Climate change issues in Oil & Gas Sector

1. Climate change issues inOil & Gas Sector A sectoral discussion on Environmental issues, GHG emissions, GHG abatement opportunities, Role of CDM

2. Contents • Environmental issues for the Indian Oil & Gas Sector • GHG Emissions from various industries & sectors • Climate Change – Enhanced Greenhouse Effect • Flexibility Mechanisms under The Kyoto Protocol & CDM • Potential GHG abatement projects, CDM methodologies and UNFCCC registrations • Carbon transactions • Way forward - Carbon footprint

3. Environmental issues for the Indian Oil & Gas Sector • The Oil & Gas Sector has a variety of impacts on the environment. These impacts depends upon the stage of the process, the size and complexity of the project, the nature and sensitivity of the surrounding environment and the effectiveness of planning, pollution prevention, mitigation and control techniques. • The major areas of environmental concern includes : • Atmospheric Impacts • Aquatic Impacts • Terrestrial Impacts • Ecosystem Impacts • Potential Emergencies

4. Potential Environmental Impacts Atmospheric Impacts Aquatic Impacts

5. Potential Environmental Impacts Terrestrial Impacts Ecosystem Impacts Potential Emergency

6. Initiatives towards reducing atmospheric impacts • Among all the different environmental impacts, the major focus lies on Atmospheric Impact caused by Oil & Gas Industry. • One of the major sources of Atmospheric Impact caused by Oil and Gas Industry is the flaring and venting of gases. So the principle target for emission reduction is in this domain. • Various technological initiative have been introduced to reduce emissions as a result of combustion process related to power production. More efficient gas turbines have been developed together with improved turbine maintenance regimes. Efficiency improvements may also result from gas turbine optimization considerations. Other technologies to improve fuel efficiency include: steam injection, combined cycle power generation, pump and compressor optimization, waste heat recovery and the application of energy conservation principles. • Improvements in the technologies have resulted in reduced emission from the different sources. The reduction of GHG emissions directly leads to reduction of global warming. These process improvement/energy efficiency measures causing emission reduction can be directly accounted for and thus can be considered as CDM projects.

7. GHG Emissions from various industries & sectors GHG emissions associated with industry (including energy utilization) represent about 21% of world GHG emissions. The Oil & Gas and Chemical industries are among the major emitters of GHGs. Source: CAIT, IEA, 2004a, Hendriks

8. Climate Change – Enhanced Greenhouse Effect • Human activities like deforestation or heavy fossil fuel use are increasing the concentration of Greenhouse Gases (‘GHGs’) in the atmosphere. • GHGs trap heat energy in the Earth's lower atmosphere, like a thick blanket round the planet. • This enhances the green house effect, resulting in commonly known “Climate Change” or “Global Warming” • Climate Change leads to: • Rise in average global temperature (expected to go up by 1-4 Celsius in next 100 years) • Changes in vegetation • Increased storm surges • Sea level rise (parts of Maldives & Bangladesh might submerge in next 50 yrs) • Risks which will affect the profitability of the Oil & Gas industries

9. Glimpse of Climate change Risks Physical Risks • Global warming poses threat of sea level rise, hurricanes/ other natural calamities for especially those situated in the coastal regions. • Coastal E&P facilities, Refineries can face huge damage due to cyclones and hurricanes Climate Change Risks for Oil & Gas Sector • Business Risks • Extreme weather conditions resulting in increased energy cost, higher contingency requirement resulting in erosion of profit margins • Competitiveness Risks • Effect on Gross Refining Margin. As energy costs increase, Oil industries using conventional and carbon intensive energy sources will see a reduction in the GRM. Regulatory risks • ‘Carbon ’tax’ implementation on states by Central government can affect profitability of the Oil & Gas sector

10. Kyoto Protocol and CDM • Legally binding emission reduction targets for GHGs only for Annex-1 (i.e., developed ) countries • Aim of reducing overall GHG emissions by at least 5.2% below 1990 levels in 2008-2012 commitment period Developed Country Govt/ Pvt. Sector Kyoto protocol - Establishes three mechanisms to supplement national actions to achieve real, long term, measurable and cost effective GHG reductions: Sale proceeds Carbon Credits Clean Development Mechanism (‘CDM’) Developing Country GHG Abatement Project International Emission Trading (‘IET’) Joint Implementation (‘JI’) • Carbon credits are measured in terms of Certified Emission Reduction(‘CER’) • One CER equals 1 MT CO2 equivalent

