United States	Air and Radiation

Environmental Protection (6202 J)	June 1998

Agency

AEPA

Coalbed Methane Recovery
and Electric Power Generation
Project

Opportunity at the Wesola Mine
Myslowice, Poland

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Coalbed Methane Recovery and Electric
Power Generation Project

Opportunity at the Wesola Mine
Myslowice, Poland

Coalbed Methane Outreach Program
Atmospheric Pollution Prevention Division
U.S. Environmental Protection Agency

June 1998


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DISCLAIMER

Legal Notice. This report was prepared for the U.S. Environmental Protection Agency (U.S.

EPA). The U.S. EPA does not:

(a)	Make any warranty or representation, expressed or implied, with respect to the
accuracy, completeness, or usefulness of the information contained in this report, or that
the use of any apparatus, method, or process disclosed in this report may not infringe
upon privately owned rights; or

(b)	Assume any liability with respect to the use of, or damages resulting from the use of, any
information, apparatus, method, or process disclosed in this report.


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Contents

ATTACHMENTS	I

FIGURES	II

TABLES	II

UNITS AND MEASUREMENTS	Ill

ACRONYMS	Ill

1.0 PROJECT PRESENTATION	1

1.1	Project Description	1

1.1.1	Drilling Project	1

1.1.2	Gas Turbine Power Cogeneration Facility	2

1.2	Anticipated Participants	3

1.2.1	Katowice Holding Company	3

1.2.2	We sola Mine	3

1.2.3	ZEC	3

1.2.4	ZOK	3

1.3	Proposed Project Structure	3

1.3.1	Developer	3

1.3.2	Project Entity	4

1.3.3	Ownership Options	4

1.4	Proposed Financing Sources	4

1.5	Profit Results	5

1.6	Project Benefits and Risks	5

1.6.1	Benefits	5

1.6.2	Risks	6

1.7	Wesola Mine General Information	7

1.7.1	Background	7

1.7.2	Description of Business	7

1.7.3	Wesola Mine Production History	8

1.7.4	Current Financial History of the Mine	8

1.7.5	Wesola's Role in the Coal Industry	8

1.7.6	Level of Technical Sophistication and Capability	9

2.0 TECHNICAL DISCUSSION OF GOB GAS RECOVERY AND POWER GENERATION PROJECT11

2.1	Mine Site Characteristics	11

2.1.1	Geologic Conditions	11

2.1.2	Coal Reservoir Characteristics	11

2.1.3	Current Mining and Gob Degasification Plan	13

2.2	The Horizontal Gob Borehole Approach	16

2.2.1	Equipment Requirements	16

2.2.2	Equipment Costs	17

2.2.3	Application at Wesola	19

2.2.4	Directional Drilling Costs	20

2.2.5	Benefits of Horizontal Gob Boreholes at the Wesola Mine	21

2.2.6	Application at Other Mines in the Upper Silesian Coal Basin	24

2.3	Proposed Gas Turbine Power Generation Facility	24

2.3.1	Methane from Wesola's Drainage Plant	24

2.3.2	Wesola Mine Power / Heat Demands and Costs	24


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2.3.3	ZEC Costs and Revenues	26

2.3.4	Proposed Power and Heat Generation Facility Configuration	28

2.3.5	Proposed Power and Heat Generation Rates	30

2.3.6	Capital and Operating Costs for the Proposed Facility.	32

2.4 Projected Annual Net Incomes from Drilling, Heat, and Power Sales	35

3.0 ASSESSMENT OF PROJECT STRUCTURE OPTIONS	37

3.1	Role of the Developer	37

3.1.1	Level of Effort	37

3.1.2	Rewards	37

3.2	Use of a Project Entity	38

3.3	Discussion of Ownership Options	38

3.3.1	Sweat Equity and Deferred Payments	38

3.3.2	In-kind Equity	39

3.3.3	Cash Equity	39

3.4	Structure Assumptions for Financial Model	40

3.4.1	Total Estimated Project Costs	41

3.4.2	Financing Structure	41

3.4.3	Ownership	42

3.4.4	Roles for the We sola Mine	43

4.0 ECONOMIC ANALYSIS	45

4.1	Parameters Incorporated in Financial Analysis	45

4.1.1	General Assumptions	45

4.1.2	Economic Parameters	46

4.1.3	Taxes	46

4.2	Base Case and Sensitivity Conditions	47

4.2.1	Financing Structure	47

4.2.2	Prices	48

4.3	Results	49

4.3.1	Base Case with ECOFUND	49

4.3.2	Base Case without ECOFUND	49

4.3.3	Sensitivity Analyses	49

4.4	Summary of Economic Analyses	49

5.0 PROJECT BENEFITS AND RISKS	53

5.1	Project Benefits	53

5.1.1	Benefits to the Katowice Holding Company	53

5.1.2	Benefits to the We sola Mine	53

5.1.3	Benefits to ZEC	54

5.1.4	Benefits to the USB Coal Mining Industry	54

5.1.5	Environmental Benefits	54

5.2	Project Risks	55

5.2.1	Permitting Risk	56

5.2.2	Financing Risk	56

5.2.3	Gas Risk.	56

5.2.4	Construction Risks	56

5.2.5	Market Risk	56

5.2.6	Mine Closing Risk	57

5.2.7	Technical Risk	57

6.0 REFERENCES	59


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ATTACHMENTS

Attachment 1: Wesola Mine Degasification Costs

Attachment 2: Case Study Illustrating the Application of Horizontal Gob Boreholes at a Mine in
the United States

Attachment 3: Downhole Directional Drilling Equipment

Attachment 4: Information for Foreign Producers

Attachment 5:	Directional Drilling Costs

Attachment 6:	Vendor List, Drilling Equipment

Attachment 7:	Wesola Mine Power Analysis for 1996

Attachment 8:	ABB Turbine Specifications

Attachment 9:	Basic Differences between Limited Liability

Attachment 10:	Discussion of Project Financing Options

Attachment 11:	Excerpts from USAID's Guide: "Market for Financing of Environmental
Investment Projects in Poland"

Attachment 12: ECOFUND Polish Debt for Environmental Swap

Attachment 13: The National Fund for Environmental Protection and Water Management
Attachment 14: Details of Economic Analyses


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FIGURES

Figure 1.1	11 Mines of the Katowice Holding Company

Figure 2.1	Wesola Mine 1996 Methane Vented, Drained, and Used

Figure 2.2	Gob Degasification from Overlying Galleries

Figure 2.3	Coal Production and Methane Emissions from Longwall 1016a in the 501 Coal Seam

Figure 2.4	Horizontal Gob Boreholes

Figure 2.5	High Capacity Longhole Drill and Tender Unit (U.S. Dimensions)

Figure 2.6	Projected Methane Liberations and Methane Drained with Improved Degasification

Efficiency (5 and 10% increase per year after 1996)

Figure 2.7	Power Costs by Month and Cost Component for 1996

Figure 2.8	ZEC Revenues from Heat Generated from gas and Coal by Month for 1996

Figure 2.9	1996 ZEC Income from Commodities Traded with the Wesola Mine

Figure 2.10	Proposed Site Layout for the Power Plant on Wesola Mine Property

TABLES

Table 2.1 Cost of Gob Degasification with Overlying Galleries per Longwall
Table 2.2 High Capacity Longhole Drill and Tender Unit Specifications
Table 2.3 Cost of Directional Drilling Equipment Imported to Poland
Table 2.4 Total Estimated Costs for Three Horizontal Gob Boreholes Developed by Drilling
Contractor

Table 2.5 Projected Savings for Range of Gallery Development Avoided in the Saddle Area
Table 2.6 Projected Annual Revenue Gains for Range of Degasification Improvement in the Saddle

Area on a per Longwall Basis
Table 2.7 Projected Total Annual Cost Benefit for Range of Avoided Gallery Development and

Degasification Improvement in the Saddle Area on a per Longwall Basis
Table 2.8 Key Parameters of ZEC's Operations
Table 2.9 ABB GT-5 Turbine Specifications under ISO Conditions

Table 2.10 Anticipated Cost Distribution between Utility and the Project Using the Wesola Mine's
1996 Data

Table 2.11 Favorable Price for Heat to ZEC to Compensate for Project's Gas Use
Table 2.12 Capital Cost Estimate for Power and Heat Generation Facility
Table 2.13 Annual Operating Cost Estimate for Power and Heat Generation Facility
Table 2.14 Projected Annual Gross Income with the Turbine Operating at Full Capacity
Table 3.1 Total Estimated Project

Table 4.1 First-Year Prices for Commodities Used in Analyses

Table 4.2 First-Year Prices for Commodities Used in Sensitivity Analyses

Table 4.3 Scenarios Simulated with Key Economic Indicators

Table 4.4 Cash Flow Statement for Base Case Model with ECOFUND Grant

Table 4.5 Cash Flow Statement for Base Case Model without a Grant from the ECOFUND

Table 5.1 Additional Methane Emissions and Equivalent C02 Mitigated by Proposed Project

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UNITS AND MEASUREMENTS

CO	Carbon monoxide

C02	Carbon dioxide

G	Giga

GJ	Giga joule

H2	Hydrogen gas

He	Helium

kg	Kilogram

kJ	Kilo joule

kN	Kilo Newton

kW-hr	Kilowatt hour

$M	Million dollars

m	Meter

m3	Cubic meter

md	Milli-darcy

mm	Millimeter

m/s	Meters per second

MPa	Mega Pascal

M tonnes	Million metric tons

MW	Megawatt

MWth	Megawatts, thermal

MWe	Megawatts, electric

N m	Newton meters

NOx	Nitrogen oxides

PM	Particulate matter

rpm	Revolutions per minute

S02	Sulfur dioxide

t	Metric ton, 1,000 kilograms

Tonne	Metric ton, 1,000 kilograms

ACRONYMS

ECP

Engineering Procurement and Construction

U.S. EPA

U.S. Environmental Protection Agency

IRR

Internal Rate of Return

NPV

Net Present Value

ROM

Run of Mine

USB

Upper Silesian Basin

$US

U.S. Dollars

VAT

Value Added Tax

ZEC

Zaklad Energetyki Cieplnej

ZOK

Zaklad Odemeanowania Kopaln Spolka ZO.O

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1.0 PROJECT PRESENTATION

This U.S. Environmental Protection Agency (U.S. EPA) report is a prefeasibility assessment of
an opportunity to establish two modern coal mine methane technologies at gassy underground
coal mines in the Upper Silesian Basin (USB), Poland. The first is the use of directional drilling
tools to develop horizontal gob boreholes to drain methane more efficiently than conventional
methods. The second is the introduction of a gas turbine cogeneration plant fueled with coal
mine methane that produces both electric power and heat. A demonstration project combining
both techniques would be located at the Wesola Mine, a property of the Katowice Holding
Company which owns ten other coal mines in the USB.

Ideas for technology transfers and eventual selection of the Wesola Mine arose from two U.S.
EPA missions, one in 1995 and the other in 1997. During the second mission, U.S. EPA and
U.S. and Polish contractors performed research to investigate the technical, institutional, and
economic feasibility of the proposed project, and they narrowed the selection of a project site to
Wesola.

Poland is a large producer of underground coal. Many of its coals are gassy (i.e., above 8.0
cubic meters (m3) per tonne of coal in situ). Although many Polish mines recover and use
significant amounts of methane, they encounter difficulty in reducing coal mine methane
emissions, partly due to the lack of capital and partly due to uncertainty of the effectiveness of
available technologies. Much of Poland's coal industry loses money due to over-capacity, over-
employment, and difficult geological conditions. The new Polish government, which took over
in November of 1997, intends to restructure the coal industry. Restructuring will pressure all
coal companies to modernize and control costs to increase the probability of survival. The
Polish coal mining status, therefore, creates a receptive climate for the introduction of the
improved methods described herein. A successful implementation of this and similar projects in
the USB also will benefit the global climate by substantially reducing the quantity of methane
emitted to the atmosphere.

1.1 Project Description

The project is comprised of two components: directional drilling and power and heat generation.
1.1.1 Drilling Project

The Wesola Mine, located in northeastern USB in the town of Myslowice, presently produces
approximately 3.5 million metric tons (M tonnes) of coal per year. Wesola continuously
searches for ways to reduce mining and degasification costs and to increase coal production.
This will become even more important as it exploits even deeper levels where refrigeration of
mine ventilation air may be required. Wesola management is receptive to the project.

The mine relies on a system of overlying galleries for stress relief, gob degasification, and for
application (injection) of backfilling material. Wesola engineers indicate that new techniques are
needed for continued and profitable exploitation of new sections of the mine. If they can
achieve effective gob degasification with in-mine horizontal gob boreholes and minimize
overlying galleries, they can reduce development costs.

Horizontal gob boreholes are small (76 to 90 millimeter (mm) in diameter), long (in excess of
1,000 m) boreholes developed from the mining horizon up into strata overlying unmined panels.

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Through the use of directional drilling tools, these boreholes strategically intersect fractures that
will generate over the rubble zone after undermining by longwall systems. The technique takes
advantage of the large surface area presented by the horizontal borehole which provides
excellent connectivity with these mining-induced fractures.

Horizontal gob borehole development requires state-of-the-art, in-mine directional drilling
equipment. Japanese and Chinese coal operations use the technique, and U.S. mines have
conducted field trials. It is suitable for deployment in deeper, multi-seam operations. Miners
have found that horizontal gob boreholes provide high degasification efficiencies at lower costs
than either boreholes drilled from overlying galleries, or cross-measure boreholes (angled
boreholes drilled in advance of mining into overlying or underlying strata from gate entries)
The technique requires fewer boreholes and is applicable to both advancing or retreat longwall
systems.

The drilling equipment for the Wesola project will cost approximately US$1.6 million, including
import fees, equipment approval, and training costs. Implementing horizontal gob boreholes at
the Wesola Mine will reduce gob degasification costs, improve current gob gas recovery
efficiencies, and increase recovered gas quality. More importantly with respect to the mine's
economic results, the method will improve mining productivity. Any improvement to
degasification efficiency will reduce the frequent down times attributed to high methane
concentrations at the mine's working faces. Wesola presently encounters mine-wide methane
production delays that significantly reduce coal production.

