UNDP		Conference		Economic Risk Analysis of CMM Projects. The Impacts of CER Revenue

Economic Risk Analysis of CMM Projects. The Impacts of CER Revenue

International conference

Coal Mine Methane: Recovery, Utilization,
Investment Opportunities

June 19-20, 2006

Kemerovo, Russia

Economic Risk Analysis of CMM Projects
The Impacts of CER Revenue

Michael M. Cote, Ruby Canyon Engineering
Ronald C. Collings, Ruby Canyon Engineering
Daniel B. Jones, MGM International

Objective of the Presentation

• Differentiate between project hurdles and economic risk
• Discuss economic risk in terms of resource and commodity price
• Explain the role of GHG emissions reduction credits for reducing economic risk

Hurdles to Initiating a CMM Project

• Establishing gas ownership (coal or oil and gas estate, public vs. private)
• Institutional resistance (coal producers are not gas developers)
• Operating agreement between gas user and mine management (who controls gas production, transfer of ownership)
• Negotiating a gas sales or power sales agreement (small potatoes syndrome)

Economic Risk

• Long-term reliability of gas supply
• Maintaining a minimum gas quality
• Project duration
• Gas use decision
• Availability and value of incentives

Gas Availability (Active Mines)

• High initial gob well rate followed by rapid decline
• Erratic gas rates as new gob wells are brought on and old wells shut-in
• Longwall moves can disrupt gas production

Gas Availability (Abandoned Mines)

• Static pressure in void
• Resource base in void
• Resource base absorbed in coal within and adjacent to mine
• Contacting total mine volume with wells
• Projects are often oversized based on initial rates

Variation in Methane Flowsfrom Two CMM Drainage Pump Stations

Gas Quality

• Gas quality varies by type of drainage well
• Low methane content can be encountered if vertical well is drilled too deep
• Low methane content can be associated with certain in-mine drainage schemes
• Gas quality is stable in abandoned mines assuming no atmospheric ingress
  

Comparison of Total Methane Concentration Using Gob Gas (75% CH4) from Vertical Wells

Project Duration

• Mine life could be shortened due to:
  • Price of coal
  • Operating cost
  • Catastrophic event
• Mine could move to less gassy seam
• Mine could move to less gassy area of existing seam

Gas Use Decision

Gas sales

• Feedstock market for low quality gas
  • Industry located nearby?
  • On-site use?
• Pipeline sales for high quality gas
  • Infrastructure in place?
  • Cost of pipeline tap?
  • Transportation fees?
  • Gas processing costs?
  • Sales price?
    

Electric power sales

• Minimize gas quantity and quality variability
  • On site use by the mine could require standby or demand charges by utility
  • Connection fees and onerous equipment requirements
  • Backup charges may apply for sales to grid
  • Power sales price
    • Utility may only have to purchase at “avoided c

Break-Even Price for Power Generation with Methane Assuming Various Generating Efficiencies

Gas vs. Electric Power (Industrial Prices, 2004) for Various CMM Coutries

Example Economics for CMM Power Generation Project

Assumptions

• 5 MW project
• Capital cost: 4.75 M$
• Operating cost: 15 $/MWhr
• Electrical efficiency: 37%
• Run-time: 85%
• Cost of Methane: 0.0 and $70/Mm3
• Borrowed capital paid off in 10 yrs at 8% Interest
• 15 year project life
  

Pre-Tax IRR vs. Power Sales Price for Typical 5 MW CMM Power Project Using Reciprocating Engines

CER Price Necessary to Achieve a 20% and 30% IRR for CMM Project at Various Power Prices

Gas Use Decision

Optimum facility size

• Sizing for maximum expected gas volume can cause severe under-utilization of equipment
• Size energy recovery project for minimum expected gas volume
• Role for flaring excess methane
  • Can be combined with gas sales or power generation project
  • Revenue can still be generated by CERs

Example of Combined Electric Power and Flaring Project (UK Coal)

Conclusions

• Numerous hurdles need to be overcome to get a CMM project established
• The major economic risk to a successful energy recovery project is obtaining a favorable electric power or gas sales price for a CMM project
• A secondary, but still significant risk, is the continuous availability of good quality gas

International conference Coal Mine Methane: Recovery, Utilization,
Investment Opportunities

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