Saturday, October 10, 2009

Sakhalin Project 3

Environment Issues:-

One key concern from environmental groups is that the Sakahlin II project will harm the western gray whale population. The whales summer feeding grounds are close to the project's offshore platforms in the Sea of Okhotsk.
In 2006 IUCN set up the Western Gray Whale Advisory Panel. Its members are marine scientists who give independent advice to Sakhalin Energy about managing any potential risks to the western gray whales. The Russian Academy of Sciences has identified an increasing population of western gray whales in the Sea of Okhotsk during a photo identification research programme.The Far Eastern Regional Hydrometeorological Research Institute (FERHRI) are involved in regular monitoring of the western gray whales near the oil and gas developments on the Sakhalin Shelf.
Other concerns are that the project will threaten the livelihood of tens of thousands of fishermen, destroy the key salmon fishing area off the island by dumping one million tons of dredging spoil waste into the sea, and imply a long-time threat of a large oil spill in the Sea of Okhotsk and Sea of Japan Dredging of Aniva Bay was completed in 2005. In 2005 the salmon harvest was recorded as an all-time high of more than 134,000 tonnes. In 2007 this record was overturned with a salmon catch of 144,181 tonnes.. Environmental monitoring reports are publicly available.
Sakhalin Energy paid compensation of $US110,000 to the Russian Federation to cover potential fish impacts from the Sakhalin II project. This compensation was paid regardless of whether any impact was recorded on the fishing industry or not. Part of these funds was used to set up thriving salmon hatcheries on Sakhalin Island.
Here by i am also adding a Blog written by Mr. Eric Watkins

Can Russia reliably supply Japan with LNG?Tokyo Electric Power Co and Tokyo Gas Co this week said they expect to receive their first shipment of LNG from Russia's Sakhalin-2 project on April 6.They said that Tokyo Gas’s LNG carrier Energy Frontier, which loaded about 67,000 metric tons of LNG at Sakhalin-2, sailed from the Prigorodnoye liquefaction plant and is bound for their shared import terminal at Sodegaura.Tepco and Tokyo Gas are the first buyers to receive LNG from the Sakhalin-2 project, and the cargo aboard the Energy Frontier is to be divided equally by both companies for use as a fuel for city gas and power generation.Sakhalin-2, the first LNG development project in Russia, produces 9.6 million tons per year of LNG, supplying about 6 million tons per year to Japan to be used by four electric power companies and five gas companies.Altogether, Tepco will purchase 2 million tons per year and Tokyo Gas, 1.6 million tons per year on an FOB basis. Looking ahead, though, how reliable will Russia be as a supplier?As we all know, Japan has been looking to diversify its supplies of LNG away from Indonesia, which has proven to be unreliable regarding supply, price, and regularity.Will Japan’s move to Russia amount to an improvement over Indonesia as a supplier or will it face similar problems there, too?

I want ur comments on this topic.

Sakhalin Project 2

The Sakhalin II LNG plant is the first of its kind in Russia. It is located in Prigorodnoye in the south of Sakhalin Island, 13 kilometres (8 mi) east of Korsakov. It will receive, treat, process and liquefy natural gas. Construction of the LNG plant was carried out by OAO Nipigaspererabothka (Nipigas) and the KhimEnergo consortium, together with two Japanese companies Chiyoda Corporation and Toyo Engineering.
A special gas liquefaction process was developed by Shell for use in cold climates such as Sakhalin, based on the use of a double mixed refrigerant (DMR). This advanced technology was adapted to ensure maximum production efficiency in the very, cold conditions of Sakhalin’s winters.
The complex includes:
Two 100,000 m³ LNG storage tanks
An LNG jetty
Two LNG processing trains, each with a capacity of 4.8 million tons of LNG per annum
Two refrigerant storage spheres, 1,600 m³ each (gross capacity) for propane and ethane storage
A diesel fuel system
A heat transfer fluid (HTF) system for the supply of heat to various process consumers
Five gas turbine driven generators with a total capacity of around 129 MW electrical power
Utility systems including instrument air and nitrogen plants and diesel fuel systems
A waste water treatment plant to treat both sewage water and coil-containing water.
The plant has been designed to prevent major loss of containment in the event of an earthquake – i.e. no major loss of LNG - and to ensure the structural integrity of critical elements such as emergency shut down valves and the control room of the plant. If necessary, the plant can safely be shut down. Royal Dutch Shell estimates that the LNG plant will have the ability to meet eight percent of the world’s current LNG demand, 9.6 million tonnes of LNG per year.The consortium is examining the possibility of adding another train.