The project described herein will purchase the drilling equipment and operate it in the Wesola
Mine as well as in other gassy mines in the USB, particularly those that use the overlying gallery
degasification system. Drainage engineers familiar with the Basin indicate that the new drill will
have extensive application, especially at mines that exploit shallower reserves, and where the
vertical distances between mined seams are greater. Unlike Wesola, these operations would
be less prone to adverse stress conditions and could have more success in avoiding the use of
overlying galleries.

1.1.2 Gas Turbine Power Cogeneration Facility

The second part of the project is a 2.5 megawatt electric (MWe) gas turbine facility that uses all
of the methane drained by the mine, supplemented with fumigant methane contained in the
mine's ventilation exhaust which serves as the turbine combustion intake air. The facility will
generate both power and heat. With improved methane drainage techniques, the mine can
supply sufficient gas to increase the plant output with a second turbine unit.

Commercial turbines modified to operate on medium quality gas (as low as 35 percent methane
in air) are available and are in use at a few coal mining operations in Germany (Kowollik and
Heimer, 1986). The use of mine ventilation exhaust air as combustion air is currently
demonstrated at two multi-unit, coal mine methane-fueled, internal combustion engine power
plants in Australia.

The estimated capital cost of the power and heat generation facility is approximately US$3.0
million including shipping and import taxes. Project development and construction costs are
US$280,000. The proposed project will provide more efficient use of the drained methane gas
and provide cost benefits to both the Wesola Mine and the affiliated energy company Zaklad
Energetyki Cieplnej (ZEC).

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1.2 Anticipated Participants

The 1997 U.S. EPA mission held discussions with several existing entities that may play a role
in the development of this project. There are at least two other entities, as yet non-existent or
unidentified, that are necessary to implement the project: the project entity and the project
developer. Both are discussed in the next section. The following paragraphs identify existing
participants.

1.2.1	Katowice Holding Company

Katowice Holding owns the Wesola Mine and an operating subsidiary, Zaklad Energetyki
Cieplnej (ZEC), described below. The company maintains decision making authority over
potential ventures entered into by its subsidiaries.

1.2.2	Wesola Mine

The mine is the project host, the gas supplier, and the purchaser of drilling and energy services
and products. From this influential position, the mine must take an important role in the project.
On the other hand, the mine may not wish to absorb the project into its current financial
difficulties by being the sole project owner.

1.2.3	ZEC

ZEC, a subsidiary of Katowice Holding, is currently Wesola's coal mine methane customer and
supplier of heat. The project must fit within that relationship.

1.2.4	ZOK

Zaklad Odemeanowania Kopaln Spolka Zo.o., (ZOK), is the established methane drainage
service company (consulting and drilling) in the region.

1.3 Proposed Project Structure

A project structure is the arrangement of project ownership and financing which is supported by
contractual agreements. The structure recognizes "senior money" (i.e., low-risk equity capital),
and it provides rewards to the high-risk development capital. The structure allows vested
interests (e.g., the Wesola Mine), to obtain a share of the project in consideration for in-kind
services such as a free ground lease and long-term contracts. A project of this type normally
uses a project entity, created only for the project (see below). Such a project also requires a
developer who will accept an ownership share in return for services.

1.3.1 Developer

While the report does not identify a specific developer, it defines developer roles and ideal
characteristics.

A developer takes many coordinated steps to build a viable project vehicle that is sustained by a
network of contractual agreements and a flow of funds that are sufficient to reward every
participant. Normally the developer's role continues until closing, after which the developer may

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assume another project role or turn the project management over to the project entity. A
developer will, either personally or by contract, arrange all project matters: technical, legal,
financial, and environmental. A motivated developer linked with a well-financed entity with
access to capital is best able to sustain all project demands until closing. An ideal developer will
be willing to assume project risks and will receive rewards only after the project achieves
success.

1.3.2	Project Entity

Most energy projects, especially those with complex ownership, choose to create a new
corporation or other limited-liability, legal entity to create and embody the ownership and
management of the project. The entity is empowered to raise money, make contracts, hire
contractors and personnel, and operate the business. The entity's rights and duties are
described in the contracts drawn up by the developer and the project owners. This report
recommends that the project entity be separate from the Wesola Mine, although it may be
appropriate to include the mine as a minor shareholder.

1.3.3	Ownership Options

Ownership shares of the proposed drilling and power generation project at the Wesola Mine
may accrue to entities that have benefited the project in one of three ways:

•	Time and effort—"sweat equity"—and deferred payment (e.g., the developer, equipment
supplier (ABB), or an ECP Contractor).

•	In-kind services or items of value (e.g., site lease and services from Wesola, engineering
services from ZEC and ZOK, and driller training costs and assistance with equipment
approval from ZOK).

•	Equity capital (cash). Equity providers will have the strongest claim on ownership of the
project.

1.4 Proposed Financing Sources

The total estimated project costs (see Table 3.1) are approximately US$4.95 million in hard
costs and US$0.13 million in in-kind contributions. The 1997 U.S. EPA mission interviewed a
number of private and public sources of financing including grant funds, equity contributions,
and debt capital. Many of the respondents advised that this project obtain a 40 percent equity
share, including potential grant funds. The following are proposed sources of financing for the
project. Information on other potential sources appears in Attachments 10 and 11.

•	ECOFUND can provide grant funds up to 30 percent of the investment value.
Attachment 12 reviews the origin of this agency.

•	The National Fund and its local associates, the Voivodship Funds (see Attachment 13)
provide grants, cash equity (National Fund), and debt (with remission provisions). Fines
and fees paid by mining and industrial operations support the National Fund. These
funds can provide up to 20 percent of the equity capital and 30 percent of debt financing.

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•	Commercial banks provide up to 30 percent of debt financing (see Attachments 10 and
11).

•	The economic analyses in this report assumed the following sources of equity and debt
capital:

Equity

Percent

USSM



ECOFUND (Grant)

20

.99



National Fund

10

.50



Private Sources and Project Development

10

.50



Total Equity

40

1.99

Debt









National Fund/Voivodship Fund

30

1.48



Commercial Banks

30

1.48



Total Debt

60

2.96



Total Capitalization (cash)

100

4.95

1.5 Profit Results

Table 4.3 in Section 4 presents the financial results of the project, given various sensitivity
conditions. The analyses specifically define prices for energy and drilling services bought and
sold between the project entity and its major participants. To be conservative, the analysis
causes the project to pay at current market levels, but to sell at prices favorable to both Wesola
and ZEC.

The project likely qualifies for a grant from ECOFUND for 20 percent of the capital cost. All of
the cases with an ECOFUND grant show that the project will earn 15 percent or higher internal
rate of return (IRR), after tax. Without the grant, the project earns marginal after-tax IRR's of
between 5 and 10 percent for the range of sensitivity conditions investigated.

Based on assumptions developed in Section 3 and summarized above, the financial analyses
indicate that the power, heat, and drilling project at the Wesola Mine is economically viable.
The sensitivity studies show that the project is marginal without the ECOFUND grant and with
power and heat prices that are very favorable to the Wesola Mine and ZEC. These prices will
be necessary to interest the Wesola Mine and ZEC, as both of these entities are key to the
proposed project. The ECOFUND grant is necessary to more easily attract commercial and
private debt and equity sources, and to increase the likelihood of project development.

1.6 Project Benefits and Risks

1.6.1 Benefits

The proposed project, more than being a viable business enterprise, will provide a wide range of
benefits to the mine, ZEC, the USB coal mine industry, and the global environment. The
benefits are listed below and described more fully in Section 5.

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1.6.1.1	Wesola Mine

•	Power cost savings

•	Increased revenues from gas sales

•	Reduced degasification costs

•	Increased revenues from increased coal production

•	Operational benefits

•	Reduced environmental fees (potential)

1.6.1.2	ZEC

•	No loss of current market

•	Increased profit margins

1.6.1.3	Upper Silesian Coal Basin Coal Mining Industry

•	Introduces new, more effective drilling method to the region

•	Provides training and new business opportunity to ZOK (or new business entity)

•	Adds potential markets for USB coal mine methane

•	Contributes to the competitiveness of USB coal mining

1.6.1.4	Environment

•	Removes the methane global warming equivalent of approximately 630,000 tonnes of
carbon dioxide (C02) through the course of the project period

•	Offsets 9,135 tonnes of coal annually, mitigating an additional 18,108 tonnes of C02 per
year

•	Improves local air quality (nitrogen oxide (NOx), sulfur dioxide (S02), and particulate
matter (PM) reductions)

1.6.2 Risks

Project developers, debt, and equity providers can minimize project risks by performing due
diligence to give the assurance that the project has no fundamental flaws, and that all
uncertainties have been resolved. The perceived risks and uncertainties of the proposed
project are listed below and described in Section 5.

1.6.2.1	Permitting Risk

•	Timing of approval of drilling equipment by Polish Higher Mining Authority

1.6.2.2	Financing Risk

•	Ability to assemble a cohesive group of investors and lenders

•	Agreement on a project structure, distribution of equity, dividend and payout schedules

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1.6.2.3 Gas Risk

•	Securing a predictable supply of CMM

•	Ensuring continued methane drainage activities at Wesola

1.6.2.4	Construction Risks

•	Controlling costs and construction delays

1.6.2.5	Market Risk

•	Establishing firm, "Take-or-Pay" power and heat contracts

1.6.2.6	Mine Closing Risk

•	Assuring continued mine operation, considering financial status of coal sector in Poland

1.6.2.7	Technical Risk

•	Ensuring smooth functioning of project systems

1.7 Wesola Mine General Information

1.7.1	Background

The Wesola Mine is located in the northeastern portion of the Upper Silesian Coal Basin (USB),
in the town of Myslowice, southeast of Katowice. The Wesola Mine is one of eleven mines that
comprise the state-owned Katowice Holding Company as shown on Figure 1.1. Mine
development began in the early 1950s on a concession that occupies approximately 45 km2.
The mine employs about 5,500 people in the region.

1.7.2	Description of Business

The Wesola Mine, owned by the Katowice Holding Company along with 10 other coal mines, is
one of Katowice Holding's largest coal producers and largest employers. The Wesola Mine
presently produces approximately 3.5 M tonnes of sub-bituminous through high-volatile
bituminous coal per year, from six or more working levels. The mine holds significant coal and
methane reserves. The concession contains over 1,000 M tonnes of measured and indicated
coal reserves. In-situ methane resources associated with these coal reserves exceed 11.0 G
cubic meters.

Wesola is continuously working to implement techniques to reduce mining and degasification
costs and increase coal production. It is planning to exploit even deeper levels where
refrigeration of mine ventilation air may be required.

The Wesola Mine staff supports the project proposed herein because of the mine's large power
demand and its high cost of mining, exacerbated by extensive degasification and consolidation
(backfilling) programs.

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KATOWICE
CONCESSIONS

1.	STAZIC

2.	WESOLA

3.	KLEOFAS

4.	WIECZOREK

5.	WUJEK

6.	MURCKI

7.	KATOWICE

8.	MYSLOWICE

9.	NIWKA - MODRZEJOW

10.	SLASK - MATYLDA

11.	KAZIMIERZ - JULIUSZ

WESOLA MINE CONCESSION

OTHER KATOWICE HOLDING CONCESSIONS

SOURCE: BUREAU OF GEOLOGIC CONCESSIONS

Figure 1.1: Location of the Wesola Mine Concession in Upper Silesia

1.7.3	Wesola Mine Production History

The Wesola Mine's coal production decreased to the 3.5 M tonnes per year level in 1990 as
developments moved to deeper levels. Previously, the mine produced about 5.5 M tonnes per
year on a relatively consistent basis between 1980 and 1990. Coal production at Wesola
started in 1952.

1.7.4	Current Financial History of the Mine

According to the latest available financial information, the Wesola Mine is not a profitable
operation. 1993 financial information indicates that the mine's operating costs exceeded
revenues from coal sales by US$21 million (Nasz Holding, 1994).

1.7.5	Wesola's Role in the Coal Industry

Poland's coal industry continues to lose economic ground. Efforts at accepting an industry-wide
restructuring plan failed in 1996 despite an influx of consulting assistance from the European
Union and the U.S. Trade and Development Agency. Recent elections in September of 1997
yielded a new government controlled by the AWS Party. The new government, including the
other major political faction (the Freedom Union), has plans to restructure the coal industry.
Major changes are planned, including a 30 M tonnes per year reduction in coal production, and
a 70,000 personnel labor reduction by the year 2000. Restructuring will pressure the Katowice
Holding Company to modernize and control costs at their most viable properties to increase the
probability of survival.

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1.7.6 Level of Technical Sophistication and Capability

As discussed above, the Wesola Mine's engineering and management staff supports the
proposed project and foresees the need to implement new technology to compete and operate
profitably in a freer market. Wesola's engineering staff is extensive (a chief engineer with
subordinate engineering support staff for every discipline), educated, and very capable of
incorporating and adapting new technology into their mining programs.

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2.0	TECHNICAL DISCUSSION OF GOB GAS RECOVERY AND POWER GENERATION
PROJECT

2.1	Mine Site Characteristics

2.1.1	Geologic Conditions

In the USB, two distinct formations comprise the coal bearing strata: an upper formation of
continental sediments, and a lower formation of siliciclastic sediments. These formations bear
234 coal seams, averaging 339 meters (m) in total thickness, of which 200 are economic for
mining based on Polish estimates and conditions.

In the vicinity of the Wesola Mine (the central part of the USB), triassic and tertiary formations
(composed of claystones, sandstones, dolomites, limestones, shales, conglomerates, and
mudstones) overlie the carboniferous formations (tertiary lies unconformably). At the Wesola
Mine, the immediate overburden is not impermeable. Initially methane content increases with
increased depth, then, at a point through the coal bearing strata, a distinct reduction with depth
is observed.

Presently the mine produces coal from six sub-bituminous through high volatile, B, bituminous in
rank, coal seams with an average heating value of 23,545 kilo joule per kilo gram (kJ/kg): the
No. 405, 401, 501, 510, 414, and 314. Immediate mine plans (next 5 years), focus on exploiting
the very gassy 501 and 510 coal seams, which have a combined thickness of 8.6 m. A binder
that varies between one and 25 meters in thickness separates these two seams across the
property.

