]Energy Economist

www.platts.com

Issue 326 / December 2008

The McGraw Hill Companies

Project finance in Asia 3There are four ways to raise capital: debt, equity, assets sales and cash flow. All facedifficulties, yet deals are being struck, with a shift towards risk sharing, debt re-pricingand new lending sources. And while the rest of the world economy stumbles, energydemand growth in Asia remains strong, leaving the business case for new projectfinancing intact and providing new opportunities for Asian capital. Ross McCracken

Venezuela seeks partners 6Declining oil prices and global financing difficulties threatens to seriously hamperVenezuelan oil production, already ailing from a shortage of natural gas for secondarycrude recovery. However, one unforeseen, yet favorable outcome is that to securetechnology, expertise and investment the government is opening up the industry tooutside players, even if the terms could do with improvement. Carlos Camacho

Mediterranean gas potential 10Despite their long history of gas production, the states of North Africa promise bothrising output and reserves, providing a critical counterweight for Europe to Russian gas.Algeria is expanding its export infrastructure, Libya remains underexplored and Egypt hasdelivered a succession of new discoveries, while the area between Libya and Sicily isshaping up to be a new gas prone hydrocarbon province. John Kendall

Demand down, prices up: WEO 2008 15In its World Energy Outlook 2008, the IEA produces no surprises in reiterating that theworld is heading rapidly towards boiling point. However, it has both reduced its oildemand forecast and raised its expectations for prices. Underpinning this analysis is acomprehensive field-by-field study of decline rates that shows the oil industry faces ahuge challenge simply to keep output as it is. Ross McCracken

Tax credits boost US solar 18A tax credit regime lasting eight years is the stuff of renewable energy developers’dreams, but that is what solar power now has in the United States. However, with thefinancial crisis clipping the wings of traditional tax equity investors, developers arelooking to the newly-empowered utilities to jump on the Concentrated Solar Powerbandwagon. Typically risk averse when it come to emergent technologies, the questionis will they take the plunge? Elisa Wood

Equatorial Guinea develops regional gas role 22Equatorial Guinea hopes to establish itself as a regional gas hub for LNG production,exploiting its own reserves and potentially bringing in gas from Cameroon and Nigeria.However, the bulk of the population receives none of the oil and gas wealth, whilepolitical expression and basic human rights are denied by an authoritarian andautocratic government. A coup is the only likely method of political change. Neil Ford

Petchems: where did it all go wrong? 27The petrochemical industry find itself between a rock and a hard place -- hit by risingcosts and declining demand. Investment in new capacity, which is still coming onstream,coupled with the global economic slowdown, have left the industry fundamentallyoversupplied. The result will be a long, tough, multi-year winter of low operating rates,margin compression and consolidation. Shahrin Ismaiyatim

Features

Project finance in Asia 3Venezuela seeks partners 6Mediterranean gas potential 10Demand down, prices up: WEO 2008 15Tax credits boost US solar 18Equatorial Guinea develops regional gas role 22Petchems: where did it all go wrong? 27

Events/Letters

Forthcoming conferences 30Singapore: Keeping in pole position 31Washington: Jobs and climate change 32Moscow: Putin (and Medvedev) forever 33Brussels: EU strategic review leaves Russia cold 34

Market News

OPEC compliance critical to achieve price floor 35Principles agreed for Trans-Caspian crude project 36Somali pirates overreach with Sirius Star hijack 37Myanmar-China pipelines to start construction in 2009 38Nord Stream to displace Russian gas transiting Ukraine 39Papua New Guinea secures $1 billion in LNG finance 40No end in sight for Indian power shortages 41Kentucky plans coal-to-liquids boom 42Slowing trade hits Chinese energy demand 43Cleantech firms observe downturn in project finance 44Eskom long-term nuclear plans limited by funding 45Chronic power shortages hinder Bangladeshi industry 46

Data & Markets

EUAs slide further in November as economy slows 47Oil dips below $50/barrel 48

ENERGY ECONOMIST / ISSUE 326 / DECEMBER 2008

EDITORIAL

2

Contents Trimming the hedges Airlines’ difficult relationship with hedging beggars belief.Head of Asia Transport Research for UBS, Damien Horth,told a meeting of the world’s airlines in November, that“hedging is a waste of time”. “Most of the hedging Ihave seen in the last two to three years has beenspeculative.” That is an extraordinary statement. Almostas barmy as “making margin from hedging.” If acompany’s hedging is speculative, or has a margin, thenit isn’t hedging, it’s speculation.

