Natural Gas Development and elated Environmenta Strategy +:+ Objectives and Work Program of The Natural Gas Development Unit A Ifi'r?ckgrc;~~t~iCtc I);apcr for DiscusSio~lat ZSSkIAP's 'b.mraua9Meeting hf1.senrf~er27 29 - ESMAP World BanWUNDPIBilateralAid Energy SectorManagement Assistance Program Natural Gas Development And Related Environmental Strategy +$. Objectives and Work Program of the Natural Gas Development Unit A Background Paperfor Discussion at ESMAP's Annual Meeting November 27-29 A Background Paperfor Discussion at ESMAP's Annual Meeting November 27-29 Pads Table of Contents SectionOne Introduction SectionTwo Natural GasDevelopmentUnit Work Program SectionThree Review of Natural GasReserves,Costs,Demand SectionFour EnvironmentalIssues Section One INTRODUCTION Natural gas occupies a curious position in In developing countries, where concerns the international energy market. Like oil, vary as widely as attempted remedies, gas can fulfill a wide range of energy needs natural gas development and market from premium feedstocks and environmen- penetration face a number of obstacles. tally benign space heating to boiler fuel They revolve around complex issues relat- uses. But while proven gas reserves are ing to country legislation,regulation,owner- larger and gas itself is far cleaner than oil, ship, institutional structure, fiscal regimes, higher initial transport costs have meant that financing, pricing, infomution and technol- most natural gas is consumed in the country ogy flows, lack of understanding of the where it is produced. structure of costs, and misperceptions about the best use of gas. Thepotential of natural gas is alsoneither well understood nor widely investigated. In Unsurprisingly, the development of the long established and mature markets of natural gas has not received the attention it the industrialized countries, the techniques should, either by developingcountriesor by of regulation and pricing aremostly relicsof multilateral and bilateral institutions. In historical accident. In many countries they developing countries, history shows an un- arebeing revised. Only~centlyand because even cord of gas development for internal of environmental concerns have EEC markets. Either initialinterest in itsdevelop- regulations been changed to allow gas use in ment has been lacking or considerable power. Many OECD countries are planning delays have marked both negotiations to expand significantly their use of gas for among governments, companies, and banks power. overparticular projects and the implementa- tion of theprojectsthemselves. Objectives Against this background and after cmful up to work exclusively on gas issues and review and consultations, a new ESMAP primarily to promote the development and Natural Gas Development Unit has been set use of natural gas in developing countries. hnsuing a key strategic environmentalop- As part of the broad agenda of sustainable tion identified by numerous participants in development, there is a need to help the donor community, the unit will identify developing countries evaluate new and ex- and suppor~upstream preinvestment work isting coal, oil, and new hydro power plants and projects, prepare gas developmentplans against the use of gas, to measure the total and financing packages, and serve as one costs of each alternative, and in some cases focal point within the natural gas com- to explore the possibility of importing gas munity for promoting natural gas and re- either as LNG or CNG. The Natural Gas lated environment strategies. The unit will Development Unit has a major opportunity. also carry out policy and research work in It can play a key role in defining the energy the gas andrelatedenvironmentareas. and environment related strategies of developing countries with the aim of in- Four points summarize the rationale for creasing efficiency and replacing more gas developmentanduse: noxious fuels with natural gas as part of the effmtoreduceenvironmentaldegradation. (a) the gas reserves discovered in over 50 developing countries have not been ex- The role of the Natural Gas Development ploited at or near their potential despite Unit in this broad approachincludes: their relative low cost compared to alter- native fuels; (a) increasing the efficiency and lowering the cost of energy production and con- (b) the development of natural gas has be- sumption in developing countries come increasingly attractive on through increased development of economic grounds in a variety of sec- natural gas. The unit will promote ex- tors-power in particular-with the new panded programsof economically viable low capital cost, high energy efficient preinvestment and investment activities turbine technology and short construc- to developindigenous natural gas within tionperiod, an integrated energy planning framework and will direct project funds (c) gas is increasingly attractiveon environ- to support fuel efficiency and substitu- mental grounds. It burns more cleanly tion under more stringentenvironmental and has a much lower COZ, nitrogen, standards; sulfur and particulate matter content than oil or coal. The ratio of COZ (b) assisting developing