The LNG plant has two LNG double-walled, storage tanks with a capacity of 100,000 m³ each. LNG will be exported via an 805 metres (2,640 ft) jetty in Aniva Bay. The jetty is fitted with four arms – two loading arms, one dual purpose arm and one vapour return arm. The upper deck is designed for a road bed and electric cables. The lower deck is used for the LNG pipeline, communication lines and a footpath. LNG is pumped from the storage tanks into the parallel loading lines which are brought to the LNG jetty. At the jetty head, the pipelines are connected with the jetty's four loading arms. The water depth at the tail of the jetty is 14 metres (46 ft). The jetty will service LNG tankers which have capacities of between 18,000 m³ and 145,000 m³. Loading operations are estimated to take from six to 16 hours, depending on vessel capacity. The jetty will be able to handle loading of around 160 LNG carriers per year.
The LNG plant was inaugurated on 18 February 2009. The first cargo is expected to load to the LNG carrier Grand Aniva at the end of March 2009. Contracts for the supply of LNG have been signed with:

Kyūshū Electric Power Company: 0.5 million tonnes per annum - 24 years (June 2004)
Shell Eastern Trading Ltd: 37 million tonnes over a 20 year period (October 2004)
Tokyo Gas: 1.1 million tonnes per annum - 24 years (February 2005)
Toho Gas: 0.5 million tonnes per annum - 24 years (June 2005)
Korea Gas Corporation: 1.5 million tonnes per annum - 20 years (July 2005)
Hiroshima Gas Co.Ltd: 0.21 million tonnes per annum -20 years (April 2006)
Tōhoku Electric Power Company: 0.42 million tonnes per annum - 20 years (May 2006)
Osaka Gas: 0.20 million tonnes per annum - 20 years (February 2007)
Chūbu Electric Power Company: 0.5 million tonnes per annum - 15 years (August 2007)

Sakhalin project----A challenging location explored

Sakhalin II is the world’s biggest integrated oil and gas project. It is being built from scratch in the harsh subartic environment of Sakhalin Island in the Russian Far East. Phase 1 involved the installation and first oil production from the Vityaz Production Complex at the Piltun-Astokhskoye field in 1999. The complex incorporated an offshore platform “Molikpaq”, a single anchor leg mooring and a floating storage and offloading unit. Phase 2 includes the installation of two further platforms, 300 kms of offshore pipelines connecting all three platforms to shore, more than 800 km of onshore oil and gas pipelines, an onshore processing facility, an oil export terminal and the construction of Russia’s first liquefied natural gas (LNG) plant and associated export facilities.

Two oil and gas fields are being developed offshore Sakhalin Island in the Sea of Okhotsk: Piltun-Astokhskoye and Lunskoye. Associated infrastructure has been constructed onshore. Piltun-Astokhskoye is primarily an oil field and Lunskoye is primarily a gas field. The project is managed and operated by Sakhalin Energy Investment Company Ltd. (Sakhalin Energy).
Sakhalin II is of vital importance to Russia's future energy policy. For this reason, in 2006 the Russian government targeted the foreign owners of the development, forcing them to sell a majority stake to Gazprom.

The field is situated in an area previously little touched by human activity, causing various groups to criticize the development and the impact it will have on the local environment.
The two fields contain an estimated 1,200 million barrels (190,000,000 m3) of crude oil and 500 billion cubic meters (18 trillion cubic feet) of natural gas; 9.6 million tonnes of liquefied natural gas a year and about 180,000 barrels per day (29,000 m³/d) of oil will be produced.The total project cost until 2014 was originally estimated by Shell to be between US$9 and $11 billion. However, the costs turned out to be substantially underestimated and in July 2005 Shell revised the estimate upwards to $20 billion, causing much consternation among analysts and Russian business partners alikeThe two fields contain an estimated 1,200 million barrels (190,000,000 m3) of crude oil and 500 billion cubic meters (18 trillion cubic feet) of natural gas; 9.6 million tonnes of liquefied natural gas a year and about 180,000 barrels per day (29,000 m³/d) of oil will be produced. The total project cost until 2014 was originally estimated by Shell to be between US$9 and $11 billion. However, the costs turned out to be substantially underestimated and in July 2005 Shell revised the estimate upwards to $20 billion, causing much consternation among analysts and Russian business part.