Hedging buys a period of price certainty; no more, noless. A hedge means a firm suffers no loss if pricesmove against them and makes no gain if prices move intheir favor (assuming an unhedged position). Thequestion is can you make a profit in your chosenbusiness (not oil trading) at the price you have taken?

Unfortunately, the short-run view predominates; if anairline hedges as prices rise, its management arefinancial geniuses, if an E&P company does the same,they are idiots. The idiots and geniuses swap hats whenprices fall. But both miss the point entirely if they see ahedge as either ‘in’ or ‘out’ of the money. Hedging worksas a continuous process valued over a long cycle of upand down price movements, in which the ‘losses’ and‘profits’ balance out. The value is reduced price volatility.Or it can be used in other ways, for example, to protect arevenue stream to secure financing.

Hedges are hugely oversold by those paid to arrangethem. The misguided short-term vision of losses andgains leads many into outright speculation – “makingmargin from hedging”. At that point, your financialmanagers shouldn’t be running airlines or E&P firms.Hedging offers price certainty over a defined time. Itdoesn’t necessarily offer a good price, nor does itprotect from long-term price trends. The only question is;are those limited periods of price certainty worth moreto your business that the cost of arranging the hedges?

– ross_mccracken@platts.com

Issue 326 / December 2008(ISSN: 0262-7108)

Energy Economist

Energy Economist is published monthly by Platts, a division of The McGraw-Hill Companies, registered office: 20 Canada Square, Canary Wharf, London,UK, E14 5LH.

Officers of the Corporation: Harold McGraw III, Chairman, President and ChiefExecutive Officer; Kenneth Vittor, Executive Vice President and General Counsel;Robert J. Bahash, Executive Vice President and Chief Financial Officer; JohnWeisenseel, Senior Vice President, Treasurer.

Prices, indexes, assessments and other price information published herein arebased on material collected from actual market participants. Platts makes nowarranties, express or implied, as to the accuracy, adequacy or completeness ofthe data and other information set forth in this publication (‘data’) or as to themerchantability or fitness for a particular use of the data. Platts assumes noliability in connection with any party’s use of the data. Corporate policy prohibitseditorial personnel from holding any financial interest in companies they coverand from disclosing information prior to the publication date of an issue.

Copyright © 2008 by Platts, The McGraw-Hill Companies, Inc.

Permission is granted for those registered with the Copyright ClearanceCenter (CCC) to photocopy material herein for internal reference or personaluse only, provided that appropriate payment is made to the CCC, 222Rosewood Drive, Danvers, MA 01923, phone +1-978-750-8400.Reproduction in any other form, or for any other purpose, is forbidden withoutexpress permission of The McGraw-Hill Companies, Inc. Text-only archivesavailable on Dialog, Factiva, and LexisNexis.

Platts is a trademark of The McGraw-Hill Companies, Inc.

To reach Platts

E-mail: support@platts.com

North AmericaTel: 800-PLATTS-8 (toll-free)

+1-212-904-3070 (direct)

Latin AmericaTel: + 54-11-4804-1890

Europe & Middle EastTel: +44-20-7176-6111

Asia PacificTel: +65-6530-6430

AdvertisingTel: +1-720-548-5479

The McGraw Hill Companies

EditorRoss McCrackenRoss_McCracken@platts.com+44 1590 679 989

Managing editorPaul WhiteheadAssociate editorHenry Edwardes-EvansEditorial Director, European PowerVera BleiProduction editorDominic PilgrimEditorial Director, Global PowerLarry FosterVice President, EditorialDan Tanz

Platts PresidentVictoria Chu Pao

Manager, Advertising SalesAnn Forte

]

For most people in the US, October 3, 2008 will godown in history as the infamous day that Congressapproved an unprecedented $700 billion bailout forthe financial industry. But for concentrated solarpower advocates, it will also be remembered as theday the door swung wide to opportunity. Attached tothe Emergency Economic Stabilization Act of 2008was an unrelated energy bill that included incentivesfor renewable energy, including an eight-yearextension of the solar tax credit. Solar lobbyists hadpreviously spent 18 months trying to convinceCongress to pass the extension only to see it fail in17 votes amid partisan haggling.