countries in devis- emittedper unit of energy by natural gas ing transitional energylenvironment is a small fraction of coal and oil emis- strategies,which include substitution of sions;and natural gas for coal, oil, and hydro power and in facilitating these transi- (d)in most applications,it is technologically tions through integratedinstitutionaland cleanerandmore convenient to use. policyreforms; (c) encouraging the use of gas to reduce en- (f) stimulating private sector involvement, vironmentalpollutionassociatedwith oil including local and fmign capital and coal; markets as sources to finance gas development; and (d) dtveloping financial, contractual, and economic evaluation methodologiesthat (g) assessing and publicizing new tech- take environmental costs and benefits nologies. intoaccount; Section Two provides an indicative work (e) promoting use of gas, particularly in the program and is followed by abrief review in lowest income countries, and encourag- Section Three of gas reserves, costs, and ing small (rural) uses of gas where dtrnand structure and in Section Four of en- economicallyj u ~ ~ e d , . vironment related issues in developing countries. SectionTwo Natural Gas Development Unit Work Program The work program of the Natural Gas have immediate relevance for gas develop- Development Unit (IENGU) is based on ex- ment. Someof the countriesthat willbenefit tensive discussions with the ESMAP from this work include Algeria, Argentina, donors, UNDP,policymakers in a number Bangladesh, Bolivia, Brazil, B m a , Colom- of developing countries, developed country bia, cate d'Ivoire, Ghana, Indonesia, gas companies and suppliers, as well as the Morocco, Pakistan, Poland, Somalia, Tan- World Bank operations staffs, to determine zania, andTunisia. priority areas of mutual interest. The unit will work closely with gas related project GasMarketDownstreamDevelopment and research initiatives and with hydrocar- bons, electric power, and environment staff Gas market studies and surveys are in donor countries, UNDP offices, the Bank, needed to determine potential demand in and elsewhere. It will be responsible for various countries for natural gas in power, coordination with the International Gas industry, fertilizer and petrochemical Union and other major gas groups. It will manufacturing, residential, commercial, also liaise closely with the various gas re- transport and small(rural)uses. lated interests in the international com- munity (the bilaterals, UNDP,UNEP, IEA), Gas Development Plan and Environment gas companies, international oil companies, Impact Assessment equipment manufacturers, financing institu- tions, universities, environmental groups, Like a long-term power system develop- and others. ment model, a gas plan provides the framework within which individual projects Upstream Gas Exploration and Develop- can be compared. The use of a formal,long- ment tern sector model in gas use assists in sys- tem optimization, project selection, and IENGU will develop a common gas con- design. As a means of integrating planning tract franaework that developing countries for upstream and downstream gas develop- can use to assist in exploring for gas. Par- ment, it provides economic ranking and op- ticularly important in low-incomeAsian and timization of potential uses, analyzespricing African countries where natural gas is a and institutional issues and defines the re- major resource, a framework contract can quired implementation steps for new gas projects. This approach also assesses the en- developing and using domestic capital vironmental impact of gas use relative to al- markets for the gas industry. ternativefuels. LPG, CNG, and Small Uses for Gas Environmental Assessment of Gas Use The unit will develop guidelines for im- This work will take an integrated look at plementation of compressed natural gas the total fuel processes (production, (CNG) projects for transport. It will also transport, use) and compare the environ- work on developing small uses of gas, CNG mental costs and benefits of using gas rela- and LPG particularly in low-income tive to otherfuels. countries, where extensive use of fuel wood has resulted in deforestation among other Gas Pricing, Fiscal Regimes major environmental problems and degrada- tion. The unit will develop a gas pricing and t-cation structure covering well-head GasExport Markets and Economics transmission,distribution and end consumer prices. The potential gas export and import markets and the economics of gas exports Regulation, Restructuring, Ownership and imports will be assessedon a worldwide and InstitutionalFramework scale. The work will concentrate on the European marketlAfrica-Maghreb, Asian This work will concentrate on planning, and the North and South American markets institutional issues, management and as well as regional trade in Africa, Asia, and regulatory aspects of gas utilities. The unit Latin America. This work will be of use to a will work on restructuringand ownershipis- number of developing countries, both cur- suesrelated to gas companies,drawing from rent and potential gas exporters such as Al- the experienceof the