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Economic Model andComplementary Qualitative Analysis For:

CNG, Methanol & GTL

Integration of Natural Gas Based Oil Replacements in Israel Transport Sector

Chief Scientist Office

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The government resolution 2790 (dated 30.01.2011), concerning the implementation of a national plan for the development of technologies that reduce oil usage in the transportation sector, was followed by the formation of a dedicated board in the Ministry of Energy and Water Resources. The board for the encouragement and integration of natural gas based oil substitutes seeks to examine and analyze the feasibility and implications for the integration of natural gas based fuels in the transport sector considering economic, engineering, and regulatory aspects.

The board is supported by a team of consultants lead by Pareto Group LTD., which also includes DHV MED and the international Royal Haskoning DHV NL.

Their project aims to identify optimal platforms for the implementation of gas based oil substitutes in the Israeli road transportation sector.

The project is comprised of two main stages:

a. An appraisal of the international literature and experience, including reviews of:

•Global trends in use of fuels: penetration and integration levels, technological trends, etc.

•Relevant barriers and impediments for each fuel (technological, economic, regulatory, etc.).

•Policy measures implemented abroad, in order to facilitate the introduction of the fuels, and the analysis of their effectiveness and success.

b. A detailed economic model and complementary qualitative analysis for each fuel:

•The economic analysis compares alternatives for the implementation of the different fuels. The extensive analysis considers all relevant segments of the supply chain, including production, transportation, and consumption of the fuels by the end-users, as well as the required infrastructure.

•A comparative qualitative analysis of the different alternatives, that expresses relevantparametersfordecisionmakersthatarenotquantifiableatthisstage.

The project was accompanied and supported by an extended group of government andprofessionalrepresentatives,including:thePrimeMinister’sOffice,theMinistryof Transportation, The Ministry of Environmental Protection, The Ministry of Health, the Tax Authority, as well as the Israeli Institute for Strategic Planning and relevant Academia and industry representatives.

InOctober2012,a reportwaspublished for apublic reviewprior to thefinalformalization of recommended policy measures and a proposal for a government resolution. The full report is available at: energy.gov.il.

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Analyzed Alternatives:

GTLMethanolCNG Fueltype

Stand alone plant- dedicated for transportation fuels

M15

Gas stations connected to the transportation grid

Fastfill+storage

Slowfill

Analyzedplatforms

Integrated in existing refinery–dedicatedfor petrochemical industry

M30

Gas stations connected to thedistribution grid

Fastfill+storage

Slowfill Integrated in existing refinery–dedicatedfor transportation fuels

M85 Mother–daughterstations

Methodology: The economic model produces an educated assessment of the implications for integrating NG technologies in the transportation sector. The assessments are based on four main pillars:

1. Calculation of fuel price at the pump for end-users: the consumer price is calculated according to techno-economical characterizations of the different links along the value chain of the different fuels. It derives from the analysis of the construction and operation costs of the production, transportation, and supply segments. The calculated price entails the required rates of return for the different playersalongthesupplychainaccordingtothecoststructure,financingnature,and risk assessment of each segment.

2. Financial feasibility for choosing Alternative Fuel Vehicles (AFV): this analysis,whichreflectstheendconsumer’spointofview,evaluatestheend-user’ssavings in driving costs, as well as the end- user’s total monetary savings in the ownership cost, which is the total vehicle expenditures and returns along the ownership period (taxes excluded). The analysis characterized the implications that stem from the use of alternative fuels, with regards to required adjustments of vehicles and their effects in respect of different parameters such as purchase costs, residual value, fuel economy, maintenance costs, etc. This analysis enabled the assessment of the expected savings and the penetration potential of each fuel.

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We analyzed the following vehicle categories:

Private vehicles Light duty vehicles Buses Delivery trucks

3. Penetration levels:

CNG: a demand curve was constructed based on an adjusted MA3T model developed by the Oak Ridge National Laboratory for the DOE of the USA by placing the results of the economic analysis for- end users in the demand curve; we were able to assess the penetration levels of CNG vehicles given their economic attractiveness.

