PROGRAM PROJECT INFORMATION DOCUMENT (PID) CONCEPT STAGE. Petrobras (PESA) Gas Transport System Project Region

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1 49307 PROGRAM PROJECT INFORMATION DOCUMENT (PID) CONCEPT STAGE Project Name Petrobras (PESA) Gas Transport System Project Region Latin America and the Caribbean Sector Power (50%), O&G (50%) Project ID P Borrower(s) Petrobras Energía SA Implementing Agency Petrobras Energía SA Environment Category [ ] A [X] B [ ] C [ ] FI [ ] TBD (to be determined) Date PID May 15, 2009 Prepared/Modified Estimated Date of September 30, 2009 Appraisal Authorization Estimated Date of Board N/A Approval I. Key development issues Argentina is the largest natural gas producer in South America and owns an estimated 16.1 trillion cubic feet (Tcf) of proven natural gas reserves, the fourth-largest amount in Latin America. Argentina began deregulating natural gas production in 1989 as part of its privatization of YPF (now Repsol-YPF). Two companies control the country s natural gas transportation system, Transportadora de Gas del Sur (TGS) and Transportadora de Gas del Norte (TGN). TGS, controlled by Petrobras Energia SA (PESA) is South America s largest pipeline company. It operates the 2,130 mile San Martin pipeline, connecting Buenos Aires to the Southern part of Argentina, with a capacity of 1,020 million cubic feet per day (MMcf/d), as well as the Neuba I and Neuba II pipelines. Argentina s power sector is one of the most competitive and deregulated in South America. Generation, transmission and distribution are open to the private sector, while cross-ownership between these three functions is restricted and Argentine law guarantees access to the grid. However power generators sell their electricity to the Compañía Administradora del Mercado Mayorista Eléctrico (CAMMESA), which has not been able to pay generators the entire spot market price as its inflows have been frozen since January Moreover those spot prices are capped using the marginal cost of the least efficient gas-fired power plant, assuming that gas is available at the official price of US$1.5/MMBTU, thus resulting in a low tariff of US$27/MWh. This tariff, well below regional norms (e.g. US$60/MWh in Chile LRMC and 57.3 in Brazil LRMC), squeezes generators operating margins and limit their capacity to invest in maintenance and new capacity. In order to circumvent this issue, the government has introduced the Energia plus plan in mid-2006, to encourage the construction of new generation capacity by allowing new generators to earn higher returns than the existing capacity. This has been coupled to Resolution 1281 (September 5, 2006), which establishes that, as of November 2006, industrial and commercial consumers must be supplied electricity at their 2005 levels at current prices. Any demand above those levels has to be supplied by higher tariff contracts with new Energia plus generators. In addition, in March 2008, the Government approved Resolution 24/2008,

2 which created a new natural gas market called Gas Plus to encourage private investment in natural gas exploration and production. The Gas Plus regime applies to new discoveries and to tight gas fields. The price of the new gas, whose commercialization will be restricted to the domestic market, will not be subject to the conditions established in the Agreement with Natural Gas Producers but will be based on costs and a reasonable profit. Experts believe that, if the Gas Plus regime is successful, it could stimulate new investments in electricity generation plants under the Energy Plus regime as it could ensure fuel supply to the new plants. The Petrobras Gas Transport system Project is designed to fit within the double window of opportunity created by the Clean Development Mechanism and the need for additional power generation supported by the above mentioned legislations. The project intends to generate and sell power to the Argentine grid by cogeneration from waste heat gases from The Fiat-Cerri Plant, hereby displacing thermal power generation on the grid and achieving GHG emission reductions. Consistency with the UNFCCC and Kyoto Protocol Through the proposed Petrobras Gas Transport system Project, the World Bank is in a strong position both to help mitigate climate change and foster its goal of universal access to energy by (1) reducing the emission of GHGs from the Fiat-Cerri Plant and selling these ERs in the international carbon market, and (2) providing electricity to the grid through cogeneration that will displace power from traditional thermal plants. In addition, the project will have a limited but positive impact on local communities by generating employment during both construction and operations. This project fits well with the aims of the both the World Bank and the UNFCCC to use Carbon Finance as a vehicle for the transfer of technology and best practise on low carbon-intensity management of facilities. The World Bank has considerable experience in the carbon finance operations in the power sector, and this project will leverage the Bank s experience in carbon finance operations to assist the project entity in dealing with the steps necessary for certification of emissions reductions under the Clean Development Mechanism, including the preparation of the Project Design Document (PDD), the verification of the project by Argentina's Designated National Authority (DNA), calculation of the baseline and reduced emissions, and certification of the emission reductions by independent auditors. This is the first Carbon Finance operation undertaken by PESA, and experience has shown that the Bank s participation and transfer of knowledge and skills can be invaluable in ensuring the success, sustainability, and scaling up of such projects. Consistency with Relevant National Criteria Having ratified the Kyoto Protocol in 2001 and created the Oficina Argentina para un Mecanismo de Desarrollo Limpio (OAMDL), which depends onthe Secretaría de Medio Ambiente y Desarollo Sustentable de la Nación (SAyDS), Argentina is eligible to participate in the international carbon market and sell Emission Reductions (ERs) from Clean Development Mechanism (CDM) projects. The Petrobras Gas Transport system Project, by designing a