developedcountries. geria, Burma, China, Indonesia, Malaysia, Nigeria, and Trinidad and Tobago, as well Financingof GasProjects as importers such as Chile, India, Korea, Pakistan, and Turkey. This activity will include a review of al- ternativefinancingmethods and will include Training work using the new Expanded Cofmancing Operation developed by the World Bank, as The unit will prepare regional training well as other innovative financing,including seminarsfor developingcountries. TableII,I ESMAP GaoDevelopmentUnlt Indlcatlve Work Program CY 90 Country Studies CatTCItImato(OO0US$) 1. India OasDovelopent Plan,Pricingand RelatedBnvironmentalImpact h m r n e n t - 2. Tanzania ImplomentadonPlan for Ou Use in Power and Indwhy - 3. Poland OasDevelopment Plan andRolatedEnvironmentalImpact Aewment - 4. Poland GasRicingand Relatad ContractualIeeua - 5. Rwanda Lake Kivu GasDovalopment(inreladon to themarketain Rwanda,Burundi,Zaire) - 6. Indonesia ImplomentationPlanfor IIkensportUem of Gaa - 7. Argentina OaaUtllizatlonandPricingStudy - 8. North Yemen GasDevelopmentPlan - 9. Momcco GasMarketStudyand Ralatad EnvironmantalAaeasament - 10. Angola GasDevelopmentPlan - Subtotal GeneralStudies Cost~ t e ( 0 0US$) 0 1. Natural GasTradc:ProspectsandEconomics 2. A Unified Approach to OasE U ,andSalesContracts 3. Regubry and OwnershipAspectsof GasCompanies 4. EnvironmentalCostsand Benefitsof GasUse 5. TechnicalandEconomic Study of GasUsein Power,Methanol,Fertilizer, Middle Distillate 6. InnovativeFinancingof GasProjects 7. Developmentof PotentialSmallSuppliesandUsesof Gasin M c a 8. Trainingfor NaturalGasUtilities 9. ComparativeReview ofGasPricingandTariff'u:ation ' Subtotal Total (Countryand General Studies) Section Three REVIEW OF GAS RESERVES, COSTS, DEMAND Natural Gas Reserves The fact that some 47 percent of global ment has been slow. proven gas reserves of 111.7 million cubic meters arc located in 57 developing Although many developing countries' countries means that opportunities for gas reserves comprise minor portions of the development arc both diverse and global total, they arc often large in relation widespread throughout Africa, Asia, Latin to existing and potential internal markets. In America, and the Middle East. Despite the many small,low-income countrieswhm oil fact that there has been little systematic ex- imports take up a large share of foreign ex- ploration for gas, gas reserves exceed change, gas is an important indigenous proven oil reserves. And since the oil in- resource whose development and use could dustry frequently regards gas discoveries in contribute significantly to both economic developing countries as little better than dry growth and environmentalsafety. holes, it is hardly surprising that develop- Table IILl GasReserves by Region (TrillionCubicMeters) MaJorRegions 1975 1980 1985 1988 DevelopingCountries 24.9 31.6 41.7 52.1 Latin America 2.4 4.4 5.4 7.1 Africa 5.1 5.6 5.9 7.2 Asia 2.6 3.7 5.4 7.6 MiddleEast 14.8 17.9 25.O 30.2 Total WorldProven Reserves 63.1 76.9 96.4 111.7 Share of Developing Countries 39.5% 41.1% 43.2% 46.8% Source:CEDIOAZ Marginal Cost of Natural Gas A World Bank study indicates that mar- would replace--is below the economic cost ginal costs of natural gas delivered to the of alternative fuels. An oil price low as main markets (exploration, production, and US$15 per barrel of oil equivalent in con- transport to the market) in ten developing stant 1989dollarswouldjusti.the develop- countries with diverse geological location, ment of most onshore and someoffshoregas market, and gas qualities is only US$0.24- reserves in developing countries. Obviously, US$1.29/MCF, or US$3.6-US$10.1 per bar- higher projections for future oil prices rel of oil equivalent. Further, in most would alsojustify gas development, even in countries, the total economic cost of g a s remote locations, or offshore gas in deep including this marginal cost as well as a waters. depletion value based on the price of fuels it Table III.2 Estimated Marginal Costof Natural Gas MarginalCost Country (US$/MCF) Bangladesh 0.24 Cameroon 1.29 Egypt India Morocco 1.16 Nigeria Pakistan Thailand 0.80 Tanzania 0.61 Tunisia Source:TheWorld Bank Demand for Natural Gas For developing countries as a group, the tial attractivemarket to cover the large start- growth of energy consumption has been far up capital costs of development and greater than the world average. Looking to transport. Once the infrastructure is in place, the future, not only will the shares of each there is certainly room for promoting gas fuel in the overall energy mix change use among smaller commercial and in- markedly from the current pattern, but so dustrial consumers. There is, then, a need will the relative consumption of the various both for a long time horizon in planning gas worldregions. development and for coordination with major gas consuming sectors such as power, Most forecastsindicate that the largest in- industry, urban centers. However, care must cremental increase in energy consumption be taken not to emphasizeonly large uses of willcomein thedevelopingcountries.With gas. An ESMAP fmanced study in greater urbanization and industrialization