Methanol: a review of ethanol demand in several countries (due to lack of western countries experience with methanol) indicates that when FFVs option is available, market penetration is swift, and as long as the alternative fuel maintains a competitive price, consumers will tend to prefer it over conventional gasoline. Because FFVs are available with no additional costs, the model assumes that the purchase rate of new vehicles in Israel is the only effective constraint for the potential penetration of FFVs.

GTL: synthetic gasoline and diesel, produced via GTL process, are excellent substitutes for conventional fuels. Thus, the model assumes that when production costs are lower than market prices of conventional fuels, there will be a full and immediate integration of any amount produced in the GTL plant.

4. Assessment of market savings and other market benefits: the market economic feasibility is analyzed on the basis of the results of the previous stages. It is differentiated from the end-user’s economic feasibility on two main accounts:

a. It analyzes overall costs throughout the life span of the vehicle as opposed to the more limited ownership period;

b. It considers external implications that are not internalized by the end-user.

Noneofthefinancialanalysesincludetaxes,inordertoassesstheeconomicpotentialregardless of possible future enactments. The conventional fuel base prices for all calculations are 3.63 NIS per liter of gasoline, and 3.79 NIS per liter of diesel.

The main results and conclusions for the examined alternatives are presented in what follows.

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CNGMain results:

a. Driving costs:

The CNG price for each vehicle category is calculated according to the fuelling platform most relevantand implementable for thatcategory.Accordingly, slowfill fuelingstations connected to the distribution grid is the relevant platform for busses and trucks,whilefastfillfuelingstationsconnectedtothedistributiongridistherelevantplatform for private and commercial vehicles.

According to data received from car manufacturers, the maintenance costs of CNG vehicles are similar to those of gasoline vehicles. Hence, the savings per KM driven is derived from the fuel costs and fuel economies of the vehicles. The following chart depicts the sensitivity of the savings in driving costs to gas prices. As expected, the sensitivityishigherforlessfuelefficientvehiclecategories.

The sensitivity for changes in gasoline prices is calculated by the quotient of the change in gasoline price over the fuel economy data of the relevant vehicle categories in terms of liters per KM.

b. consumer savings:

The following chart shows the consumer’s total annual savings for different vehicle categories, in addition to the return period for the investment, given different gas prices. The annual savings, represented by the columns (which refer to the right vertical axis), incorporate differences in purchase costs and residual values that are spread over the ownership period, as well as differences in driving costs. The horizontal lines (which refer to the left vertical axis) depict the investment return period for the consumer. When this period is longer than the ownership period, a transfer to a CNG vehicleisnotfinanciallysecurefortheconsumer.

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Itisimportanttonotethatbecauseofsignificantpotentialsavingsindrivingcosts,theoverall consumer savings are very sensitive to the expected mileage of each vehicle category. Hence, we also differentiate between sub-categories of private vehicles: we identify both leasing vehicles (with almost double the mileage of the average private vehicle),andtaxifleets(whichdriveondieselandwithapprox.5timesthemileage)ashaving a much higher savings potential, reaching 2,500 NIS and 8,000 NIS respectfully in the baseline scenario.

c. Annual market savings:

The diagram below displays the annual market savings for different vehicle categories, given different gas prices.

The following table summarizes the market implications of integrating CNG vehicles in the transportation sector. These implications are derived from the expected penetration levelsaccordingtodemandcurvesbuilt,assumingnofinancialincentives:

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20222017Year0.25%0.13%Expectedpenetrationrate–privatevehicles0.18%0.09%Expectedpenetrationrate–commercialvehicles33.3%18.6%Expectedpenetrationrate–busses75,93834,639Annual savings (1000 NIS)7,9993,520liters Annual gasoline savings (1000)94,17443,154Annual diesel savings (1000 liters)166,43676,113Annual consumption of natural gas (MCM)

It can be concluded that without intervention, the penetration rates of private and commercialvehiclesareinsignificant,andthatmarketimplicationsstemmainlyfromthe integration of CNG busses.

