Carbon Credits:
New Uses for Financing Natural Gas

Nigeria is the world’s largest source of vented or natural gas. Residents in the local community complain about the number of flares as well as the sulfur dioxide and particulates they claim are emitted from the burning of the unprocessed natural gas. The flaring from Nigerian oil wells and refineries produces more greenhouse gases (GHG) than any other single source in Africa south of the Sahara.

The problem, however, is bigger than Nigeria. The World Bank has formed a group that is working to reduce natural gas venting or flaring, based in part on its recent report estimating global vented or flared natural gas reaches about 14 Bcf/d. The burning of the natural gas reportedly produces 400 million tons a year of carbon dioxide, which GHG scientists blame for contributing to climate change.

If sold in the United States, the gas flaring would generate an estimated US$40 billion.
One of the means by which natural gas is captured and moved to a market such as the United States is through liquefied natural gas (LNG) projects, through which the gas is compressed and temperature reduced to liquefy the gas for ease of transport. The LNG is then shipped in special vessels across oceans to a market such as Japan, China or the United States. At the receiving port, the LNG is raised to higher temperatures and shipped by pipeline to markets.

Often there is no perceived market for this gas, and no known way of financing the transport of it to market if identified. Local markets present significant opportunities to put the gas to use. For example, in Nigeria, one investor is looking to capture the natural gas and transport it to cell towers. Because the electricity distribution system is not well developed in all areas of Nigeria, many cell towers have no connection to an electrical source; the cell towers use diesel-fueled generators to produce power.

The opportunity to transport natural gas to the cell towers provides a cheaper source of fuel. Transportation is one of the most significant challenges. Without a pipeline, another system is required. Ken Kelley, a Texas businessman, is working to apply his technology to make the needed transportation possible. His companies, including GTM Manufacturing, have decades of experience in transporting gases and provide a trailer system allowing trucking of LNG or compressed natural gas (CNG), which includes containers know as GTMs specially designed to store LNG and CNG. These trailers can be used in Nigeria to bring gas from offshore platforms or onshore wells to the cell towers. Liquefied natural gas can be transported effectively up to about 250 miles (402 km).

Kelley is involved in another project designed to utilize local sources of natural gas to fuel vehicles as well as for industrial purposes. He is backing a company in Peru called Irridia to use natural gas from the Camisea pipeline to supply new users. Diesel, gasoline and fuel oil are imported because there are no refineries in Peru, which makes these fuels expensive. The project will use the GTMs to transport the natural gas to industrial users as well as fuel stations for public and private use of the gasoline in vehicles.

The project helps Peru by creating increased foreign investment directly in the country. The dev-elopment of the natural gas industry there will benefit Peruvians by providing a less expensive fuel source because it is domestically produced and significantly cheaper than diesel, fuel oil or gasoline.

The project also provides an incentive for the development of new industrial parks in less populated areas as trucks can provide gas to these locations. The cheaper fuel reduces industrial production costs, thus increasing competitiveness. The country may save as much as $100 million in international reserves by substituting locally produced fuel for imported liquid fuels.
“Natural gas can be used to fuel vehicles and industry that does not run on electricity.” Kelley said. “Trucks alone burned 20 billion gal [75.7 billion L] of diesel fuel last year. Conversion to natural gas would save the industry $50 billion in fuel cost, reduce air pollution by 60% of the nitrogen oxides and 90% of the particulates or 60 million tons of pollution annually, and reduce our dependence on imported oil by 1.3 million b/d.

“Of course, renewables such as wind and biogas will play into the future fuel mix. There just will not be a single fuel in our future like there was in the past, we simply cannot continue to rely on oil for the preponderance of our energy needs.”

One of the significant benefits of burning natural gas rather than petroleum-based fuels is that burning of natural gas may produce less carbon dioxide. Thus, the carbon footprint of natural gas-fueled operations or vehicles may be less than petroleum-fueled operations and vehicles.

Climate change regulation may provide the capital to solve much of this problem. The key to this process is a “cap-and-trade” system or emissions markets for GHGs. This leads to what is commonly called “carbon trading.” The concept derives from what is known as emissions trading through which “pollution rights” may be bought and sold between pollution emitters. Under such a system, a regulated company may reduce emissions at its facility or purchase “emission rights” from a party that has reduced its own emissions beyond those required by pollution regulations. This system of trading of allowances between polluting facilities allows less efficient pollution-reducing facilities to purchase allowances from more efficient pollution-reducing facilities.

The pollution rights are usually referred to as emission allowances and form part of the cap-and-trade system. The “cap” is the limit placed on a state or country for a relevant type of air pollution emission. The “trade” is the market for pollution allowances between regulated polluting facilities.

Cap-and-trade systems typically also allow the use of what are known as pollution offsets, which are generally reductions of emissions from activities not part of the regulated industry. The offsets can be used to meet the reductions required by a regulated polluting facility and are sold to the regulated facilities, forming another part of the emissions market.

In this type of a system where allowances are granted to a facility in a regulated industry, a particular facility may meet its reductions in emissions by reducing its emissions, buying another regulated facility’s allowances or buying offsets from a party in another industry or business.

The system also must impose substantial fines for failing to meet the emission limits. The fines must be significantly higher than the cost of reducing its emissions and/or buying allowances or offsets to make the system work. Otherwise, the regulated facility would pay a fine rather than reducing its emissions or buying allowances or offsets.

In other words, a cap and trade system is basically a market of emission allowances and offsets where industry is forced to participate in the system by continually lowering allowed emissions generally and by each regulated facility. For the regulated industry, this is a market-based system that allows the market to function and parties in the emissions market to find the least costly approach to reduce emissions.

An emissions market was established under the Kyoto Protocol. Under the Clean Development Mechanism (CDM), GHG emission reduction projects in developing countries can be reviewed and approved by a United Nations board known as the CDM Executive Board. Once approved, this board issues offset credits know as Certified Emission Reduction Credits (CERCs), a type of “carbon credit,” which can then be sold to industrialized countries such as those in the European Union or Japan.

Projects to reduce vented or flared natural gas have resulted in significant financial payoffs for oil companies that have captured and used the gas. One example is the CDM project in the Rang Dong oilfield offshore off Vietnam. In February 2008, the CDM Executive Board approved 4.49 million tonnes of CERCs for the capture of previously flared gas and piping it onshore for use. At a price of 15 Euros (US$23.19) for each CERC, the value of these credits would be about $67 million Euros ($103 million).

The potential for fuel switching to promote domestic use of natural gas in countries where it is vented or flared provides an opening for capital investors as well as the governments to reduce the costs of fuel for their businesses and people. Carbon trading through the Kyoto Protocol provides the potential for creating a new revenue stream for the project. Often, these credits are sold on a forward basis, so the buyer pays money for the right to some or all of the credits that may be generated when the project is completed and the CDM executive board reviews the project and issues the CERS. Such a seller is taking a risk, but the potential profits can be significant.

Without the funds carbon credits generate, the Rang Dong project may never have occurred. Emission markets encourage capital to reduce GHGs and provide economic benefit to developing countries to be invested in these projects as they find substantial return on their investments. Carbon trading may prove to be a key element to many of these projects, including those to reduce the venting and flaring of natrual gas.

Scott D. Deatherage is an environmental attorney with Thompson & Knight in Dallas, Texas. He leads the firm’s Climate Change and Renewable Energy Practice Group and regularly advises clients on environmental legal matters, including climate change and greenhouse gas legislation as well as the effects on corporate strategy to manage both risks and leverage opportunities.