11. Project Implementation Kyoto Approvals CER Transaction 2 3 1 CDM Process : Availing Carbon Credits CDM PROJECT PROMOTER Project Identification CDM Documentation* CER ERPA Project Construction Validation by DOE Endorsement by DNA BUYER OF CER Project operation Registration with UNFCCC Generation of Carbon credits *PIN: Project Identification Note *PDD: Project Design Document ERPA: Emission Reduction Purchase Agreement DOE: Designated Operational Entity DNA: Designated National Authority Verification/ Certification by DOE UNFCCC / EB Issues CERs

12. Potential GHG abatement Projects in Upstream Oil & Gas Sector

13. Potential GHG abatement projects in Upstream Oil & Gas Sector 1. Installation of Gas Recovery Facilities to prevent emission of methane/CO2 to the atmosphere • Installation of compressors to recover low pressure (LP) gas and compress the same for further distribution • Installation of ejector systems which uses the motive force to suck LP gases which were previously flared • Installation of separators to separate gas at various pressures and recover very low pressure gas that was previously flared • Up-gradation of process gas compressors (PGC) • Optimal utilization of gas for internal consumption in gas lift wells/ gas re-injection • Laying pipelines from gas rich areas to areas where there is scarcity of gas but greater demand (by identifying potential consumers). 2. Common Grid of Power at Offshore • A common grid of power is setup by achieving interconnectivity across various process and well platforms. • This interconnectivity can be achieved by laying submarine cables and transferring surplus power (NG based) to the shore for sale. • The project replaces more carbon intensive power source (DG based) to relatively cleaner (NG based) power.

14. Potential GHG abatement projects in Upstream Oil & Gas Sector...(contd) 3. Recovering Vapors from Storage Tanks • Recovery and utilization of vapors, previously being vented out from oil storage tanks, using ejector system. 4. Carbon Capture & Storage (CCS) • Capture of CO2 from large stationary sources, transportation of the gas to an appropriate injection site where it is pumped and stored into underground geological formations such as natural gas and oil fields. • Storage may also be combined with Enhanced Oil Recovery (EOR) or Enhanced Gas Recovery (EGR) • This also results in energy consumption reduction of oil and gas recovery from the wells.

15. Other Potential GHG abatement projects in Upstream Oil & Gas Sector • Facilities for reduction of gas flaring through ejectors/compressors/separators/pipeline etc. • Waste heat recovery at oil production facilities. • Energy efficiency improvement in gas processing plant • Power factor improvement at oil installations • Reduction in gas pipe leaks • Fuel switch from fossil fuels to other cleaner fuels like natural gas • Captive power generation by utilizing natural gas • Oil tank head vapor recovery system

16. Potential GHG abatement projects in Downstream Oil & Gas Sector

17. Potential GHG abatement projects in Downstream Oil & Gas Sector 1. Energy efficiency Improvement measures in the existing system • Steam generation and distribution system up-gradation -Enhanced heat utilization through installation of centralized flash steam recovery system to recover steam condensate -Flash steam utilization in vapour absorption chiller to produce refrigeration effect -Better steam trap management to reduce heat loss -Improvement in the cogeneration/ self generation efficiency • Steam optimization by installation of Dry-ejector system instead of steam-jet ejector in VDU In Dry-ejector system vacuum gas oil is used as motive liquid and circulated in the system. This reduces generation of LP steam which is required as motive fluid in conventional steam-jet ejector. An unique technology.

18. Potential GHG abatenment projects in Downstream Oil & Gas Sector & Petrochemical Units • Energy efficiency Improvement in the existing system…contd • Installation of ‘mist cooling tower’ instead of conventional cooling tower A much lower cooling water temperature can be achieved through ‘mist cooling tower’. This improves heat recovery and reduces cooling water requirement hence lower pumping energy etc. Not a common practice in large-scale hydrocarbon industries. • Heat integration through the application of state-of-the-art pinch technology Energy efficiency improvement through optimization of heat exchanger network in CDU/VDU/pre-heat train of distillation units etc. Optimization of HEN is performed using Pinch Analysis. • New generation refractory Replacement of conventional refractory with ceramic fibre insulation to reduce heat loss in furnace

19. Few more potential areas in refinery units where CDM may be applicable 2. Flare recovery system • utilization to cater to heat demand of refinery • utilization in boilers/ Gas Turbine 3. Fuel switch projects • Fuel switching in furnace, heater etc • Fuel switch in the thermal energy generation system/ cogeneration/ self generation equipments • Optimization in H2 recovery from off gases from CRU, VGO hydro-treater etc 4. Application of Advanced Processes • Use of new generation catalysts which reduces coke deposition on the catalyst • Application of energy-efficient Solvent De-asphalting technology instead of energy-intensive Cracking/Coking technology

