Obstacles and lessons learned when preparing for an ETS Emily Spears; BP Energy Asia, presentation to the BPMR 28th October 2014 – Shenzhen

Agenda

Preparation to ensure your success:

−  Establishing a Carbon Project Team

−  The need to develop a Market Participation Strategy

−  Purchasing preparation & considerations : Primary & Secondary

INTERNAL USE ONLY

LOCAL ENTITY MANAGED

GLOBAL SUPPORT

Carbon Solutions

Identifying mitigation options

Emerging Business & Ventures

Early leanings in emerging markets

Global Emissions Trading Desk Outsourcing & managing risk

Safety & Operational Risk GHG reporting & risk

quantification

       

Policy, Advocacy & External

Affairs

Strategy Compliance Reporting

Trading & Offsets

Finance & Tax

Purchasing

Communic-ations Sales Systems &

Processes Legal

Project Manager

Governance Board

Establishing A Carbon Project Team

•  BP model is to centralise market facing activity into a single trading entity. Benefits of this approach include:

•  Individual installations are then able to focus time and resource on their core activities e.g. refining or petchems, where they can be competitively advantaged.

A Central Trading Function

4

1

2

3

Single Face To market

•  Prevents individual installations competing against each other in market

•  Allows netting of within group long or short positions

Centre of Excellence

•  Developing of trading specialist team and infrastructure support (not cost efficient in each individual installation)

•  Creates competitive advantage for Sinopec in trading market

Installations are Market Neutral

•  Trading division buys/sells from individual installation at annual average price which is market neutral price

•  Trading/speculative profits within trading division but stay within Group

The Need to Develop a Market Participation Strategy

Total Harbour Time BP’s Emissions Trading Scheme 1998-2001

In September 1998 BP announced it would operate an internal emissions trading system to reduce its greenhouse gas (GHG) emissions 10% below 1990 levels by 2010.

In 2001 we met our target – Nearly 10 years ahead of schedule & learnt valuable lessons along the way…

The price fluctuated with the reported emissions forecast. The forecast varied dramatically through the year reasons for this are: •  Improvements in forecast, particularly

acquired assets and •  Acceptance of changing economic outlook •  Lack of early market participation

Source: Point Carbon, 2008

EU ETS

Improvements in forecast

Changing Economic Outlook

Limited early market participation

50.00 55.00 60.00 65.00 70.00 75.00 80.00

0 20 40 60 80

100

BEJING ETS Trading Data

Volume (kt) BJEA Price (CYN/t)

35.0

37.0

39.0

41.0

43.0

45.0

0

50

100

150

200

250

SHANGHAI ETS Trading Data

Volume (kt) SHEA13 Price (CYN/t)

35 45 55 65 75 85

0 20000 40000 60000 80000

100000 120000

SHENZEN ETS Trading Data

Volume SZEA13 Price (CNY/t) Source: Adapted from Sinocarbon, 2014

Chinese Pilots

Purchasing preparation & considerations : Primary & Secondary Trading

Allowances – Be ready to act

Ensure you are able to act on time:

•  Identify potential counterparties early

•  Pre agree trading documentation (STA, Master Agreement, ISDA, Custom)

•  Pre approve market entry & exit points with management

45 55 65 75 85 95

105 115 125 135

Shenzhen ETS Trading data (CYN/t)

Source: Adapted from Sinocarbon, 2014

Offset Transaction Risk Considerations

Primary Offset

Refers to the initial transaction between the project developer and the investor. Contract terns vary between projects. Typically, the price agreed is a function of the

inherent risk apportionment within the contract.

.

Secondary Offset

Refers to the onward purchase of an already developed offset or one who’s delivery is guaranteed. Typically, the

buyer in the secondary market carries much less risk and as a result a higher price.

Offset Diversification – A lesson from the CDM

0 5

10 15 20 25 30 35 40 45 50

PDD Volumes Risk Adjusted

Ann

ual I

ssua

nce

(Mt)

CCER Volumes Transport (66%)

Methane (79%)

Landfill Methane Recovery (58%)

Natural gas (59%)

Hydro (81%)

Biomass (96%)

•  UNEP RISOE CDM pipeline provides valuable insight into issuance risk.

Conclusion