2.1.2	Coal Reservoir Characteristics

2.1.2.1	In-Situ Gas Content

Desorption measurements conducted on coals from the Wesola Mine using the Polish canister
method indicate in-situ gas contents of up to 11.6 m3 per tonne (U.S. EPA, 1995). Polish
Methane Hazard Classification information indicates that the majority of the coal seams
presently mined at Wesola have in-situ gas contents greater than 8.0 m3 per tonne. By the year
2005, in excess of 60 percent of coal production will originate from coals with this magnitude of
gas content or greater.

2.1.2.2	Permeability

Absolute permeabilities of coals in the USB typically range between 0.1 and 1.0 milli-darcy (md).
Mining operations exploiting gas-bearing strata with these characteristically low permeability
values lend themselves to degasification techniques applied immediately in advance of mining
(short boreholes from coal faces to intersect fissures), and focusing on gob gas emissions. In
longwall gobs, overlying strata will fracture extensively as a result of mining activity, and
permeability will increase by several orders of magnitude.

2.1.2.3	Gas Quality

The Wesola Mine recovers a methane and air mixture from gob areas; approximately 60
percent methane and 40 percent air on a volume basis. Generally, coalbed gas recovered from

11


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virgin coals in the USB contains a high percentage of nitrogen (average between 15 and 17
percent), along with lower concentrations of C02, CO, H2 and He (Polish Geologic Institute,
1994).

2.1.2.4	Mine Characteristics

The Wesola Mine exploits the six coal seams identified above with longwall mining methods.
Seven longwall faces operate at different levels, with personnel, materials, and ventilation
supplied via six shafts. The mine presently (as of 1997) produces in excess of 3.5 M tonnes of
coal per year from depths greater than 850 m below surface. Measured and indicated coal
reserves are in excess of 1,000 M tonnes (U.S. EPA, 1995). The anticipated life of the mine is
more than 20 years.

2.1.2.5	Methane Emissions

Wesola personnel indicate that methane emissions during longwall mining of some of the
gassier seams, (longwall 1016a in the 501 seam for example) are in excess of 39 m3 per
minute. These emissions contribute to the present total mine methane liberation rate of
between 105,000 and 140,000 m3 per day (123,000 m3 per day average for 1996). Figure 2.1
illustrates mine methane emissions by month for 1996. Wesola mining engineers anticipate that
annual mine methane liberations will increase by approximately 10 percent by the year 2000
and will level off thereafter (see Figure 2.6).

~ Volume of Methane Vented
~Volume of Methane Drained
. ~Volume of Methane Used

LL

Figure 2.1: Wesola Mine 1996 Methane Vented, Drained, and Used

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2.1.2.6	Mine Degasification

The Wesola Mine uses various degasification techniques, including short-probe boreholes
developed immediately in advance of mining, cross-measure boreholes, and boreholes drilled
from gob gas drainage galleries.

As indicated on Figure 2.1, the Wesola Mine degasification system recovers between 12 and 21
percent of the methane liberated, or between 15,000 and 25,000 m3 per day (17 percent
average degasification system efficiency for 1996). Mine accounting reports indicate that
overall degasification costs, which include the costs of materials, salaries to workers, and
energy for both surface and underground related activities, exceed US$800,000 per year.

2.1.2.7	Methane Utilization

The Wesola Mine operates a surface methane drainage plant equipped with seven vacuum
pumps, with a total production capacity of 86,400 m3 of methane per day. The plant is situated
on the surface at one of the mine's ventilation exhaust shafts (the "Waclaw" Shaft). The plant
presently operates at approximately 25 percent of capacity and currently processes gas of
between 55 and 65 percent methane in air on a volume basis (61 percent 1996 average). As
indicated on Figure 2.1, the mine uses most of the gas drained during the winter but less than
40 percent of the drained gas during summer months (65 percent 1996 overall average use).
The gas is sold to Zaklad Energetyki Cieplnej (ZEC), which operates two boiler houses: a small
facility capable of producing approximately 1.4 megawatt of thermal energy (MWth), and a
larger 30 MWth facility. As the boilers are fitted with over-stoke burners, ZEC has the option to
fuel them with either gas or coal.

The Wesola Mine purchases more than 50 percent of the annual heat generated by ZEC for hot
water heating and building heating (average of 58 percent of ZEC heat for 1996). ZEC sells the
balance of the heat to the local district heating network.

2.1.3 Current Mining and Gob Degasification Plan

The Wesola Mine's near-term plans focus on exploitation of the 501 and 510 coal seams
(Saddle Group), in the northern part of the concession in areas designated as B and D. In this
region, the two target seams remain relatively close to each other (1 m in some places), with the
501 seam at the higher elevation. The mine exploits these seams using a retreat system of
single entry longwall panels, each capable of producing in excess of 4,000 tonnes of coal per
day.

In mining the Saddle Group, the mine relies on a system of overlying galleries for stress relief,
gob degasification, and for application of backfilling material. Wesola engineers indicate that
because of their multi-level mining program, especially in areas where the mined seams are in
close proximity to each other, extensive consolidation of the longwall gob is necessary to
minimize roof control problems and stress conditions. For the initial longwalls in the saddle
group, Wesola operators developed overlying galleries in the uneconomic 416 coal seam,
approximately 40 m above the 501. As operators developed subsequent panels they
determined that this seam is not contiguous and resorted to developing overlying galleries in
rock. For some panels, operators were able to use existing galleries at higher levels.

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Wesola personnel indicate that new degasification techniques are needed for continued
exploitation of the Saddle Group, and that these techniques must consider stress relief
conditions and gob consolidation requirements.

2.1.3.1 Degasification from Overlying Galleries in the Saddle Group

The mine utilizes galleries as platforms from which it develops angled gob boreholes into the
strata overlying the 501 seam as shown generally on Figure 2.2. Methane emissions and the
degasification effectiveness attained by Wesola with the overlying gallery system of
degasification, as measured for one of the gassiest longwalls in the Saddle Group to date, are
shown on Figure 2.3. The magnitude of these emissions, in connection with projected
increases in coal production from the Saddle Group, demonstrates the urgency of Wesola's
degasification needs.

Figure 2.2: Gob Degasification from Overlying Galleries

Moreover, Wesola reports extensive lost time delays during mining because of high methane
concentrations in the ventilating air stream at the working faces (up to 7,320 minutes per month,
mine-wide for all working sections).

2.1.3.2 Cost of Degasification from Overlying Galleries in the Saddle Group

Wesola Mine engineers indicate that if effective gob degasification could be achieved without

14


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45

45

3 Methane in Ventilation Airflow (m3/min)
D Methane Drained (m3/min)

-Coal Production (t/dx 100)

Figure 2.3: Coal Production and Methane Emissions from Longwall 1016a in the 501 Coal Seam

overlying galleries (e.g., by using in-mine horizontal gob boreholes) they could minimize
development of this costly infrastructure. They indicate that this is particularly valid in the
Saddle Group areas where the galleries would need to be driven in rock; specifically in the B
area where the 416 seam is discontinuous. Table 2.1 presents an estimate of the costs
incurred by Wesola for incorporating the overlying gallery degasification technique, including the
cost of developing the galleries, drilling the gob boreholes, installing the gathering lines, and
maintaining the system. Cost calculations using Wesola Mine data are included in
Attachment 1.

Component

Cost in US $1,000's

1250 Meters of Gallery

900

60 Boreholes

224

Gathering Lines and Wellheads

21

System Maintenance

15

Total Per Longwall Panel

1,160

Table 2.1: Cost of Gob Degasification with Overlying Galleries Per Longwall

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2.2 The Horizontal Gob Borehole Approach

Wesola Mine personnel are receptive to the horizontal gob borehole approach to reduce the
development of galleries constructed in the 416 seam or in rock for degasification purposes. As
previously mentioned, horizontal gob boreholes are small diameter (76 to 90 mm), long (in
excess of 1,000 m) boreholes developed from the mining horizon up into strata overlying
unmined panels as shown on Figure 2.4 (boreholes are drilled from entry on left side of figure).

Figure 2.4: Horizontal Gob Boreholes

These boreholes are developed in advance of mining with directional drilling equipment to
strategically intersect fractures that will generate over the rubble zone after undermining by
longwall systems. The large surface area presented by the horizontal borehole provides
excellent connectivity with these mining-induced fractures in the relaxed zone over the gob
area.

This horizontal gob borehole technique is applied in coal operations in Japan and in China
where the United Nations administered a technology transfer program, and it has been field
tested in the United States (see Attachment 2 for results of United States field trials). It is
suitable for deployment in deeper, multi-seam operations where the more common gob
degasification techniques are cross-measure or overlying gallery methods. Miners have found
that this technique provides high degasification efficiencies at lower implementation costs than
either the overlying gallery or the cross-measure methods. This unique technique requires a
reduced number of boreholes and applies to both advancing or retreating longwall systems.

2.2.1 Equipment Requirements

Horizontal gob borehole development requires state-of-the-art, permissible, in-mine directional
drilling equipment comprised of: a high thrust permissible drill, a steerable downhole motor
assembly, drill rods, drill bits, and a survey system. Figure 2.5 shows a typical high-capacity,
permissible drilling system comprised of a drill and support unit. The support unit provides
hydraulic power for drill thrust and controls, and pressurized water for downhole motor
operations. All drill operations, except tramming (electric), are hydraulic powered. Table 2.2
presents general specifications of a high-capacity longhole drill and tender. Attachment 3
presents detailed descriptions of downhole equipment for directional drilling.

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High Capacity Longhole Drill Specifications

Drill Unit Dimensions

2.083 m (W) X 1.092 m (H) X 3.835 m (L)

Weight of Drill Unit

9,080 kg

Maximum Thrust (Push and Pull)

178 kN

Maximum Torque

3391 N m (at 100 rpm)

Maximum Stroke

3.35 m

Max Rated Drill Head Advance

0.25 m/s

Feed Frame Inclination

+/-15 Degrees from Horizontal

Drill Chuck System

BQ - Size (56 mm Diameter)

High Capacity Longhole Drill Tender Specifications

Tender Unit Dimensions

2.4 m (W) X 1.2 m (H) X 4.065 m (L)

Weight of Tender Unit

11,340 kg

Water Pumping System

3.9 l/sec and 8 MPa Maximum Rated

Monitoring

Methane /Fire Suppression

Table 2.2: High Capacity Longhole Drill and Tender Unit Specifications

2.2.2 Equipment Costs

Table 2.3 itemizes the drilling and ancillary equipment and procurement costs required for the
development of horizontal gob degasification boreholes. These costs reflect United Kingdom
mine equipment permissibility requirements (more stringent than in the Unites States), and
assume that all of the equipment is imported to Poland from the United States, including
shipping and import duties and taxes. Supplies sufficient to develop 1000 m boreholes are
specified.

Description

Unit Price

Unit

Quantity

Total Cost

1.

Longhole Directional Drill









a.

Drill and Power Unit

$650,000

Package

1

$650,000

1.

Drill Rods









a.

Non-Magnetic Drill Rods

$500

Meter

40

$20,000

b.

BQWL Drill Rods

$30

Meter

2,000

$60,000

c.

Downhole Fishing Tools

$5,000

Package

3

$15,000

1.

Downhole Motor









a.

1-2 Stage "B" Motor

$19,000

Package

4

$76,000

b.

Orientation Sub and Spare Subs

$2,500

Package

4

$10,000

c.

Spare U-Joints and Bearings

$7,500

Package

4

$30,000

d.

Fishing Tools

$2,000

Package

3

$6,000

1.

Survey Tools









a.

Downhole Single Shot Tool

$22,500

Package

2

$45,000

b.

Ancillary Equipment and Spare Parts

$5,000

Package

4

$20,000

1.

Miscellaneous Items









a.

Drill Bits

$1,500

Per Unit

35

$52,500

b.

Hole Openers

$750

Per Unit

6

$4,500

c.

Miscellaneous

$3,000

Package

1

$3,000

1.

Other









a.

Shipping and Insurance

$28,000

Quote

1

$28,000

b.

Customs Duties

$204,000

20%

1

$204,000

c.

Value Added Tax (VAT)

$85,680

7%

1

$85,680









TOTAL

$1,309,680

Notes:

1.	The border tax, former 5%, was eliminated.

2.	Customs duties are an average 20% of value, inclusive of shipping for agro-industrial products.

3.	Equipment is not subject to excise tax.

4.	Equipment is subject to 7% VAT on customs value plus excise tax plus duty.

Table 2.3: Cost of Directional Drilling Equipment Imported to Poland

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LONG HOLE DRILL UNIT

POWER UNIT

SIDE

PILOT OPERATED DRILL CONTROLS

PLAN

PLAN

Figure 2.5: High Capacity Longhole Drill and Tender Unit


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2.2.3 Application at Wesola

If planned in coordination with mine development and production efforts, horizontal gob
boreholes can be successfully deployed at the Wesola Mine. This must be done with mine
participation and must consider the prevalent geologic conditions at the proposed drilling
locations, the mine's experience at drilling into overlying strata, and knowledge of the size and
capabilities of the drilling equipment.

2.2.3.1	Drilling Locations

Wesola engineers indicate that horizontal gob boreholes are applicable for degasification of
some longwall gobs in the Saddle Seams. They indicate that because of backfilling
requirements and stress conditions, the horizontal gob boreholes will not replace all of the
overlying gallery development, but would certainly reduce the extent of this costly infrastructure.
The boreholes are especially applicable in the B and D Saddle Seam areas where some of the
overlying galleries need to be developed in rock. Although difficult to assess without initial on-
site trials of the technique, designers anticipate that approximately 30 percent of the gallery
infrastructure could be negated by the use of horizontal gob boreholes in the Saddle Seam
area.

Wesola engineers must plan a degasification system for each longwall panel according to Polish
mining code. Their engineers use the consulting capabilities of ZOK for methane drainage
planning and drilling. ZOK has over 30 years of degasification experience in the Upper Silesian
Basin and should be involved in planning the drilling locations for the horizontal gob boreholes
at Wesola.

