Projects and Related Studies
An Examination of Financial Options for the Upgrade of Compressor Stations on the Natural Gas Transmission System in Ukraine
The Pacific Northwest National Laboratory conducted an analysis expanding on an earlier assessment for upgrading a portion of the natural gas pipeline system in the Ukraine entitled "INVESTMENT PROGRAM: ENERGY EFFICIENCY UPGRADES TO COMPRESSOR STATIONS OF UKRAINIAN GAS TRANSMISSION SYSTEM." The purpose of the expansion was to examine the implications of a broader set of financing scenarios for the economy of the Ukraine.
This analysis examined three financing scenarios to replace 96 turbines and 9 compressors at 23 compressor stations on Ukraine's Soyuz, Urengoy-Uzhgorod and "Progress" and Shebelinka-Kiev natural gas pipelines over the eight year period 2000-2007 at an estimated cost of $461.4 million. The turbines and compressors are determined to be at the end of their operating life and replacement would provide improvements in energy efficiency, reduce O&M expenses, improved reliability, and, in the case of the Sheblinka-Kiev pipeline, prevent reduction of domestic gas production. It is estimated that the efficiency improvements will provide about 800 million cubic meters and domestic production of about 4,000 million cubic meter gas annually, thus directly reducing the need for imported gas.
The Soyuz and Urengoy-Uzhgorod and "Progress" pipelines each account for 44% of the investment, with the Shebelinka-Kiev pipeline accounting for the remaining 12%. Of the value of the improvements for the period 2000-2019, improved energy efficiency accounts for 34% of the total, reduced O&M for 3%, increased reliability for 10%, and continued domestic production for 53%.
The three financing scenarios are:
- 20/80/0. 20% of the financing is provided by Ukraine, 80% by an international financing institution, and 0% by a private sector investor.
- 20/40/40. 20% of the financing is provided by Ukraine, 40% by an international financing institution, and 40% by a private sector investor.
- 20/0/80. 20% of the financing is provided by Ukraine, 0% by an international financing institution, and 80% by a private sector investor.
The financing sources have different loan terms with average nominal interest rates of about 7.0%, 12.5%, and 18.0% respectively for the three scenarios. The loan period also differed with 10 years for private sector capital, and 12 years for capital provided by an IFI.
The scenarios were analyzed on the basis of financial and economic performance from investment perspectives of the program as a whole and only Ukraine. The financial analysis accounted for taxes, cost of financing, fuel costs and other factors that would impact the return that investors could expect to realize. The economic analysis excluded direct taxes, financial transfers and used marginal fuel prices to characterize the economics of the program for the Ukrainian economy. An important note is that the determination of fuel price is difficult as transactions are frequently not based on cash, which makes it difficult to establish value.
A number of metrics (present value of the investment, present value of the return, net present value, internal rate of return, discounted payback, and simple payback) were constructed for the three financing scenarios by the two investment perspectives these are displayed in tables 3.8, 3.9, and 3.10. The net present value was positive and the internal rate of return exceeded 20% for all cases except in the Ukraine investment perspective for the 20/0/80 financing scenario. Further, as expected, the metrics showed that the investment became more attractive as the loan terms became more favorable and the interest rate decreased. While the metrics indicate that it is beneficial to maximize financing from an IFI, there are a number of considerations that further bear upon the economic or national consequences of structuring a financing approach. The most important are:
- The involvement of a private sector financier may enable equipment to be obtained from domestic sources, whereas this may not be possible using financing from an IFI.
- A private sector financier may be able to assist in arranging a partnership for the domestic manufacture of and an export market for equipment.
- A private sector financier may be able to assist in securing a stable market for current or increased levels of contract purchases of in Central and Western Europe, thus securing Ukraine's transmission role.
- The ability to reduce the import of at least 4.8 billion cubic meters annually with the corresponding cash outflow.
Project contact: Thomas Secrest