International Finance and Coal Mine Methane Projects Karl H

International Finance and Coal Mine Methane Projects

Karl H. Schultz
(United States, Washington D.C., U.S. Environmental Protection Agency)

Abstract This paper examines the range of potential financing sources for coal mine methane projects in developing countries and economies in transition, and provides an update on current projects financed or otherwise supported by various multi-lateral and bilateral organizations. Financing is a critical component for resource development in all of the developing countries and economies in transition, to overcome some of the barriers to commercial project development. Beyond a lack of capitalization in these countries, barriers may include a lack of information on resources or markets, little or no domestic experience with state-of-the-art recovery and end-use technologies, and risks associated with doing business in a rapidly changing business and political environment. The paper discusses the different financing mechanisms and how they may overcome particular barriers to project development, and surveys the various organizations and programs that may provide financing for coal mine methane projects.

1. Introduction
The availability of capital is necessary to develop coal mine methane resources in developing countries and economies in transition. In spite of the significant energy demand in many nations with plentiful coal mine methane resources, all too often, capital is lacking for projects in these nations. The reasons are many for this absence of capital, but often come down to the lack of information by the owners of capital on project opportunities, and by the often greater costs and risks of developing projects in these countries because of significant political and market risks.

However, there are numerous examples of investments or interventions by private sector, multilateral, and governmental organizations that have led to successful project developments. These organizations invest in coal mine methane for various reasons. Private sector banks and equity investors must consider the financial return on their investment. Multi-lateral organizations are primarily motivated by socio-economic developmental goals. Governments are motivated by a combination of reasons including enhancement of international relations and trade, and for social goals. Each of these three broad groups of organizations, however, can play an important role in stimulating growth of coal mine methane market activities. This paper will describe how different financial organizations can support coal mine methane projects, and then will survey many of the major organizations available for different sorts of financial interventions.

2. International Market Potential of Coal Mine Methane
A recent U.S. EPA study [1] explores the cost effectiveness of strategies to reduce coal mine two complementary means of using the gas, i.e., pipeline injection, and catalytic oxidation of mine ventilation air to produce thermal energy for on-site needs or power production. future emissions reductions, individually or in combination. For example, mines could use a portion of the recovered gas on-site in a coal preparation plant, while injecting their highest quality gas into a pipeline for sale. The U.S. EPA analysis does not consider such options, and therefore does not account for all of the cost-effective combinations of gas use possible at some mines.
Figure 1: Emission Reduction Versus Equivalent Gas Price For Coal Mines by Year (%)

Baseline Methane Liberated: 2000 = 4.2 Tg; 2010 = 4.9 Tg; 2020 = 5.3 Tg.

The analysis shows that up to 30%, or about 1.8 Bcm (7 MMTCE) of all methane emissions could be profitably reduced at U.S. coal mines in 2000, compared to the current annual coal mine methane production rate of less than 1.4 Bcm. At a cost of less than $4/million Btu over current gas prices (equivalent to less than $30/tonne of carbon equivalent), the model predicts that almost all underground coal mine methane emissions, or about 4.4 Bcm (17 MMTCE) could be put to use, rather than entering the atmosphere [Figure 1]. Compared to many estimates of the average cost of reducing carbon emissions, this analysis indicates that coal mine methane recovery is a very efficient means of mitigating greenhouse gas emissions, while in many cases providing coal mines with additional profits.

Opportunities in developing countries and economies in transition may be even more favorable, considering the low average gas drainage efficiencies and the lack of capital and technical information on many gas recovery and use options. In the Kuznetsk Coal Basin in Russia, for instance, methane recovery efficiencies are very low and very little coal mine methane is harnessed for use, even though this basin has some of the gassiest mines in the world. U.S. EPA is currently drafting cost analyses for several important coal producing nations, including Russia, Ukraine, China, and India, which may further serve to indicate the great potential for low cost methane emission reductions.

To consider the scale of the potential international coal mine methane market, one can look back to estimates of emissions prepared by U.S. EPA. [2]. U.S. EPA estimated 1990 Methane Emissions to be between 24.4 and 39.6 Tg/yr (37 to 60 Bcm/yr. Assuming that enhanced degasification may result in a 50% global recovery efficiency, and that this gas has a minimum value of $.10/cm; the potential revenue could be between $1.85 billion and $3.0 billion per year. Taking into account the potential value in reducing methane emissions to the atmosphere, and advances in technologies to process, produce power, and employ mine ventilation air, the future market value is likely to be even greater.
3. Finance and Market Development
However significant their market value, external financial and other support is crucial to develop coal mine methane projects in economies in transition (EITs) and developing countries. Most of these countries are particularly handicapped by a lack of domestic capital. The recent Asian and Russian financial crises have further strained the level of available capital in many countries with significant coal mine methane resources. Even projects with low risk and high return are thus hampered from developing. This is particularly of concern for projects that introduce new technologies and equipment that would significantly enhance project viability, but which often require significant levels of hard currency to import equipment and technical advice. The rapid advances in coalbed methane recovery technology in the West over the past two decades have meant that many countries would remain incapable of fully developing their resource base without external support. As a consequence, it may be necessary for coal mine methane project developers to explore the range of international financing mechanisms available in order to identify viable sources of capital and technical assistance.