Drill site selection will need to consider: (1) the required azimuth of the boreholes (relative to the
longwall panel configuration), (2) the maximum attainable vertical borehole deflection rate, and
(3) optimizing drilling efficiency by maximizing the number of boreholes developed from a single
drill site (minimizing movement of drilling equipment). A preliminary review of mining plans
indicates that approximately three horizontal gob borehole drilling sites and a total of nine
horizontal gob boreholes are necessary to degasify the gobs of two longwall panels. This is a
general requirement that will vary depending on the specifics of the mining plan and geologic
conditions.

2.2.3.2	Application over Longwall Gobs

Wesola operators must develop a series of parallel horizontal boreholes with slightly overlapped
zones of influence to achieve a broad, continuous low-pressure zone over the target longwall
gob. They must target a region just below the lowest contributing source seam in the fractured
zone above the gob (but above the rubble zone). Recommended targets include the tension
zones at the start and ends, and along the sides, of longwall panels where strata are relaxed
and the apertures of mining-induced fractures remain open. With directional drilling techniques,
operators can develop a multitude of deviated, tangential boreholes from an original, single
borehole once this borehole reaches the desired horizontal horizon.

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2.2.3.3	Drilling Conditions

Wesola Mine personnel have experienced borehole stability problems when drilling into
overlying strata from galleries in the northwest Saddle Seam area and attribute this to
competent rock and adverse stress conditions relating to previous over-mining. In these
conditions, the boreholes were sheared by discrete fracturing and in some cases did not
produce any gas from the gob area after undermining.

When determining the required horizontal target and appropriate drilling procedures, Wesola
and ZOK drilling experience will be invaluable.

2.2.3.4	Capabilities of the Drilling Equipment

Critical to this project is the maximum vertical deflection rate that the equipment and drilling
tools attain from a set inclination at the drill site. These parameters for site selection and
targeting assessments are needed. The directional drilling equipment presented herein can
deflect vertically at a maximum rate of up to one degree within approximately three meters,
depending upon the composition of the strata. The equipment can incline the drill feed frame 15
degrees from horizontal.

2.2.4 Directional Drilling Costs

To apply directional drilling technology at Wesola to develop horizontal gob boreholes, imported
drilling equipment is required. It must be approved by the Polish Higher Mining Authority for use
in Polish mines and Polish drilling technicians must be trained.

Estimated Costs for directional drilling to develop horizontal gob boreholes at Wesola assume
that a trained third-party contractor (ZOK or new entity) performs the drilling on a cost-per-meter
basis.

2.2.4.1	Polish Approval of Equipment

As per Polish Geological and Mining Law (Dziennik Ustaw Rzeczypospolieej Polskiej of 1994),
No. 92, Item 34, underground drilling equipment must be approved by the President of the
Higher Mining Authority in Katowice before it is used in Polish mines. For approval, an
application must be filed with technical and safety specifications of the equipment for review by
a research institute, and a fee must be paid to the Ministry of Finance. The institute may
request that the applicant pay for research and testing. Attachment 4 presents details of the
approval process, including contact information for the Polish Higher Mining Authority.

The specified permissible drilling equipment is to be built to United Kingdom coal mine
permissibility standards. These meet the most stringent permissibility standards and will
expedite the approval process (anticipated to be not more than three months). Estimated costs
for approval of permissible drilling equipment are US$40,000.

2.2.4.2	Directional Drilling Training

Directional drilling training, involving initial classroom time along with field demonstrations
(actually drilling from a site at the Wesola Mine), will be necessary. Classroom sessions will
cover drill operation, borehole trajectory control, surveying, tool maintenance, trouble shooting,

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and system applications. Field training will involve an initial demonstration of directional drilling
(one borehole would be drilled to completion), and subsequent active participation of Polish
drilling personnel with supervision. This report estimates a two-man, three-month training effort
totaling US$140,000, including other direct costs.

2.2.4.3 Horizontal Gob Borehole Development Costs

These costs include: (1) labor to develop the drilling site, (2) procurement and installation costs
for the wellhead assembly, and (3) directional drilling costs, assuming a contractor is hired to
case and drill three overlying horizontal gob boreholes from one drilling station. Directional
drilling cost estimates use rates charged by contracting companies in the United States adjusted
for differences in labor costs. Table 2.4 presents the costs to develop three horizontal gob
boreholes from one drill site. Attachment 5 shows site development and drilling rate
calculations.

Development Costs: 3 x 1000 m Horizontal Gob
Borehole

Component

Cost (US$)

Establish Drill Site

$10,250

Wellhead Equipment and Casing

$10,800

Borehole Drilling @ US$50 per m.

$150,000





Total Estimated Costs

$171,050

Table 2.4: Total Estimated Costs for Three Horizontal Gob Boreholes Developed by Drilling Contractor

As only a few boreholes are necessary per longwall panel with the horizontal gob borehole
degasification program, relative to 60 with the overlying galleries, wellhead and gas collection
system maintenance and inspection costs will be minimal.

2.2.5 Benefits of Horizontal Gob Boreholes at the Wesola Mine

Implementing horizontal gob boreholes at the Wesola Mine will reduce gob degasification
system costs, improve current gob gas recovery efficiencies, improve mining productivity, and
increase recovered gas quality. The economic impact of these improvements on Wesola Mine
operations is estimated below.

2.2.5.1 Degasification System Cost Savings

Section 2.1.3.2 estimates the cost of implementing a gob degasification system from overlying
galleries constructed specifically for that purpose. On a per longwall panel basis, that cost is
approximately US$1.16 million. Assuming an average of three drill sites and three horizontal
gob boreholes per drill site for two longwall panels, the development cost estimates for an
equivalent horizontal gob borehole system are US$513,000 for two longwall panels, or
US$256,000 per panel. This represents savings of US$904,000 per longwall panel if all of the
overlying gallery requirements were avoided. Since Wesola may have to use some galleries for

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other purposes, as per Section 2.2.3, it may only avoid a portion of these developments. Table
2.5 projects savings at various levels of reduced requirements for galleries.

Reduction in Gallery Development per
Panel
(%)

Cost Savings US$1,000's
per longwall panel

30

S274

40

S364

50

$454

60

$546

70

$634

Anticipated Gallery Reduction

Table 2.5: Projected Savings for Range of Gallery Development Avoided in the Saddle Area

2.2.5.2	Improved Methane Recovery

Operators can achieve reasonable methane capture efficiencies with the gallery system
because galleries operate independently of mining activity, facilitating borehole placement and
resulting in improved borehole integrity. Also, the proximity of the galleries to the gob simplifies
borehole targeting. Wesola achieves efficiencies of approximately 40 percent (for longwall
districts only, not mine-wide).

Factors that reduce methane capture and recovered gas quality at Wesola include system
control and operation (e.g., coping with the large number of boreholes) concerns relating to
spontaneous combustion, and the impacts of air intrusion through the gob.

Because substantially fewer boreholes are required with the horizontal gob borehole system,
operators need to devote less effort to proper suction control and system inspection and
maintenance. A properly implemented and operated horizontal gob borehole system increases
methane recovery while allowing less air intrusion. Operators can achieve capture efficiencies of
between 60 to 70 percent for longwall districts with this system.

The overall methane recovery efficiency at Wesola will increase with horizontal gob boreholes.
The rate of increase will depend on implementation rate, application underground (because
Wesola may need galleries in some areas), and emissions from coal faces and development
sections (expected to increase as gassier coals are mined). This analysis derived two average
methane recovery efficiency projections. The first assumes an increase in efficiency of 5
percent per year to achieve an average mine efficiency of 26 percent by the year 2005. The
second assumes an aggressive 10 percent increase per year to achieve a mine recovery
efficiency of 40 percent by 2005. The proposed drilling and power generation project considers
the more conservative 5 percent per year schedule.

2.2.5.3	Increased Coal Production

At the Wesola Mine, any improvements to system capture efficiency reduces the frequent down
times attributed to high methane concentrations at working faces. Wesola presently encounters
mine-wide methane production delays of between 4,000 and 7,320 minutes over a one-month

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period. In gassy conditions, average daily longwall production is approximately 1,875 tonnes
per day (2,900 tonnes per day average for Longwall 1016a), while under ideal conditions (no
gas, geologic, or equipment delays), operators have achieved peak daily production rates of
3,500 to 4,000 tonnes per day. Table 2.6 projects annual revenue benefits to Wesola, per
longwall panel, with improvements to district degasification system efficiency. This table
assumes that Wesola could achieve, on average, 60 percent of ideal coal production rates (i.e.,
2,400 tonnes per day per longwall), if gas delays were negated. The table further assumes that
all gas delays are mitigated with a district degasification system efficiency of 60 percent (present
district system efficiencies equal approximately 40 percent).

District Degasification
Efficiency
(%)

Average Daily Coal
Production
per Longwall
(t/d)

Projected Increase in
Annual Coal Revenues
US$1,000's per Panel*

40

1,875

$0

45

2,005

$624

50

2,135

$1,248

55

2,265

$1,872

60

2,400

$2,520

*Assumes 250 production days per year, and that clean coal is 80% of ROM, and US$24 per tonne coal.

Table 2.6: Projected Annual Revenue Gains for a Range of Degasification Improvement in the Saddle

Area on a per Longwall Basis

2.2.5.4 Total Cost Advantage

Table 2.7 presents the potential total annual cost advantage of the horizontal gob boreholes
relative to the gallery system for the range of coal production improvements and avoided gallery
costs for a single longwall in the Saddle Area.

Reduction in Gallery Development (%)

Degasification
Efficiency (%)

30

40

50

60

70

40

$161

$228

$302

$390

$477

45

$785

$852

$926

$1,014

$1,101

50

$1,409

$1,476

$1,550

$1,638

$1,725

55

$2,033

$2,100

$2,174

$2,262

$2,349

60

$2,681

$2,748

$2,822

$2,910

$2,997

Anticipated Gallery Reduction

Table 2.7: Projected Total Annual Cost Benefit (US$1,000's) for Range of Avoided Gallery Development
and Degasification Improvement in the Saddle Area on a per Longwall Basis

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2.2.6 Application at Other Mines in the Upper Silesian Coal Basin

Coal operators at other gassy mines in the Upper Silesian Coal Basin use the overlying gallery
system of longwall gob degasification, specifically: Nadwislanska Spokla Weglowa S.A.'s
Brezeszcze and Silesia Mines, Katowice Holding Company's neighboring Staszic Mine, and
Jastrzebska Spokla Weglowa S.A.'s Morcinek and Krupinski Mines. Drainage engineers
familiar with the mining conditions in the Basin indicate that horizontal gob boreholes will likely
replace overlying degasification galleries at mines that exploit shallower reserves, and where
vertical distances between mined seams are greater. These operations would be less prone to
adverse stress conditions and will not require overlying galleries for injection of backfill
materials.

2.3 Proposed Gas Turbine Power Generation Facility

The project proposed herein considers a gas turbine facility that uses all of the methane drained
from the mine, supplemented with methane, in concentrations of less than one percent, from the
mine's ventilation exhaust shaft (used as combustion intake air), to generate both power and
heat. The proposed project would provide more efficient use of the drained methane gas and
provide cost benefits to both the Wesola Mine and ZEC.

2.3.1	Methane from Wesola's Drainage Plant

As shown on Figure 2.1, the Wesola Mine presently recovers between 12,000 and 25,000 m3of
coal mine methane per day as a mixture of methane and air (on average 61 percent methane
on a volume basis). As presented in Section 2.1.2.7, the mine sells on average, 65 percent of
this gas to ZEC to fuel mine-site boilers; the unused gas vents to the atmosphere. The mine
sells the drained methane for US$0,022 per cubic meter of methane, which in 1996, generated
revenues of approximately US$106,000.

The volume of methane drained per day by Wesola is sufficient to fuel a gas turbine generating
between 2.0 and 2.5 MWe, depending on efficiency. The mine anticipates that methane
emissions will increase by 10 percent by the year 2000, and then remain relatively constant
through the year 2005. They expect to produce coal at decreased rates from increasingly
gassier seams (60 percent of seams mined in 2005 are expected to have in-situ gas contents of
greater than 8 m3 per tonne). With improved methane drainage techniques and higher
degasification system efficiencies, the mine could supply sufficient gas to generate up to 4
MWe. Figure 2.6 presents projected methane emissions and drainage volumes (with the 5 and
10 percent per year improved drainage efficiency schedules) for the next ten years.

2.3.2	Wesola Mine Power / Heat Demands and Costs
2.3.2.1 Power

The Wesola Mine uses over 150,000 MW-h and pays over US$6 million per year for power.
Their power purchase contract is similar in structure to those negotiated in the United States
where the mine pays a monthly demand charge (for 32 MW), a premium for 15-minute peak
demand per month on a MW basis, and consumption charges depending on time of use (peak
AM, peak PM, and night). Figure 2.7 presents the monthly costs of power for each of the cost
components in the purchase agreement for 1996.

24


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~	Volume Drained with 5% Increase in Efficiency per Year

~	Volume Drained with 10% Increase in Efficiency per Year

~	Projected Methane Liberation

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Figure 2.6: Projected Methane Liberations and Methane Drained with Improved Degasification

Efficiency (5 and 10% Increase per year after 1996)

The Wesola Mine's time-weighted average cost of consumed power (energy, not demand) for
1996 is US$0,031 per kilowatt hour (kW-hr). Accounting for demand charges, Wesola pays an
average total cost of power of US$0,038 on a kW-hr consumed basis. A detailed presentation
of power demand and consumption costs is presented in Attachment 7.

Wesola management anticipates that the mine's power demand will gradually increase over the
next 10 years as ventilation demands and haul distances increase; they anticipate a 2.7 MW
increase in 15-minute peak demand power between 1996 and 2005. Improved degasification
efficiencies will reduce this projection.

2.3.2.3 Heat

The Wesola Mine purchases heat from ZEC at an average price of US$4.85 per giga joule (GJ).
In 1996, the mine purchased over 250,000 GJ (for US$1.2 million). Peak mine heat demands in
winter exceed 18 MWth, while summer demands decrease to approximately 2 MWth.

Mine engineers indicate that an additional 2 to 6 MWth could be used for operation of
absorption chillers to satisfy future underground mine refrigeration requirements. Wesola
engineers anticipate refrigerating the mine's ventilation air at deeper levels where they expect
virgin rock temperatures exceeding 40°C.

