conventional

revenue stream

Clean energy or forestryinvestment

Carbon credits

1) Opportunity: An additional value from “clean” sector projects


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

“Retrofits”

Construction of new power plants to meet a growing demand for power

“Greenfield”


All things equal, carbon trading would enhance competitiveness of clean energy technologies


Country Project Type% IRR w/o

% IRR w/cer's

IRR Increase [% points]

% IRR Increase

Romania District heating 10.5 11.4 0.9 9Costa Rica Wind 9.7 10.6 0.9 9J amaica Wind 17.0 18.0 1.0 6Morocco Wind 12.7 14.0 1.3 10Chile Hydro 9.2 10.4 1.2 13Costa Rica Hydro 7.1 9.7 2.6 37Guyana Bagasse 7.2 7.7 0.5 7Nicaragua Bagasse 14.6 18.2 3.6 25Brazil Biomass 8.3 13.5 5.2 63Latvia Methane 11.4 18.8 7.4 65India Methane 13.8 18.7 4.9 36Source: World Bank, J uly 2001

1) Opportunity: Monetizing carbon credits can increase project IRR’s


A Fugitive Methane Project Example

BLUE Indicates Extra Debt Capacity


1) Opportunity: Leverage investment in ‘clean’ sectors

Project Equity

Carbon

Debt “Carbon capital”

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


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


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

0.00

50.00

100.00

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350.00

Pre-Unced Pre-CoP 1 AIJ PP Pre-Kyoto Post-Kyoto

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tme

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(US

$ m

)

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arb

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(U

S$

/to

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)Investment committed

Price of carbon

Forestry projects, to 1998 only. Source: Moura Costa & Stuart 1998


Carbon market volumes (Source: Point Carbon: Global Market Outlook, 2003)


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

Carbon Transactions

0

5,000

10,000

15,000

20,000

25,000

2002

2003

2004

2005

2006

2007

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2012

US

$ m

illio

ns

Transaction Fees

Other Services

Secondary markets and liquidity


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

3) Markets: Existing Buyers


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

3) Markets: Current price range


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

-Additionality

-Host country approval

-Sustainable development benefits

-Project cycle


4) Rules: Additionality and Baseline G

HG

em

issi

ons

Time

Project commissioned

“With project” emission level

“Without project” emission level Carbon

credits


4) Rules: CDM project cycle

Pre-investment phaseProject design:Baseline reportPDD

Project validation / host country approval

Project registration

Monitoring

Verification

Issue of CER

Implementation

Certification

Investment & Operation


5) Sectors and Project Types under the CDMEnergy 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


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


The Economics of waste to energy projects are especially attractive

Wind farm project:

20 MW installed capacity

50,000 t CO2 ER’s p.a.(10 years)

Project costs: US$20m (+)

Carbon value:

@ $3/ t CO2 = $1.72m

@ $5/ t CO2 = $2.87m

Proportion of project costs:

@ $3/ t CO2 = 8.6%

@ $5/ t CO2 = 14.35%

Waste to energy project:

2 MW installed capacity

>50,000 t CO2 ER’s p.a.(10 years)

Project costs: US$3.5m

Carbon value:

@$3 /t CO2 = $1.72m

@$5 /t CO2 = $2.87m

Proportion of project costs:

@ $3/ t CO2 = 49.1%

@ $5/ t CO2 = 82.0%


NovaGerar Landfill gas-to-energy Project – Brasil


Jamaican Wind Project


Olkaria geothermal project in Kenya


Pipeline: Transactional Services

Project Country Type CO2e(t/yr) Status

Okaria 3 Kenya Geothermal 75,000 LOI with World BankFelda Malaysia Biomass 50,000 in negotiationPhilBio Philippines Anaerobic Dig. 150,000 In negotiationLicorcia Nicaragua Anaerobic Dig. 100,000Patagonical Argentina Landfill 500,000AT Biopower Thailand Biomass 200,000 LOI with IFCV&M Brazil Biomass 1,000,000 ERPA with IFCEEN El Salvador Biomass 30,000SWI Thailand Anaerobic Dig. 250,000 In negotiationNobracel Brazil Biomass 100,000 Buyer term sheet signed.Unidos Brazil Forestry 100,000NovaGerar Brazil Landfill 300,000 ERPA agreed with

World Bankt


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


For further information, please contact:

[email protected] 01862 297489www.ecosecurities.com

EcoSecurities Group Ltd.


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


A Wind Project Example

BLUE Indicates Extra Debt Capacity

ecosecurities group ltd. 2002 confidential carbon finance and oil and gas context paul soffe –...

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