4. Financing Options
Financing options range from self financing to a variety of external financing options that allocate risk and return differently. Depending on the perceived risk, expected return, cost, and expected social benefits attributed to a project, one or a combination of the following financing options may be appropriate. This section briefly describes the options and discusses when they may be appropriate for a coal mine methane project.

4.1 Internal capitalization
Companies may consider investing in their own coal mine methane projects for two different reasons. First, when the capital costs are relatively low so that the transaction costs of seeking external capital outweigh the benefits, and secondly, when the company considers that adsorbing all of the project risk is justified for the expected returns and the ability to effectively control the project, and when the company has sufficient capital to afford self-financing. In addition, internal capitalization is the only option a developer has if no outside sources are interested or able to invest in the project.

4.2 Private sector external equity and debt
Projects that have sufficiently high expected returns and reasonably low risks are appropriate candidates for private sector investment. In fact, to the extent that a project may be financed by the private sector, the public (domestic and international) sector should not consider it appropriate to directly participate. Private sector investment is preferable because the project participants will typically have a financial incentive to review and manage the project in the most efficient manner to insure success.

Under good circumstances project developers will be able to attract outside equity investors in a coal mine methane project. Equity investors become owners of the project, and hence control the project and bear most of a project’s risk. They also, however, are able to share in the returns from the project. Equity, joint venture partnerships may be particularly helpful for international coal mine methane projects when, for instance, each partner has complementary expertise at managing and operating a project. For instance, an effective joint venture project in a developing country might bring together a coal company that owns the gas and may have demand for it, with a Western gas producer that has technical expertise and capital that optimize the project’s efficiency and size.

In addition to the straight economic value of coal mine methane projects stemming from their energy value, a growing number of private companies have been developing policies and taking actions to reduce or offset greenhouse gas emissions. The majority of U.S. electric utilities, for instance, have signed a voluntary agreement with the U.S. Department of Energy (U.S. DOE) to take measures to reduce greenhouse gas emissions [3]. In addition, a growing number of organizations (1,038 for 1996) are reporting greenhouse gas reductions to the U.S. DOE’s voluntary reporting program. British Petroleum-Amoco and Shell, two of the largest oil and gas companies in the world, have developed aggressive greenhouse gas reduction goals, and are implementing internal greenhouse gas reduction trading systems.

To date, the majority of these companies have achieved these reductions through a number of internal efficiency investments and by developing and holding equity stakes in projects that reduce greenhouse gas emissions. Industry associations, such as the Edison Electric Institute, have adopted venture capital investment funds for their member companies that invest in companies and identify projects that develop and commercial technologies that lead to greenhouse gas reductions. In addition, some companies are contemplating a limited equity stake in coal mine methane projects. These companies would provide partial support to capitalize the project, in return for all greenhouse gas reductions resulting. Others are interested in simple purchase of the reductions after the project is in operation, and subject to monitoring and verification. As this market in greenhouse gas emissions grows, it will help encourage coal mine methane projects though the capital or revenue it may bring. However, to maximize the value of any international emissions exchange, it is important that the investor’s nations, and the host nation sanction an official emission exchange. Governmental policies and international agreements regarding emissions trades are still under development.

4.3 Public sector debt
National, provincial, and local governments often provide favorable financing terms on loans for projects considered desirable to promote social, economic, or other ends. For instance, the Polish government manages the National Fund for Environmental Protection and Water Management, which provides loans with preferential terms to projects that protect the environment. Support for this fund comes from environmental fees and fines and loan repayments. Such preferential loan policies provide often-needed capital that the private sector may not be able to provide at rates that enhance the financial attractiveness of projects to the point where they are viable. As such, they may play an important role supporting coal mine methane projects in conjunction with a private development and capital. Governments may also issue bonds that play a similar role for projects that are implemented directly with public sector involvement.

4.4 Public sector grant and service
The public sector may provide direct or indirect grant support to encourage socially beneficial activities, such as reductions in greenhouse gas emissions or energy conservation. In China, for example the government has provided significant support for developing the coalbed methane industry by funding research and projects to demonstrate coal mine methane technological applicability to Chinese coals [4]. In addition, the public sector in the U.S. provided a tax credit for the production of coalbed methane that helped stimulate production. These measures are important in introducing new practices that may enhance the viability of projects. In instances when grant support is partial, the grant component enhances the rate of return of currently marginal projects to make them attractive to investors. In a similar vein, the public sector may provide support to develop an industry such as coal mine methane by providing services to help the private sector identify the technologies, markets and finance sources.