25


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700,000

Figure 2.7: Power Costs by Month and Cost Component for 1996

2.3.3 ZEC Costs and Revenues

Established by the Katowice Holding Company, ZEC operates the two coalbed methane and
coal-fired boiler houses on the Wesola Mine property. The Wesola Mine and ZEC exchange the
commodities listed in Table 2.8 at the rates indicated.

Key Parameters of ZEC's Operations

Rate

Coalbed Methane Purchase Price

$.67

Coal Purchase Price ($/GJ)

$1.69

Water Purchase Price ($/m3)

$.04

Price of Heat to Wesola ($/GJ)

$4.85

Table 2.8: Key Parameters of ZEC's Operations

26


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ZEC revenues from heat sales generated by gas for 1996 are approximately US$655,000.
Figure 2.8 presents revenues by month for heat sales generated by coal and gas for 1996,
assuming mine and market heat prices are the same. The 1996 cash flows to and from ZEC,
the Wesola Mine, and the market (for district heat), are presented for the commodities of
interest on Figure 2.9 for the year 1996. As indicated on the figure, in 1996, ZEC's net income
from trade with the Wesola Mine was approximately US$454,000.

~	Heat Generated from Coal

~	Heat Generated from Gas

Figure 2.8: ZEC Revenues from Heat Generated from Gas and Coal by Month for 1996

27


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* assumes same market and mine heat price

ZEC NET INCOME FROM TRADE WITH WESOLA

US$1,000's

Heat Sold

$1,218

Methane Purchased

($106)

Coal Purchased

($658)

Water Purchased

Negligible

NET

$454

Figure 2.9: 1996 ZEC Income from Commodities Traded with the Wesola Mine

ZEC and boiler houses operated by the local utility meet district heating demands in the
Myslowice township. As Myslowice is a developed area, local planners do not anticipate
increased heating demands over the next ten years, except as demanded by changes in
climatic conditions.

This report's analysis of the proposed coalbed methane power generation and heat facility does
not impair income currently earned by ZEC heat sales. That guideline is important until the
Wesola Mine's heat demands increase with the installation of absorption chillers for
underground refrigeration.

2.3.4 Proposed Power and Heat Generation Facility Configuration

The proposed project will generate power and heat using a gas turbine fueled by drained coal
mine methane and combustion air from a ventilation exhaust shaft. The proposed facility will be
designed to accommodate additional modular power and heat generating units as the mine's
methane liberation and drainage efficiencies increase.

2.3.4.1 Gas Turbine

The gas turbine proposed for this project was selected to consume the maximum average daily
volume of methane presently drained by the Wesola Mine and still operate with lower available
fuel volumes at a reduced capacity. A review of turbine vendor performance specifications

28


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located a turbine suitable for the available fuel with the best heat rate (i.e., the ABB GT-5 turbine
specified in Table 2.9.) Attachment 8 presents detailed performance specifications.

GT-5 Turbine Performance Item

Specification

Gross Power Output at ISO Conditions (MW)

2.712

Heat Rate at ISO Conditions (kJ/kWe-h)

13,245

100% CH4 Requirement at ISO Conditions (sm3pd)

26,021

Generating Efficiency at ISO Conditions (%)

27.4

Total Heat Generated at ISO Conditions (MW)

7.2

Combustion Intake Mass Flow Rate (kg/s)

15.0

Table 2.9: ABB GT-5 Turbine Specifications under ISO Conditions

2.3.4.2	Impact of Methane in Combustion Air

Because the turbine will be fueled by gob gas, a methane/air mixture of approximately 60
percent methane in air, some of the excess air required for combustion is provided with the fuel
(i.e., 0.200 m3/s, or 0.241 kg/s at standard conditions). Introducing combustion air from the
mine's ventilation exhaust shaft (Waclaw Shaft), which discharges air with a methane
concentration of approximately 0.2 percent, will provide approximately 0.025 m3/s, or 2,160
m3/day of methane (0.016 kg/s at standard conditions), which contributes to a little over 2
percent of the turbine's fuel requirement. Note that the air in the fuel and the methane in the
combustion intake air represents a net increase in the air-to-fuel ratio (although minimal), and
should not affect turbine performance.

2.3.4.3	Waste Heat Boiler

As per Attachment 8, manufacturer specifications indicate that the turbine discharge gases will
be at 446 °C. The effluent will contain oxygen and nitrogen at concentrations of 15 and 76
percent by volume, respectively. Using a waste heat boiler from the gas turbine's manufacturer,
the proposed installation will recover approximately 40 percent of the heat rate, or 3.96 MWth at
ISO conditions. The unfired boiler will supply the existing heat exchanger with water at 70°C, as
available from ZEC from the district heating system return, and will provide 10,450 GJ per
month of thermal energy under ideal and ISO conditions.

2.3.4.4	Site Location

The power and heat generation plant should be sited adjacent to the Waclaw ventilation exhaust
shaft and gas drainage plant on the Wesola Mine property as shown on Figure 2.10. The power
plant footprint is approximately 5 m x 10 m. The plant will be interconnected to the ventilation
exhaust shaft by ducting, a short gas supply line, and insulated water inlet and return lines.

29


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Wesola Men and Materials and Hoisting Shafts

150 m

Waciaw Ventilation Shaft

ZEC 30 MWth Boiler
House

Methane Drainage Plant

Proposed Power Plant Site

ZEC 1.4 MWth Boiler House

2000 m

Figure 2.10: Proposed Site Layout for the Power Plant on Wesola Mine Property

2.3.5 Proposed Power and Heat Generation Rates

The proposed power and heat facility will operate so that a favorable rate can be offered to the
Wesola Mine and ZEC for power and heat, respectively.

2.3.5.1 Avoided Cost of Power

The proposed project will offset between 2 and 2.5 MWe presently purchased by the Wesola
Mine from the local utility. Because facility availability will be dependent to a large part on the
recovery of gob gas from underground activities, the Wesola Mine must implement a system of
load shedding to use the facility to its advantage. Wth load shedding, the facility would allow
the mine to reduce its demand power from 32 MW to 30 MW or below.

Table 2.10 presents the anticipated distribution of power demand and use charges from the
utility and the proposed project with Wesola's 1996 data, assuming a 95 percent turbine
availability and the peak demand reduction discussed above. The table shows that the project's
avoided cost of power is US$0,036 per kW-h consumed.

30


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Power Cost Components

Totals for
1996

Utility Charges

Proposed Project
Charges

Demand Power (MW)

12x32 MW

12x30 MW

12x2 MW

Cost of Demand ($)

446,135

418,251

27,883

Cost per MW ($)

1,162

1,162

1,162









15 Min Peak Power (MW)

12x25.8 MW

12x23.8 MW

12x2 MW

Cost of Peak Power ($)

617,106

569,345

47,761

Cost per MW ($)

1,990

1,990

1,990









Total Consumption MW-h

159,030

142,432

16,598

Consumption Cost ($)

4,963,518

4,445,462

518,056

Cost per kW-h ($)

3.121

3.121

3.121









Total Cost ($)

6,026,758

5,433,058

593,700

Total Cost per kW-h ($)

.038

.038

.036

Table 2.10: Anticipated Cost Distribution Between Utility and the Project Using the Wesola Mine's

1996 Data

2.3.5.2 Cost of Heat

The most logical business arrangement with ZEC is to have the project: (1) compensate ZEC for
the increased costs of generating heat with coal (US$1.69 versus US$0.67 perGJ), and (2) not
compete with ZEC in heat sales. Table 2.11 summarizes the impact of the proposed power and
heat project on ZEC based on 1996 information, assuming similar heat demand and use of all of
the methane drained. The data show that if the project sold all of its heat to ZEC at a favorable
price of US$3.61 per GJ (Wesola pays US$4.85 per GJ), for resale to the mine or market, the
project's impacts on ZEC are minimized.

Heat Component

Value

Heat Demand for 1996 (GJ)

461,390

Heat to be Supplied by Project (GJ)

110,000*

Net Heat to be Supplied by ZEC (GJ)

351,390

ZEC's Cost to Supply (Fired by Gas and Coal)**

$456,960

ZEC's Cost to Supply (Fired by Coal Only)

$593,850

Net Increase in Cost to ZEC by Firing with Coal

$136,890

Market Value of Heat Supplied by Project

$533,500

Less Net Increase in Production Costs to ZEC

$136,890

Favored Heat Purchase Value

$396,610

Favored Heat Purchase Rate (per GJ)

$3.61

*Assumes turbine at full capacity and 95% availability.
** Assumes cost of commodities only (gas, coal, etc.)

Table 2.11: Favorable Price for Heat to ZEC to Compensate for Project's Gas Use

31


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2.3.6 Capital and Operating Costs for the Proposed Facility

2.3.6.1	Facility Capital Costs

Capital cost estimates for the proposed power and heat generation facility are approximately
US$2.8 million as itemized in Table 2.12. This cost includes shipping and duty for the imported
equipment, and all of the anticipated taxes for purchased goods and services. Costs not
included are related to business start-up such as project development costs, transaction costs,
interest during construction, and operating capital. Section 3 addresses these costs.

2.3.6.2	Facility Operating Costs

The estimated operating costs for the proposed facility are US$300,000 per year as itemized in
Table 2.13. This cost does not account for the cost of gas purchased by the project, or the
costs of the parasitic gas and power losses (i.e., by the compressor, in-line fan, and water pump
as noted in the table). These costs are considered in the economic analyses presented in
Section 4.

32


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Siz9

















fl IS?)

fl IS?)

fl IS?)



















onn \a/\i

1

n



































30

Aj on

M/A

AJ













<£ RCn OQC



























It O O-JO COG

Table 2.12: Capital Cost Estimate for Power and Heat Generation Facility


-------
Operating Costs for Wesola Mine Power and Heat Generation Facility

r.nmpnnpnt

Make/Type

Si7P

Quantity

Rate

Monthly Hosts

Annual Host









a is.*i

a is.*i

a is.*i

Ras Prorpssing













Ras tn Oppratp P.nmprpRRnr*

Mpthanp frnm PSnh PSas

1 fififl

nmpd







P.nmprpRRnr Si ipplips

Fluids and Pnnsi imahlps



1

SRnn ppr mn

s mn nn

s 9 Rnn

P.nmprpssnr Maint/Rppair

D F> Ph/prhanl ppr yr



n r

$9 nnn ppr mn

$ 1 nnn nn

s 19 nnn

Support Fqnipmpnt Snpplips anrl Maintpnanrp





1

smn ppr mn

$ mn nn

s fi nnn

Subtotal











$ 97 finn















Pnwpr feneration













Pnwprtn Driup In-I inp Fan*

3F> kW In-I inp Avial

an7 nnn

kW-h/yr







Maintpnannp/lnsppntinn/Rppairs

ARR Sprvinp Prngram





s nnR / kw-h

$ q-iRann

$ im9m

Suhtotal











S 1in9Fifi















Heat Generation













Pnwprtn Driup P.pntrifi igal Pump*

?D kW P.pntrifi igal

i7Rnnn

kW-h/yr





















Operations













Si irfanp Plppratnrc with Rpnpfitc

Tprhnirianc

Fi ill Timp

9

.F> R3fi















General and Administrative**













Managpmpnt with Rpnpfits

Managpr and Annnnntant

Full Timp

1

son nn/hr

s a 44n nn

S 41 9Rn

Insnrannp







S 1 nnn ppr mn

$ 1 nnn nn

s 19 nnn

Subtotal











S S3 9Rn















Other













r.n ntingpnny







1R%



$ 9,7 nm















Total FstimateH Operating Hosts











S 9R3 R73

* Compressor, Fan and pump will be powered by project. Project will purchase gas from Wesola at prescribed rate.

** Assumes that Wesola Mine or ZEC provides office and support staff as necessary

Table 2.13: Annual Operating Cost Estimate for Power and Heat Generation Facility


-------
2.4 Projected Annual Net Incomes from Drilling, Heat, and Power Sales

The projected net annual gross income to the proposed project, including income from drilling, is
presented in Table 2.14. The table assumes that the power generation facility operates at full
load at installed conditions and: (1) sells power at 10 percent less than the avoided cost to the
mine, and (2) sells heat to ZEC at 75 percent of present costs to the mine. A further assumption
is that the new drilling equipment drills 13,600 m per year at a rate of US$50 per meter (see
advance rate and drill availability assumptions in Attachment 5).

Costs

Volume

Rate

Annual Cost

Basis

Gas Purchase (cubic meter)

8.811.264

$0,022

$ 194.663

at Price Paid bv ZEC

Operatina Costs





$ 283.673

Heat and Power Op. Costs

Drillina Costs

13.600

$38.28

$ 520.600

Drillina Costs

Total Costs





$ 998.935





Revenue

Volume

Rate

Annual Revenue

Basis

Power Sales (kW-hr)

19.731.121

$0,032

$ 639.288

Price is 90% of Avoided Cost

Heat (GJ) to ZEC

103.849

$ 3.61

$ 374.894

at 75% of Price to Mine

Drillina (m)

13.600

$50.00

$ 680.000

at $50 per m

Total Revenues





$ 1.694.183













Gross Income





$ 695.247



Table 2.14: Projected Annual Gross Income for Project from Power, Heat, and Drilling with Turbine

Operating at Full Load and 95 Percent Availability

35


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36


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3.0

ASSESSMENT OF PROJECT STRUCTURE OPTIONS

A project structure is the arrangement of ownership and financing supported by contractual
agreements. The structure recognizes "senior money"—low-risk equity capital—and it rewards
high-risk development capital. The structure allows vested interests, the Wesola Mine for
example, to obtain a share of the project in consideration for in-kind services such as free
ground lease and long-term contracts. This section presents the role of the project developer,
the use of a project entity, project ownership issues, and a description of the assumed structure
used for the preliminary cash flow model.

3.1 Role of the Developer

3.1.1	Level of Effort

A developer must take scores of coordinated steps (personally or by contract), that build a
viable project vehicle ruled by a network of contractual agreements and supported by a flow of
funds sufficient enough to reward every participant. Normally the developer's role continues
until closing, after which the developer may assume another project role or turn the project
management over to the project entity. A developer will:

•	Complete project configuration;

•	Obtain development funds;

•	Test technical feasibility;

•	Hire a financial advisor or investment banker;

•	Test financial feasibility;

•	Hire professionals: legal and environmental advisors, analysts, or engineers;

•	Form project structure;

•	Obtain letters of intent (LOI) from each owner and funding source;

•	Negotiate contracts: mine, energy markets, equipment suppliers, or engineering-
procurement-construction (EPC) contractor;

•	Obtain permits: import, environmental, or local;

•	Schedule and manage activities for participants, suppliers, civil servants, funding
sources, or advisors; and

•	Maintain development budget and report to supplier of development funds.