“It’s really a big deal,” said Frank Wilkins, team leader forCSP at the US Department of Energy. “Our basic missionis to try and help get solar energy into the economy. Thisextension will help developers do exactly that.”

The credits attract large investors with a ‘tax appetite,’i.e. those willing to back a project in return for a taxreduction. In many ways, the investment credits are theUS answer to the European feed-in tariff. US lawmakerstend to avoid direct market subsidies like the feed-intariff, but are open to policies that ease tax burdens.

The 30% solar credit is not new; its duration is what thesolar industry is celebrating. It is typically difficult toconvince Congress to make an eight-year commitment.Wind energy, for example, won only a one-year extensionfor its production tax credit, again exposing the industryto the notorious boom and bust development cycle.

“It takes about four years from the time a developergets a power purchase agreement with a utility to thetime that plant is financed and built. So the eight-year

extension gives developers essentially two shots atmaking their technology better and lowering thecosts,” Wilkins said.

Unfortunately, solar energy’s win comes with a sad irony.It arrives just as the financial meltdown cripplestraditional tax equity investors, among them GoldmanSachs, Lehman Brothers, and AIG. Fewer prospects areavailable for CSP developers as they try to finance theirprojects. “Some notable investors have fallen away;others that have been quite active are pulling back.There is clearly an impact on the market,” said KevinWalsh, managing director with GE Energy FinancialServices. So while the door is open for significant CSPgrowth, the industry now wonders: who will usherthrough the projects?

Old technology made newCSP is not new to the US, although it has seen a surgein interest in the last couple of years. The technologycame to California’s Mojave Desert in 1984 with theSolar Electricity Generating Station (SEGS), a series ofprojects completed in the early 1990s and stillgenerating 354 MW. Developed by Luz International,most of the units were later purchased by FPL Energyand continue to operate today selling their power toSouthern California Edison.

After SEGS was built, the industry went dormant in theUS for the next 16 years until the 64 MW Nevada SolarOne began providing power to the grid in 2007. The$250 million plant was built over 16 months on 400acres in Boulder City, Nevada, by Acciona Solar Power, amajority-owned subsidiary of Acciona Energy. Like theSEGS units, it uses what is known as parabolic troughtechnology. More than 182,000 mirrors concentrate sunrays onto about 18,240 receiver tubes, where fluid heatsup to 735°F and produces steam that drives aconventional turbine.

Now more than a dozen solar thermal projects are onthe drawing board, amounting to several gigawatts ofpower, most of them in the southwestern UnitedStates. A handful of the projects hold utility powerpurchase agreements.

CSP solves several of today’s energy problems, say itssupporters. Far larger than their sister photovoltaicprojects, CSP units can produce as many megawatts as aconventional fossil fuel plant – and provide them duringperiods of peak demand. Their scale also helps utilities

US POWER

ENERGY ECONOMIST / ISSUE 326 / DECEMBER 2008

ANALYSIS

18

Tax credits boost US solarA tax credit regime lasting eight years is the stuff of renewable energy developers’dreams, but that is what solar power now has in the United States. However, with thefinancial crisis clipping the wings of traditional tax equity investors, developers arelooking to the newly-empowered utilities to jump on the Concentrated Solar Powerbandwagon. Typically risk averse when it come to emergent technologies, the questionis will they take the plunge? Elisa Wood

Solar CSP PPAs by technology (MW)

Source: Emerging Energy Research

Parabolic Trough(1,041 MW)

Dish Engine(800 MW)

Linear Fresnel(177 MW)

Central Receiver(645 MW)

Proven TechnologyDeveloping Technologies

quickly meet government mandates in several states thata percentage of their supply come from renewable energy.The CSP plants appease public sentiment that the UnitedStates move toward energy independence through greentechnologies. And they create ‘clean’ manufacturing,assembly and construction jobs – the ‘green collar’employment that many states now pursue.

Further, it is a renewable technology that utilities feelcomfortable adopting because of the size of the plantsand their turbine-based technology, according to MichaelFritsch, the president and chief operating officer ofConfoe, a Texas management consulting company. “Fromthe stand point of a utility looking at investing in arenewable resource, concentrating solar thermal makesa lot of sense. ‘We know turbines. We know largeinstallations. This is really familiar territory for us.’”