Sunday, October 4, 2009

Clean Development Mechanism

Before starting about CDM let us understand, what is Kyoto Protocol?
The Kyoto Protocol (Article 12 of this protocol states all the regulating framework of the CDM) was established in 1997 as an international agreement on emission reduction of greenhouse gases (GHG). The Protocol defines mandatory GHG emission targets for industrialized countries (Annex I countries), and voluntary participation for developing countries (Non-Annex I countries). The Kyoto protocol has 175 member countries, and 36 of these countries have committed to reduce their GHG emissions by five percent in the period from 2008 to 2012 compared to emissions in 1990. The rest of the countries have no legal binding emission targets. There are many gases that contribute to the green house effect. The Kyoto Protocol deals with six of them.

Gas Global Warming Potential
Carbon dioxide (CO2) 1
Methane (CH4) 21
Nitrous oxide (N2O) 310
Hydro fluorocarbons (HFCs) 140-11,700
Per fluorocarbons (PFCs) 7,000-9,200
Sulphur hexafluoride (SF6) 23,900
The Kyoto protocol has defined three mechanisms to ensure flexibility and cost effectiveness:
Emission quota trading: Annex I countries are allowed to trade emission quotas. Example: The European Trading System (ETS). In January 2005, several European sectors including energy, metals, minerals and pulp and paper came under EU Emissions trading directive which sets carbon dioxide gas emission limits. If a company emits lower than its allowed limit, it may sell its extra allowance to other companies who are not meeting their targets. The penalty for violation is 40 Euro for every tonne of Carbon dioxide over the limit, and a requirement to purchase the missing emission allowances.
Joint Implementation (JI): Annex I countries are allowed to invest in emission reduction projects in other Annex I countries as an alternative to emission reduction in their own country.
Clean Development Mechanism (CDM): Annex I countries are allowed to invest in emission reduction projects in Non- Annex I countries as an alternative to emission reduction projects in their own country.
Also, CDM allows Annex I (industrialized) countries to meet their emission reduction targets by paying for green house gas emission reduction in non-Annex I (developing) countries.

For example: - A company in Brazil (a non Annex I country) switches from coal power to biomass. The CDM board certifies that by doing this the company has reduced Carbon dioxide emissions by 100,000 tonnes per year. It is issued with 100,000 CER’s (Certified Emission Reductions). Under the Kyoto Protocol, the United Kingdom (an Annex I country) has to reduce its green house gas emissions by 1 million tonnes of carbon dioxide each year. If it purchases the 100,000 CER’s from the Brazilian company, this target reduces from 1million tonnes/year to 900,000 tonnes per year making the goal easier to achieve. [A CER is given by the CDM Executive Board to projects in developing countries to certify they have reduced green house gas emissions by one tonne of carbon dioxide per year].

Where is CDM Applicable?
· Wind, Solar, Biomass, Hydro power projects.
· Waste Management Process.
· Energy Efficiency measures.
· Fuel Switching. Like switching from fossil fuel to green fuel like Biomass. Following is the table showing the quantity of CO2 being saved from various projects.

-Electricity Saving
1KWh= 0.8 to 0.9 kg CO2

-Power Generation (Renewable)
1MW= 4000-5000 ton CO2

-Coal Saving
1Kg= 1.3-1.6 kg CO2

-Oil Saving
1litre Oil= 0.35-0.45 kg CO2

-NG based Power Generation
1 kg NG burning/ Saving= 2.4-2.5 kg CO2

Parties to a project finance?