The developer must have the forbearance and perseverance to undertake a process that can
take months, even years, and he must have the fiscal support to sustain him and to pay for the
many services that the project demands before it becomes self-sustaining. A motivated
developer associated with a well-financed entity with access to "patient money" is best qualified
to sustain project demands until closing.

3.1.2	Rewards

Paid developers take no risk and receive no reward except payment for their time. This is the
least common method of project development as a paid developer has little incentive to
succeed. More commonly, developers are motivated by reward (roughly proportional to the
magnitude of the risk), and pay for professional advice, reports, fees, and other out-of-pocket
expenses to fulfill project needs. The mission to Poland did not identify any person or firm with

37


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the interest and financial backing to develop the project without outside support. A preferred
approach is for interested individuals to locate an established entity that has an interest in the
project, and which can provide a source of development funding (see Section 4.1). These
individuals may then arrange to obtain funding for expenses and fees and to negotiate a reward
arrangement to repay risks and efforts based on project milestones as follows:

•	Reimbursement of deferred salary (at closing)

•	Reimbursement of expenses (at closing)

•	Developer's fee (at closing)

•	Bonus on successful start-up

•	Management contract through X years of operation

•	Small equity share

(Note that payment options are subject to competing interests from the development capital
supplier, the equity partners, and the debt suppliers.)

3.2 Use of a Project Entity

Most energy projects, especially those with complex ownership, choose to create a new
corporation or other limited-liability legal entity to create and embody the ownership and
management of the project. The entity is empowered to raise money, make contracts, hire
contractors and personnel, and operate the business. The entity's rights and duties are
described in the contracts drawn up by the developer and the project owners.

During the mission to Poland potential investors expressed a preference for an entity separate
from the Wesola Mine. This step relieves the project from mine-related concerns (e.g., limited
available capital and difficult finances), and facilitates funding from environmental sources (all
mines have environmental liabilities). Most of these investors feel that it is appropriate to
include the mine as a minor shareholder in the project, particularly as the mine would sell gas to
the project and purchase power and heat.

This report does not prescribe a preferable entity, as this is ultimately the project developer's
decision; however, it is apparent that a limited liability company (SP. Zo.o.), or a joint stock
company (S.A.), allows for foreign investment contributions and part ownership. Attachment 9
presents the differences between the two entities available to a foreign investor.

3.3 Discussion of Ownership Options

Ownership shares of the proposed drilling and power generation project at the Wesola Mine
may accrue to entities that have benefited from the project in one of three ways: (1) time and
effort—"sweat equity"— and deferred payment, (2) in-kind services or items of value, and (3)
equity capital (cash).

3.3.1 Sweat Equity and Deferred Payments

These equity forms qualify as high-risk equity, provided they remain in the project well beyond
start-up and through the riskier early operating years.

38


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3.3.1.1	Developer

The most significant incentive for a developer is the potential to earn a share of a project that
could more than compensate him for the risks he has taken. Moreover, investors bringing
equity and debt capital to the project prefer that the developer's share be large enough to entice
him to implement the project with all the means at his disposal.

3.3.1.2	Suppliers

Other major participants may wish to invest time and effort during the development phase.
Normally they will "cash out" at closing, but they may opt to allow the value of their contribution
to remain in the project as part of its capitalization. One example can be an ECP contractor
who donates preliminary design and other engineering services to enable the project to get its
permits. An example of a deferred payment is the major equipment supplier that leaves its final
ten-percent payment "in the project" during the critical first year or two before cashing out.

3.3.2	In-kind Equity

When a major participant donates valuable items or services to a project that requires cash
compensation, it may elect to exchange that item or service for a project ownership share. The
following three subsections discuss potential examples for this drilling and power project.

3.3.2.1	Wesola Mine

The mine is in a position to gain ownership by: (1) providing assistance at the project
development level, (2) providing support to detailed engineering for the surface power facility,
(3) assisting with management during construction (4) donating the site, access rights,
personnel, and any buildings that may be appropriate, and (5) effecting an exclusive power
purchase and gas sales agreement (see Section 3.4.4).

3.3.2.2	ZEC

By using personnel already on site, ZEC can gain an ownership position by assisting at the
development stage and by conducting some of the operating duties, such as monitoring
turbine/generator performance or providing light maintenance, office services, and security.

3.3.2.3	ZOK

ZOK can gain ownership by: (1) providing assistance at the project development level, (2)
guiding the Polish Higher Mining Authority through the equipment approval process, (3)
providing engineering services to incorporate directional drilling into the Wesola Mine's
degasification program, and (4) providing drilling technicians at no cost through the directional
drilling training period. These investments can be traded for either a project share or a
percentage of margins earned on drilling fees collected during the operation phase.

3.3.3	Cash Equity

The proposed drilling and power project will need to receive the majority of equity from an
investor in cash at financial closing. This is especially true of this first-of-its-kind project for the
Polish mining industry. Debt suppliers need assurance that a major share of capital is supplied

39


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by someone who assumes the risk of failure. Fortunately for the proposed project, two
government agencies expressed interest in providing equity capital with favorable terms.

The project qualifies for Polish government assistance because of its strong environmental
benefits. For these reasons, part or all of the equity (including some in the form of a grant), and
some debt, will likely come from national or bilateral agencies. More promising sources of other
equity and debt are discussed below. Attachments 10 and 11 present additional details on
financing sources, including potentially interested foreign programs

3.3.3.1	ECOFUND

The ECOFUND, which manages the "debt for environmental swap" (Attachment 12), can grant
funds for project investment at the closing (up to 30 percent) that will be considered as equity by
the debt suppliers. This capital is "free" in the sense that it need not earn a return (i.e., project
earnings may be applied only to other equity suppliers, thus enhancing their rate of return).

3.3.3.2	The National Fund for Environmental Protection and Water Management ("National Fund")

The National Fund and its local associate, the Voivodship Fund (Attachment 13), provide grants
or cash equity (at National Fund level only) for an ownership position in the project. Although
these funds prefer lending capital (with loan remission provisions), they will consider providing
cash equity for investments in hard assets of commercially viable projects. To compensate for
risk, the funds request strong equity positions (up to 40 percent), in projects developed by new
companies, or by coal mining operations. As the National and Voivodship funds are supported
by royalties on revenues from coal and methane sales and from environmental fees charged to
mines, the funds may apply the earnings from their equity contribution in the project to offset
fees charged to mine entities that are co-participants in the same project (Wesola Mine,
Katowice Holding Co., or ZEC). Although possible, this arrangement for compensating mine
entities that have an ownership interest in the proposed project must be investigated further.

3.3.3.3	Private Sources

The proposed project may need to supplement the above equity sources with private equity.
This investigation does not identify private sources of equity, although a portion of this may
come from the developer funds supplier. Unfortunately, private equity suppliers will demand the
maximum project share for their money, and negotiating an agreement will require a skillful
financial intermediary.

3.4 Structure Assumptions for Financial Model

In developing the financial model to assess the viability of the proposed project, the analysis
assumes that a separate project entity will be formed and owned by equity contributors; equity
will need to represent up to 40 percent of the proposed project capital costs (see Section 3.4.2).
Equity contributions during project operations also need consideration as project owners.

40


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3.4.1 Total Estimated Project Costs

Table 3.1 presents the total estimated capital costs for the proposed project, including project
development, procurement, and construction separated into two categories: hard costs, and
potential sweat and in-kind contributions. The estimate includes an overall project cost
contingency of 7.5 percent.



Components

Costs

Hard Costs

Sweat / In-Kind









Project Development







Proiect DeveloDer

$ 50.000

$ 20.000

$ 30.000

Financial / Bankina

$ 20.000

$ 20.000



Legal. Environmental. Engineering

$ 80.000

$ 50.000

$ 30.000

Permittina

$ 15.000

$ 15.000



Transactions

$ 25.000

$ 25.000



Sub-Total

$ 190.000

$ 130.000

$ 60.000









Proiect Construction







Capital/Interest During Construction

$ 150.000

$ 150.000



Construction Manaaement

$ 20.000

$

$ 20.000









Drillina EauiDment







Procured Cost

$ 992.000

$ 992.000



ADDroval bv Hiaher Minina Authoritv

$ 40.000

$ 32.500

$ 7.500

Directional Drillina Trainina

$ 175.000

$ 140.000

$ 35.000

ShiDDina and Insurance

$ 28.000

$ 28.000



ImDort Duties

$ 204.000

$ 204.000



Taxes

$ 85.680

$ 85.680











Power and Heat EauiDment







Procured Cost

$ 2.278.240

$ 2.278.240



ShiDDina

$ 25.000

$ 25.000



Import Duties

$ 285.713

$ 285.713



Taxes

$ 249.574

$ 249.574











Subtotal

$ 4.533.206

$ 4.470.706

$ 62.500









Total

$ 4.723.206

$ 4.600.706

$ 122.500









7.5 % Continaencv

$ 354.240

$ 345.053

$ 9.188









Total Costs

S 5 077 447

S 4 945 759

S 131 688

Table 3.1: Total Estimated Project Costs (US$)

3.4.2 Financing Structure
3.4.2.1 Debt-to-Equity Ratio

As the proposed project is a first for Poland, the model assumed a 60/40 debt-to-equity ratio.
Later projects may be able to increase debt leveraging with 70/30 and 80/20 ratios. Typically

41


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banks will only lend 80 percent of a project's capital if they have encountered similar and
consistently successful projects.

3.4.2.2	Equity Capital ($1.98 million)

Potential sources for up to 40 percent cash equity include:

•	20 percent from ECOFUND in the form of a grant,

•	10 percent from National Fund, and

•	10 percent from project development and private sources.

3.4.2.3	Sweat and In-kind Equity ($131,688)

The mission identified potential sweat and in-kind sources that can defer, at a minimum,
approximately two percent of total project costs. These include: (1) project development efforts
as defined in Section 3.1 by the developer, the Wesola Mine, ZEC, and ZOK, (2) engineering
and permit assistance, including support of detailed engineering efforts, and assistance with
construction management that can be provided by the Wesola Mine, ZEC, or ZOK, (3)
equipment approval efforts provided by the Wesola Mine or ZOK, and (4) technicians with
drilling experience for training provided by the Wesola Mine or ZOK.

These or other entities can contribute more noncash equity to the project. However, to be
conservative the economic projections kept this contribution to less than three percent of
overall costs.

3.4.3.4	Debt Capital ($2.97 million)

The following are likely sources for the 60 percent debt capital:

•	30 percent from National Fund and/or Voivodship Fund

•	30 percent from commercial banks

3.4.3 Ownership

Project owners will be shareholders (individuals, companies, or financial institutions) that have
contributed equity to the project: either sweat, in-kind, or cash. The financial model simulating
the 60/40 debt-to-equity ratio ("Base Case"), assumed that only half of the equity contribution
represents project ownership because the ECOFUND does not require a share (grant funding).
Equity provided from private sources will require approximately half of the ownership, and the
National and Voivodship funds will request an additional one-third. The remaining one-sixth
interest can be rewarded to the sweat and in-kind contributors. Pending further investigation
and approval (from the State Treasury and others), the National and Voivodship Funds can
reward a portion of their dividends to mine-related co-owners by posting their dividends against
the company's environmental fees.

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3.4.4 Roles for the Wesola Mine

The relationship between the proposed project and the Wesola Mine must be carefully
negotiated because of the critical impact the mine has on the project. Project investors will
insist that the relationship be formalized with a series of agreements.

As the host and supplier of the gas, the Wesola Mine is in an influential position, and ultimately
will decide whether or not the project may go forward. On the other hand, if the mine tries to
control too much of the project or negotiates for unrealistic prices on the gas, drilling fees, and
thermal energy prices, it may jeopardize the project's financial viability. In order to resolve this
issue, it is advised that the mine be provided an earned ownership in the project and that the
project negotiate power purchase and heat sales agreements that benefit the mine.

To earn an ownership position, the Wesola Mine may provide in-kind services during project
development and construction as presented above, or it may provide the following during
operations:

•	Host project's power plant, office, means of access, pipelines, or power lines;

•	Operational support personnel;

•	Gas at the same subsidized rate negotiated with ZEC; or

•	Gas supply coordination with project needs.

In return, the project will supply power and heat on a favored-nation basis (less than avoided
cost and below market rates), and possibly reduce the mine's environmental fee obligations.

43


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44


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4.0 ECONOMIC ANALYSIS

This section presents the parameters used in the financial evaluations of the proposed project,
the base case scenario and sensitivity conditions, project cash flows, and key economic results.

4.1 Parameters Incorporated in Financial Analysis

4.1.1 General Assumptions

4.1.1.1	Project Structure

As described in Section 3, the analysis assumes that the project is owned and operated by a
separate entity, either a limited liability (Sp. Z o.o.) or joint stock company (S.A.) comprised of
equity contributors.

The Wesola Mine, ZEC, and ZOK, all with equity stakes in the project, provide operational
assistance for the surface power and heat generation facility, and underground drilling.
Underground drilling is not limited to the Wesola Mine.

Economic analyses do not account for the cost savings to the mine for power and
degasification, or for benefits to ZEC. These are quantified separately in Section 5.

4.1.1.2	Project Period

The analysis considered a ten-year project period without additional investments to expand
power and heat generation, or drilling capabilities.

4.1.1.3	Project Size

The proposed combined heat and power project is of sufficient size to use all of the gas
currently drained by the Wesola Mine (including some ventilation air as combustion air), with the
provision to use additional drained gas. Projecting future methane liberations and an
anticipated increase in methane drainage efficiency with the introduction of new drilling
technology, the project will require all of the methane drained for the first three years, after
which additional gas would be available for heating or additional power capacity as needed.
Attachment 14 presents an economic projection of the power and heat facility with increased
methane liberation and capture.