5. International Financial Organizations
The number of private sector financial organizations that have or may invest in coal mine methane projects is immense, and their investments are more typically in either mature markets, or in larger scale projects in developing countries and economies in transition. As a result, this paper will not survey conventional private sector financial institutions. It will, however, selectively describe the activities multi-lateral, governmental, and unconventional private sector organizations have or could undertake in coal mine methane project investments.

5.1 Multi-lateral development organizations
World Bank. The World Bank funds environmental and energy infrastructure projects in developing countries for which the procurement of technical assistance, civil works, materials and equipment are necessary. These agencies provide grants and loans to government ministries and businesses, which implement projects under local procurement and contracting regulations. The World Bank institutions that have undertaken or are exploring coal mine methane projects include the International Bank for Reconstruction and Development (IBRD), the International Finance Corporation (IFC), the Global Environment Facility (GEF), and the Global Carbon Initiative (GCI).

The IBRD provides loans at near-market interest rates to the governments of developing countries and economies in transition. The IBRD has provided or is discussing the provision of loans for restructuring of the coal industries of Russia, Ukraine, Poland, Czech Republic, India, and other countries with significant coal mine methane resources. Some of these loan funds may be mobilized for coal mine methane projects, either to enhance the mine safety and productivity of coal mining operations, or to provide jobs and opportunities for small business development, or to render the local and global environmental benefits associated with developing a clean energy resource that reduces methane emissions.

The IFC provide loans and equity stakes in private sector projects in developing countries and economies in transition. It has expressed an increased interest in developing projects that reduce greenhouse gas emissions, and could participate in financing, for instance, development of a private drilling services company or a company that removed contaminants from medium quality coal mine gas to allow it to meet pipeline specifications.

The Global Environment Facility provides financing for activities to protect the global environment in developing countries and economies in transition, and is implemented by the United Nations Development Program (UNDP), the United Nations Environment Program (UNEP) and the World Bank. GEF provides grants to support the incremental cost of projects that provide benefits to the global environment, such as reductions in greenhouse gas emissions, over the costs of “business as usual” projects . The World Bank manages the GEF’s funds, and develops investment operations. Currently, the bank is managing a GEF coal mine methane project through the IBRD in Ukraine, in partnership with the Ukrainian Government and domestic and international gas production companies. The IFC has expressed interest in participating in a GEF coal mine methane project with the private sector.

The World Bank has also designed and is in the pilot phases of developing a Global Carbon Initiative. The World Bank would broker carbon offsets produced by Bank financed projects, with the incremental costs of carbon emissions reductions paid by nations and private investors. At a World Bank board meeting in April of 1999, a decision will be made whether to accept the pilot phase for further development. Such a fund, in effect a mutual fund for greenhouse gas reductions, could mobilize additional capital for coal mine methane projects. There is one proposed project under consideration for reducing coal mine methane emissions in the Kuzbass Coal Basin of Russia.

United Nations. The United Nations Development Program (UNDP) manages technical assistance projects under the Global Environment Facility (GEF). GEF technical assistance projects provide the resources to demonstrate technologies, develop training programs, and provide technical assistance on policies and programs that the government may develop to encourage projects and practices favorable for the global environment. In nations or regions where the development of coal mine methane projects is at a basic level, UNDP GEF projects are very appropriate, to develop the physical and human infrastructure to the point where conditions are appropriate for private sector investment. One United Nations managed GEF coal mine methane project has been completed in China, a second has been approved in India, and a third is under study in Russia.

Regional Multi-lateral Banks and Organizations. Regional multi-lateral banks can play a similar role to the World Bank in providing loans, equity investments, and guarantees. The Asian Development Bank (ADB), for instance, is currently funding a study conducted in China to precede a potential loan to finance a coal mine methane recovery and power production project. Other multi-lateral banks that could finance projects in their client countries include the European Bank for Reconstruction and Development (EBRD) and the African Development Bank.

In addition to multi-lateral banks, there are a number of multi-lateral cooperation organizations that can play a role in promoting technical assistance and financing demonstration projects. Two of these organizations that have supported coalbed methane developments include the European Commission in Poland, and Asia Pacific Economic Cooperation (APEC) in China.

5.2 Bi-lateral assistance
Most industrialized nations provide assistance through international aid, energy, environmental and trade agencies that may help finance coal mine methane projects in developing countries and economies in transition. Trade, national security, or humanitarian goals may motivate aid programs.

