PROPOSAL FOR REVIEW

1. IDENTIFIERS: PROJECT NUMBER:

PROJECT NAME: UKRAINE: Coalbed Methane Recovery

DURATION: 3 yearsIMPLEMENTING AGENCY: World BankEXECUTING AGENCY: CBM Unit, Ministry of EconomyREQUESTING COUNTRY OR COUNTRIES: Ukraine

ELIGIBILITY: Ratified the FCCC on 5/13/97; GEF eligibility on the basis of IBRD eligibility

GEF FOCAL AREA: Climate ChangeGEF PROGRAMMING FRAMEWORK: Short term response measures2. SUMMARY: The project’s objectives are to: (a) reduce emissions of greenhouse gases which are a byproduct of Ukraine’s mining sector; (b) increase resource recovery and promote the commercial extraction of coalbed methane; and (c) help increase the productivity and safety of Ukraine’s underground coal mines. The project has two components; the Mining component will undertake underground extraction of methane; and the second component will support the creation of a coalbed methane company which will carry out field tests to verify the commercial potential of surface gas extraction.

3. COSTS AND FINANCING (MILLION US):

GEF: -Project- - PDF:Subtotal GEF:

$6$0.2$6.2

CO-FINANCING: -IA:-Other International:-Government:-Private

$5.7$2.0$2.5$1.0

TOTAL PROJECT COST: $17.44. ASSOCIATED FINANCING (MILLION US$)

5. OPERATIONAL FOCAL POINT ENDORSEMENT: NAME: Mr. Sergiy KulyckORGANIZATION:Advisor to Executive Director, The World Bank

Title: GEF Political Focal Point for Ukraine

Date: January 16, 1998

6. IA CONTACT: Jocelyne Albert, Sr. Regional CoordinatorEastern Europe and Central Asia Tel. 202-473-3458, Fax 202-522-3256internet: jalbert@worldbank.org

Page 1

A: Project Development Objective

1. Project development objective and key performance indicators (see Annex 1):

The primary objective of the Coalbed Methane Recovery Project is to reduce territorial emissions of greenhouse gases which are a byproduct of Ukraine’s mining sector. The Project has two specific development objectives: (a) to increase resource recovery and promote the commercial extraction of coalbed methane; (b) to help increase the productivity and safety of Ukraine’s underground coal mines . The key performance indicators are: (a ) volume of coalbed methane gas sold or converted into salable product; and (b) productivity of labor of project mines

2. Project Global objectives and key performance indicators (see Annex 1):

To reduce the volume of methane gas released to the atmosphere from coal mining, and hence to assist Ukraine, an Annex 1 country, meet its obligations under the Framework Convention on Climate Change (UNFCCC). The key performance indicator is the reduction of the annual quantity of carbon equivalent emitted.

B: Strategic Context

1a. Sector-related Country Assistance Strategy (CAS) goal supported by the project (see Annex 1):

CAS document number: 15674-UA Date of latest CAS discussion: June 27, 1996(i) Improve the quality of the environment; and(ii) promote private sector development.

b. GEF Operational Strategy/program objective addressed by the project:

The proposed project is consistent with the guidance for climate change short-term response measures as described in the GEF Operational Strategy, in that

(a) it is technically, environmentally and socially sustainable; (b) it is a national priority of the Ministry of Environment in Ukraine. While Ukraine has not yet

submitted a National Communication, a broad carbon emissions inventory and forecast for the energy sector, undertaken in 1994, identified coalbed methane as the most attractive abatement option in Ukraine. The attractiveness of coalbed methane was confirmed in a subsequent country study, published in 1997;

(c) it leads to a significant reduction of greenhouse gases at a cost of about $9/ton of carbon equivalent;

(d) it provides an essential transfer of technology, including training and managerial assistance during project implementation; and

(e) it would develop a current atmospheric emission of methane into an indigenous energy source.

Beyond the direct greenhouse gas reduction benefit, the project has a high potential for replication. By demonstrating a cheap and replicable carbon abatement opportunity, the project would assist Ukraine in meeting its commitments under the UNFCCC. By the same token, as greenhouse gas emissions are gradually curtailed, the economics of coalbed methane recovery will become more and more attractive, relative to more emission-intensive alternatives. Thus, while the current operation would require incremental cost funding, future projects are expected to become increasingly attractive in their own right.