Qualitative analysis:

Main strengths:

• Environmental influence: the alternative presents themost significantimprovement compared to conventional fuels. Due to minimal land use, the lack of a production plant and the redundancy of fuel transportation. As well as improvement in vehicle emissions, mainly for inter-city drivers and heavy vehicles (busses and trucks).

• Regulation: the regulatory status of CNG is relatively established.

• Proven international experience: the technology exists for many years in developed countries and has been proven feasible for heavy vehicles.

Main disadvantages:

• Level of intervention required: the "chicken and egg" problem mandates government intervention for both supply and demand side. International experience indicates that regulation is needed over long periods of time.

• Deployment of fueling infrastructure: for vehicles that are not a part of dedicatedfleets,withknowndrivingcourses,awidespreaddeploymentoffuelingstations is necessary, which relies on the yet to be completed NG grid deployment.

• Safety: CNG holds greater security risks, since it is a combustible, high pressure gas.

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Conclusions:

Implementation platforms:

• Economic feasibilityandhigh levelof implementationcapacity forslowfillgasstationsconnectedto thedistributiongrid that targetsdedicatedvehiclefleets.Heavyfleetsshowpotentialforsignificantsavings,andfleetswithknown,returntohome routs do not require vast deployment of fuelling infrastructure.

• Targetedvehiclefleetswithsignificanthighmileagesuchas leasingvehiclesandtaxis, also present potential for implementation.

• Feasibility of other platforms depends on the penetration rate of CNG vehicles and consequent demand.

Private vehicles:

• Despitesignificantsavingsindrivingcosts,totalsavingsaremarginal,asaresultof incremental purchase costs.

• TheadvantagesofusingCNGaresignificantlygreaterforhighmileagevehicles.

• The “chicken and egg” problem requires simultaneous treatment of both supply and demand side.

• International experience indicates low levels of integration for private vehicles.

Commercial vehicles:

• Potentialsolutionforcommercialvehicles.Benefits increasesignificantly forhighmileagevehiclefleets,and/orintercitydrivingcharacteristics.

• Relatively short time to market.

Buses:

• Economic analysis indicates high market savings.

• Othermarketbenefits:

- Environment: savings of up to 40,000 NIS per bus in external environmental costs.

- Shortest time to market relative to methanol and GTL.

-Highlevelofcertaintyconcerningmarketbenefits.

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MethanolMain results:

a. Driving costs and consumer savings:

Unlike CNG vehicles, the incremental costs for purchasing FFVs (that allow use of blendedfuelswithhighrangesofmethanolconcentrations)orforretrofittingexistingvehicles for the use of M15, are negligible. Thus, if the savings in driving costs are higherthantheincrementalmaintenancecosts,theconsumerwillbenefitfromnettotal savings immediately.

The following chart depicts the sensitivity of driving costs per KM for different methanol blends to natural gas prices. As expected, higher concentrations of methanol allow higher savings, but are also more sensitive to price. Three main points should be stressed: a) the savings depicted here do not include incremental maintenance costs (discussed below); b) a conservative premise is used, according to which, the fuel economy is derived directly from the energetic value of methanol blend; c) we assume the methanol price will be calculated according to the methanol plant production costs,ratherthanthesignificantlyhigherimportpriceformethanol.

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The actual savings per KM might defer from these results as a result of the following factors:

1. Incremental maintenance costs: European manufacturers demand higher treatment frequencies for vehicles that use ethanol, which causes higher maintenance costs regardless of any factual higher levels of wear and tear. The incremental costs associated with this requirement are estimated at 9%. As methanol is more corrosive than ethanol, the model assumes that the incremental maintenance costs for methanol would be at least at the same level. Nevertheless, a methanol experiment is currently conducted in Israel. The experiment’s aim is to assess the actual additional wear and tear caused by the use of M15. Pending the results of the experiment, it might be possible by coordination with the manufacturers, to reduce the requirements for higher treatment frequency. Hence, an optimistic assessment would assume incremental maintenance cost of only 4%.