One example of a bi-lateral assistance agency is the U.S. Agency for International Development (U.S. AID). It mission is broadly to contribute to U.S. national interests by supporting efforts to achieve sustainable economic and social progress in developing countries and economies in transition. It provides technical assistance and grants that may support coalbed methane projects. In the past it has provided funding for a power generation demonstration project at a Russian coal mine, and has helped support the U.S. Environmental Protection Agency (U.S. EPA) in establishment of coalbed methane clearinghouses in Poland and Russia. It currently is supporting, with U.S. EPA, a similar center in Ukraine. Several technical agencies, such as the U.S. Department of Energy (U.S. DOE) and the U.S. EPA have supported coalbed methane activities for different reasons. The U.S. DOE’s mandate is to promote energy resource development and national security. As such, it has provided support with U.S. EPA on a coal mine methane use demonstration project in Poland. The U.S. EPA’s mandate, to promote human health and safeguard the natural environment, has led to it’s leveraging support for various technical exchanges, demonstration projects and coalbed methane clearinghouses in six developing countries and economies in transition.

Another organization within the U.S. government that may help facilitate coal mine methane projects is the U.S. Initiative on Joint Implementation (USIJI). USIJI is a pilot program to execute an article of the U.N. Framework Convention on Climate Change that allows nations to meet any obligations to limit greenhouse gas emissions by working together. In principal, joint implementation occurs when the cost to reduce emissions is less in one country than another. Hence, companies that are looking for the most cost effective means of offsetting their emissions may apply to USIJI to receive approval by both the U.S. secretariat, and by the government of the country where the project would take place.

Various countries support trade agencies to provide financing for projects and companies that aid domestic industries through encouraging exports or investment. For instance, U.S. government trade agencies include the Overseas Private Investment Corporation, the Trade and Development Agency, the Export-Import Bank, and the Small Business Administration. The U.S. Overseas Private Investment Corporation (OPIC) is a U.S. government agency that provides direct loans and/or guarantees and equity investments for overseas projects developed by U.S. companies. The U.S. Trade and Development Agency (TDA) provides grant funding for market feasibility studies where the potential market for U.S. enterprises appears significant. It has supported studies of coalbed methane market potential in Poland, Ukraine, and South Africa. The Export-Import Bank (Ex-Im Bank) provides export credit insurance, loans, and loan guarantees to U.S. exporters, and limited-recourse project finance to investors. The Small Business Administration (SBA) provides working capital loan guarantees, regular loans for fixed assets, or long-term international trade loans to small U.S. businesses. Other nations have similar agencies to support their businesses.

5.3 Private sector financing
Financing from the private sector may be more difficult to procure for smaller coal mine methane projects in developing countries and economies in transition, however, there exist venture capital firms that are interested in certain investments if the risk is deemed low and the return high. Some firms specialize in investments in oil and gas projects, alternative energy projects, or in particular regions. These “boutique” firms are appropriate candidates from which to seek financing since their familiarity with a particular project type or region gives them greater ability to ascertain the viability of a particular project.

Beyond conventional financing for international coal mine methane projects, there has been, as discussed above, significant growth in the financing of projects that lead to reductions in greenhouse gas emissions. The drivers of this new market have been electric utilities and other major energy producers and consumers. These companies have financed numerous international projects, including coal mine methane projects, and there is significant activity in financing international projects. A small number of companies are now specializing in brokering greenhouse gas emission “credits”. This market is growing; in 1998 the entire market was estimated at five million tons of CO2 equivalent, in 1999 just one of these companies reported brokering thirteen million tons.

6. Conclusion
Interest in coal mine methane has increased globally as the maturing of the coalbed methane industry in the U.S. and elsewhere has led to greater confidence in the viability of this resource. In addition, global environmental concerns are interesting both the public and private sectors in coal mine methane projects as a cost effective and measurable means of reducing greenhouse gas emissions. The role of different financing mechanisms in capitalizing projects is particularly important to continue this international momentum, in particular in the large number of developing nations and economies in transition where the financial and technological risks are greater, and the resources scarcer to introduce new means of recovering and using coal mine methane. Project developers will benefit from a familiarity with the various organizations that may help support coal mine methane industrial development, and with an understanding of the various energy conservation, economic development, and environmental benefits that coal mine methane projects bring so they may fully convey the complete value of their projects when engaging potential financing sources.

References cited

1. EPA, 1999. U.S. Methane Emissions 1990 - 2020: Inventories, Projections, and Opportunities for Reductions, EPA 430-R-99-013.

2. EPA, 1993. Options for Reducing Methane Emissions Internationally, Volume II: International Opportunities for Reducing Methane Emissions, Report to Congress, EPA 430-R-93-006 B.

3. Kinsman J.D. et al, 1996: “A Status Report on Climate Challenge Program’s Voluntary Initiatives to Manage U.S. Electric Utility Greenhouse Gases”; 89th Annual Meeting and Exhibition, Air and Waste Management Association, pps. 6-9.

4. Anon.: “China Provides Incentives for Coalbed Methane Projects”; World Coal, V. 8, No. 1, p. 52.