3 framework to capture the waste heat gases from the Fiat-Cerri turbo-compression plant (located in TGS s gas transport system) and use them for power generation has a potential for both emission reductions and additional generation capacity. The promotion of investment in the power sector in order to develop additional generation capacity and meet national demand for energy is a top priority for the Argentine government. CAMMESA projected a need for an additional capacity of 1,600 MW in order to meet demand by Due to the urgency of the situation and the pervasive lack of private investment, SENER (The Energy Secretariat) enacted Resolutions 712 and 826 in 2004, to create FONINVEMEM, the Fund for the Investment Needed to Increase the Supply of Electricity in the Wholesale Market. The same need motivated the creation of the previously mentioned Energia plus and resolution 1281 new regulatory framework. II. Rationale for Bank involvement The Bank has two main objectives for its involvement in the Petrobras Gas Transport system Project: 1. Fight climate change through increased awareness and utilization of Carbon Finance opportunities. Climate change has emerged as a key concern for the World Bank and its clients, especially after the 2005 G-8 Summit in Gleneagles. The Bank has been a leader in the field and incorporated these considerations into its development operations. Through the extensive experience with the carbon funds for which it acts as a trustee, the Bank is well-positioned to integrate and maximize the potential of carbon finance in the energy sector. 2. More specifically, scale-up CDM projects and clean energy investment in the industrial and Oil and Gas (O&G) sectors. As previously mentioned, meeting an increasing energy demand in a situation of reduced investment in power generation, high and volatile international oil prices and scarcity of natural gas is a top priority for Argentina. In this context, it is fundamental to establish incentives for energy efficiency, demand-side management and foster alternative ways to meet energy demand through investment in renewable sources and cogeneration. The Petrobras Gas Transport system Project holds significant potential for establishing and spreading best practices in the O&G sector. Involving Petrobras Energia, a leader in oil and gas exploration, transportation and power generation in the southern cone is desirable, if only for the large scale opportunities for CDM projects it offers, and as well as a means to increase the visibility of CDM opportunities in the sector. If successful, the Petrobras Gas Transport system Project is expected to (1) open the door for further cooperation between the Bank and Petrobras on identifying potential carbon finance projects within other business units, (2) raise interest among competitors and industry for CDM activities. The Bank s Comparative Advantage

