Economic Evaluation Process for Solution Gas Conservation

Presentation to the EUB/World Bank

2003 Global Gas Flaring Reduction Workshop

Peter M. Jones Compliance & Operations Branch

October 24, 2003 Alberta Energy and Utilities Board

Incentives For Conserving Solution Gas

• Economic – Positive rate of return on the costs of implementing solution gas conservation (sales, re-injection, heat/power cogeneration).

• Environmental and Health – A reduction in emissions with potential adverse health effects and environmental and aesthetic impacts.

• Reputation – Organizations conserving non renewable natural resources and protecting the environment are perceived as “good corporate citizens”.

Disincentives For Conserving Solution Gas

• Economic – Negative rate of return on the costs of implementing solution gas conservation.

• Logistics – Remoteness or location of an infrastructure capable of utilizing and processing solution gas, renders conservation impractical for reasons such as safety and potential environmental impact.

Evaluation of Solution Gas Flares/Vents

• The objective for solution gas flaring/venting management is the elimination, reduction and the improvement of the efficiency of flaring.

• In order to accomplish these objectives, the EUB has adopted a decision tree process to be used by operators as a means for implementing the objectives for solution gas flaring management.

• Using the decision tree, an operator would first assess conservation of solution gas by tie-in to a gathering system, followed by other options such as reinjection and other economic technical options to eliminate flaring. Economic, social, and environmental factors would be considered in this evaluation.

Flaring/Venting Management Decision Tree

Eliminate solution gas flaring and

venting

Reduce solution gas flaring and

venting

NO

Meet flaring and venting

performance requirements

NO

YES

YES

Implement

Performance requirements

EUB Guide 60 Gas Combustion & Venting and Fugitive Emission Management Requirements

Tests

•Public concern?

•Health impacts?

•Economic alternatives?Economic alternatives?

•Environmental impacts benefits?

Economic Decision Process - Assumptions

• The evaluation will be a before-tax analysis• Only revenue from incremental gas and gas by-products

(LNG/LPG’s) that would otherwise be flared will be included in the evaluation.

• Cost savings resulting from flare elimination, such as maintenance, fuel and operating costs must be included in the evaluation.

• A project will be considered economic if the incremental economics of solution gas conservation generates a net present value (NPV) greater than zero.

• A comprehensive report should be available for audit, for projects deemed to be uneconomic. This report should incorporate all of the details of the Economic Decision Process – Requirements.

Economic Decision Process – Requirements

• Gas and gas by-product price forecast for performing a sales or fuel gas evaluation.

• Electricity price forecast for performing a power cogeneration evaluation.

• Reserves estimate and production forecast (decline analysis).• Capital and labour cost estimates for all costs relating to the

conservation of the solution gas.• A ‘percentage of capital cost’ based or equivalent operating cost

allowance.• Current and projected inflation rate.

Economic Decision Process – Requirements cont’d.

• Discount rate (based on the cost of borrowing money and usually interpreted as the prime lending rate at a recognized financial institution plus a ‘cost of borrowing’ percentage).

• A simple spreadsheet calculator to automate the evaluation process.

Gas & Electricity Price Forecast

(CERI) Power vs (CDRML) Natural Gas Price ForecastJuly 2003

$3.91

$6.68

$5.93

$5.13

$4.33

$4.99 $5.10 $5.21 $5.32 $5.42 $5.53$5.80

$4.92

$4.43

$43.84

$35.16 $35.42

$30.45

$25.82

$33.50$31.54

$30.38

$36.84$38.00$42.09$41.39

$33.15

$29.74

$0.00

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

$7.00

$8.00

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Year

Gas

Pri

ce (

$Cd

n/M

MB

tu)

$0.00

$5.00

$10.00

$15.00

$20.00

$25.00

$30.00

$35.00

$40.00

$45.00

$50.00

Po

wer

Pri

ce (

$Cd

n/M

W.h

)