2. Methanol price: the model assumes that methanol produced and marketed locally willbesoldataprofitableproductionprice,whichwecalculatetobe327.12$perton.Thisassumptionisdebatable,astheinternationalmarketpriceissignificantlyhigher–about430$(340€),andtheimportpricewillinfluencethelocalprice.

3. Fuel economy: The model conservatively assumes that the ratio of the driving distance per liter of methanol blend in relation to the range per liter of pure gasoline is equal to the ratio of the different fuels energetic value, which stands at 49% for pure methanol in relation to pure gasoline. Nevertheless, enhanced burning propertiesofmethanolmayincreasethisratioupto63%,whichwillsignificantlyincrease the economy of methanol vehicles.

The following table enables to examine the implications that stem from changes in the model’s ground assumptions. It depicts the minimal methanol concentration required to offset incremental maintenance costs with savings in driving costs. Hence, a consumerwillhavenetprofitforusingamethanolblendonlywhentheconcentrationof methanol in the blend is higher than stated.

Methanol sold according to import market priceMethanol sold according to production costs

Fuel economy in relationto gasoline

Fuel economy in relationto gasoline

Lenient assumption

(0.63)

Conservative assumption

(0.49)

Lenient assumption

(0.63)

Conservative assumption

(0.49)30.0%N/A1 Conservative

assumption(9%)

Incremental maintenance

costs

20.0% 37.4% (Baseassumption)

Conservativeassumption (9%)

Incremental maintenance

costs

14.4%2.5%Lenient as- sumption

(4%)

1.6%2.0%Lenientassumption (4%)

1 Economically feasible only at concentrations higher than 90%, applicable only to dedicated methanol vehicles.

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b. Market savings:

Similar to consumer savings, the market savings are derived mainly from driving costs savings, and are dependent on the assumptions concerning fuel economy, maintenance frequency required, and methanol price. The following charts depict the market savings per vehicle given the different possible scenarios.

Examined cases:

Fuel economy compared toconventional vehicleIncremental maintenance costsCase

49%9%A

63%9%B

49%4%C

63%4%D

Annual market savings per vehicle – methanol sold according to production costs at the plant:

02' גרף עמ

01' גרף עמ

-0.22 -0.13

0.04 0.13

-0.06

0.14 0.14

0.34 0.51

1.16

0.71

1.36

-0.5

0

0.5

1

1.5

case A case B case c case D

Annu

al sa

ving

s (10

00 N

IS)

plant price M15 M30 M85

-0.29 -0.19

-0.03

0.07

-0.20

0.00

0.00

0.20

-0.10

0.65

0.10

0.85

-0.4

-0.2

0

0.2

0.4

0.6

0.8

1

case A case B case c case D

Annu

al sa

ving

s (10

00 N

IS)

Import price

M15 M30 M85

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Annual market savings per vehicle– methanol sold according to import market price:

02' גרף עמ

01' גרף עמ

-0.22 -0.13

0.04 0.13

-0.06

0.14 0.14

0.34 0.51

1.16

0.71

1.36

-0.5

0

0.5

1

1.5

case A case B case c case D

Annu

al sa

ving

s (10

00 N

IS)

plant price M15 M30 M85

-0.29 -0.19

-0.03

0.07

-0.20

0.00

0.00

0.20

-0.10

0.65

0.10

0.85

-0.4

-0.2

0

0.2

0.4

0.6

0.8

1

case A case B case c case D

Annu

al sa

ving

s (10

00 N

IS)

Import price

M15 M30 M85

The following table summarizes the market implications of integrating methanol FFVs in the transportation sector. The amount of methanol introduced to the market is determined by the plant expected output (400,000 tons dedicated to the transportation sector). As mentioned, the effective constraint is the rate of penetration of new vehicles to the market (~180,000-200,000 vehicles per year), but to accommodate all potential FFV owners, Israel would have to rely heavily on methanol import, or encourage more local methanol plants2.

M85M30M15

10%43%94%Expectedpenetrationrate–20178%36%78%Expectedpenetrationrate–2022141.5-66-404Annual savings (1,000,000 NIS)

247,500Annual gasoline savings (1000 liters )340Annual consumption of natural gas (MCM)

2 Gasoline savings and natural gas consumption do not vary across different concentration because the plant output remains constant.

