Why is the oil & gas industry underrepresented in the CDM and Carbon Markets?

1. Why is the oil & gas industry underrepresented in the CDM and Carbon Markets? Session Two - Day Two of Global Gas Flaring Workshop 4th -6th October 2009 in Doha, Qatar

2. OutlineWhy is the O&G industry underrepresented in the CDM and Carbon Markets? • Overview of GHG emissions in the O&G industry • CDM coverage • Coverage of approved CDM methodologies • Coverage in terms of project developments • Causes for low application of the CDM in abatement of O&G emissions • Natural reasons • Barriers to CDM development related to UNFCCC rules and procedures • (How) can barriers to CDM development be rectified? • Awareness and interest in the O&G industry • Reforms of UNFCCC rules and procedures Carbon Limits AS

3. 1. Overview of O&G GHG emission sources 1,500+ ~ 8% of global GHG emissions MMtCO2e 1,000 Wasted energy 630 570 ~550 ~500 500 Venting (CH4) Fugitives (CH4) Flaring (CO2+CH4) Gas treatment (CO2) Useful energy (CO2) * Estimatescalculated by Carbon Limits, basedon data from DMSP/GGFR (2006), EPA (1992/1994/2004) , M2M (2008) and IEA (2008). Verylowlevelofaccuracy due to absenceofaggregated, monitoredoperational data. Carbon Limits AS

4. 1. Overview of GHG emission sourcesSources of Flaring, Venting and Fugitive emissions (FVF) in the O&G industry * Estimatescalculated by Carbon Limits, basedon data from DMSP/GGFR (2006), EPA (1992/1994/2004) and M2M (2008) Carbon Limits AS

5. 2. CDM coverageCoverage of approved CDM methodologies - flaring, venting and fugitive emissions * Estimatescalculated by Carbon Limits, basedon data from DMSP/GGFR (2006), EPA (1992/1994/2004) and M2M (2008) Carbon Limits AS

6. 2. CDM coverageAreas of coverage, uncertainties and gaps in approved flare methodologies These uses of recovered gas are covered by one or more of the approved methodologies LPG NGL Intl’ gas market(s) New LNG It is uncertain whether these uses of recovered gas are covered in approved methodologies New CNG These uses of recovered gas are not covered by the set of approved flaring methodologies New pipeline New GPP Geological formation New facilities New pipeline Gas injection for storage GTL (e.g. LNG) Gas re-injection for EOR and storage Grid-power Feedstock Recovered gas CPF Local gas market Industrial fuel Oil well On-site use Oil reservoir Existing end-user(s) New end-user(s) Gas-lift gas Grid-power GTL (e.g. LNG) GPP Grid-power GPP Feedstock Feedstock Industrial fuel Industrial fuel GTL (e.g. LNG) Carbon Limits AS

7. 2. CDM coverageCoverage of approved CDM methodologies – flaring, venting and fugitive emissions • A few emission sources are covered by one or more approved CDM methodologies (e.g. flaring and fugitive emission in gas infrastructure) • Each approved CDM methodology has limited coverage of alternative abatement technologies/options (e.g. flare reduction methodologies) • Significant emission sources within the O&G sector are not covered by any approved CDM methodology (e.g. vented sources) The coverage of GHG abatement opportunities in the O&G sector is insufficient in approved CDM methodologies Carbon Limits AS

8. 2. CDM coverageCoverage in terms of project developments Carbon Limits AS

9. 2. CDM coverageRejected and terminated flare reduction CDM projects Carbon Limits AS

10. 2. CDM coverageCoverage in terms of project developments • Limited number of CDM projects under development/implementation in the O&G sector compared both to the level of emissions in the sector and the abatement efforts undertaken by O&G companies • There is a problematic track record with respect to: • CDM validation and registration – fit with methodologies and additionality • Monitoring, verification and issuance – very low issuance rate so far • Apparent lack of awareness and interest in the O&G sector – few active players The CDM has not been instrumental in leading to real, measurable and verifiable ERs in the O&G sector to date Carbon Limits AS

11. 3. Causes for low application of the CDMNatural reasons • Project opportunities at brownfield sites are typically not studied in detail (as required for PDD development) until market conditions are perceived as favorable or environmental regulations get tougher • Projects, especially flare reduction projects, are complex and have long lead times. CDM development must be integral to project planning and execution, and timely action and dedicated resources are required over a long time period • The perceived value of the CDM is limited due to low historical success rate, a politically unstable market, significant transaction costs (especially if methodology development is required) and changing and unpredictable rules and procedures • Many flare reduction projects are capital intensive, and CDM revenues does not provide a reliable source of income until after CDM registration is secured Carbon Limits AS

12. 3. Causes for low application of the CDMBarriers to CDM development related to UNFCCC rules and procedures • Project activities must be developed with reference to an approved CDM methodology to qualify under the CDM: • There is limited coverage of realistic abatement opportunities in the O&G sector • Attempts to expand the applicability of approved CDM methodologies related to the O&G sector have been limited and relatively unsuccessful to date • CDM methodologies are public goods and expensive, complex and time consuming to develop for individual project opportunities • Project designs and financial assessments must be close to final prior to initiating PDD development, validation and registration • Rules and procedures are constantly changing, requiring up-to-date knowledge and timely action to secure CDM registration • The CDM fails to provide timely and reliable input to investors due to long lead times for CDM registration (minimum one year after start of validation) Carbon Limits AS

13. 4. (How) can barriers to CDM development be rectified?Integrating CDM development with normal project evaluation and execution • The CDM holds the potential to make many investments, that would otherwise not be considered viable, financially attractive to O&G companies • Identification of CDM project opportunities must be done as an integral part of normal project evaluation and should focus on investment opportunities that fit approved methodologies and have a strong additionality for reasonable near to mid-term changes in framework conditions • Internal resources should be allocated to clarify project concepts and develop financial assessments to the level of detail required for CDM registration at an early stage of project development • An application for CDM registration should be submitted prior to making an investment decision, requiring willingness to undertake limited up-front investments in PDD development and validation Carbon Limits AS

14. 4. (How) can barriers to CDM development be rectified?Reforms of UNFCCC rules and procedures • Project developers should actively follow developments in CDM rules and procedures and participate in discussions that shape the perception and coverage of O&G projects in the CDM • Development of new or revised CDM methodologies should be initiated or supported to help qualify project types with significant emission reduction potential and low abatement costs under the CDM Carbon Limits AS