As a result, CSP proposals are cropping up throughoutCalifornia, Nevada, Arizona and other southwesternstates with arid conditions and large land masses.Wind power is the only utility-scale renewable energymoving into the economy at a faster clip, according toEmerging Energy Research. The Cambridge,Massachusetts firm forecasts that the United Stateswill produce 10 GW from CSP by 2020, or possiblymore depending on how quickly the financial marketsrevive. The industry is likely to make a $20 billioninvestment over the next five years, largely in the USand Spain, the other epicenter of development.

Price on par with gas peakersCSP is typically priced from 10 US cents/kWh to 16cents/kWh in 20-year contracts with utilities, accordingto Reese Tisdale, EER research director and author of itsreport “Global Concentrated Solar Power Markets andStrategies, 2007-2020.” The price may seem high, but itis on par with generation produced by gas-fired peakingplants, which is what CSP displaces, according toConfoe’s Fritsch. “You tend to get the peak powerdemand when it is hottest and sunniest because thepower demand is for air conditioning. So your best powergeneration (from CSP) comes at times when you needthe power most, which is a big benefit. When peopleargue wind versus solar, solar matches up better withthe demand peaks.”

The DOE has set a goal of installing 1 GW of CSP in thesouthwestern states by 2010 in the hope thateconomies of scale will bring down the cost of theresource to 7 cents/kWh. “The whole goal of the gameis to produce power at less cost…because financing isrelatively expensive – and it just got a whole lot harder,”said Chris Huntington , SkyFuel’s vice president ofbusiness development.

So, the push is on among plant designers to createlighter and more efficient projects. Since the fuel – thesun – is free, CSP generation prices are heavily driven bythe cost of steel and other materials used to build theplants. Engineers are trying to bring down costs with

more effective reflectors, energy storage, efficientmanufacturing and assembly, fewer moving parts, andsolar pairings with fossil fuel units.

SkyFuel, an Albuquerque, New Mexico company, says ithas cut the cost of parabolic trough concentrators by 35%compared with other commercially available systems.Instead of conventional mirrors, Skyfuel uses a silvered-polymer film to capture the sun’s rays. The newtechnology was designed jointly by the National RenewableEnergy Laboratory and Randy Gee, SkyFuel’s chieftechnology officer and a designer of Nevada Solar One.The plastic reflectors are lighter and 50% cheaper thanthe easily broken curved-glass mirrors that are typicallyused, according to SkyFuel. “We believe that building atrough with shard glass mirrors is just asking for highercapital costs because the mirrors will break and will raindown and break your receiver,” said Huntington .

BrightSource, an Oakland, California firm is headed byArnold Goldman, founder of the former LuzInternational, which built the nine original MojaveDesert plants in the 1980s. BrightSource is pushing atower technology that it says operates at asignificantly lower cost than the older Mojave troughunits. The older plant uses long rows of curved glassmirrors to heat synthetic oil, which is piped to a heatexchanger to produce steam at about 375 degreesCelsius. The new system uses small flat glass mirrorsthat heat steam directly to a temperature of about550 degrees Celsius, according to the company.

SolarReserve, a Los Angeles based company, is bettingheavily on a tower system that uses molten salts forenergy storage. It works by first capturing the sun withthousands of tracking mirrors in a two square mile field.The mirrors concentrate the sunlight on a receiver thatsits on top of a tower in the center of the field. Moltensalt in the receiver heats and then flows into a storagetank, and is eventually pumped to a steam generator.

In the late 1990s, United Technologies tested thesystem in a demonstration project called Solar Two inDaggett, California. It has since given SolarReserve anexclusive worldwide license for the technology. Thestorage makes the plants dispatchable and opens thedoor for pairing them on the grid with wind facilities. The

US POWER

ENERGY ECONOMIST / ISSUE 326 / DECEMBER 2008

ANALYSIS

19

Solar CSP PPAs by developer and utility

Project MW Utility

Bethel Energy 98.8 SDG&ESolel 554 PG&ESan Joaquin Solar 107 PG&EAbengoa Solar 282 APSStirling Energy Systems 500.0 SCEStirling Energy Systems 300.0 SDG&EAusra-Carrizo Solar 177.0 PG&EBrightSource Energy 400.0 PG&EeSolar 245.0 SCE

Source: Emerging Energy Research

stored solar power can be dispatched when the wind isnot blowing. Terry Murphy, SolarReserve CEO, said thecompany is now eyeing 50 different projectsinternationally. SolarReserve has not signed any utilitypower purchase agreements in the United States, but isinstead pursuing a strategy of “doing the work first” –completing site development and certain regulatoryreviews, Murphy said.

