4.3 Sacha Central flare-to-power business model

equipment. Figure 4.3 is a schematic representation of the Sacha Central flareto-power business model.

The project required an investment of US$5 million for power generators, gas compressors, electrical interchange, and the required infrastructure. Four MW of power capacity was installed. The investment was 100 percent equity-financed by Hoerbiger and Arcolands (US$2.2 million and US$ 2.8 million, respectively).

The project’s revenue model is a tolling agreement with monthly capacity and, to a lesser degree, energy-related payments. The capacity payments are due regardless of the availability of associated gas and also in force majeure situations (such as employee strikes). Payments are not due only in the scenario in which Hoerbiger is unable to provide the service owing to failure of its equipment. The tolling agreement has a duration of four years. Thereafter, Hoerbiger receives only operations and maintenance fees but no capacity payments. Petroecuador’s commitment under the tolling agreement is not covered by any guarantees—Hoerbiger assumed the full risk.

The implied cost of electricity during the four-year contract is competitive compared to diesel generation and still sufficiently high to generate an estimated 10 percent return on equity for Hoerbiger. The tolling agreement will result in US$10 million in payments to Hoerbiger over four years, equivalent to US$0.10 per kilowatt-hour (kWh) of power supplied to Petroecuador. Because capacity payments are not applicable after year 4, over a longer period the average electricity price drops further. This price compares to a cost of diesel generation for Petroecuador currently ranging between US$0.20/kWh and US$0.26/kWh (assuming a price of diesel in the range of US$2.0 to US$2.5/gallon).7

In addition to reducing emissions from flaring and displacing diesel generation, the project has important socioeconomic cobenefits. Hoerbiger estimates

FIGURE 4.3

Sacha Central flare-to-power business model

Arcolands Hoerbiger

EPC facility construction for gas handling and power generation

Arcolands/ Hoerbiger Capita (US$)

Arcolands EP Petroecuador

Payment of capital and O&M

Arcolands/ Hoerbiger

Maintenance of gas handling and power generation equipment

Source: World Bank, based on interviews with Hoerbiger. Note: EPC = engineering, procurement, and construction; O&M = operations and maintenance.

the direct emissions savings from flaring at 70,000 tons of CO2 equivalent (tCO2e) per year over the four-year contract; further savings from diesel replacement were not quantified. From a social perspective, construction and operation generated employment and service supply opportunities for the local indigenous population. The project also contributed to addressing concerns raised by the local community, who attributed an increased incidence of health ailments to their proximity to the oil field (Colectivo 2020; El Comercio 2021).

Takeaways

Turnkey FMR project development can represent a new revenue opportunity for OCMs facing slowing demand for equipment in a mature oil and gas sector. In addition to their technical expertise, OCMs can put their balance sheet to work and relieve oil field operators of the up-front investment cost of an FMR project. The OCMs’ familiarity with their client’s operations can also contribute to speedy project development.

Hoerbiger attributes the successful implementation of Sacha Central and similar FMR projects to several factors: (1) strong project management and execution capabilities (construction in four months and within budget); (2) the small size of the projects, which inherently reduces execution risk; (3) Hoerbiger’s and Arcolands’ existing technical know-how as OCM and equipment reseller, respectively; (4) the small project size that did not warrant political interest groups to get involved; and (5) the clear climate change mitigation benefits of its solutions.

Building a portfolio of small FMR projects reduces execution and financial risks for developers. Small projects can be easier to implement, especially if the involvement of stakeholders is limited to the developer, oil company, and offtaker to avoid political risk. A portfolio approach also acts as a hedge against flare-specific risks, such as the unpredictability of future associated gas volumes.

Although the cash flow profile of some FMR projects could be suitable for a leveraged capital structure, often 100 percent equity funding is the only practical solution in the project development phase. Minimizing project development time and hassle is often critical to convincing oil field operators to consider FMR projects, because the latter are seen as noncore and bring limited financial benefits compared to oil production. Implementation and enforcement of greenhouse gas regulations increase interest and awareness in FMR projects as well, which is not always the case across countries. Negotiating loan packages can be time-consuming given the many uncertainties of FMR projects (for example, gas supply and off-taker risks), and the prospect of receiving a loan in the construction phase can be far from certain.

In the operational phase, when development risk is no longer present, FMR projects may be easier to leverage—especially if de-risking tools are available—freeing up equity that developers could dedicate to new FMR projects. Not all risks disappear in the operational phase; for instance, FMR projects remain exposed to off-taker risk. These risks will likely be reflected in relatively low leverage and relatively high interest payments. De-risking tools such as partial credit guarantees or insurance for breach of contract could enhance the bankability of FMR projects, allowing developers to take money off the table and subsequently spread their equity capital across a larger number of FMR projects.