as Bangladesh indicates that small uses of well as the growth of the transport sector, natural gas in many low-income countries the shareof commercialfuelsin total energy couldbe economicandprovide an important consumption will increase. Moreover, con- source of energy to smaller urban and rural sumption of gas is expected to grow faster users. than that of all other fuels, particularly due to environmental concerns with coal, An examination of the sectoral composi- nuclear energy, and hydro power. In tion of gas use shows somemajor variations developing countries, the share of gas con- among countries and regions. In particular, sumption in total commercial energy con- the largest share of gas in industrialized sumption is expected to grow from about countries is in the residential and commer- 14.5 percent to over 20 percent by the year cial sectors,and the share of power has just 2000. started to increase. In developing countries the largest share of gas is in power and in- In order for gas to increase its market dustry. share,however,it is necessary to find an ini- TableUI.3 Sectoral Distributionof Natural Gas (%) c w 3 a r ~ Industrial Power Residential/ Raw Generation Commercial Materials Total World 28.0 40.0 26.0 6.0 100.0 DevelopingCounaies Latin America 36.5 47.5 9.5 6.5 100.0 Asia 31.5 38.5 8.5 21.5 100.0 MiddleEast 25.0 60.0 6.0 9.0 100.0 Source:CEDIGAZ Power producers includingimporteddieselplants. Despite the overwhelming economic The power sector is the major candidate benefits fromgas use in power generation,a for gas use in most developing countries, survey of government plans for additional where the demand for power is large and on capacity over the years 1980-2000findsfew the rise. Gas can be used in existing plants that giveprominence to gas in terms of total (after conversion) and in new power plants. generating capacity. Gas is neither being Apart from the environmental premium at- used nor targeted for use at rates near its tached to gas, which is particularly impor- potential. Working against its development tant for power plants built near cities, an are four considerations: first, a lack of important argument in favor of gas is that it knowledge in gas utilities in developing produces low costelectricityefficiently,par- countries and in aid agencies; second, a ticularly in combined-cycle plants which natural conservative attitude toward against can be built quite rapidly. Capital costs of unfamiliar fuels; third, the prestige factorof these plants are low. Their efficiencyis very hydro projects; and fourth, lack of informa- high. And they come in a large range of tion about the environmental premium of sizes. In fact, the smaller plants are as natural gas and its wide availability. economic as the larger ones. Therefore, even for smaller, remote gas fields in areas Industry with potential power demand, gas based power plants can compete with other power Industry uses gas both for fuel and as an FigureIII.1 ElectricityGeneratingCosts Base Load Operation ELECTRICITY GENERATING COSTS Base Load Operation KlCop. EQ. NUCLEAR H'tDPO FlJR alternative feedstock. Bulk uses include significant both for domestic use and for ex- aluminum,iron, steel and cement industries. ports. Ln a country such as Tanzania, with its chronic shortageof foreign currency, where Residentialand CommercialUses one cement plant has accounted for 10per- cent of all fuel oil consumed in the country, While a premium market for natural gas, there is a distinct advantage to the use of particularly in developed countries, this domestic gas. Gas has a premium value in market is smaller in many developing ceramics and glass. Not only does it countries due to a lack of space heating as generally contain no sulphur, it also pennits well as the lower per capita energy use that the kind of close control over the intensity goes with low incomes. Nonetheless, in and direction of flames that is of great utility cases where gas costs are low (forexample, in making both ceramics and glass.Gas uses Bangladesh, India, Indonesia, Malaysia, in small industries such as brewing, food Nigeria, Pakistan, Tanzania) such uses are processing, and light manufacturing also often economic, particularly in major com- hold important potential. In many areas, mercial concentrations,and given lowcosts. smaller handicraft and local industries such as brick kilns can benefit from natural gas Transportand Small Markets use. As a feedstock in fertilizers, petrochemicals, and methanol, gas is also So far the transport market has used gas in only a limited way. Compressing natural LPG and Condensates gas into cylinders as CNG-a well developed technology+pens new market The developmentpotential of a field rises opportunities.In New Zealand, for example, sharply when natural gas contains a high over 100,000vehicles are fueled by CNG as proportion of condensates and LPG,which are many Tokyo taxis and the fleet of Bank have a high international price and can pro- of America in San Francisco. In many vide foreign currency to repay development developing countries with relatively low costs. LPG,in particular, is an important cost gas, CNG can