Download Risk Management and Efficient Contract Structures in the CCS

Risk Management and Optimal Contract Structures
for the CCS-EOR* Value Chain
Anna Agarwal, John E. Parsons
Center for Energy and Environmental Policy Research
Massachusetts Institute of Technology
October 10, 2011
*CCS-EOR stands for Carbon Capture and Storage-Enhanced Oil Recovery
CCS (carbon capture and storage) value chain consists of
three key components
Capturing CO2
(at large stationary CO2 source
such as coal-fired power plant)
Source: Bellona Foundation
Transporting CO2
Storing CO2
(by pipeline)
(in geological formations – in oil fields
for enhanced oil recovery (EOR))
Source: IEAGHG Weyburn-Midale Project Update
Source: IPCC Report on CCS
2
Motivation
 CCS is pure cost, enabling financial value captured elsewhere in the
$1,057m
value chain.
-$791m
-$74m
Pipeline
Oil Field
Power Plant
 Commercial deployment would require enabling commercial
structuring of the value chain.
 Our Focus: Contract structures to distribute profits and allocate risks
among the involved entities.
 Optimal contract structures maximize the overall project value.
3
Approach
We develop a cash-flow model for a prototype CCS-EOR project.
Coal-fired Power Plant
Pipeline (dedicated)
500MW IGCC with 90% CO2 Capture
50 mile
Oil Field
190 million bbl
of recoverable oil
Project involves collaboration between two entities: power plant company and oil field
company (pipeline jointly owned)
Analyze impact of market risks on the CCS-EOR project and
evaluate optimal contingent decisions.
Evaluate risk-sharing offered by standard contract structures and
resulting incentives for optimal decision-making.
4
Project Risk Exposure
(if market risk factors changed 3 years after start of operations)
99% 95%
68%
68%
95%
99%
Price of Oil
Wholesale Price of Electricity
Upper Bounds
Lower Bounds
Price of Coal
CO2 Emission Penalty
(no pass-through on electricity price)
CO2 Emission Penalty
(with pass-through on electricity price)
0
1,000
2,000
3,000
Ex-post NPV ($million)
4,000
5,000
6,000
Volatility in oil price is the dominant risk factor.
5
Optimal Contingent Decision-Making
example of re-optimizing CO2 capture rate contingent on oil price
2,200
Oil Price ($/bbl)
90%
90% at $70/bbl
Ex-post NPV ($million)
$70
2,000
$50
1,800
$30
70%
70% at $50/bbl
1,600
$20
1,400
60%
60% at $30/bbl
No
0% capture
below $20/bbl
1,200
1,000
800
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
CO2 Capture Rate
Re-optimizing CO2 capture rate leads to financial gains of
$130 million at $30/bbl, and $247 million at $20/bbl.
6
Key Questions
 Who bears the different risks along the value chain?
 Are the ex ante negotiated contract terms still profitable ex post?
 Are the profit maximizing contingent decisions for the individual
entity aligned with the overall project?
Lets look at two standard contract structures
Fixed price CO2 contracts
Ex ante range of profitable contract prices (per ton CO2):
$62 - $ 76
Indexed price CO2 contracts – indexed to oil price
Ex ante range of profitable contract prices (per ton CO2) :
82% - 101% of oil price
7
Risk-Sharing and Incentives
- Evaluating Financial Gain by Optimizing CO2 Capture Rate
Fixed Price Contracts
Indexed Price Contracts
Financial Gain ($million)
000
600
200
Financial Gain ($million)
NPV in the 'High Risk' Scenario under Indexed Price Contracts
250
200
Overall Project
150
100
Power Plant Co.
100
Oil Field Co.
50
0
62
82% -5085%
200
150
64
88%
66
91%
68
94% 70
97% 72
100% 74
Fixed Price
Contract
($/ton)
Indexed Contract
(%oilPrice
price/ton)
76
50
0
82%
85% 88% 91% 94% 97% 100%
Indexed Contract Price (%oil price/ton)
Fixed price contracts result in conflict of interests, as the power plant
company has no incentive to adjust the CO2 capture rate.
Risk-sharing offered by indexed price contracts incentivizes optimal
decision-making and creates alignment of interests.
