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Global Gas Flaring Reduction Initiative

Rashad KaldanyDirector

Oil, Gas and ChemicalsWorld Bank Group

Marrakech, Nov. 8, 2001

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Background

Initiative includes all stakeholders: industry, governments, NGOs and the Bank Seminar June 2001 in NorwayBank: Global Public GoodsTwo major Initiatives

Gas flaring InitiativeExtractive Industry Review

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Gas Flaring: ”Causes”

Flaring

Culture

Governance

Contracts

Markets

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Culture• Associated gas a “waste product”

• “Oilmen” viewed gas as a nuisance

• 1870 to 1970: Gas “is useless”

• Flares: a proud sign of oil production / exploration success

• Until 1980: Global warming not an “issue”

• Culture has changed: Associated gas is valuable

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Contracts

• Until 1980s associated gas was an afterthought

• Concerns were contractor’s own use and safety

• Associated Gas often free to state

• No obligation on contractor to find markets

• No obligation on state to find markets

• Flaring permitted: often by default

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Markets

• Flaring is a response to lack of markets for gas

• Until 1980s markets were poorly developed

• Gas marketing usually a state responsibility

• State often failed to invest in the market

• Rights of contractors to market limited

• Willingness of oil producers to market gas limited

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Governance• Flaring problem correlated with governance

• Good governance = maximize economic use of gas

• Good (example): North Sea, Alberta

• Good: Long term, transparent, economic incentives

• Bad: Short term, non-transparent, “other” incentives

• Governance means good rules and strong enforcement

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World: City Lights and Gas Flares

1994-95 Satellite data. Flares in Red, City Lights Grey.

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Key Issues• Best regulatory practices

• An Oil Industry issue or a Global Climate Change issue

• How to determine what is “economic” gas use

• How to ensure energy markets use gas economically

• Who bears cost of cutting uneconomic flaring

• How to improve oil production contracts

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Flaring: What do We Know?• Flaring partly understood in terms of local impact

• Poorly understood in terms of impact on global climate change / GHG emissions.

• Efficiency of gas flaring

• Relationship between flaring and venting

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Flaring: What do We Know?• Composition of flare emissions critical to GHG impact:

• Carbon Dioxide (CO2): Global Warming Potential = 1• Methane (CH4): GWP = 21• Nitrous Oxide (N2O): GWP =310

• Average composition of flared gas offshore UK (1998):tonnes/CM CO2: 0.198 CH4: 0.0107 N2O : 0.00155GWP/CM 0.198 0.225 0.481

• Small variations in CH4 and NOx can have large impact on Global Warming effect of flaring

• Uncertainty about: flared volumes and GWP of emissions.

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Main activitiesNine main activities in the Global InitiativeConsultations

Consultations with key stakeholders Dec. 2001

ConferencesMarrakech: Informal Launch Launching Conference, Early 2002Presentation of results at RIO+10 conference

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Knowledge improvement and dissemination

Improve available data on flaring and ventingQuantitative estimate for each country

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Best Regulatory Practices and Governance

Introduction of improved contractual and regulatory frameworks dealing with flaringBest Regulatory PracticeIncorporation of flaring management into petroleum sector governance

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Projects

Design of financing mechanisms to reduce flaring

Carbon Credit TradingIdentification of pilot projects for flaring reductionCountries

Russia, Azerbaijan, Kazakhstan, Nigeria, Chad

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Flaring Reduction: Links to Poverty Alleviation

• Direct links: • Less direct pollution impact on communities• Resource benefits to local communities• Fuel for local power and industry

• Indirect links:• More efficient energy markets• Higher fiscal revenues (resource rent, carbon credits)• Helps reduce impact of global warming

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Direct Control of Flaring vs. Indirect Control of CO2

• Flaring now part of oil industry regulation

• Direct controls common (e.g. Argentina)

• Kyoto / CDM could bring flaring into carbon trading

• Flaring Reduction = Earn Carbon Credits (+$$$)

• Continue Flaring = Pay Carbon Credits (-$$$)

• Tension between industry regulation and carbon trading?

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What is “economic” gas use?• In an efficient market all associated gas is used

until the “marginal” unit is uneconomic to recover

• Most gas markets are not fully efficient due to regulation, monopolies etc.

• In theory priority No. 1 should be:“Make all gas markets efficient”

• In practice efficiency a tough long-term goal

• How much market inefficiency is acceptable before:Producers are penalized for flaring, and/orRewarded for not flaring ?

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What is Economic Threshold?

$/MCM

MCM / year

A

B

Cost of not-Flaring

Economic Value of Gas

“Market Price” of Gas

Cost of Flaring Elimination

C

a b c

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How to Ensure Gas Market Efficiency• Challenges:

• Investments and financing

• Energy price reforms

• Social impacts of reforms, investments

• Regulation and governance

• Fuel choice flexibility

• Major challenges are in the poorer countries (W.Africa, S.&E.Asia, Latin America), and the transition economies (FSU).

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Who Bears the Cost?• If the energy market is efficient only “uneconomic”

flaring reduction has a net cost.

• Present regulations: Oil companies bear cost of flaring reduction, but may transfer to taxpayer with deductions.

• Poverty issues: Can poorer countries bear the cost offlare reduction for global climate benefits?

• Competition issues: Countries with strict flaring regimesmay lose investments to countries with lax regimes.

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Discussion

We would like to discuss the Initiative with you todayHow stakeholders can participateQ&A