NEWS

Cow Dung, Rotting Chickens Poised to Beat Oil, Natural Gas

02/14/2007

Cow Dung, Rotting Chickens Poised to Beat Oil, Natural Gas

By Christopher Martin and Mathew Carr

Feb. 14 (Bloomberg)—First Reserve Corp., the biggest private equity firm in the energy industry, expects a fivefold gain from rotting chickens and cow dung.

That assumption is looking less preposterous. A consensus is emerging for U.S. legislation that encourages trading of credits earned from projects that reduce emissions of greenhouse gases and curb global warming.

``Giddy returns'' are probable, predicts First Reserve Director Glenn Payne, who says the first sign of a new law will lead to a quintupling of credit values to around $19 per ton of carbon dioxide, from $3.50 now. Profits from oil and gas over the next five years will increase less than 10 percent, futures prices show.

``Companies like First Reserve that get in now can make double or triple-digit returns annually,'' said Josh Margolis, director of emissions trading at Cantor Fitzgerald LP in New York. ``It's high reward because there are some big risks.''

Greed is motivating Wall Street to join the fight against global warming. New York-based Goldman Sachs Group Inc., the largest securities firm, made at least $68 million in six months from an investment in Climate Exchange Plc, an emissions trading marketplace that has tripled in value.

Morgan Stanley, the second-largest securities firm, over the next five years plans to invest in $3 billion of programs to cut greenhouse gas pollution or in the credits that result. Citigroup Inc. yesterday announced a venture with the hedge fund unit of Wayzata, Minnesota-based Cargill Inc., the largest U.S. agricultural company, to buy shares in Sindicatum Carbon Capital Ltd. to generate carbon credits.

Tyson, J.B. Hunt

First Reserve contracted with Springdale, Arkansas-based Tyson Foods Inc. to have the world's largest meat processor turn over carbon credits generated by cleaning up the methane from its chicken scraps and wastewater ponds.

The agreements obligate First Reserve to pay a fee and fund the installation and operation of the equipment needed to keep greenhouse gases out of the air. The investment firm then sells the credits to a power plant owner or another company that needs to meet state or federal pollution limits.

First Reserve also signed contracts with Lowell, Arkansas- based trucker J.B. Hunt Transport Services Inc. and the Boise, Idaho-based Albertson's grocery chain. The greenhouse gas reductions from these agreements will come from replacing truck fuel with biodiesel and installing energy efficient store lighting. Future projects may involve capturing the methane that wafts from pig or cow excrement, Payne said.

``Capturing the emissions from rotting chicken carcasses is a lot cheaper than from coal-plant emissions,'' Payne said in an interview from First Reserve's headquarters in Greenwich, Connecticut. The market in Europe, where greenhouse gas emission caps have been in place for two years, shows how high the value of U.S. credits will climb, he said.

Pelosi's Goal

While Payne declined to discuss First Reserve's performance, one of the firm's funds returned 48 percent annually from 2001 through June of last year, according to the California Public Employees' Retirement System Web site.

Private equity funds on average returned 5.9 percent a year over the past five years, according to data from Thomson Financial.

The U.S. Congress this year may approve a law to reduce emissions of carbon dioxide, methane and other gases that cause global warming. House Speaker Nancy Pelosi, a California Democrat, said last week that ``mandatory action'' is needed to cut emissions in half by 2050.

President George W. Bush cited the need to ``confront the serious challenge of global climate change'' in his State of the Union speech on Jan. 23. The comment marked a shift in his rhetoric, said Red Cavaney, chairman of the American Petroleum Institute. Senator Dianne Feinstein, a Democrat who has proposed legislation to cap greenhouse gases, called it ``a start.''

`No Debate'

Bush, a Republican, in 2001 pulled the U.S. out of the Kyoto Protocol, saying the mandatory emission caps in the international climate change treaty would hurt economic growth.

While U.S. Energy Secretary Samuel Bodman said on Feb. 2 that Bush still opposes emission limits, he agreed with a United Nations panel that found growing scientific evidence of society's contribution to climate change. The role of humans in global warming is ``no longer up for debate,'' he said.

U.S. credits today cost about $3.50 per ton of carbon, according to the Chicago Climate Exchange, a group that has created a market among companies that voluntarily agree to cut their emissions.

`Cheap' Credits

Investors are seeking credits in the U.S. because ``they are cheap,'' said Seb Walhain, head of environmental products at Fortis, Belgium's biggest financial services group. ``The risk is the credits investors buy may or may not be eligible'' under the rules that are ultimately established by lawmakers.

Walhain, who participated in the first emissions-related trading in Europe in 2003, said Fortis is now seeking to generate credits in the U.S. from projects similar to those of First Reserve.

The plan at Tyson is to cover rotting chicken carcasses to capture and burn the methane they emit. The project prevents emissions from rising into the atmosphere, where they trap heat and contribute to global warming.

Similar projects garnered a 45 percent return in two years for Trading Emissions Plc, an Isle of Man, U.K.-based firm founded two years ago with the sole purpose of investing in emissions projects and credits. Crude oil and natural gas prices at the end of 2012 may be only 7 percent to 8 percent higher than today, futures markets show.

Branson's $25 Million

Trading Emissions in December sold 255,000 credits to the U.K. government at about 14.50 euros a ton. They had been acquired in late 2005 and early 2006 for less than 10 euros each. The credits are approved by the UN for compliance under the Kyoto Protocol in Europe.

Carbon dioxide is released into the air from burning fossil fuels in power plants, factories, cars and planes. Other greenhouse gases include methane, which traps 21 times more heat than carbon dioxide.

Former U.S. Vice President Al Gore and British billionaire Richard Branson last week announced a $25 million prize for scientists who can devise a more efficient way to reduce greenhouse gases in the atmosphere.

First Reserve, founded in 1983 by investment banker William Macaulay, entered the carbon market by buying a 50 percent stake last September in Blue Source, a Salt Lake City-based company that develops greenhouse gas projects. Morgan Stanley, taking the same approach, bought a stake last month in a similar business, MGM International. Neither firm would release the terms of its acquisition.

300 Million Credits

First Reserve expects the contracts at Blue Source to generate 300 million credits, each equal to one ton of carbon prevented from polluting the Earth's atmosphere. The company has the largest number of U.S. emissions credits, equal to all of the carbon dioxide released in two years by Exxon Mobil Corp., the world's biggest energy company.

First Reserve has invested $12 billion since its founding in 1983. Last August, Macaulay raised $7.8 billion for a new investment fund, the largest pool of its type in the energy business.

GE and AES

Fairfield, Connecticut-based General Electric Co., the largest maker of electric generators, and power plant builder AES Corp. of Arlington, Virginia, said on Jan. 14 that they created a joint venture for carbon emission credits.

The venture will develop projects that cut U.S. greenhouse gas emissions by 10 million tons each year, creating 10 million credits, according to Kevin Walsh, director of renewable energy at GE Energy Financial Services in Stamford, Connecticut. ``Our goal is to make this a viable business in a voluntary market and be a leader as it becomes regulated,'' he said.

Germany's E.ON AG, the world's largest utility, said Feb. 7 that it will acquire credits by investing with banks in projects that curb greenhouse gases in the developing world.

Speculators, including hedge funds, are replacing industrial companies as the biggest buyers of carbon credits, according to Greg Spencer, chief executive officer of Blue Source. ``It's more about taking positions in a market that will appreciate significantly over time,'' he said.