As indicated in Section 2, the project will drill horizontal gob boreholes at the Wesola Mine as
necessary and then move to other mine operations in the Upper Silesian Basin (Section 2.2.5).
The financial analyses assume that the project will drill two shifts per day and that the drill will
operate approximately 80 percent of the time. The remaining time accounts for movement of
the drill to other drilling locations. Wth an average advance rate of 32 m per shift for drilling in
rock, the equipment will drill approximately 13,600 m per year.

4.1.1.4	Project Revenues

Total project revenues depend on pricing schedules set for the base case and sensitivity
analyses discussed below. Attachment 14 presents project revenues for the base case period.

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4.1.1.5 Project Costs

Section 3, Table 3.1 presents total project capital costs at US$5.0 million. Annual estimated
operating costs are approximately US$1.0 million per year as summarized separately for drilling
and power and heat in Table 2.14 for operations assuming that the project pays the Wesola
Mine the same price for gas as ZEC presently pays. Attachment 14 contains itemized expenses
and projections over the project period.

4.1.2	Economic Parameters

4.1.2.1	Inflation

The Polish inflation rate at the time of the mission was approximately 17 percent, but
economists predict potentially dramatic reductions. In order to facilitate interpretation, all
financial analyses are on a constant U.S. dollar basis except as discussed below.

4.1.2.2	Energy Prices

Economists, including the regulating Ministry of Finance, forecast that energy prices will
escalate at 5 percent above inflation as these are presently below economic costs. Energy
prices escalated in this analysis include those for gas, power, and heat.

4.1.2.3	Interest Rates

Annual interest rates for loans obtained from commercial banks in Poland range between 23
and 26 percent at the time of the mission. Adjusting for inflation at 17 percent, the effective, or
real, rate is calculated at between 5.1 and 7.7 percent. For the financial analyses, rates were
selected to represent loans from both government and commercial banks as presented for the
base case and sensitivity conditions below. Loan interest rates were kept constant through the
course of the project period.

4.1.3	Taxes

4.1.3.1	Corporate Tax Rate

As per the Ministry of Finance, the corporate tax rate for both limited liability and joint stock
companies in Poland is currently 38 percent regardless of income. According to legislation
enacted in 1996, this rate will decrease by 2 percent per year to reach a level of 32 percent by
the year 2000. There are no additional local or regional corporate income taxes in Poland.

The financial analyses accounted for the varying tax schedule and incorporated the following
allowances that reduce gross income, as prescribed by Polish tax law.

4.1.3.2	Allowances

• Business Losses: Business losses incurred, as calculated for tax purposes, may be
carried forward. Losses incurred during one fiscal year can offset income earned during

46


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the next three consecutive years in equal portions provided that profits in any of these
years cover at least one-third of the loss.

•	Depreciation: Polish tax law allows depreciation of tangible equipment, typically by the
straight-line method, or by accelerated methods with approval. As per the Ministry of
Finance, Bill of Register No. 7, Position 34, assets valued over US$750 can be
depreciated according to group. For drilling equipment, Group 510, straight-line
allowances are between 17 to 20 percent per year. For machines and equipment
relating to mining, Group 51, the annual allowance is between 14 and 17 percent. The
financial analyses depreciated assets using the straight-line method, those related to
drilling at 17 percent and those related to the surface facility at 14 percent.

•	Amortization: Polish tax law also allows amortization of intangible assets. The financial
analyses amortized these over a five-year period.

•	Other: The financial model assumed that import duties and taxes paid on equipment
were amortized over five years to offset revenues.

4.1.3.3 Value Added Tax (VAT)

VAT paid by the project can be used to offset VAT collected by the project from sales of power
and heat. In Poland, VAT is treated separately and any surplus VAT paid can be used to offset
future VAT collected. Net VAT is due to the taxation office.

The financial analyses assumed that the VAT paid on purchase of equipment and purchase of
gas is offset by VAT collected from power, heat, and drilling sales.

4.2 Base Case and Sensitivity Conditions

4.2.1 Financing Structure

4.2.1.1	Debt-to-Equity Ratio

As per Section 3.4, the base case debt-to-equity ratio used for the financial analyses is 60/40.
Base case equity and debt sources are designated in Section 3.4.2. We selected this condition
to represent the worst case (typical of new projects) as more costly hard currency is required
relative to leveraged, or lower-cost, money.

Analyses for debt-to-equity ratios of 60/40 and 70/30 are made, both with and without the
ECOFUND grant of 20 percent of the project costs (see Section 3).

4.2.1.2	Interest Rate

For the financial analyses, a real interest rate is used for debt capital to accurately represent the
proportion of debt sought by the project from the government (5 percent) and commercial
sources (8 percent). Based on information presented in Section 3, a blended rate of 6.5 percent
for the 60/40 debt-to-equity ratio (base case with and without ECOFUND grant) is calculated, as
is 6.7 percent for the 70/30 condition, also with and without the grant. Note that the National

47


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and Voivodship fund debt (30 percent) and equity contribution (10 percent National Fund) is
maintained for both debt-to-equity ratios.

4.2.1.3 Remissions

The analyses assume that the loan from the National and Voivodship Funds qualifies for
remission after the project fulfills its environmental obligations (three years to operate power and
heat facility to peak load). The analyses simulate payment of 50 percent of the principal over
three years and that remission is granted for 40 percent of the original debt. The project pays
interest over three years on the average principal balance and then pays the remaining 10
percent of the principal in Year 4 (with interest).

4.2.2 Prices

Table 4.1 presents first-year base case prices charged by the project for drilling, heat, and
power. All analyses assume that the mine charges the project the same rates for gas and water
as presently charged to ZEC. Table 4.1 also includes these prices. The analysis escalated only
prices for power and heat.

Commodity

Price
(US$)

Comments

Power ($/kW-hr)

.032

10% less than avoided cost

Heat ($/GJ)

3.61

75% of price paid by mine

Drilling ($/m)

50.00

See Attachment 3

Gas ($/m3)

.022

Price presently paid by ZEC

Water ($/m3)

.43

Price presently paid by ZEC

Table 4.1: First-Year Prices for Commodities Used in Analyses

First-year prices for the sensitivity evaluations are shown in Table 4.2. Power and heat prices
charged by the project were further reduced.

Commodity

Price
(US$)

Comments

Power ($/kW-hr)

.029

20% less than avoided cost

Heat ($/GJ)

3.15

65% of price paid by mine

Drilling ($/m)

50.00

See Attachment 3

Gas ($/m3)

.022

Price presently paid by ZEC

Water ($/m3)

.43

Price presently paid by ZEC

Table 4.2: First-Year Prices for Commodities Used in Sensitivity Analyses

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4.3 Results

4.3.1	Base Case with ECOFUND

Table 4.4 presents the cash flow statement for the base case model (using the base case
commodity prices as presented in Table 4.1) with an ECOFUND grant of US$945,000. The
statement presents the project's anticipated constant dollar cash flow over the project period
and calculates the project's internal rate of return (IRR), net present value (NPV) at a rate of
return on investment of 10 percent, and its pay-back period (years to pay initial investment).

With the base case commodity prices and with the ECOFUND Grant, the project would provide
an IRR of 31 percent and a net present value US$1.07 million, and would pay the initial equity
contribution of US$945,000 in 4.9 years.

4.3.2	Base Case without ECOFUND

Table 4.5 presents the cash flow statement for the base case model (using the base case
commodity prices in Table 4.1), but without a grant from the ECOFUND. Without the grant, the
project is marginally economically viable, with a projected internal rate of return of slightly more
than 10 percent, an NPV of less than US$50 thousand (at 10 percent), and a pay-back period of
7 years. The initial equity contribution to project in this case is approximately US$2.0 million.

4.3.3	Sensitivity Analyses

Further analyses vary the prices the project would charge the Wesola Mine and ZEC for power
and heat, and the project financing structure. Table 4.2 presents the sales prices for power and
heat used for the sensitivity analyses (power price at 20 percent below avoided cost and heat
price at 65 percent of current market price). The alternative debt-to-equity ratio investigated in
the sensitivity studies is 70 percent debt and 30 percent equity.

Table 4.3 presents a matrix of the commodity pricing and project finance permutations
evaluated and the key economic indicators calculated for each scenario.

4.4 Summary of Economic Analyses

Economic analyses of the proposed power, heat, and drilling project were conducted with the
parameters provided from the recommended project financing sources as presented in Section
3.4.2. These include both debt and equity financing from government sponsored sources which
fund environmental projects, and from commercial and/or private banks and investors. These
analyses evaluate the impact of the ECOFUND grant, a 20 percent unearned contribution of
capital (US$945,000), and of alternate debt-to-equity ratios (60/40 and 70/30). In all cases, the
government sponsored equity and debt sources (National and Voivodship Funds), contribute a
maximum of 10 percent of equity, and 30 percent debt. The analyses assume that the
remaining balance of equity and debt is provided by interested commercial banks and private
investors.

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Without ECOFUND Grant

IRR

(%)

NPV (10%)
($1000's)

Pay Back
Period
(Years)

Debt to Equity 60/40, Base Case
Prices

10.3

40

7.0

Debt to Equity 60/40, Sensitivity
Prices

5.4

(541)

8.3

Debt to Equity 70/30, Base Case
Prices

10.5

554

7.4

Debt to Equity 70/30, Sensitivity
Prices

5.5

(507)

8.3

With ECOFUND Grant







Debt to Equity 60/40, Base Case
Prices

23.9

1,067

4.9

Debt to Equity 60/40, Sensitivity
Prices

14.5

352

6.5

Debt to Equity 70/30, Base Case
Prices

28.0

1,080

4.8

Debt to Equity 70/30, Sensitivity
Prices

18.4

520

6.3

Table 4.3 Scenarios Simulated with Key Economic Indicators

The economic analyses are made on a constant dollar basis, with escalation of energy prices as
these are projected to exceed Poland's inflation projections (five percent), and incorporate other
financial assumptions from this section. The analyses also specifically define the prices of
commodities bought and sold by the project and for providing drilling services. Prices of
commodities purchased by the project are at current market (between the Wesola Mine and
ZEC) value, while prices for power and heat produced by the project are favorable to both the
Wesola Mine and ZEC. The proposed price for heat sold by the project to ZEC considers ZEC's
additional costs of producing heat with coal rather than coalbed methane.

Based on the specific parameters and assumptions described above, the financial analyses
indicate that the proposed power, heat, and drilling project at the Wesola Mine is economically
viable. The sensitivity studies show that the project is only marginally viable without the
ECOFUND Grant and with base case power and heat prices. It is likely that very favorable heat
and gas prices, such as those used in the sensitivity analyses, will be necessary to interest the
Wesola Mine and ZEC. Both of these entities are key to the proposed project (the project
trades commodities solely with these entities) and hold, therefore, very influential positions. The
analyses show that the ECOFUND grant is necessary with very favorable heat and gas prices.
It is also required to attract commercial and private debt and equity sources, and to increase the
likelihood of project development.

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CASH FLOW STATEMENT

Years

0

1

2

3

4

5

6

7

8

9

10

Revenue and Expenditures

























Revenue





$ 1,412,963

$ 1,557,913

$ 1,711,998

$ 1,836,876

$ 1,894,720

$ 1,955,456

$ 2,019,228

$ 2,086,190

$ 2,156,499

$ 2,230,324

Equity Investment

40% Eq.Less ECOFUND Grant

$ 945,292





















Operating Costs





$ 963,306

$ 984,435

$ 1,008,224

$ 1,029,619

$ 1,040,886

$ 1,052,717

$ 1,065,139

$ 1,078,183

$ 1,091,878

$ 1,106,258

Gross Margin



$ (945,292)

$ 449,657

$ 573,478

$ 703,774

$ 807,257

$ 853,833

$ 902,738

$ 954,089

$ 1,008,007

$ 1,064,621

$ 1,124,066



Taxes

























Depreciation

Tangible Equipment



$ (487,594)

$ (487,594)

$ (487,594)

$ (487,594)

$ (487,594)

$ (467,754)

$ (318,954)

$ (45,565)

$

$

Interest for National/Voivodship Fund

40% Forg.after 50% Principal Paid



$ (64,977)

$ (53,137)

$ (41,297)

$ (33,609)

$

$

$

$

$

$

Interest for Commercial Loan

Over 7 Years



$ (113,435)

$ (100,722)

$ (86,992)

$ (72,164)

$ (56,149)

$ (38,853)

$ (20,174)

$

$

$

Amortizataion

Over 5 Years



$ (203,593)

$ (203,593)

$ (203,593)

$ (203,593)

$ (203,593)

$

$

$

$

$

Business Loss Carry Forward

3 Years Amortization





$

$

$ (3,432)

$ (35,499)

$ (38,568)

$

$

$

$

Corporate Tax

40% to 32% by 2000



$

$

$

$ 2,334

$ 22,719

$ 114,420

$ 196,788

$ 307,982

$ 340,679

$ 359,701

Net Income After Tax





$ (419,942)

$ (271,568)

$ (115,703)

$ 4,531

$ 48,279

$ 243,144

$ 418,174

$ 654,461

$ 723,942

$ 764,365



Cash Flow Adjustment

























Plus Depreciation





$ 487,594

$ 487,594

$ 487,594

$ 487,594

$ 487,594

$ 467,754

$ 318,954

$ 45,565

$

$

Plus Amortization





$ 203,593

$ 203,593

$ 203,593

$ 203,593

$ 203,593

$

$

$

$

$

Plus Loss Carry Forward





$

$

$

$ 3,432

$ 35,499

$ 38,568

$

$

$

$

Less Principal Paid - Funds

16.7% per year for 3 years



$ (236,796)

$ (236,796)

$ (236,796)

$ (70,755)

$

$

$

$

$

$

Less Principal Paid - Bank

Payment



$ (158,912)

$ (171,625)

$ (185,355)

$ (200,183)

$ (216,198)

$ (233,493)

$ (252,173)

$

$

$



Cash Flows

























Net Cash Flow



$ (945,292)

$ (124,463)

$ 11,199

$ 153,334

$ 428,212

$ 558,767

$ 515,971

$ 484,955

$ 700,026

$ 723,942

$ 764,365

Net Cum. Cash



$ (945,292)

$ (1,069,754)

$ (1,058,556)

$ (905,221)

$ (477,009)