Ausra opened a 5 MW demonstration project inOctober that uses flat, rather than curved mirrors. ThePalo Alto, California company says its simplified designmakes more efficient use of land and lowers costs.Known as the Kimberlina, the demonstration project isa stepping stone toward the company’s 177 MWCarrizo Plains solar power plant, whose output is undercontract to California utility Pacific Gas and Electric.Meanwhile, Washington-based Infinia is putting itsmoney on Stirling engine technology with standardizedand efficient manufacturing: “We’re creating a solarpower generation appliance that can be stamped outlike Chevrolets and deployed like Maytags,” said J.D.Sitton, president and CEO.

Still others are working on dual-fuel solar/gas-firedplants that back-out gas when solar is cheaper. FloridaPower & Light in June announced plans to pursue thehybrid design at its gas-fired Martin plant. The utilityintends to begin construction in 2009 on the 75 MWplant. SkyFuel, which is also pursuing hybrid technology,says the pairing significantly lowers generation costs toabout 10 cents/kwh. “We call it our fuel saver system.In an environment of high natural gas prices, you canthrottle back on gas and pump up the solar power,”Huntington said.

European companies are looking to catch a piece of theUS market. For example, Irish company NTR in Aprilinvested $100 million in Arizona company Stirling EnergySystems. The company has proposed two California CSPplants, one in the Mojave Desert and a second in theImperial Valley, which together will produce 1,750 MW.

The projects hold long-term power purchase agreementswith two utilities – San Diego Gas & Electric andSouthern California Edison.

Not all plain sailingBut for all of the progress CSP is making, it faces someroadblocks – today’s ailing economy aside. The projectswork best in the desert, where clouds are few andhumidity non-existent. But that places them far frompopulation centers that need power. So like US windfarms, CSP relies heavily on transmission. And while USpoliticians say they favor national expansion andupgrades to transmission projects, little work has takenplace to date. “Location is the primary siting factor – itbrings a whole new dimension to transmission issues.How do you get the solar power to Chicago, Dallas orHouston?” said Charlie Ricker, BrightSource Energy’ssenior vice president of Marketing and Development.

Further, the plants typically require water to operate, noteasily found in the desert. While the technology canemploy closed-looped systems, “the initial cost ofbringing water to the desert can be an issue,” notedConfoe’s Fritsch. He added the project’s greencredentials are tarnished in the eyes of some becauseof their use of water in arid lands.

And like its fast-growing brethren, the wind farm, CSP iscreating growing pressure on turbine manufacturers tokeep up with demand. “When the CSP bug hit a year andhalf ago, everybody wanted to build big stand-aloneplants. But there are a lot of issues, not to mentiongetting the big turbines from Siemens or GE. You have towait three years for a 100 or 200 MW stand-aloneplant,” said SkyFuel’s Huntington.

Huntington also questions how many of the projects withutility power purchase agreements will be developed atpromised prices. Having such contracts helps developersattract financing. But the contracts offer fewer guaranteesthan many realize, he said. “A PPA is one step up frombuying a lottery ticket. It is so grossly misunderstood. Thebroad perception is that these companies are in business.What they’ve done is say that they will deliver power at acertain price, which is probably an aggressive price.”

Finally, CSP requires large swaths of flat land to operate– about 1,500 acres for 300 MW, according to the DOE’sWilkins. “Where do you get that much land?” Theindustry sees possibility in the 219 million acres thatthe federal Bureau of Land Management oversees in thesouthwestern states, with the charge of securing theland’s health and productivity for future generations.After solar developers submitted 125 applications to usethe land, BLM place a moratorium on further requestsuntil it could conduct a comprehensive environmentalreview of the technology’s impact. The industry protestedthe moratorium, and, in July, BLM lifted it. But thefederal agency continues its environmental review atwhat many in the industry consider to be a snail’s pace.The final environmental study is due out in spring 2010.