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Qualitative analysis:

Main strengths:

• Time to Market: Israel already imports methanol. More so, an Israeli plant is in development stages. By relying on imported FFVs, the fuel can be implemented in a relatively short period of time.

• Safety: the fuel is considered relatively safe due to high combustion temperature.

• Israel as a methanol test field: in light of increased global interest in methanol, Israel may be a leading factor for western countries. Due to its size, Israel may present a preferable and attractive option for international investments in experiments and feasibility studies.

• Facilitation of alcoholic fuels: introduction of FFVs may encourage more alcoholic fuels, such as ethanol that might be produced in the future in Israel from waste.

Main disadvantages:

• Lack of international experience: other than China, methanol is not commercially widespread in transportation sectors. The nature of the Chinese regime impedes the possibility of relying on experience accumulated in China.

• Lack of regulation: the current fuel standard allows the use of up to 3.5% methanol. The standard needs to be changed to allow higher concentrations. Furthermore, vehicle and fueling station standards must be set since there is no current European standard to rely on.

• Health issues: methanol is not considered carcinogenic, however, formaldehyde which may be emitted when methanol is burned is considered cancerous. Nonetheless, more information is much required for an educated assessment of the health risks.

Conclusions:

Implementation platforms:

• Only relevant for private vehicles. Very low availability of busses and commercial vehicles.

• Market savings are sensitive to concentration of methanol in the blend chosen.

• Conservative assumptions suggest economic feasibility for blends with at least 37.5% methanol.

• Feasibility for lowerconcentrationsmaybeachieved,pendingonverificationofmore lenient assumptions.

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Private vehicles:

• FFVs may be introduced to the market with no incremental purchase costs.

• Consumer savings, as well as market savings, is sensitive to concentration of methanol in the blend.

• TheadvantagesofusingCNGaresignificantlyhigher forhighmileagevehicles.

• SignificantadvantagesforM15intermsofapplicability,possiblyimmediatetime to market. A proof of economic viability is necessary.

Commercial vehicles and buses:

• Thoughtheanalysisshowspotentialforsignificantsavings,lackofvehicleavailability renders the option to irrelevant.

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GTLMain results:

Synthetic fuels produced via GTL process are used in conventional vehicles with no adjustmentsormodificationsneeded.Therefore,thesavingsinthiscasestemfromtheabilitytoproducethesyntheticfuelatlowercoststhantheoilrefinerycostsoftheconventional fuels. The following chart shows the breakeven point for oil barrel price. ItsignifiestheminimalpriceaGTLplantmaysellanoilbarrelequivalentthroughouttheoperationperiodandremainprofitable.Oilbarrelmarketpricesthatarehigherthan the breakeven point, allow for economic feasibility of a GTL plant. The difference betweenahighermarketpriceand theproductionpriceperbarrel signifies thedirectmarketbenefitsfromtheproductionofaGTLbarrel.Thechartalsoshowsthederivedfuelpricesforconsumers(redandbluecolumns)foreachplantconfiguration,regulated marketing costs included.

01' גרף עמ

2.78 2.66 2.46

3.63

2.91 2.76 2.51

3.79

80.27 74.24 64.50

112.55

0 15 30 45 60 75 90 105 120 135 150

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

Grass root plant Integrated in refinery -

dedicated to petrochemical

industry

Integrated in refinery -

dedicated to transportation

Conventional fuels Br

eak-

even

Bar

rel p

rices

($)

Pric

e pe

r Lite

r (N

IS, w

ithou

t mar

ketin

g)

Gasoline price Diesel price Barrel price

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ThefollowingtablepresentsthemainfinancialparametersforaGTLplant.

