INTERNATIONAL WORKSHOP ON BEST PRACTICES IN METHANE DRAINAGE
INTERNATIONAL WORKSHOP ON BEST PRACTICES IN METHANE DRAINAGE AND USE IN COAL MINES 9 -10 March 2017 Ranchi(Jharkhand), India CMPDIL, RANCHI 1
FINANCING & DEVELOPMENT STRATEGIES FOR COAL MINE METHANE PROJECTS IN CURRENT MARKETS FINANCING STRATEGIES FOR CMM PROJECTS Naveen Kintali ACA, ACMA, CS(Final) CMPDIL, India CMPDIL, RANCHI 2
Outline q Introduction to CMM q. Feasibility Study Process and assessing models q. Financing Strategies for CMM q Project Funding Resources q. CMM Project Risks q. Reference CMPDIL, RANCHI 3
CMM-COAL MINE METHANE q. Global methane emissions from coal mining sector can be reduced through recovery and utilization projects q That collect methane gas from coal mines for productive use or through destruction when an economic use is not feasible q. CMM is a wealth from waste if captured in a systematic way CMPDIL, RANCHI 4
CMM-USES Natural gas sale Coal drying Heat source for mine ventilation air Supplemental fuel for mine boilers Vehicle fuel as compressed or LNG Manufacturing feedstock Direct gas sales to industrial or other end users Primary fuel for power generation CMPDIL, RANCHI 5
CMM - Current Project Market q 200 CMM projects worldwide in 17 countries q. More than 5. 5 billion cubic meters of gas annually from active and abandoned coal mines q. Avoiding 77 million metric tons of carbon dioxide equivalent (Mt. CO 2 e) of GHG emissions each year q. Globally, the greatest volume of CMM recovered and used is from drainage (degasification) systems at active underground coal mines. q. Several countries with declining coal production are effectively capturing and using the methane from their abandoned (closed) underground coal mines including countries such as France and Japan, where active underground mining has ceased. CMPDIL, RANCHI 6
CMM - Project Development-Process Project Idea Note (PIN) or Project Concept Paper Preliminary feasibility (or) pre-feasibility studies (PFS) Full-scale, comprehensive feasibility studies (FS) Technology demonstrations or pilot installations CMPDIL, RANCHI 7
CMM-Financial Feasibility study Costs Revenues • Capital expenditure • Operating Expenditure • Sale of gas or electricity • Tax Incentives • Opportunity benefits if any • Carbon Credits, • Renewable or alternative energy credits CMPDIL, RANCHI 8
Revenue/benefits Tangible Benefits Intangible Benefits • Sales Revenues from gas • Carbon credits • Renewable energy credits • Tax Incentives • Delay of the Mining Project • Decrease in green house gas emissions into the environment • Hazards associated with mining are averted • Opportunity benefits from coal mines CMPDIL, RANCHI 9
CMM-Capital Cost Components Degasification system Gas collection and gathering system Gas processing system Engineering, design Land fees Civil and Electricals Permits, registrations other legal fees Procurement of equipment CMPDIL, RANCHI off-takeagreements Measurement and monitoring equipment 10
CMM - Operating Cost components Salaries & wages Equipment maintenance & insurances Maintenance and operation of gas recovery systems Maintenance cost of infrastructure Power & Diesel costs Annual operating costs of compressors, water/gas separator Royalty & applicable taxes on gas CMPDIL, RANCHI 11
Feasibility study-Assessing Models Net Present Value (NPV) Internal Rate of Return (IRR) Payback Period Profitability Index (PI) CMPDIL, RANCHI 12
Financial impact -illustrated q. A modern high- production long wall can produce 2 million tonnes per annum (Mtpa) in good geological conditions. q. If the coal price is Rs. 1000/t, then any gas emission-related constraint that slows or stops production for 10% of the time would cost the mining company Rs. 20 crores per year in lost revenues. q. Approximately 87 lakhs revenue loss per day-one day stoppage q. Once a gas drainage system is in place, investing in additional gas capture provides an opportunity for savings or additional revenue. CMPDIL, RANCHI 13
Financial strategies for CMM project Feasible q. CMM Project may be treated as a intrinsic part of Coal mine project q. Impact of benefits from coal mining is considered for CMM project feasibility study ◦ Loss of revenue from sales ◦ Foreign exchange loss due to Demand supply gap ◦ Delay of projects – return on investment delayed ◦ Savings of fixed cost component without any production ◦ Hazards associated with Mining q. Tax incentives/grants /Capital investment incentives, like tax holidays CMPDIL, RANCHI 14
CMM – FINANCING STRATEGIES q. Financing off the balance sheet: The potential advantages are lower financing costs and quicker turn- around. q. Equity q. Debt q. Vendor Financing q. Multilateral, Regional and Bilateral Financial Institutions q. Carbon Financing CMPDIL, RANCHI 15
