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, 2003Alberta 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 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

Gas Price Forecast

Electricity Price Forecast

Production Forecast/Decline Analysis

Conversions, Constants & Formulae

Capital Costs, Expense and PV Calculation

Gas Revenue Calculation

Economic (NPV) Summary