$Cdn/MMBtu $Cdn/MW.h

ACTUAL

Gas Price Forecast

Current & Historical Natural Gas Price and Price Forecast

$0.00

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

$7.00

$8.00

$9.00

$10.00

Can

adia

n D

oll

ars

Per

GJ/

Mcf

GJ AECO Month $3.91 $3.54 $3.17 $2.93 $3.51 $4.27 $4.85 $5.25 $6.04 $6.71 $8.45 $7.20 $6.48 $6.63 $6.50 $5.58 $5.86 $5.29

Mcf (MMBtu) AECO Month $4.13 $3.73 $3.34 $3.09 $3.70 $4.50 $5.12 $5.54 $6.37 $7.08 $8.91 $7.60 $6.84 $6.99 $6.86 $5.89 $6.18 $5.58

Mcf (MMBtu) Rolling 12 Mth Avg $3.75 $3.60 $3.49 $3.43 $3.47 $3.66 $3.74 $3.91 $4.16 $4.51 $4.97 $5.26 $5.49 $5.76 $6.05 $6.28 $6.49 $6.58

Mcf (MMBtu) - Dobson Forecast $3.49 $3.49 $3.84 $3.84 $3.84 $3.84 $3.84 $3.84 $5.22 $5.22 $5.22 $5.22 $5.22 $5.22 $6.68 $6.68 $6.68 $6.68

Mcf (MMBtu) - Annual Avg $3.91 $3.91 $3.91 $3.91 $3.91 $3.91 $3.91 $3.91 $6.83 $6.83 $6.83 $6.83 $6.83 $6.83 $6.83 $6.83 $6.83 $6.83

May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct

2002 2003

Electricity Price Forecast

Monthly Power Pool Price & Forecast

0.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00

80.00

90.00

100.00

C$/

MW

h

MONTHLY AVG POOL PRICE 46.23 26.41 32.03 45.70 44.35 69.07 70.88 80.52 81.23 89.80 51.68 56.50 44.47 87.91 55.63 43.63 58.08

12 MONTH ROLLING AVG 40.35 38.10 36.40 37.72 37.75 40.73 43.84 48.18 53.09 55.97 56.53 57.87 57.72 62.85 64.81 64.64 65.78

CERI PRICE F'CAST 35.17 35.17 35.17 35.17 35.17 35.17 35.17 35.16 35.16 35.16 35.16 35.16 35.16 35.16 35.16 35.16 35.16

ANNUAL AVG POOL PRICE 43.84 43.84 43.84 43.84 43.84 43.84 43.84 64.95 64.95 64.95 64.95 64.95 64.95 64.95 64.95 64.95 64.95

JUN JUL AUG SEP OCT NOV DEC JAN FEB MAR APR MAY JUN JUL AUG SEP OCT

2002 2003

Production Forecast/Decline Analysis

Production Decline Analysis

0.0

1,000.0

2,000.0

3,000.0

4,000.0

5,000.0

6,000.0

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Year

m3/

day

Gas

0.0

2.0

4.0

6.0

8.0

10.0

12.0

m3/

day

Oil

Gas Produced (m3/day) Gas Economic Limit (m3/day) Oil Produced (m3/day) Oil Economic Limit (m3/day)

Economic limit reached in 2009/2010

Exponential decline ~ 15%/year - Constant GOR of 500 m3/m3Economic Limit ~ 3.5 m3/day Oil and 1750 m3/day Gas

Conversions, Constants & Formulae

Conversions and Constants used1 M3 (metres cubed) = 35.494 scf (standard cubic feet)1 Mscf (thousand cubic feet) = 1 MMBtu (Million British Thermal Units)

Discount rate for Present Value 7.50% See Guide 60 for details.Inflation rate 1.85% See Guide 60 for details.