2. Main sector issues and Government strategy:

The main sector issue is the non-competitiveness of the large majority of Ukrainian coal mines and the

growing demand for operating subsidies with significant adverse impact on the national economy. The Government adopted a strategy to close uneconomic mines and to corporatize the lowest-cost mines.

The proposed Coalbed Methane Recovery Project is a component of a larger, IBRD-supported investment in the coal mining sector. This larger investment, the Coal Mining Improvement Project (CMIP) has the objective of supporting viable coal mining companies by improving the working conditions and motivation of staff, reducing environmental impacts and improving living conditions in coal mining areas, reducing unemployment in municipalities affected by coal mine restructuring (underway since 1996 and financed by earlier IBRD loans), and improving the management of viable mines. The total investment for the CMIP is tentatively set at $300m, including the proposed GEF project.

Government strategy on Climate Change. The Parliament of Ukraine formally ratified the Framework Convention on Climate Change in November, 1996. The Ministry of Environment has prepared a draft program, in conjunction with other line Ministries, to limit and reduce “equivalent” carbon emissions from the country. One such program is a National Methane Recovery Program instituted by the Ministry of Coal and Industry. This program, which will form the technical base from which the proposed GEF Coalbed Methane Recovery project is being developed, has the objective of recovering methane for use as an indigenous source of energy, helping reduce damage to the environment while reducing the imported fuel bill of Ukraine.

3. Sector issues to be addressed by the project and strategic choices:

Most Ukrainian mines are gassy, have a low productivity and high risk of gas and dust explosions. The country depends increasingly on energy imports, mainly in the form of gas. The project is designed to support the transition of selected low-cost mines to higher productivity and improved safety, as well as to limit the country’s dependence on imported energy.

C: Project Description Summary

1. Project components (see Annex1):

Component Category Indicative Costs

(US$M)

Bank-financing(US$M)

GEF financing(US$m)

Other financing

Gov’t, equity, or

other donorMining (Credit facility for low-cost mines). The credits must be used for increasing productivity and improving mine safety by underground extraction of methane and/or for utilizing the gas on the mines’ premises.

Credit 10.1 4.4 3.2 2.5

Gas Production (Testing the viability of modern large-scale gas extraction from the surface). The component supports the creation of a coalbed methane company and its carrying out a full scale field test with commercial objectives.

Physical 5.1 1.3 2.8 1.0

Training/Capacity Building. Ukrainian staff will be trained in the management of the credit facility under the CMIP as part of a significant training and capacity building component financed by EU Tacis, USAID, UK Know-How Fund

Training 2.0 2.0

Total 17.2 5.7 6.0 5.5

2. Key policy and institutional reforms to be sought:

Opening of difficult (coalbed methane) gas exploitation to private sector. This pilot project would provide the government with an opportunity to test the technical and commercial feasibility of coalbed methane. If successful, the Bank would work with the Government to attract private investors into this market.

3. Benefits and target population:

The target population are miners of participating mines and residents of the Donbass area who would benefit from the development of an alternative energy program using local labor and equipment.

The direct benefits are: a reduction in greenhouse gas emissions; more productive and safer mines, reduction of dependency on energy imports, and cleaner air. It is estimated that the Mining Component would lead to the recovery of usable methane in supported mines of about 120 million m3 over ten years. Should the Gas Production Component demonstrate good recovery rates and production of high-quality methane, it has the potential to be replicated in Ukraine on a larger scale. Current coalbed methane recovery through surface drilling is of small scale and often hampered by obsolete equipment; but is successfully providing fuel for district heating, vehicles and industrial process heat. The project is expected to demonstrate the commercial viability of full-scale recovery project using modern equipment and techniques. Should it be successful, these uses are expected to become more common and more economic as a result of the project.

4. Institutional and implementation arrangements:

Implementation of the 3-year project will be coordinated by the Coalbed Methane Unit (CBM Unit) in the Ministry of Economy. This Unit will be established with a mandate to promote project activities, as well to take lead responsibility for the monitoring and evaluation aspects of the project.

The Mining Component will be carried out by low-cost mines eligible for applying for credits under the Bank-financed Coal Mining Improvement Project (CMIP). Credits will be awarded and supervised by either one or two commercial banks or a special mine development and privatization fund, in line with principles, criteria and procedures agreed with the Bank under the CMIP and consistent with GEF incremental cost eligibility criteria. Technical assistance for the fiscal agency and applying mines will be provided through field advisers financed by donors (EU TACIS, UK Know-How Fund, USAID) under the Coal Mining Improvement Project.

