Final report for One North East And NEPIC 21/12/10 - The Carbon ...

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Commercial risk profileThe case for a Tees CCS networkFinal ReportRegulatory and policy risksTechnical and operating risksEconomic and market risksAnchor closes outfinancingContract negotiationsbetween partiesInvestment in non-anchorcapture plantBuild onshore networkAnchor project captureplantOffshore (over-sized)pipelineOperational start-up from anchor project(s)Capture technology demonstratedProject returnsNon-anchor sources connectCCS chain demonstratedStorage site integritydemonstratedEOR revenuestariff revenuesFEED studiesStorage site assessmentsPipeline routesPermitting &planningSelection for supportFID for anchor & oversized pipelineSite closureLiability transferStorage sitemonitoringDesign Development Construction Operation & Maintenance DecommissioningProject timelineNote: project timeline and level of commercial risk are illustrative only (not to scale)Figure 15 Commercial risks across the project lifecycleThe key project milestones are also shown in Figure 15 in red, and include:1. Selection of anchor project(s) for EU and/or UK CCS demonstration support2. Reaching a final investment decision (FID) for the anchor project(s) and over-sizing ofthe offshore pipeline3. Operational start-up from the anchor project(s) i.e. CO 2 capture, transport and storageof the anchor project emissions4. Connection of other industrial emitters into the network5. Site closure and decommissioningClearly a much larger range of project milestones and decision points also need to bereached by the full range of parties involved across the project value chain (some of whichare shown on Figure 15 in blue text).Progress through the project cycle requires successful transitions between each projectphases and decision-based milestone. For example, without a FID being made on theanchor project(s), an onshore network for the purposes of subsequent connectors cannot36
The case for a Tees CCS networkFinal Reportbe financed 78 . Each party will have its own set of key decision points, contingent uponthose of the other parties involved.Figure 15 also demonstrates how the commercial risk profile of the project as a wholeincreases as the project moves from the design and development stages (£10s of millions)through to the construction of plant and network infrastructure (£100s of millions). Oncethe network is built and the CCS chain is successfully demonstrated, the commercial riskprofile is then reduced, subject to a range of factors - including capital providers achievingtheir required return on investment through cost recovery (see Section 6 for a discussionof revenue model options).The levels of commercial risk associated with the onshore and offshore investmentcomponents differ. For example:The capital requirement for the onshore network is in the order of £10s of millions andfalls within the range of typical on-balance sheet capital investments made by a largecorporate, particularly as this could be a shared cost among connecting sources.Building the onshore network can be phased as different tranches of sources connect,thereby limiting the commercial risk exposure of the infrastructure as a whole, andallowing individual branches to be funded by the main beneficiaries.The up-front investment in the „over-sized‟ offshore pipeline represents the largestinfrastructure capital requirement (several £100s of millions), thereby exposing lendersto the most substantial level of commercial risk - most noticeably associated withunder-utilisation.From a technical and engineering viewpoint the pipeline may be deemed to present theleast risk within the entire CCS chain. However the commercial success of the transportelement is contingent on multiple individual „projects‟ i.e. capture, compression andstorage. The value chain requirements for an integrated CCS network see these complexrisks overlaid several times over.As shown in Figure 15, specific risks arising across the project cycle can be broadlygrouped into regulatory, policy, technical, operating, economic and market risk categories,each of which impacts the overall commercial risk of the project as a whole. Wheremultiple parties are involved in developing a project on a commercial basis, the specificrisks need to be allocated across counterparties to those most suited to accept andmanage them, and negotiated such that the adoption of risk is balanced with potentialrewards (for example, the developer/operator of the over-sized offshore pipeline mightoffset its significant investment risk by ensuring „cost plus‟ recovery through network-usertariffs and/or EOR revenues).Aside from establishing a robust business case, there is an absolute requirement forproject sponsors and developers to demonstrate to lenders, project supporters and otherstakeholders that all risks have been understood and can be adequately managed aheadof project commencement.78 Similarly, potential investment in EOR activities (tertiary production from North Sea oil fields) is likely to becontingent upon demonstration of a predictable and steady flow of CO 2 volumes above a certain level.37
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