4 The World Bank is uniquely positioned to support this project because of its extensive experience and expertise in Carbon Finance and infrastructure projects. In Argentina, the Bank has experience supporting infrastructure projects at the local level as well as through central government institutions. The focus of the proposed project also benefits from Bank involvement, as the Bank brings operational experience in the energy sector from Latin America and elsewhere. How the Project Fits into the Carbon Finance Strategy of the Bank Specifically, the project is in agreement with the following strategic objectives of the Bank s Carbon Finance Unit (ENVCF): 1. High-quality ERs to show how project-based GHG emission reduction transactions can promote and contribute to sustainable development and lower the cost of compliance with the Kyoto Protocol; 2. Knowledge dissemination to enable the Parties to the UNFCCC, the private sector, and other interested parties to learn by doing in the development of policies, rules, and business processes to achieve ERs under the CDM; III. Proposed objective(s) The project objectives are to reduce (1) GHG emissions from PESA s pipelines turbocompression plant, (2) to contribute towards mainstreaming cleaner, more environmentally sound technologies in the power sector in Argentina by demonstrating the potential of carbon finance to catalyze and advance environmentally beneficial practices. The project activity will generate Certificates of Emission Reductions (CERs) and revenues through the selling of CERs in the Clean Development Mechanism. The revenues obtained will contribute to eliminate the barriers that prevent the implementation of this project in the absence of proper legal and economic incentives at this time in the Argentine context. The emissions reduction (ER) credits generated through the project activity will help Annex I countries meet their ER obligations as agreed under the Kyoto Protocol. IV. Preliminary Description The proposed Petrobras Gas Transport system Project has a single component, which is the recovery of exhaust waste heat gases from the Fiat-Cerri plant. The captured gases will then be used to generate electricity that will be sold to the national grid. The currently installed turbines in the turbo-compression plant, being of an old low-efficiency model, are perfect for this type of project. By preventing the release of CO2 and N2O in the atmosphere and further displacing electric power from conventional thermal plants, the project will generate ERs that will be certified, monitored, and sold to the SCF. The resulting income will help make this project financially more attractive and could foster similar GHG mitigation projects at the in a sector where there are neither incentives nor regulations aimed at promoting energy efficiency and where demand for electricity is covered through additions to conventional thermal generation capacity.

5 The technology option selected for the plant consists in a waste gas or waste heat based cogeneration system. Recovered waste gas and heat from the plant will be used in a single boiler linked to one steam turbo-generator. Waste heat recovery and waste gas recovery are proven technologies, and the project will fall under the AMS-III.Q. version 2, a methodology for Waste Energy Recovery (gas/heat/pressure) Projects. The project will recover the waste gas from the gas turbine that powers the turbo-compressor at the natural gas (NG) compression plant. The waste gas is currently released to the atmosphere at 450 C. The steam power plant will generate steam in a heat recovery steam generator (HRSG); then, the generated steam will produce electricity through a steam turbine coupled to an electricity generator. In order to keep constant power output, the HRSG will burn auxiliary fuel - NG extracted from the main pipeline- whenever the turbo compressor runs at low load or is shutoff for maintenance. The steam will be used to feed a steam turbine coupled to an electricity generator. This system can operate 24 hours a day, 365 days a year. The installed capacity under normal operation condition of the turbo-compressor will be 14 MW V. Safeguard Policies that might apply Safeguard Policies Triggered by the Project Yes No TBD Environmental Assessment (OP/BP 4.01) [X] [ ] Natural Habitats (OP/BP 4.04) [ ] [X] Pest Management (OP 4.09) [ ] [X] Physical Cultural Resources (OP/BP 4.11) [ ] [X] Involuntary Resettlement (OP/BP 4.12) [ ] [X] Indigenous Peoples ( OP/BP 4.10) [ ] [X] Forests (OP/BP 4.36) [ ] [X] Safety of Dams (OP/BP 4.37) [ ] [X] Projects in Disputed Areas (OP/BP 7.60) * [ ] [X] Projects on International Waterways (OP/BP 7.50) [ ] [X] Piloting the Use of Borrower Systems to Address Environmental and Social Issues in Bank-Supported Projects (OP/BP 4.00) [ ] [X] VI. Tentative financing Source: Spanish Carbon Fund Borrower/Recipient IBRD Total US$ US$2,221,150 VII. Contact point * By supporting the proposed project, the Bank does not intend to prejudice the final determination of the parties' claims on the disputed areas

6 Contact: Roberto Aiello Title: Senior Energy Specialist Tel: Location: Washington D.C.