20. Few more potential areas in refinery units where CDM may be applicable.... (contd) • Novel bio-catalytic processes with very low energy consumption • Application of membrane separation technology instead of conventional separation techniques • H2 generation in the refinery through natural gas reforming instead of naphtha reforming • Gas-to-Liquid (GTL) technology for production of petroleum fuel/Lube oil/Wax from Natural Gas • Integrated Gas Combined Cycle (IGCC) based power generation from vacuum residue/ petroleum coke – higher power generation efficiency with generation of H2 as by product • Steam-injection in Gas Turbine 5. Alternative Fuels/ Energy • Bio-diesel • Efficient generation of H2 and utilization • Renewable energy – wind power/ hydro power/ solar power etc. 6. Transportation project • Changes in the mode of transportation of petroleum products e.g. from road to rail/ pipeline • Energy efficiency improvement in the intermediate pumping stations of crude/ product pipelines

21. CDM methodologies available for the Oil & Gas Sector • Recovery and utilization of gas from oil wells that would otherwise be flared or vented AM0009 AM0018 • Steam optimization systems AM0037 • Flare (or vent) reduction and utilization of gas from oil wells as a feedstock AM0055 • Baseline and Monitoring Methodology for the recovery and utilization of waste gas in refinery facilities AM0077 • Recovery of gas from oil wells that would otherwise be vented or flared and its delivery to specific end-users AMS-III.P • Recovery and utilization of waste gas in refinery facilities

22. Registered CDM projects in the Oil & Gas Sector from India Essar Oil Limited • GHG emission reduction through the installation of energy efficient vacuum creating system in the vacuum distillation column of petroleum refinery Methodology used:AM0018 Oil and Natural Gas Corporation (ONGC) Limited • Flare gas recovery project at Uran plant, Oil and Natural Gas Corporation (ONGC) Limited Methodology used: AM0037 • Flare gas recovery project at Hazira Gas Processing Complex (HGPC), Hazira plant, Oil and Natural Gas Corporation (ONGC) Limited Methodology used: AM0037 • Up-gradation of Gas Turbine 1 (GT 1) and Gas Turbine 2 (GT 2) at co-generation plant of Hazira Gas Processing Complex (HGPC) of Oil and Natural Gas Corporation Limited (ONGC) Methodology used: AMS.II-D • Waste heat recovery from Process Gas Compressors (PGCs), Mumbai high south (offshore platform) and using the recovered heat to heat process heating oil • Methodology used: AMS-II.D Numaligarh Refinery Limited • NRL -Captive power generation by recovery and utilization of the waste energy (thermal and pressure) of HP steam Methodology used: ACM0004

23. Registered CDM projects in the Oil & Gas Sector from India • Bharat Petroleum Corporation Limited (BPCL)’s Wind Power Project, India Methodology used:AMS.I-D Bharat Petroleum Corporation Limited Indian Oil Corporation Limited • GHG emission reductions through pre-heat train optimization in the CDU and VDU of Digboi Refinery,, Indian Oil Corporation Limited (Assam Oil Division) Methodology used: AMS-II.D • Flare Gas Recovery and Utilization of Recovered Flare Gas for process heating requirements at IOCL, Haldia Refinery Methodology used: AMS-III.P • Flare Gas Recovery system (FGRS) at Barauni Refinery of Indian Oil Corporation Limited Methodology used: AMS.III-P Oil India Limited • Oil India Limited (OIL) – Greenhouse Gas Emission Reduction through Recovery and Utilization of Flare Gas Methodology used: AM0009

24. Carbon transactions

25. Carbon transactions • carbon transactions are purchase contracts whereby one party pays another party in exchange for a given quantity of GHG emission reductions, either in the form of allowances or “credits” that the buyer can use to meet its compliance objectives vis-à-vis greenhouse gas mitigation. • Payment for emission reductions can be made using one or more of the following forms: cash, equity, debt, or in-kind contributions such as providing technologies to abate GHG emissions. Carbon Transactions Allowance based Transactions (EUA) Project based Transactions (CER,ERU)

26. Carbon transaction options… Forward transaction • Ensures guaranteed carbon revenue • Advance possible, but modalities still uncertain • Could be fixed price or market-linked • Possible to put ‘floor’ and ‘ceiling’ • ‘Guaranteed’ quantity or ‘best effort’ basis Spot transaction • Transaction on issuance of CERs • Till today, has resulted in better rate • Has been more popular in India so far Combination of ‘Forward’ and ‘Spot’ • Usually when large quantum of CERs available (say >100,000 p.a.)