To reduce the risks associated with a concept that is technically sound but untested at full-scale commercial level, and to enhance sustainability, the Gas Production Component will be implemented by the CBM Company, a company with (likely) mixed ownership and with private management and commercial orientation. The Company would be created and be operational as a condition of disbursement for this Component. At project appraisal, agreement would be reached with the Government on the statutes of the company. The CBM Unit in the Ministry of Economy would define the regulatory framework for the company and facilitate its creation.

D: Project Rationale1. Project alternatives considered and reasons for rejection: The Energy Sector in Ukraine has been studied extensively since 1991 at the request of the Ukrainian Government. Both the World Bank and the US Government (Ukraine Country Study, published in 1997) have explored the range of options available to Ukraine to meet its national objectives.

Specifically with regard to climate change, a broad carbon emissions inventory and forecast for the energy sector was undertaken in 1994. This information was then used to identify greenhouse gas emissions reduction options for the energy sector. These options included: (i) coalbed methane; (ii) district heating thermal upgrade programs; (iii) residential natural gas metering programs; (iv) industrial energy efficiency, and (v) wind energy conversion. The results of the study showed that residential gas metering, industrial energy efficiency, and wind energy conversion projects are likely to be cost-effective in Ukraine at projected energy prices and costs. Given these results, it is unlikely that these projects would qualify for GEF funding because local benefits merit undertaking these projects without grant assistance. The results for coalbed methane recovery and district heating indicate that these types of projects could qualify for GEF funding because the dollar per ton values fall within the range of GEF short-term response measures. Coalbed methane recovery is the best candidate for GEF funding because it has the lowest cost per ton of equivalent carbon reduced. The subsequent US-sponsored Country Study confirmed the attractiveness of coalbed methane recovery.

The project is currently under preparation and a team of Ukrainian and international technical specialists is working to clearly specify the criteria for technology choice. In parallel, the criteria for mine selection are being determined as part of on-going preparatory work for the CMIP. The results of the feasibility study will be used as the basis for project appraisal. This will help to firm up cost estimates and technology specifications, and some estimates may change at appraisal. The Bank will notify the GEF Secretariat of any significant changes in cost or project design at that time.

2. Major related projects financed by the Bank and/or other development agencies (completed, ongoing and planned):

Sector issue Project Latest Supervision (Form 590) Ratings

(Bank-financed projects only)Implementation

Progress (IP)Development

Objective (DO)

Bank-financed Social and environmental impact of mine closure

Coal Pilot Project S S

Budgetary impact of coal mining Coal SECAL HU HU

Other development agenciesUSAID TA for Coalbed Methane

IP/DO Ratings: HS (Highly Satisfactory), S (Satisfactory), U (Unsatisfactory), HU (Highly Unsatisfactory)

3. Lessons learned and reflected in proposed project design:

The energy sector has been a very important area of collaboration between the Bank and the Government of Ukraine. It has become clear over time that specific investment lending is more effective than adjustment lending in Ukraine. Country commitment is critical, at the very beginning of project development. Credit provision under pilot-type arrangements have been a successful part of the Coal Pilot Project. Building on this experience, the proposed project uses a similar approach for the Mining Component. The commitment for the Gas Production Component is sought through the private sector. GEF/UNDP also finances two similar projects. The ‘China Development of Coalbed Methane Resources’ Project , and the ‘India Coal.Bed Methane Recovery and Commercialization Utilization’ project While the latter project is still under design, we have taken the early lessons from the India project with regard to technology choice and implementation arrangements into consideration in the design of this project.

Based on a recommendation received from the STAP reviewer (Annex 3), the IC analysis will be updated once the feasibility study is completed (May 98), backed-up by a thorough spreadsheet analysis and planning data from the study. The present IC analysis (Annex 1) is based on the best currently available information and responds to all comments made by the STAP reviewer regarding an earlier version of the analysis.

4. Indications of borrower commitment and ownership:

Original request came from Ukraine in 1993. The Ministry of Coal Industry has maintained its interest since that time. The Ministry of Environmental Protection has shepherded the Framework Convention on Climate Change through Parliamentary approval and is a co-partner in the development of this Project. Since the project is being developed in conjunction with an IBRD loan of the CMIP, there is a great deal of commitment by the various ministries to successfully implement this more experimental part of the CMIP.

5. Value added of Bank and Global support in this project:

a) Financing: Provide funds otherwise not available that will help develop technology and provide the basis for commercial involvement in reduction of greenhouse gases from coal mining. b) Capacity Building: Will help build institutional capacity to design and implement additional coalbed methane drainage and extraction projects that will continue the operation into the future.