be used in public fuel in the energy mix of many developing transport, as well as in small uses which do countries facing deforestation. A flexible not merit spur-lines from the main gas net- fuel that also lends itself to private sector work. Pilot studies are underway in distribution, its use has gmwn quite rapidly Bangladesh, Indonesia, Algeria, and else- in many countries. where to detexmine the potential use of CNG. SectionFour ENVIRONMENTALISSUES Environment Air pollution and acid rain are two major industrialized countries, Ankara, Bangkok, environmental problems caused largely by Buenos Aires, Calcutta, Lagos, Mexico, burning fuels. The possibility of enhanced City, New Delhi,Rio de Janeiro, SaoPaulo, global warming is a third issue. In each Seoul, and Warsaw are some of the wmt case, coal is the worst offender,followedby examples. The use of natural gas in the oil and then natural gas,the leastnoxious. power, industrial and commercial enterprises in or near such cities, and in the Air pollution is caused by emissions of residential and transport sectors can reduce toxic gases such as SOz, NOx, carbon thispollution dramatically. monoxide, fly ash, vehicle exhausts and suspendedparticles. Sulphur for example is Coal and high sulphur fuel ail are the present in most crude oils and coal, and al- worst offendersin producing acid rain. Pos- though some is removed before combustion sible solutions suchremoving S02 and NOx the cost and technical difficulties of remov- from smokestacks can inmase the cost of a ing it all are large. Gas often has low sul- new power plant by 20 percent and add 20- phur content and in any case sulphur 25 percent to buring it cleanly have high removal from gas is straightfmard. For costs. In 1987, 34 percent of all coal was equivalent quantity of energyconsumed, the consumed by developing countries includ- sulphur emissins by gas are about 5 percent ing China, which alone could become the of those from low sulphur gas-oil. Substitu- world's largest source of SOz and carbon tion of gas for coal and even low sulphur emissions by the year 2000. As yet, China gas-oil would therefore reduce sulphur has taken few measuresto alleviatethese ef- emissions dramatically. In principle, clean fects. Obviously, given China's proven gas air regulations, stronglyenforced, can solve reserves and potential, inmasing the share these pollution problems, but many cities in of gas from the current 1-2percent of total developing countries suffer from smog that commercial energy use would be an impor- far exceeds the worst cases of the 1950s in tant step. TableIV.1 EmissionFactorsfor Industrial Boilers Before ControlEquipment (Kilogramsof Emissions per Ton Oil Equivalent of Fuel Use) Coal 1%S/10%Ash Fuel Oil 1%S Natural Ges Particulates 100. 01.8 0.1-03 SulphurOxkles 293 20.0 0 CarbonMonoxide 15 0.7 0 3 Hydrocarbons 1.5 0.1 0 NitrogenOxides 11.5 Source: 'NaturalGas Rospts', IEA, 1986. The increasing concentrations of carbon fired, combined-cycle power plants, dioxide, methane, chlorofluorocarbons, demonstrates clear advantages in shifting nitrous oxide and ozone in the atmosphere away from burning coal and toward natural are the major reasons for the concern about gas. For many developing countries, en- the possibility of an enhanced greenhouse vironmental problems as well as the high effect and its practical implications remain costs and potential health hazards of hydro the subject of much scientific debate, there power schemes and their additional~settle- is agreement that certain known and pmti- ment consequences,argue in favor of gas in cal options, both to reduce greenhouse-gas many cases. output and increase economic efficiency, couldproceed in tandem Gas is an acknowledgedclean fuel. In the 1990s and early 2000s it is due to be the While gas is not completely clean, its transition fuel as its total consumption in- combustion produces far less CQ,S02 and creases at a phenomenal 40 percent particulate matter than coal or oil. In worldwide by the end of the twentieth a n - developing countries, therefm, there is in- tury.The substitutionof carbonrich fuelsby terest in substitutingnatural gas for coal and natural gas could slow down the inexorable oil, particularly in the power sector. Al- growth of carhon emissions, and carbon though natural gas production and transpor- dioxidelevelsin the atmosphere. tation couldproduce somemethane leakage, with existing technology it is relatively easy This offers a double benefit. Higher fuel to keep this sideeffectto a minimum. efficiency and the cleaner characteristics of gas would in most cases be justified on An American Gas Association study, economic efficiency grounds alone. Its use, comparing emissions from coal-fired power moreover, could clearlyreduceenvironmen- stations and from new 240,000 kW gas- tal degradation. TableIV.2 Emissions by Power Plants: Tons1Ye.r Combined cycle gas NSPS a/ coal Uncontrolledcoal Sulphurdioxide 0.3 410 3,900 Particulatematter 0.9 21 1,700 Nitrogenoxides 135.0 240 680 Carbondioxides 51,000.0 143,000 143,000 a/Refers to US EPA's new sourceperformancestandards Source: Oil andGasJournal. August 29,1988, p. 14.