Call for Improving Terms of APG Waste-to-Energy Projects

Call for Improving  Terms of APG  Waste-to-Energy ProjectsCall for Improving  Terms of APG  Waste-to-Energy Projects

Iran, besides Russia and Nigeria, has one the world's highest rates of energy waste in the form of associated petroleum gas (APG) or flare gas, which is released as a byproduct of petroleum extraction, a new survey shows.

Despite many projects implemented to reduce APG flaring, APG volume stood at 25.2 million cubic meters per day (mcm/d) in 2012, which equals production from one phase of South Pars gas field. The value of APG burned in 2012 was $4.1 billion, if calculated in accordance with the price of gas exported to Turkey, which is 45 cents per cubic meter, as indicated in a report by the Technology Research Institute of the Presidency.

The World Bank estimates that over 150 billion cubic meters of natural gas are burnt or vented annually. This amount of gas is worth approximately $30.6 billion, equivalent to 25 percent of the annual gas consumption in the US and 30 percent of the European Union's annual consumption.

Over the past decade, many NGL (natural gas liquids) projects were planned by the oil ministry to exploit the wasted APG, none of which, except for the Sirri NGL project, went into operation as a result of failures, most notably regarding provision of financial resources and removing legal obstacles.

Burning APG is controversial as it is a pollutant, a source of global warming, and is a waste of a valuable fuel sources. The gas can be utilized in a number of ways after processing; it can be sold and included in the natural gas distribution networks, used for on-site electricity generation with engines or turbines, reinjected for enhanced oil recovery, or used as feedstock for the petrochemical industry.

Mindful of the exorbitant waste, in November 2014, the oil ministry ultimately announced a public tender to put APG to better use by selling it to private firms or individuals.

The tender offered 19.6 mcm/d of APG produced in 50 oil fields owned by the National Iranian Oil Company (NIOC)'s subsidiaries, namely Iranian Offshore Oil Company, National Iranian South Oil Company, Iranian Central Oil Fields Co., and Arvandan Oil & Gas Co., as well as 1.4 mcm/d of APG flared in gas refineries of Phases 1-10 of South Pars. Conclusion of a 25-year contract is envisaged in the tender.

The project entails electricity production from APG, increasing power generation capacity by 3,000 megawatts, and also reducing diesel consumption in power plants. However, there are few downsides, the removal of which could decidedly improve APG usage.


According to the report, disproportionate risk allocation, high costs of building infrastructure, uncertainty over price of generated electricity, the short period for studying a contract before conclusion, lack of governmental support for obtaining relevant licenses, and legal ambiguity concerning the nature of cooperation are among the tender's main weaknesses.  

Contractual risk allocation remains a disadvantage for private entities willing to invest in APG projects, the research has found. The NIOC has potentially exposed the purchasers to a great deal of risk, including those related to a possible halt of activity in case obtaining relevant licenses proves problematic, or risks involving sales and export of  electricity produced thereby. "Disproportionate contractual risk allocation could lead to inappropriate decision-making," the report stated.  

The tender also makes no mention of high costs to be incurred by private entities in order to build the lacking infrastructure needed to transfer APG. Moreover, it leaves unsettled the price of generated electricity, guaranteed to be purchased by the energy ministry or the oil ministry. Construction of power plants to utilize APG would be economical once the government guarantees to purchase the electricity at export prices, which is 6-7 cents per kilowatt hour. However, the tender leaves the matter to be decided between the two parties.

Moreover, the report argues that four-month interval between the tender and conclusion of a final contract is not sufficient, as obtaining relevant licenses, including environmental, sales, and export licenses, is usually a time-consuming process. The tender also provides for no governmental assurance or assistance during the process of acquiring licenses.

The large volume of APG in some oilfields, such as those in Kharg region, necessitates construction of high-capacity power plants. Construction of these types of plants would take more than a year, according to the report, and thus a longer operational period must have been envisaged. Although a 25-year contract could be ample for smaller plants, for high-capacity power plants a longer period must be considered, taking into account their construction and operational stages.

From a legal perspective, the terms of the tender are drafted as such to denote an investment agreement, rather than a sale/purchase contract. The investment propensity is evident where the private contractor is required to provide a performance guarantee, and also within provisions related to abrogation of the contract.