E: Issues Requiring Special Attention

1. Economic

[ ] Summarize issues below (e.g., fiscal impact, pricing distortions)[ ] To be defined (indicate how issues will be identified) [ ] None

Economic evaluation methodology:

[ ] Cost benefit [ ] Cost effectiveness [x] Incremental Cost

The cost-effectiveness of the proposal will be kept under careful review, and firmer geological, technological and cost information should be available by appraisal. The GEF Secretariat will be notified of any significant changes in the cost-effectiveness of the proposal.

2. Financial

Much of the financial context in which this project will operate is being defined in other Bank operations, specifically, the Coal Mining Improvement Project (of which this project is a component), and the SECAL. Critical among the financial considerations is the selection of mines; only technically and financially viable mines (as defined in the CMIP) will be considered for inclusion in this project. Similarly, the agreed policy on decreasing subsidies to the coal sector will be followed under this project. The Bank considers it critical that consistent economic and financial policies are being applied in all of its projects.

The Mining Component has been designed as an integral part of client-driven cost reduction programs financed under the Coal Mining Improvement Project. The capital costs would be “reimbursed” through reduced future operating subsidies. This will assist the mines to cover their operating costs. To ensure financial viability of the Gas Production Component, the CBM company would be created on the basis of acceptable gas sales arrangements (see Institutional and implementation arrangements above). If the project enjoys more commercial success than is expected, the Bank will agree with the Government that profits of the involved companies would not be distributed as dividends until an amount equivalent to the GEF grant has been reinvested into the company or in new coalbed methane programs. Under best guess assumptions methane recovery is estimated to yield revenues (avoided costs of gas imports and electricity generation) of US$ 15.7m over ten years, compared to costs of US$ 25.2 million (see Annex 1, Table 2).

3. Technical

The original feasibility study for this project was undertaken with USAID financing in 1994. To prepare this project, a PDF B was granted to update the earlier study and to help select appropriate technologies for specific mines for inclusion in the project. The selection of mines will be done following the technical and financial viability criteria established under the Coal Mining Improvement Project. Bank staff will participate in reviewing the results of the updated study jointly with Ukrainian counterparts (interim review end-February, final review May 98). As stated earlier, the Bank will notify the GEF Secretariat of significant changes in the cost or project design at appraisal.

4. Institutional

The institutional framework required for the Mining Component (credit facility through Mining Development Fund), would be created as part of the Coal Mining Improvement Project, with rules acceptable to the Bank. An operational institutional framework would be a condition of disbursement for the Mining Component. Creation of the CBM company responsible for execution of the Gas Production Component would be a condition of disbursement for this activity. Its creation is to be facilitated by the CBM Unit in the Ministry of Economy.

Project monitoring and evaluation would fall within the responsibility of the CBM Unit of the Ministry of Economy. They would also take the lead in monitoring project implementation against agreed outputs and providing periodic reports to the World Bank. Monitoring of actual project impacts (reduction of

greenhouse gases, increase in mine productivity, improvements in mine safety) will also be done by the CBM Unit in collaboration with the Mine Development Fund.

5. Social

As discussed earlier (section B2), the main sector issue is non-competitiveness of the mines. Increasing mine productivity will necessarily involve mine closures, and with it, retrenchment of a significant number of miners. The Bank has been involved in this issue for several years, and has financed the Coal Pilot Project, and the Coal SECAL, both of which address the labor issue and finance the social costs of restructuring the industry.

This project does not directly involve labor retrenchment. In fact, if an economically and commercially viable technology is found to recover coalbed methane, it would lead to employment generation.

6. Environmental

a. Environmental issues:[ ] Summarize issues below (distinguish between major issues and less important ones)[ ] To be defined (indicate how issues will be identified) [X] None

Major: Other: b. Environmental category: [ ] A [ X] B [ ] C

c. Justification/Rationale for category rating: Implementation of the project is part of a national environmental action program. The project improves air quality, while posing little or no other environmental risks. Drilling from surface, establishment of gas production sites and piping of the gas produced will be carried out in accordance with good industry practices and existing environmental regulations.

d. Status of Category A assessment: EA start-up date: Date of first EA draft: Current status:

e. Proposed actions:

f. Status of any other environmental studies:

g. Local groups and NGOs consulted: (List names):

h. Resettlement

[ ] Summarize issues below (e.g., resettlement planning, compensation) [ ] To be defined (indicate how issues will be identified) [ ] None i. Borrower permission to release EA: [ ] Yes [ ] No [ ] N/A

j. Other remarks:

7. Participatory Approach:

a. Primary beneficiaries and other affected groups:

In discussions with the Ministry of Coal Industry and the management of several mines, mines have expressed their interest in participating in the project because it will help them improve mine safety and productivity. Sufficient demand for use of the proposed GEF-supported credit facility for eligible methane recovery activities is therefore expected under the Mining Component. Concerning the extraction of methane gas from the surface, the mines have limited technical capacity, nor do they necessarily wish to become involved in this technology. Potential private investors and Government officials have expressed a strong interest in the proposed Gas Production Component.

8. Checklist of Bank Policies

a. This project involves (check applicable items):

[ ] Indigenous peoples (OD [ ] Riparian water rights(OP (BP (GP

[ ] Cultural property (OPN [X] Financial management (OP (BP[X] Environmental impacts [ ] Financing of recurrent costs (OMS

(OP (BP (GP[ ] Natural habitats [ ] Local cost sharing

(OP (BP (GP (OP (BP (GP[ ] Gender issues (OP [ ] Cost-sharing above country three-year average

(GP (OP (BP[ ] Involuntary resettlement (OD [ ] Retroactive financing above normal limit

(OP (GP[ ] NGO involvement (GP [ ] Disputed territory

(OP (BP (GP[ ] NGO involvement (OP 4.36) [ ] Other (provide necessary details)

b. Describe issue(s) involved, not already discussed above:

F: Sustainability and Risks

1. Sustainability:

Sustainability of the Mining Component depends on the long-term survival of the selected mines. Participating mines will be carefully selected to ensure that only financially viable mines will benefit from GEF support. The sustainability of the component will be enhanced through its integration into a credit facility supported by the Coal Mining Improvement Project.

The Gas Production Component is an exploratory demonstration operation. While the ex ante assessment is encouraging, the long-term commercial success of the CBM company will only become clear during project implementation. It is envisaged that at the end of the three year project, the operation would be aborted if the company does not prove to be financially viable. The fact that the component would be executed by a commercially-run company (with mixed public-private ownership) operating under commercial law should enhance the likelihood of success.

2. Critical Risks (reflecting assumptions in the fourth column of Annex 2):

The overall risk assigned to this project is substantial. This is due to two reasons. First is the overall country risk of working in Ukraine. The country is currently under public sector budgetary restrictions, limiting its scope to undertake new project commitments. As well, the institutional environment is weak with frequent ministerial changes, contributing to the Bank’s difficulty in maintaining its policy dialog. Secondly, as an underground development activity (similar to development of oil, natural gas or water resources), the project warrants a S rating, i.e. lower than the riskier stage of exploration, but higher than full production stage .

The risk minimization measures proposed will significantly decrease the likelihood of poor project implementation. Most importantly is the project’s total integration into the Bank’s CMIP. This ensures transparency and vigorous analytical criteria being applied to mine selection, management of funds, establishment of the credit facility, and monitoring of project implementation performance. With regard to technology risk, the feasibility study will verify that the geologic conditions are indeed suitable to support the targeted production scale-up.

Risk Risk Rating Risk Minimization Measure

project mines remain inefficient H only mines executing an improvement program financed under the Coal Mining Improvement Project will get access to GEF-supported credit for CBM sub-components

credits made available to project mines are diverted for other purpose (country and sector risk)

S screening of mines and credit applications in accordance with criteria and procedures acceptable to the Bank

geological conditions are not conducive M pre-selection of areas with good gas potential

regulatory/institutional framework is not conducive to the creation of new commercial activities

S creation of CBM Unit in Ministry of Economy with “one-stop” function

Overall Risk Rating S

Risk Rating - H (High Risk), S (Substantial Risk), M (Modest Risk), N (Negligible or Low Risk)

Annex 1Page 1 of 5

Incremental Cost AnalysisUkraine Coalbed Methane Recovery Project

Broad Development Goals and Baseline

The Government of Ukraine is embarking on a major restructuring of the country’s coal sector. The purpose of the program is to increase the productivity and financial viability of Ukrainian coal mines, improve the quality of salable coal and thus stop a trend that has seen coal output decreasing by about 50 percent between 1990 and 1995. As part of the restructuring program, the sector will be liberalized and corporatized. Financially viable mines will be upgraded and reinforced, while uneconomic mines will be closed down. The program is carried out under strict financial, environmental and social constraints, so that the budgetary burden and the social costs of the adjustment remain tolerable.