Financing - Off the balance sheet q. Coal Mining companies and developers with significant asset bases are able to finance CMM projects q. Coal Mining companies secure a loan with little or no collateral security q. Smaller developers may look to approach above companies with a proposal to partner on specific projects. q. The potential advantages are lower financing costs and quicker turnaround CMPDIL, RANCHI 16
Equity Financing Pros. Repayment Flexibility Diversify Risk Cons. Give up ownership stake Higher cost of capital CMPDIL, RANCHI 17
Equity Financing q. Securing equity is the most likely option for developers - come from several different sources q. Private equity including venture capital is also possible but private equity firms generally show limited interest in carbon offset projects in today’s market. q. Private equity typically has a very short investment horizon of 3 -7 years with high return expectations and the relatively small scale of many projects does not meet investment criteria for these firms q. The advantage of equity financing for CMM projects is that it is more likely to available than debt financing and strengthen the balance sheet by minimize the debt CMPDIL, RANCHI 18
Debt Financing Pros. Lower cost of capital than equity Maintain ownership Tax deductions Cons. Repayment Interest rate risk Cash and collateral CMPDIL, RANCHI 19
Debt Financing q. For smaller companies or for companies with a limited operational history, securing debt financing is more difficult than for larger, more established companies. q. Supporting agreements and creditworthiness of counterparties, especially for off-take agreements, are necessary, and scrutiny is very high for debt financing q. The advantage of debt is that the project sponsor retains full “ownership” of the project compared with equity investment. Debt can improve the financial returns of a project when interest rates are very low CMPDIL, RANCHI 20
Vendor Financing q. Equipment supplier takes an equity stake or extends a line of credit or loan facility to the project q. This is a common model in the manufacturing sector and has been used in the CMM industry q. In some cases, suppliers are backed by private equity groups or other investors who are looking to pair equipment sales or leases with project investment q. The advantages of vendor financing are that it can be expedited and tailored by a vendor familiar with CMM projects q. A disadvantage may be a higher interest rate for these additional services as well as being tied to a specific equipment supplier CMPDIL, RANCHI 21
Multilateral and Bilateral Financial Institutions q. These institutions provide a range of debt, equity and other instruments and CMM projects meet many of their social and environmental goals q. Although they prefer to finance projects big projects but they may consider smaller projects q. The key advantage of multilateral and bilateral financing is the institutions’ ability to provide low interest rate loans and to take on country risk q. The disadvantage to multilateral or bilateral funds can be time and process required to secure the funds q. World Bank funding – Multilateral financing CMPDIL, RANCHI 22
Carbon Financing q. Sufficient capital is necessary to originate, design, build, and operate a project. q. In some cases, CMM projects are unable to meet preferred rates of return on commodity sales alone. q. Carbon finance, which is tied to project-based GHG reductions, is an incremental source of finance that has the potential to generate additional revenues capable of making these projects “bankable. ” CMPDIL, RANCHI 23
Challenges of Carbon Financing q. Lack of standardized methodologies q. Ownership of credits q. Process for project validating q. Verification of credits q. Carbon off-set price fluctuation CMPDIL, RANCHI 24
CMM - Funding Sources Commercial Banks Investment Bankers Gas Purchasers Venture Capitalists Pension Funds, Insurance Companies Multilateral Sources Bilateral Sources Electric Utilities Equipment Vendors / Turnkey Developers Other Institutional Investors CMPDIL, RANCHI Carbon Financing 25
CMM -Project Risks Legal risk including counterparty risk Country and political risk Resource risk Commercial and financial risk Design risk Operational risk Installation risk CMPDIL, RANCHI 26
References q. Coal Mine Methane (CMM) Finance Guide – March 2016 from Google q. Financial guide of Strategic Financial Management q. Best Practice guidance for effective methane drainage and use in coal mines by UNECE-Sep, 2016 edition q. Financing coal mine methane projects by USEPA CMPDIL, RANCHI 27
THANK YOU Contact Details : Kintali. naveen@coalindia. in Mobile No: - 8987789074 CMPDIL, RANCHI 28
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