Present Value (PV) Formulas UsedPresent Value = PV = Discount Factor (DF) x Future Value (FV)

Discount Factor = DF = 1

(1+i)t

where:i = Discount rate used = 7.50% [Prime ATB lending rate 4.5% + 3%]

t = number of years to discount to obtain Present Value

INPUT CELLS

Capital Costs, Expense and PV Calculation

A B C: [B x inflation rate] D: [B+C] D: [A+D] E F: [D xE]

Year Year Capital Costs Operating Costs*1Inflation (for operating)

Operating Costs (Inflation_Adjusted)* 2 Total Expenses

Discount Factor

Present Value of Expenses

0 2003 $160,000 $16,000 $0 $16,000 $176,000 1.000 $176,0001 2004 0 $16,000 $296 $16,296 $16,296 0.930 $15,1592 2005 0 $16,296 $301 $16,597 $16,597 0.865 $14,3623 2006 0 $16,597 $307 $16,905 $16,905 0.805 $13,6074 2007 0 $16,905 $313 $17,217 $17,217 0.749 $12,8925 2008 0 $17,217 $319 $17,536 $17,536 0.697 $12,2156 2009 0 $17,536 $324 $17,860 $17,860 0.648 $11,5737 2010 0 $17,860 $330 $18,191 $18,191 0.603 $10,9648 2011 0 $18,191 $337 $18,527 $18,527 0.561 $10,3889 2012 0 $18,527 $343 $18,870 $18,870 0.522 $9,84210 2013 0 $18,870 $349 $19,219 $19,219 0.485 $9,325

* 1 10% Capital Total $173,999 $287,004*2 Inflation rate used = 1.85%

Capital CostsMaterial Labour Total$140,000 $20,000 $160,000 2 km of pipeline @ $70/metre + $20,000 labour expense

Total $160,000

INPUT CELLSCHANGE OPERATING COST % IF MORE OR LESS THAN 10%

ItemPipeline and other Costs

Gas Expenses

Gas Revenue Calculation

NPV

Gas RevenueA B AxB

Year YearGAS

M3/day # daysGAS Total M3/Year

GAS Total scf/Year

Mscf/Year (scf/1000) MMBtu

Price ($Cdn/MMBtu)*1 Sales

Discount Factor

Present Value of Sales

0 2003 5000.0 365 1,606,000 57,003,364 57,003 57,003 $6.68 $380,782 1.000 $380,7821 2004 4250.0 365 1,365,100 48,452,859 48,453 48,453 $5.93 $287,325 0.930 $267,2792 2005 3612.5 365 1,160,335 41,184,930 41,185 41,185 $5.03 $207,160 0.865 $179,2623 2006 3070.6 365 986,285 35,007,191 35,007 35,007 $4.80 $168,035 0.805 $135,2614 2007 2610.0 365 838,342 29,756,112 29,756 29,756 $4.86 $144,615 0.749 $108,2885 2008 2218.5 365 712,591 25,292,695 25,293 25,293 $4.92 $124,440 0.697 $86,6806 2009 1885.7 365 605,702 21,498,791 21,499 21,499 $4.99 $107,279 0.648 $69,5137 2010 1602.9 365 514,847 18,273,972 18,274 18,274 $5.10 $93,197 0.603 $56,1758 2011 1362.5 365 437,620 15,532,877 15,533 15,533 $5.21 $80,926 0.561 $45,3769 2012 1158.1 365 371,977 13,202,945 13,203 13,203 $5.32 $70,240 0.522 $36,636

10 2013 984.4 365 316,180 11,222,503 11,223 11,223 $5.42 $60,826 0.485 $29,512Total $1,724,826 $1,394,765

* 1 From gas price table

INPUT CELLS

Economic (NPV) Summary

Gas Summary Table

A B C: [A-B]

Year Year Present Value

of Revenue Present Value of

ExpensesPresent Value of Economic Gain Year

0 2003 $380,782 $176,000 $204,782 20031 2004 $267,279 $15,159 $252,120 20042 2005 $179,262 $14,362 $164,900 20053 2006 $135,261 $13,607 $121,654 20064 2007 $108,288 $12,892 $95,395 20075 2008 $86,680 $12,215 $74,465 20086 2009 $69,513 $11,573 $57,940 2009 Economic Limit7 2010 $56,175 $10,964 $45,211 20108 2011 $45,376 $10,388 $34,987 20119 2012 $36,636 $9,842 $26,794 201210 2013 $29,512 $9,325 $20,187 2013

TOTAL $1,227,066 $255,809 $971,257 NPV

SUM ONLY THE CELLS WHICH REFLECT THE ECONOMICLIFE OF THE PROJECT

NPV Summary

NO INPUTS IN THIS TABLE