The project company is the legal entity that will own, develop, construct, operate and maintain the project. The project company is generally an SPV created in the project host country and therefore subject to the laws of that country

The project sponsor is the entity that manages the project. The sponsor generally becomes equity owner of the SPV and will receive any profit either via equity ownership (dividend streams) or management contracts (fees). The project sponsor generally brings management, operational, and technical experience to the project. The project sponsor may be required to provide guarantees to cover certain liabilities or risks of the project. This is not so much for security purposes but rather to ensure that the sponsor is appropriately incentivized as to the project’s success.
A project may in fact have several ‘borrowers’, for example, the construction company, the operating company, suppliers of raw materials to the project and purchasers (off-takers) of the project’s production.
The project sponsor may retain the services of a commercial or merchant bank to provide financial advisory services to the sponsor. The financial adviser theoretically will be familiar with the project host country and be able to advice on local legal requirements and transaction structures to ensure that the loan documentation and financial structure are properly assembled.
The large size of projects being financed often requires the syndication of the financing. The syndicated loan exists because often any one lender individually does not have the balance sheet availability due to capitalization requirements to provide the entire project loan. Other reasons may be that it wishes to limit its risk exposure in the financing or diversify its lending portfolio and avoid risk concentration.
Technical experts advise the project sponsor and lenders on technical matters about which the sponsor and lenders have limited knowledge (oil, mining, fuel, environmental). Such experts typically prepare reports, such as feasibility reports, for the project sponsor and lenders, and may monitor the progress of the project.
Project finance lawyers provide legal experience with specific experience of project finance structures, experience with the underlying industry and knowledge of project contracts, debt and equity documents, credit enhancement and international transactions.
Project finance lawyers provide advice on all aspects of a project, including laws and regulations; permits; organization of project entities; negotiating and drafting of project construction, operation, sale and supply contracts; negotiating and drafting of debt and equity documents; bankruptcy; tax; and similar matters.
These may be lenders or project sponsors who do not expect to have an active management role as the project goes on stream. In most cases, the equity investment is combined with agreements that allow the equity investor to sell its equity to the project owner if the equity investor wishes to get out. Third party investors normally look to invest in a project on a much longer time scale than a contractor who in most cases will want to sell out once the construction has reached completion.
Since most project financings are infrastructural, the contractor is typically one of the key players in the construction period. Construction can be either of the EPC or ‘turnkey’ variety. EPC, or engineer, procure, and construct, is when the construction company builds the facility as per already designated specifications. Turnkey, on the other hand, is when the contractor designs, engineers, procures and constructs the facility, assuming all responsibility for on-time completion. In both cases, it is important that the construction company selected has a track record of successful project management and completion.
Projects naturally are subject to local laws and regulations. These may include environmental, zoning, permits and taxes. Publicly owned projects also will be subject to various procurement and public contract laws. It is important to ensure that a project has received the entire requisite per- missions and licenses before committing financial resources. In many markets, such ‘roadblocks’ may require extensive and time-consuming preparation for applying for the requisite government permission followed by indeterminate waiting.
Government-supported export financing includes pre-export working capital, short term export receivables financing and long term financing. ECAs play important roles in infrastructure and other projects in emerging markets by stimulating international trade. They normally provide low cost financing arrangements to local manufacturers who wish to transport their technology to foreign lands. ECAs also provide political risk insurance to projects.
The host government is the government of the country in which the project is located. The host government is typically involved as an issuer of permits, licenses, authorizations and concessions. It also might grant foreign exchange availability projections and tax concessions. In some projects, the host government is an owner of the project, whether majority or minority, or will become the owner of the project at the end of a specified period, such as in a build-own-transfer (BOT) structure. It might also be involved as an off-take purchaser or as a supplier of raw materials or fuel.
These include the engineers and contractors responsible for designing and building the project. Any or all of these parties may be contractually part of the financing. The contractor is the entity responsible for construction of the project; to the extent construction of a facility is a part of the overall project. It bears the primary responsibility in most projects for the containment of construction-period costs.
Suppliers provide raw materials or other inputs to the project, since sup- ply arrangements are key to project success, project sponsors and lenders are concerned with the underlying economic feasibility of supply arrangements and the supplier’s ability to perform the contracts. Closely linked to inputs are the matter of appropriate transportation links and the ability to move the requisite materials or machinery through customs.
In large infrastructure projects, the project company will seek in advance to conclude long term agreements to sell the good or service being produced by the project (e.g. selling coal to electric power plants). This is known as an ‘off-take agreement’. The output purchaser provide a crucial element of the credit support for the underlying financing by seeking to stabilize the acquisition of the raw materials over time and protect itself from market volatility. Such support can be seen as a credit enhancement (such as guarantees) to make the project more attractive to the financing banks.
If capital allowances are available for the writing-down of plant and machinery or other assets, the project structure might involve one or more financial leasing companies. Their role will be to lease out assets to the project company in return for a rental stream. In addition to the tax advantages are the financial ones of keeping the assets off the project company’s balance sheet.
The sheer scale of many projects and the potential for incurring all sorts of liabilities dictates the necessity of arranging appropriate insurance arrangements. Insurers therefore play a crucial role in most projects. If there is an adverse incident affecting the project then the sponsor and the lenders will look to the insurers to cover them against loss.