Configuration Grass root Plant

Inte-grated in refinery - petro-

chemistry

Integrated in refinery -

transportation

Construction costs (Million $) ~4,900$ ~2,875$ ~2,950$

Revenues (Million $) ~1,975$ ~1,775$ ~2,035$

Financial Parameters given Product market

prices

NPV (Million $) ~3,800$ ~3,850$ ~5,850$

IRR 14% 18% 22%

ROE 28% 40% 52%

Return Period (years) 9 6 4

Breakeven Oil Barrel Price ($ per Barrel) 80.09$ 73.95$ 64.04$Potential Annual Market Savings (Million $) ~479 ~569 ~713

Becauseoftheextraordinaryfindings,itisimportanttonotethattheassumptionsandanalysis have been validated by experts from the US. DOE NETL, and have been found on par with an independent study currently being conducted by the DOE.

Thefinancialanalysisindicatesasubstantialbenefitpotentialforconsumersandthemarket. Nevertheless, the potential savings for the end-users are dependent on the distribution of the achieved surplus. Generally, there are two scenarios:

a. The products are sold to end-users at market prices. In this case, the plant owners enjoy the entire surplus.

b.Theproductsaresoldatpricesthatallowareasonablereturnonequity–14%.Insuch a case, the end-users enjoy the entire surplus.

Qualitative analysis:

Main strengths:

• Energetic security and diversity:allows for themostsignificantvolumeofoil substitutes. The ability to rely on self produced fuels greatly diminishes the dependency on oil states and the risks that stem from it.

• Use of existing infrastructure:thefuelcanbeimplementedwithnomodificationsto existing infrastructure, vehicles, or driving habits.

• Other uses: the GTL process allows the production of various distillates, e.g. kerosene and petrochemical products, that hedge demand risks.

• Export potential: an increasing demand in Europe for GTL fuels may hedge demand risks.

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Main disadvantages:

• Lack of competition: the Israeli market is too small to justify more than one GTL plant. As a monopoly, high level of supervision and regulation is required in order tosecurebenefitsforend-consumers.

• Environmental effects: the GTL plant has negative environmental effects, both in regard to land use and emissions during the production process.

• Statutory and regulatory barriers: regulatory institutions in Israel are unfamiliar with GTL technology, and major regulatory and statutory procedures might be required for the construction of the plant. Hence, GTL time to market is the latest of allexaminedalternatives(5yearsofplanningandstatutoryprocedures+5yearsconstruction period).

Conclusions

Implementation platforms:

• FinancialcaseforGTLplantishighlyattractive,especiallyconfigurationsthatareintegratedinexistingrefineries.Surplusestimatedas30-50$perbarrel,dependedonplantconfiguration.

• It is possible to direct the volume and mix of GTL products according to market needs.

Private vehicles:

• Favorable alternative for private vehicles in the long term.

• Marketandconsumerbenefitsaredependentonsurplusdistributionmechanism.

Commercial vehicles:

• Favorable alternative for most commercial vehicles in the long term.

• Marketandconsumerbenefitsaredependentonsurplusdistributionmechanism.

Buses:

• High savings potential in the long term.

• Marketandconsumerbenefitsaredependentonsurplusdistributionmechanism.

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Environmental analysis:

GTLMethanolCNG Environmentalaspect

Supply chainstage

---0 Use of landresources Production &

transportation---0(1) Air emissions

00-Noise

Fueling no information+++ Land & groundwaterpollution

no information-/0++Air pollution

+/00+/0Noise

Vehicles compared)+

(to diesel no

information

compared to)+(diesel

Air emissions compared to)-/0

(gasoline

compared to) -(diesel+/0+ Greenhouse gas

emissions

----/+Energeticefficiency

++Significantimprovement

+Mild improvement

0 No change

-Deterioration

--Significantdeterioration

(1)Airpollutionofmethanol/GTLplanthasbeenaccountedas incremental to thepollutionofconventionalrefinery.

RecommendationsThe following table presents the recommended alternative fuel for each vehicle category, both in the short-medium term, and in the long term:

TrucksBuses Commercial

vehiclehigh mileage

Private vehiclesPrivate vehicles Vehiclecategory high mileage average

mileage

CNGCNGCNGMethanolMethanol Short-mediumterm

CNG/GTL

CNG/GTLGTL CNG/GTL/

methanolMethanol/GTLLong term

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SpokespersonO

ffice