The effort is supported by the World Bank through a nationwide Coal Mine Improvement Program (CMIP). The program consists of four components: i) safety and health improvements; ii) environmental protection measures; iii) social mitigation programs; and iv) technical assistance.

Ukrainian mines, including those that will remain after restructuring, are gassy and this constitutes a safety hazard. The standard way of addressing the problem is through venting, i.e. methane is ventilated out of the mine and released into the air. Although gas recovery would lead to lower methane levels in the mine, venting is relatively efficient as it can be achieved with little extra investment using existing ventilators. In mines where methane recovery systems are currently in place, they are used inefficiently so that the recovered gas cannot be used. The recovered quantities are either too low or of poor quality (i.e., the air content is too high). Recovered gas is therefore, and will continue to be released into the air.

An alternative to venting would be to recover gas directly from the mine’s surface (pre-mining degasification). A Bank environmental sector study suggests that up to 500 gas recover boreholes could be drilled in the Donbass region, with the capacity of continuously producing up to 1.9 billion m3 of CH4 annually. A small number of boreholes are currently under use to supply fuel for district heating, vehicles and industrial process heat.. The operation is small-scale and often hampered by obsolete equipment, though, and is therefore not ideal for replication. Nevertheless, the experience gained with the small-scale pilot would provide useful insights on the logical next step, a demonstration of the concept with more advanced technology and on full commercial scale.

Global Environmental Objective

Only a limited amount of the gas recovery potential would be realized in the proposed project. Under the Mining Component a total of about 120 million m3 of gas would be recovered over an assumed average mining time of ten years.1 The recovered gas is expected to have a methane content of about 60%, and would be used internally, most likely for electricity generation (or, less likely, water heating). Mine-internal power generation would replace electricity from the grid. The global environmental benefit of the Mining Component would thus consist of two parts: a direct benefit of avoided methane emissions (worth 340 ktCe, using standard global warming potentials), and an indirect benefit from using methane instead of a more carbon-intensive fuel mix. This latter effect has not been estimated, but is expected to further improve the attractiveness of the project.2

An estimated 150 million m3 of gas would be recovered through drilling under the Gas Production Component. About three quarters of this gas would eventually be released in the baseline in conjunction with the exploitation of the reserves in question. Drilling would thus result in a global environmental benefit of some 320 ktCe. The remaining quarter of gas

1 All figures are tentative and will be refined during appraisal.2 Ukrainian power generation relies on a mix of fuels including coal, gas, nuclear and hydro, which on average is more carbon intensive than gas. The exact magnitude of the fuel switching effect depends on the peaking order of plants and the time profile of demand by the mining company.

Annex 1Page 2 of 5

would be additional, and its recovery would not constitute a global environmental benefit. Recovered methane would predominantly replace imported natural gas. That is, there would be no greenhouse gas emission reduction from fuel substitution.

GEF Alternative

The proposed GEF alternative would recover coalbed methane under two distinct components (see main text for a more detailed description). Under the Mining Component methane would be recovered as released during the mining process. GEF funds under this component would go to a small number of carefully selected mines with good overall performance. The recovered gas would be used mine-internally. The additional investments necessary to make full use of recovered gas (most likely the installation of generators) would also be covered under the project.

Starting with a three year test, the Gas Production Component would explore the possibility of advance (pre-mining) recovery on a large commercial scale. A commercially-run company of mixed ownership, the CBM company, would be created for this purpose, and made responsible for the production and sale of gas on a commercial basis.

Scope of the Analysis

As the majority of project impacts will be at the level of the mining and the CBM company, the system boundary was chosen to include those companies only. System-wide effects, in particular repercussions on the power system from possible electricity generation at the mines should be minimal.

The project may yield additional domestic benefits in the form of higher mine safety standards compared to those achieved through conventional venting. While the benefit of increased safety (e.g. avoided medical costs) were not valued, the productivity gain obtained because of less frequent work interruptions was factored in.

Costs

Implementation of the Mining Component would require capital investments of about US$ 7.1 million in additional drilling equipment, vacuum pumps, and piping for new systems or to upgrade existing ones. Training and other capacity building needs would be covered by CMIP. Methane recovery would not lead to cost savings on mine ventilation. For safety reasons, ventilation of the same type and specification as in the baseline would be required, and as in the baseline it would be utilized fully. Recovery would however result in a productivity increase as work interruptions due to high methane concentration would become less frequent.