Some common misconceptions about project finance?

· The assumption that lenders should in all circumstances look to the project as the exclusive source of debt service and repayment is excessively rigid and can create difficulties when negotiating between the projects participants.
· Lenders do not require a high level of equity from the project sponsors. This may be true in absolute terms but should not obscure the fact that equity participation is an effective measure to ensure that the project sponsors are incentivized for success.
· The assets of the project provide 100% security. Whilst lenders normally look for primary and secondary sources of repayment (cash flow plus security on project assets), the realizable value of such assets (e.g. roads, tunnels and pipelines which cannot be moved) are such that the security is next to meaningless when compared against future anticipated cash flows. Security therefore is primarily taken in order to ensure that participants are committed to the project rather than the intention of providing a realistic method of ensuring repayment.
· The project’s technical and economic performance will be measured according to pre-set tests and targets. Lenders will seek flexibility in interpreting the results of such negotiations in order to protect their positions. Borrowers on the other hand will argue for purely objective tests in order to avoid being subjected to subjective value judgments' on the part of the lenders.
· Lenders will not want to abandon the project as long as some surplus cash flow is being generated over operating costs, even if this level represents an uneconomic return to the project sponsors.
· Lenders will often seek assurances from the host government about the risks of expropriation and availability of foreign exchange. Often these risks are covered by insurance or export credit guarantee support. The involvement of a multilateral organization such as the World Bank or regional development banks in a project tends to ‘validate’ a project and reassure lenders’ concerns about political risk.

What is Capital Structure?

Capital Structure is one of the financing decisions. It is a composition of a firms long term financing consisting mainly of equity, preference capital and long term debt i.e. mainly consists a mix of owner’s capital and borrowed capital. The decision is to make to collect the funds in the cheapest possible manner. In other words, the capital structure is how a firm finances its overall operations and growth by using different sources of funds.
It is a critical decision for any organization. It comes under the financing decision of the financial management. This decision is important because of the need to maximize returns to equity shareholders. It deals with best selection related to finance from large number of alternatives from where we can select our funds. It deals with long term funding requirement for more than one year. The capital structure of a company is the particular combination of debt, equity and other sources of finance that it uses to fund its long term financing. The key division in capital structure is between debt and equity. These decisions are strategic rather than tactical. Such decisions affect the profitability of a firm. They also have a bearing on the competitive position of the enterprise mainly because of the fact that they are related to fixed assets. Such decisions once made are not easily reversible. Thus factors which will help to design an optimal capital structure are:-
· Accept- Reject Criteria.
· Mutually Exclusive choice Criteria.
· Capital Rationing decision.
The capital structure is how a firm finances its overall operations and growth by using different sources of funds. Debt comes in the form of bond issues or long-term debentures, while equity is classified as common stock, share holders equity. So it is a mixture of finance raised from equity share holders and long term debt. The makeup of the liabilities and stockholders' equity side of the balance sheet, especially the ratio of debt to equity. It should not be 100% equity neither 100% borrowed capital as this does not give good impact on our organization. So we have to determine optimum capital structure which is an appropriate mix which gives maximum profit to the equity shareholders. Some portion of capital should be borrowed in order to fulfill the objective of the financial management i.e. wealth maximization.