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Critical factors to succeed in new project developments Session Two - Day Two of Global Gas Flaring Workshop 4th -6th O

Critical factors to succeed in new project developments Session Two - Day Two of Global Gas Flaring Workshop 4th -6th October 2009 in Doha, Qatar . Outline Critical factors to succeed in new CDM project developments . CDM project identification Robust additionality Methodology fit

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Critical factors to succeed in new project developments Session Two - Day Two of Global Gas Flaring Workshop 4th -6th O

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  1. Critical factors to succeed in new project developments Session Two - Day Two of Global Gas Flaring Workshop 4th -6th October 2009 in Doha, Qatar

  2. OutlineCritical factors to succeed in new CDM project developments • CDM project identification • Robust additionality • Methodology fit • Timely action • Selection of a Validator • Management of the Validation process • Instrumentation and project monitoring • Management of the Verification process Carbon Limits AS

  3. CDM project identification • The O&G sector accounts for a significant part of global GHG emissions, and numerous investment opportunities with modest abatement costs exists • O&G projects are often large, complex and capital intensive. Good CDM project candidates: • Offer Real, Measurable and Verifiable emission reductions • Can become financially viable as a result of sale of CERs at realistic prices • Can be developed with reference to UN approved CDM methodologies • Framework conditions change over time, and investment portfolios should frequently be (re-)evaluated for identification of good CDM candidates • The window-of-opportunity for successful CDM registration vary greatly by project type, location and design, and the CDM development process must be closely integrated with normal project planning and execution and taken seriously with respect to resource allocation Carbon Limits AS

  4. CDM project identificationStep A: Assessment of Additionality • Environmental integrity is key to regulators – CDM must be shown to be instrumental in making investments financially viable • The intentto seek CDM registration must be flagged prior to making an investment decision/starting the project activity to the UN and/or Host Country • A comprehensive investment analysis (IA) illustrating the financial viability of the proposed CDM project prior to/at the time of making the investment decision must be provided in the Project Design Document (PDD) • Documented evidence for all assumptions and parameters utilized in the IA must be provided to the DOE • The validity of inputs to the IA will be re-assessed as part of CDM verification (e.g. gas contract price changes), and understanding the sensitivity of the IA is key during project identification

  5. CDM project identificationStep A: Assessment of Additionality Not financiallyviablewithout CER revenues Financiallyviablewithout CER revenues

  6. CDM project identificationStep A: Assessment of Additionality General observations regarding flare reduction projects: • No direct relationship between abatement costs and project size • No direct relationship between abatement costs and location • Sensitivity of abatement cost with respect to market developments vary greatly • Abatement costs vary over time as a result of technology development, project design, market developments and changes in regulation and fiscal terms The additionality of a CDM project must be demonstrated in the PDD, and the project must remain additional if framework conditions change prior to project start

  7. CDM project identificationStep A: Assessment of Additionality HIGHLY UNATTRACTIVE DIFFICULT JUSTIFICATION GOOD CDM CANDIDATES MARGINALLY ATTRACTIVE INVESTMENTS BUSINESS AS USUAL

  8. CDM project identificationStep B: Methodology fit • All CDM projects must be developed with reference to an approved CDM methodology • Methodologies change over time with limited notification, and might introduce altered applicability conditions • O&G related methodologies are limited in scope and difficult and time consuming to improve • Good CDM opportunities are characterized by a close fit with an approved CDM methodology • The interpretation of CDM methodologies is in some aspects subjective, and it is important to be aware of previous rulings and precedence with implications on their practical applicability and the competence of DOEs

  9. CDM project identificationStep B: Methodology fit = Fitwithexisting CDM methodology = Conceptualfit, needsdeviation or modification = Does not fit, requiresnewmethodology Developed for CDM, validation/registrationfailed

  10. CDM project identificationStep C: Timing of CDM development activities • The CDM must be seriously considered prior to making the investment decision • The UN/Host Country must be notified at least 6 month prior to start of the CDM project activity, either through a published PDD or specific form • Prior to submitting the PDD for validation, the following must be available: • An applicable, approved CDM methodology • (Detailed) technical design • Environmental Impact Analysis (if required) • Comprehensive financial analysis • Stakeholder comments • CDM developments in the O&G sector are complex and require specific skill sets, and risks to CDM development must be well understood and managed throughout the CDM project cycle

  11. CDM project identificationStep C: Timing of CDM development activities

  12. CDM project identificationOutcome of portfolio analysis

  13. CDM project identificationOutcome of portfolio analysis ROBUST ADDITIONALITY

  14. CDM project identificationOutcome of portfolio analysis = Fitwithexisting CDM methodology ROBUST ADDITIONALITY

  15. CDM project identificationOutcome of portfolio analysis = Fitwithexisting CDM methodology ROBUST ADDITIONALITY Good CDM candidates, initiate CDM development Marginal CDM candidates, sensitive to frameworkconditions

  16. Selection of a Validator Managing risks for O&G projects • Difficult to find DOEs with experience in CDM procedures, methodologies, investment analysis, instrument engineering and process engineering within the sectoral scope (typically resourced from ISO140001 or financial background) • The DOE’s ability to assess internal competencies has been insufficient, and have lead to withdrawal of UNFCCC accreditation • All DOEs follow more or less the same internal procedures based on the Validation and Verification Manual (VVM), and they have no latitude to assess deviations from methodologies or EB guidance • No DOEs are “secure”, but quality differ substantially and project proponents can reduce risks by careful review of CVs before contract signature

  17. Managing the Validation processWhat the DOE will focus on • Methodology: Any PDD conflicts with methodology and conflicting statements within PDD. No deviations accepted, even where methodology is incorrect • Boundary: Proper definition of the project boundary • Baseline: Provide documented evidence for all statements made with respect to viability of alternative abatement options • Barriers: Where there is any revenue, a detailed, transparent and well documented Investment Analysis (IA) is required. IA needs to prove additionality • Monitoring:Keep PDD body text as high level as possible to avoid conflicting statements with the Monitoring Plan (Annex 4). Defer details for verification if any doubts or alternative approaches.

  18. Instrumentation and project monitoringManaging risks • Installation, calibration, monitoring, storage and reporting requirements specified in the monitoring plan (MP) of the registered PDD must be closely followed • Establish procedures for frequent quality assurance and control of reported monitoring data • Quickly resolve operational problems and deviations with respect to the MP, and submit a request for deviation to the EB if alternative practices are used

  19. Managing the Verification processWhat the DOE will focus on • CDM rules and procedures have changed substantially in recent years. A tightening of procedures means that where a PDD was written and the project implemented some time ago, recent developments might cause verification difficulties • The DOE is required to raise a Request for Deviation (RfD) if: • Deviation from either methodology or PDD (physical implementation), even where there is no effect on emission reductions (e.g. alternative operational modes) • Variations from PDD forecasts above a certain threshold (baseline, ERs) • The CDM additionality will be reassessed for variations from original IA inputs (e.g. gas contract price changes), and projects must remain additional. EB decision for project that become “non-additional” not known • Deviation from PDD monitoring plan (MP) (body text or Annex 4). A high level MP which does not entail e.g. instrument tag numbers, flow calculations calibration tolerances, etc. will not cause a RfD. However, there would not be sufficient data for proper Quality Assurance. Due to lack of QA, a project was e.g. found to use estimated and surrogate data rather than measured, and verification remains suspended.

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