It was assumed that the recovered gas would be used to produce electricity for the mine. The necessary capital investment would be in the order of US$ 3.0 million, with a subsequent stream of additional operations and maintenance costs. Self-generated power would replace electricity from the grid, an avoided cost that was valued at the long-run marginal cost of power generation in Ukraine.

The activities foreseen under the Gas Production Component would not have occurred in the baseline. The required capital investments of US$ 5.1 million in drilling and piping equipment, and subsequent operation costs are therefore incremental. The recovered methane replaces natural gas which would have been imported in the baseline. Import gas was valued at its border price plus a 25% allowance for transportation cost. Training and capacity building would again be part of CMIP.

The project would yield per-unit abatement costs of 9.0 $/tCe. The incremental cost, and associated global environmental benefits, from the project are summarized in Table 1. A more detailed analysis of lifetime costs for all project components is shown in Table 2. Table 3 contains assumptions.

Annex 1Page 3 of 5

Table 1: Incremental Cost MatrixBaseline Alternative Increment

Domestic Benefit

Mining

Gas Production

efficient coal production

imported gas for domestic use

efficient coal production

local gas for domestic use

-

-

Global Environment Benefit

Mining

Gas Production

Total

0 ktCe recovered

0 ktCe recovered

0 ktCe recovered

343 ktCe recovered

318 ktCe recovered

661 ktCe recovered

343 ktCe recovered

318 ktCe recovered

661 ktCe recovered

Net Cost (m$)

MiningGas ProductionTraining and Cap. Building

Total

1.7 0.0 1.9

3.6

4.92.81.9

9.6

3.22.80.0

6.0

Process of Agreement

The parameters and assumptions used in the incremental cost analysis are based on information collected as part of project preparation (part-financed under a PDF Block B grant). More firm geological, technological and cost information will become available before project appraisal. Based on this information, the analysis will be refined and confirmed. The final estimate, within the parameters of short-term response measures, will be formally agreed with the Ukrainian authorities in the course of project negotiations.

Annex 1Page 4 of 5

Table 2: Lifetime incremental costs

Year Total (NPV)1 2 3 4 5 6 7 8 9 10

Baseline

Mining ComponentOperating costs, CH4 recovery M$ 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 1.7 M$Useable recovered gas mio.m3 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 mio.m3

Avoided GHG emissions ktCe 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 ktCe

Gas Production ComponentIndependent demonstration activity 0.0 M$

Training and Capacity BuildingTraining and cap. building M$ 1.0 0.5 0.5 0.0 0.0 0.0 0.0 0.0 0.0 0.0 1.9 M$

TotalBaseline net cost 3.6 M$Baseline GHG abatement 0.0 ktCe

Alternative

Mining ComponentCapital cost, CH4 recovery M$ 7.1 7.1 M$Operating cost, CH4 recovery M$ 0.2 0.8 0.8 0.8 0.8 0.8 0.8 0.8 0.8 0.8 5.0 M$Productivity increase M$ 0.0 -0.2 -0.4 -0.4 -0.4 -0.4 -0.4 -0.4 -0.4 -0.4 -1.9 M$Useable gas recovered mio.m3 0.0 7.3 14.6 14.6 14.6 14.6 14.6 14.6 14.6 14.6 124.1 mio.m3

Avoided GHG emiss. recovery ktCe 0.0 20.2 40.4 40.4 40.4 40.4 40.4 40.4 40.4 40.4 343.3 ktCe

Capital cost, power generation M$ 3.0 3.0 M$O & M cost, power generation M$ 0.0 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.7 M$Avoided electricity cost M$ 0.0 -0.9 -1.7 -1.7 -1.7 -1.7 -1.7 -1.7 -1.7 -1.7 -9.1 M$Avoided GHG emiss. fuel switch ktCe not assessed

Net costs, mining component 4.9 M$GHG abatement, mining component 343.3 ktCe

Gas Production ComponentCapital cost M$ 5.1 5.1 M$Operating cost M$ 0.0 0.8 0.8 0.8 0.8 0.8 0.8 0.8 0.8 0.8 4.3 M$Useable gas recovered mio.m3 0.0 0.0 0.0 13.1 24.1 28.5 28.5 26.3 19.7 13.1 153.3 mio.m3

Avoided gas imports M$ 0.0 0.0 0.0 -1.0 -1.8 -2.1 -2.1 -2.0 -1.5 -1.0 -6.6 M$Avoided GHG emissions ktCe 0.0 0.0 0.0 27.3 50.0 59.1 59.1 54.5 40.9 27.3 318.0 ktCe