8
Risk-Sharing and Ex post Insolvencies
- Evaluating Resulting Ex-post NPV
Indexed Price Contracts
Fixed Price Contracts
Optimal CO2 Capture
90%
NPV in the 'High
Risk'CO
Scenario
under Indexed Price Contracts
2 Capture
2,400
1,600
Overall Project
6001,200
200
Ex-post NPV ($million)
Ex-post NPV ($million)
Ex-post NPV ($million)
2,400
1,000
2,000
2,000
1,600
1,200
Power Plant Co.
800
Oil Field Co.
400
0
64
66
68
70
72
74
-400 62
82%
85%
88%
91%
94%
97% 100%
-200 -800
Fixed Contract Price ($/ton)
Indexed Contract Price (%oil price/ton)
76
800
400
0
-40082%
-800
85%
88%
91%
94%
97%
100%
Indexed Contract Price (%oil price/ton)
High risk of ex post insolvency in fixed price contracts can lead to
inefficient investment decisions.
Risk-sharing through indexed price contracts not only maximizes
the project value, it also minimizes the insolvency risks.
9
Summary
Market risks are significant in a CCS-EOR project.
Choice of contract determines :
•Who bears the risks?
•What incentives does the risk allocation produce?
Standard contracts have weaknesses in terms of ex post insolvencies and poor
incentive structures that result in sub-optimal project value.
Future Work
Extend analysis to technical risks such as uncertainty in CO2 storage operations.
Analyze how contracts would evolve as the CCS industry matures.
10
Thank you
11
Extra Slides
12
Power Plant
$/kW
6,900
Fixed O&M Cost
$/kW/year
50
Variable O&M Cost
mills/kWh
9
Price of Coal
$/MMBtu
2
Penalty for CO2 Emissions
$/ton
5
Wholesale Electricity Price
cents/kWh
10
Capital Investment
$/bbl
5
O&M Cost
$/bbl
10
CO2 Recycle Cost
$/ton
30
Price of Oil Recovered
$/bbl
75
Overnight Cost
Oil Field
12.5%
Royalty Payment (% of oil production value)
Pipeline
Capital Investment
$million/mile
1.7
$/ton
2.5
O&M Costs
Project Timeline
2010
2011
….
2017
2018
2019
2020
2021
….
2044
25 years
Construction Starts
Operation Starts
13
Ex-post Risk Factor Values
68% conf. int.
95% conf. int.
99% conf. int.
Volatility
Base case
High
Low
High
Low
High
Low
Oil Price ($/bbl)
21%
75
108
52
155
36
223
25
Wholesale Price of Electricity (¢/kWh)
10%
10
12
8
14
7
17
6
Coal Price ($/MMBtu)
9%
2.0
2.3
1.7
2.7
1.5
3.2
1.3
CO2 Emission Penalty ($/ton CO2)
47%
5
11
2
25
1
57
0.4
14
CO2 Contract Price ($/ton)
Sensitivity of ex-ante negotiable contract prices
80
70
Negotiable
contract price
60
Minimum
50
40
Maximum
Base Case
30
20
10
0
4,000
6,900
5,000
6,000
7,000
8,000
Overnight Cost ($/kW)
Depending on the overnight cost –
minimum negotiable price can vary from $11-$73 per ton CO2.
15
Annualized Cash-flows of the Power Plant and the Oil Field
Annualized Cash-flows ($million)
400
200
Power Plant
0
Pipeline
-200
Oil Field
-400
-600
-800
-1000
-1200
2017
start of construction
2020
2023
start of operations
2026
2029
2032
Year
2035
2038
2041
2044
end of operations
16
Net Power Output (MW)
Net Power Output as a Function of the CO2 Capture Rate for Different
Levels of Recoverable Energy Penalty
650
Recoverable Energy
Penalty
(from 90% to 0% capture)
10%
600
15%
20%
550
25%
500
90%
60%
30%
0%
CO2 Capture Rate
17
Contractual Profit-Sharing
Negotiable Contract Terms
$62-$76 per ton CO2
delivered
(for indexed price
contracts:
82%-101% of oil price)
18