US POWER

ENERGY ECONOMIST / ISSUE 326 / DECEMBER 2008

ANALYSIS

20

US CSP projects announced by 2012, by technology

Source: Emerging Energy Research

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2009 2011 2012 Grand total2010

Central ReceiverDish Engine

ISCCLinear FresnelParabolic Trough

Utilities to the rescue?Still, the most pressing and immediate problem for theindustry is attracting investment in an inhospitableeconomic climate. And given the sheer number of CSPprojects – and the structure of the solar tax credit – theindustry needs a lot of investors with a tax appetite.

Tim Howell, managing director at GE Energy FinancialService, says that solar investments are much more taxintensive in the first year of operation than wind power.Given how the tax credits work, 10,000 MW of windprojects create $600 million in tax credits the first year,while 1,000 MW of solar, at $5/watt, produce $1.5billion in tax credits. “The competition for tax capacity,which is a scarce resource in times of financial crisis,the times we find ourselves in now, is a problem wehave to solve,” he said.

Industry insiders see a solution: utilities. Until Congress’October vote, utilities were prohibited from using the solartax credit. However, the new law changed the playing fieldby allowing their participation. Utilities now can act asproject investors, and could assume the role previouslyplayed by the private tax equity investor. It is too early tosay how many utilities will engage and whether they willpartner with private developers or compete with them bydeveloping their own projects. But several solarcompanies say they are confident that utility involvementwill come, and will prove a boon for the industry.

SkyFuel, for example, has supported the idea of utilitiesbeing allowed to take the investment tax credit, buckingothers in the business who fear the competition. “Wefelt it was best to have the biggest, most seriousplayers, free to build. It is only through scaling up thatprices will come down. I do think eventually utilities willtake an equity position,” said Huntington.

Infinia expects utilities to “get aggressive and deploycapital in the CSP space,” added Sitton, but not immedi-ately because they must get the proper signals that stateregulators will support the activity. “They are cash flow

positive and net income positive. This is a way for themto provide extra returns to shareholders. I don’t expectthe capital will come flooding in overnight. But I’d say sometime in the first or second quarter of next year, we canexpect to see some of the better positioned utilities begin.”

BrightSource’s Ricker also sees utilities moving into thespace, if they can overcome their aversion to risk. “Utilitieshistorically have not been big investors in new technologies.But certainly in our conversations with utilities, they havealways evidenced an interest in being owners. That wasnot an option until recently. We’ll find out if their interestis as strong when it comes time to write a check.”

Whatever utilities do, Ricker says the most viableprojects will find financing, but maybe not immediately.“We certainly think things will get better. There is ageneral sentiment that good projects will go forward –with a bit more due diligence than before.”

Many in the industry also expect increased supportbecause of the election of Barack Obama as USpresident. Obama has signaled that he will support anational renewable portfolio standard. More than half ofthe states have passed RPS requirements – a mandatethat a percentage of power come from renewables.Those who support a national RPS say it will enliven thegreen market because companies will no longer have todeal with a hodgepodge of rules that lack consistencyfrom state to state. But it remains to be seen how soonor even if Obama will follow through with the RPS – or bewaylaid by the nation’s pressing economic concerns

So for now, the CSP industry finds itself in a waitingposition. The door is open and the tax credits are inplace for developers to realize their goals. Whetherprojects trickle or surge through the entryway dependson who will join them. The industry looks with hope toutilities, a new president, and the possibility of a re-invigorated market in 2009.

Research assistant Corey Haga contributed to this article.

US POWER

ENERGY ECONOMIST / ISSUE 326 / DECEMBER 2008

ANALYSIS

21

CSP applications by acres (000)

Note: Some applications are on top of other applications for thesame land, causing elevated numbers

Source: Emerging Energy Research

-75 -50 -25 75 100 125 150 175 200 225 25050250

Utility / IPP

Pure-play Developer

Technology Promoter

Cancelled / Withdrawn Application

1,441,004 Acres

AESPG&E

Starwood EnergyChevron

Solar ReserveLightsource Renewables

AusraSolel

Horizon Wind EnergySES

Solar MillenniumIDIT

enXcoBrightsource Energy

NextLight RenewablesIberdrola

Goldman SachsCogentrix Solar

FPL Energy