Net costs, gas production component 2.8 M$GHG abatement, gas production component 318.0 ktCe

Training and Capacity Buildingtraining and technical assistance M$ 1.0 0.5 0.5 0.0 0.0 0.0 0.0 0.0 0.0 0.0 1.9 M$

TotalNet cost, alternative 9.5 M$GHG abatement, alternative 661.3 ktCe

Increment

Mining Component Incremental costs 3.2 M$GHG abatement 343.3 ktCe

Unit abatement cost 9.3 $/tCe

Gas Production Component Incremental costs 2.8 M$GHG abatement 318.0 ktCe

Unit abatement cost 8.7 $/tCe

Training and Capacity Building Incremental costs 0.0 M$

Total project Incremental costs 6.0 M$GHG abatement 661.3 ktCe

Unit abatement cost 9.0 $/tCe

Annex 1Page 5 of 5

Table 3: Assumptions

gas price at consumer point 125 $/th.m3 energy value of gas (kWh/m3) 10.0carbon convert. factor 4.61 kgCe/m3 efficiency of generator (%) 30%discount rate 10% LRMC of grid-power * (c/kWh) 6.5

CH4 content of recovered gas 60% power O&M (% of inv) 4%

* estimated as 5.0 ct/kWh at busbar and 6.5 ct/kWh at medium voltage feed.

Annex 2Page 1 of 5

Project Design SummaryUkraine Coalbed Methane Recovery Project

Narrative Summary Key Performance Indicators Monitoring and Evaluation Critical Assumptionsa. Sector-related CAS Goal:improve quality of the environmentb. GEF Operational Program:assist Ukraine in meeting is obligations under the FCCC by reducing GHG emissions

reduction of the annual quantity of carbon equivalent emitted

national communication

(Goal to Bank Mission)

Project Development Objective:(a) increased drainage and utilization of CBM from viable mines

(b) commercialization of CBM supply

Global Objectives:Reduction in GHG gas emissions from coal sector

indicators of project’s impact:(a) ratio of CBM utilized to coal produced (sector-wide)

(b) CBM volume sold commercially

C equiv. target

for both objectives:

annual reporting (during five years after project completion) to CBM Unit

Reports to CBM Unit

(Objective to Goal)

(a) viability of project mines can be enhanced under Coal Mining Improvement Project(b) a supportive legal and institutional framework for commercialization of CBM supply is in place

Project is replicable

Outputs:Mining Component:project mines increased their CBM output at acceptable costs

Gas Production Component:CBM Company is ready to undertake on its own commercial CBM project(s)

Global Outputs:reduce the volume of CH4 released into the atmosphere from coal mining

CBM volume extracted and utilized (m3/a), coal produced (t/a), capital cost for CBM recovery and utilization ($), coal production costs ($/t)

CBM volume sold (m3/a), new project agreements signed and financing available

CH4 target

Reports to Mine Development Fund

Reports to CBM Unit

Reports to CBM Unit

(Outputs to Objective)

efficiency of project mine improved, credits made available to project mines are used for intended purpose

geological conditions, regulatory/institutional framework and taxation inducive

carbon intensity of replaced power remains above that of gas

Project Components/Sub-components:Mining Component· drilling (supply of modern

underground drilling equipment)

· gas collection (repair and

Inputs (budget in US$ million):

3.5

3.6

records of disbursement for each project mine from account for GEF funds at Mine Development Fund

(Components to Outputs)

· compatibility of drilling program and mine operations

Annex 2Page 2 of 5

replacement of pipes and vacuum pumps, new instrumentation)

· gas utilization (installation of Diesel generators, rehab. of boilers)

Gas Production Component· drilling (supply of a

modern surface drilling rig)

· drillhole treatment (e.g., fraccing or other test)

· gas distribution (piping & instrumentation to connect with existing consumers)

Training Componentpart of, and monitored under CMIP

3.0

4.0

0.6

0.5

2.0

records of disbursement from special account of CBM Unit

· compatibility with mine safety regulations

· suitability of gas quality and quantity

· sufficient amount of gas discovered

· sufficient improvement of gas production

· consumers capable of paying negotiated gas price

Annex 2Page 3 of 5

ANNEX 3: Technical Review

Please note that Annex 3 is not available in electronic form - copies of Annex 3 are available upon request from the GEF Secretariat.