27. Carbon Finance Opportunities… Project finance • Investors from Europe, Japan interested in financing CDM, especially RE projects • Right on CERs (full / partial) imperative Transaction cost finance • Buyers ready to pick up full/part of transaction cost • CER price usually discounted

28. VER market…. Voluntary market • Essentially a non-compliance market • Driven by social responsibility • Market is emerging… not stable yet • Transacted comodity: VER = Verified Emission Reduction • From registered projects outside crediting period • From non-registered projects • Prices lower compared to CERs • Opportunities are yet to be assessed

29. CDM – Value Accretion Curve PIN = Project Idea Note PDD = Project Design Document UNFCCC = United Nations Framework Convention on Climate Change

30. CDM Transaction Cost • Documentation cost Expenses incurred in documentation, Consultant’s fee • Validation cost Fee payable to DOE for validation • Registration fee to UNFCCC For 15k CER/y : Nil For > 15k CER/y : @ 0.1 USD for first 15k CERs @ 0.2 USD for balance CERs • CER verification charges Fee payable to DOE for verification (every time) • Share of Proceeds (SoP) Charged by UNFCCC every time during issuance of CERs, calculated same way as Regn Fee. Regn fee paid, if any is adjusted • Adaptation Fund 2% CERs deducted by UNFCCC at issuance

31. Summary • Climate change and global warming: major threat to the Oil & Gas industries. • The Oil & Gas sector will be a significant part of an evolving solution to the CO2 challenge and certainly drive the ushering of a cleaner hydro carbon age in future. • Companies have already started pursuing strategies to position themselves in the cleaner, more sustainable and low carbon growth trajectory by conscious reorganization of their product portfolio and restructuring of their multi-location operations. • Big Oil Companies like British Petroleum is planning to invest USD 8 billion in low carbon power and alternative energy business over the next decade and aims at USD 1 billion of operating profit by 2015 from this business only. • Adoption of the right strategy for mitigating long term climate change risks can provide distinct competitive advantage. • Companies seeking to develop their strategies should first analyze their ‘value-at-stake’ or ‘value-at-risk’ under a variety of scenarios from current and emerging policies to reduce carbon emissions.

32. Carbon footprint - key starting step Carbon footprint has the power to influence all decisions on climate change strategy Establishing carbon footprint Map carbon footprint Determine boundary Develop carbon inventory Capacity building Determine carbon emissions Enablers Identify key sources of GHG emissions Identify and decide Organizational and Operational Boundary Select the GHG emission calculation approach Developing customized modules and inventory manuals Provide Training on the implementation of inventory manuals Demonstrating the use of customized modules Collecting activity data and emission data Applying customized calculation tools for estimating GHG emissions

33. WBCSD & WRI Protocol…. The framework for GHG Accounting GHG ACCOUNTING & REPORTING PRINCIPLES ACCURACY RELEVANCE COMPLETNESS TRANSPARENCY CONSISTENCY

34. Determining Organizational Boundary

35. Determining Operational Boundary

36. Identifying and calculating GHG emissions

37. Key Performance Indicators • PRODUCTIVITY/EFFICIENCY RATIOS: -Express the value or achievement of a business divided by its GHG impact. -Increasing efficiency ratios reflect a positive performance improvement. -Examples of productivity/efficiency ratios include resource productivity (e.g., sales per GHG) and process eco-efficiency (e.g., production volume per amount of GHG). • INTENSITY RATIOS (normalized” environmental impact data): -Express GHG impact per unit of physical activity or unit of economic output. -A physical intensity ratio is suitable when aggregating or comparing across businesses that have similar products. An economic intensity ratio is suitable when aggregating or comparing across businesses that produce different products. A declining intensity ratio reflects a positive performance improvement. -Many companies historically tracked environmental performance with intensity ratios. -Examples of intensity ratios include product emission intensity (e.g., tonnes of CO2emissions per electricity generated); service intensity (e.g., GHG emissions per function or per service); and sales intensity (e.g., emissions per sales). • PERCENTAGES (Percentage Indicator): -Ratio between two similar issues (with the same physical unit in the numerator and the denominator). -Examples of percentages are current GHG emissions expressed as % of base year GHG emissions.

38. Thank you Indra Guha Senior Manager Climate Change and Sustainability Services Indra.Guha@in.ey.com Mobile: 9871430769