$ 81,758

$ 597,729

$ 1,082,683

$ 1,782,709

$ 2,506,651

$ 3,271,016

Economic Indicators



Internal Rate of Return

23.6%



Net Present Value 10%

$ 1,067,126

Pay Back Period (Years)

4.9

Table 4.4: Cash Flow Statement for Base Case Model with ECOFUND Grant

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CASH FLOW STATEMENT

Years

0

1

2

3

4

5

6

7

8

9

10

Revenue and Expenditures

























Revenue





$ 1,412,963

$ 1,557,913

$ 1,711,998

$ 1,836,876

$ 1,894,720

$ 1,955,456

$ 2,019,228

$ 2,086,190

$ 2,156,499

$ 2,230,324

Equity Investment

No Ecofund Grant

$ 1,978,304





















Operating Costs





$ 963,306

$ 984,435

$ 1,008,224

$ 1,029,619

$ 1,040,886

$ 1,052,717

$ 1,065,139

$ 1,078,183

$ 1,091,878

$ 1,106,258

Gross Margin



$ (1,978,304)

$ 449,657

$ 573,478

$ 703,774

$ 807,257

$ 853,833

$ 902,738

$ 954,089

$ 1,008,007

$ 1,064,621

$ 1,124,066



Taxes

























Depreciation

Tangible Equipment



$ (487,594)

$ (487,594)

$ (487,594)

$ (487,594)

$ (487,594)

$ (467,754)

$ (318,954)

$ (45,565)

$

$

Interest for National/Voivodship Fund

40% Forg.after 50% Principal Paid



$ (67,992)

$ (55,603)

$ (43,214)

$ (35,168)

$

$

$

$

$

$

Interest for Commercial Loan

Over 7 Years



$ (118,698)

$ (105,395)

$ (91,028)

$ (75,512)

$ (58,754)

$ (40,656)

$ (21,110)

$

$

$

Amortizataion

Over 5 Years



$ (203,593)

$ (203,593)

$ (203,593)

$ (203,593)

$ (203,593)

$

$

$

$

$

Business Loss Carry Forward

3 Years Amortization





$

$

$ (1,797)

$ (34,631)

$ (40,552)

$

$

$

$

Corporate Tax

40% to 32% by 2000



$

$

$

$ 1,222

$ 22,164

$ 113,209

$ 196,488

$ 307,982

$ 340,679

$ 359,701

Net Income AfterTax





$ (428,220)

$ (278,707)

$ (121,655)

$ 2,371

$ 47,098

$ 240,568

$ 417,537

$ 654,461

$ 723,942

$ 764,365



Cash Flow Adjustment

























Plus Depreciation





$ 487,594

$ 487,594

$ 487,594

$ 487,594

$ 487,594

$ 467,754

$ 318,954

$ 45,565

$

$

Plus Amortization





$ 203,593

$ 203,593

$ 203,593

$ 203,593

$ 203,593

$

$

$

$

$

Plus Loss Carry Forward





$

$

$

$ 1,797

$ 34,631

$ 40,552

$

$

$

$

Less Principal Paid - Funds

16.7% per year for 3 years



$ (247,783)

$ (247,783)

$ (247,783)

$ (74,038)

$

$

$

$

$

$

Less Principal Paid - Bank

Payment



$ (166,285)

$ (179,588)

$ (193,955)

$ (209,471)

$ (226,229)

$ (244,327)

$ (263,873)

$

$

$



Cash Flows

























Net Cash Flow



$ (1,978,304)

$ (151,101)

$ (14,890)

$ 127,795

$ 411,846

$ 546,686

$ 504,547

$ 472,618

$ 700,026

$ 723,942

$ 764,365

Net Cum. Cash



$ (1,978,304)

$ (2,129,404)

$ (2,144,295)

$ (2,016,500)

$ (1,604,654)

$ (1,057,968)

$ (553,421)

$ (80,804)

$ 619,222

$ 1,343,164

$ 2,107,529

Economic Indicators



Internal Rate of Return

10.3%



Net Present Value 10%

$ 40,365

Pay Back Period (Years)

7

Table 4.5: Cash Flow Statement for Base Case Model without ECOFUND Grant

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5.0

PROJECT BENEFITS AND RISKS

This section examines the benefits of the proposed project to the Katowice Holding Company,
Wesola Mine, ZEC, the USB Coal Mining Industry, and the environment. It also summarizes
project risks for the prospective developer, investors, and lenders.

5.1 Project Benefits

The proposed project will provide numerous benefits to the Katowice Holding Company and its
subsidiaries, the USB coal mining industry, and to the global environment.

5.1.1	Benefits to the Katowice Holding Company

Any efforts to reduce operating costs and improve revenues from coal production at the Wesola
Mine would benefit the holding company. In 1993 the Wesola Mine operated at a US$21 million
loss. The power, heat, and drilling project proposed herein could potentially result in savings of
between US$1 million and US$3 million per year per longwall panel, primarily by eliminating
methane-related coal production delays. The proposed project would introduce a lower-cost,
readily controllable system of gob degasification that could improve efficiency in each of the
company's mines.

5.1.2	Benefits to the Wesola Mine

Presented below are the benefits of the proposed power, heat, and drilling project to the Wesola
Mine.

5.1.2.1	Power Cost Savings

The Wesola Mine will save over US$130,000 per year by purchasing power from the project at a
favored cost of 20 percent less than avoided cost.

5.1.2.2	Increased Revenues from Gas Sales

As the proposed project will purchase all of the gas drained by the mine, gas sales will increase
by 54 percent. Using 1996 drainage volumes, the Wesola Mine would gain additional revenue
in excess of US$57,000 per year.

5.1.2.3	Reduced Degasification Costs

The Wesola Mine could potentially reduce its degasification costs by US$364,000 per longwall
panel by avoiding up to 40 percent of overlying gallery infrastructure through the use of
horizontal gob boreholes.

5.1.2.4	Increased Revenues from Increased Coal Production

Because the proposed horizontal borehole system can be readily controlled and optimized, we
anticipate improvements in district methane drainage efficiencies and in recovered gas quality.
Improved degasification efficiencies will result in (1) reduced production delays due to methane
gas and (2) increased longwall coal production. With a 25 percent increase in district drainage

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efficiency, the Wesola Mine could increase revenues from coal sales by over US$1 million per
longwall panel.

5.1.2.5	Operations Benefits

The proposed power, heat, and drilling project would reduce ventilation system demands and
improve mine safety. With improved methane capture efficiencies, required mine airflow rates
for dilution of methane during coal production will be reduced. Reduced airflow rates resulting
in reduced mine pressure differentials will help minimize spontaneous combustion. With
improvements to drainage efficiency, mine fans may potentially operate at less acute blade
angles or at reduced rotational speeds, reducing power demands and, therefore, ventilating
costs. Furthermore, reduced emissions into active mine workings will decrease the potential of
explosive air-methane accumulations underground, particularly at working faces where the
potential for ignition due to frictional sparking is greatest. This report does not quantify these
benefits.

5.1.2.6	Environmental Fees

If the National Fund is to participate in the project as an equity partner, it could potentially use its
dividends to offset the Wesola Mine's environmental fees. This arrangement needs to be
verified and approved by the State Treasury.

5.1.3 Benefits to ZEC

This report proposes that the power, heat, and drilling project compensate ZEC for its increased
heat generating costs resulting from firing its hot water boilers with coal rather than cofiring with
coalbed methane. The project reimburses ZEC by selling its heat, up to 104,000 GJ per year, to
ZEC for resale at significantly below market prices. The margin earned by ZEC from resale of
the heat is sufficient to more than offset ZEC's increased generation costs. Also, the volume of
heat produced by the project is sufficient to supply ZEC's market heat demands during some
summer months, which would allow ZEC to curtail summer costs and realize increased savings.

5.1.4 Benefits to the USB Coal Mining Industry

The proposed project recommends the involvement of ZOK, a recognized gas drainage service
company in the USB. ZOK's experience and contacts in the basin, its ability to carry out drilling
operations at any mine, and the applicability of directional drilling to develop in-seam or
horizontal gob boreholes at other mines in the basin, will serve to expand the mine
degasification field in the region. As indicated in Section 2.2.6, directionally drilled horizontal
gob boreholes could be applied at a number of other mines in the USB to offset overlying
degasification galleries.

5.1.5 Environmental Benefits

Table 5.1 summarizes the estimated additional annual methane emissions mitigated by this
project if it were operating today and in the year 2000, assuming that (1) ZEC gas demands
remain at 1996 levels and (2) the overall methane drainage efficiency increases by five percent
per year. The table includes equivalent C02 emissions based on a global warming potential of

54


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methane of 21 times that of C02 over a 100-year time frame (IPCC,1996). Cumulatively, the
project will mitigate in excess of 44 Mm3 of methane, or the equivalent of approximately 630,000
tonnes of C02.

Year

Methane
Liberated
(m3)

Used by ZEC in
1996
(m3)

Additional
Emissions
Mitigated by
Project
(m3)

Additional C02
Mitigated by
Project
(tonnes)

1996

44,930,770

4,778,883

3,072,561

43,749

2000

49,879,440

4,778,883

4,781,361

68,080

Table 5.1: Additional Methane Emissions and Equivalent C02 Mitigated by Proposed Project

The use of CMM to generate 2.4MWe of power and over 100,000 GJ of heat per year will also
result in reduction of C02 and local air pollution emissions normally associated with coal
burning. At maximum operating capacity, the proposed project will annually displace
approximately 10,500 tonnes of coal combusted for power generation at the local power plant.
Table 5.2 presents the project's annual reductions in the emissions of C02, S02, NOx, and
particulates associated with the displaced coal. The table accounts for a net increase in coal
consumption by ZEC to offset the displaced CMM.

Pollutant Annual Reduction

(tonnes)

CM

O
o

18,108

so2

127

NOx

50

Particulates

548

Table 5.2: Global Environmental and Local Air Quality Impacts of Displaced Coal.

5.2 Project Risks

Every project will encounter some risk at each stage of its evolution. During the development
phase, the developer will perform due diligence to give assurance that the project has no
fundamental flaws. Before project financing is completed, both the equity and debt providers
will conduct their own due diligence to ascertain that all uncertainties have been resolved and
that the project faces no unforeseen risks. Finally, owners and investors commonly purchase
insurance to compensate for certain insurable, unpreventable events, some of which are known
as force majeure events.

The following sections summarize some of the more important risks that may concern the
Wesola project's stakeholders.

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5.2.1 Permitting Risk

This report discusses the requirement to obtain approvals to import horizontal directional drilling
equipment into Poland. The Polish Higher Mining Authority will likely approve the equipment
upon review of sufficient documentation, and after equipment testing, but there is uncertainty
regarding the timeliness of the approval process. Approval delay will impact the project
schedule. The developer must be convinced that equipment approval is certain before going
ahead with costly development work. To facilitate approval and maintain schedules, the
developer and project participants (ZOK or the Wesola Mine) must liaise appropriately with the
approving agency.

5.2.2	Financing Risk

Financing risk includes the risk of not being able to assemble an investor and lender group
whose members can agree on the equitability of the project structure, the distribution of risks,
and debt and dividend payout schedules. The developer, who must accept the financing risk
until financial closing, can mitigate the possibility of failure by writing a sound and equitable
financing plan and providing the potential investors with a firm letter of intent for each critical
agreement that underlies the project.

5.2.3	Gas Risk

The proposed project depends on a steady and predictable supply of drained CMM from the
Wesola Mine throughout its economic life. Using existing mine records, investors and lenders
need to assure themselves that the gas resource will be present in the coal reserves that
Wesola plans to mine. They will also need assurance that the mine will continue to implement a
system of methane drainage, and that that system will recover CMM according to the schedules
set out in the project plan. This means that the project will contract with the Wesola Mine to
accept the gas risk by assuring, to the extent possible, an adequate CMM flow to the
cogeneration plant.

5.2.4	Construction Risks

Risks of cost overruns and schedule delays face the project developer during the construction
phase. Construction projects experience cost overruns and delays because of design faults,
equipment availability problems, unforeseen equipment importation issues, contractor-related
disputes and issues, labor problems, and uncontrollable (e.g., climate) and force majeure
circumstances. The project participants can minimize construction risks with duediligence
during engineering design, procurement, and contractor selection, and by effectively managing
the construction project.

5.2.5	Market Risk

The two elements of the proposed project (drilling and cogeneration) must have firm
commitments in place to accept and pay for their services and products. The drilling project
must have enough firm drilling agreements to assure investors there will be sufficient revenue to
amortize the equipment. The cogeneration project must have letters of intent to purchase its
electric and thermal products, thus transferring market risks to the purchasers. To accomplish
this, energy purchase agreements would have "Take-or-Pay" clauses, committing the
purchaser(s) to pay for energy products whether or not they take delivery. The Take-or-Pay

56


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agreements with the Wesola Mine and ZEC would provide incentives to the mine and the
Katowice Holding Company by reinforcing their commitment to assure the gas supply, thereby
minimizing the gas risk described above.

5.2.6	Mine Closing Risk

The mine closing risk combines elements of both gas and market risks for the proposed project
because the mine is the supplier of gas and the market for power. Certainly, if coal industry
restructuring is well underway before the project goes to financing, Wesola's future will be
relatively secure. But if the mine were to close for any reason, the cogeneration project would
cease to function. Investors might be able to salvage the tangible parts of the asset base by
moving the plant to another site. However, such an event would inflict severe losses on the
project. Investors would have to develop a new project, install the equipment at the new site,
close the Wesola operation, and forego revenues during the transition period. If potential
investors perform due diligence before restructuring, they should review all information available
on the Wesola Mine's economic status and its reserve base relative to other mines in the USB.
Investors must assure themselves of the mine's ability to remain open during the period of the
project loans.

5.2.7	Technical Risk

Technical risk relates to the systems and equipment components the project plans to use for
horizontal directional drilling and the cogeneration plant. The horizontal directional drilling
equipment specified herein for the project has a long and successful record of performance in
coal mines throughout the world. One area of potential concern that can be characterized at the
outset, however, relates to the geological and stress conditions at the Wesola Mine. Project
participants must consult with experienced Wesola Mine and ZOK personnel and develop
drilling plans at locations where directional drilling has a high liklihood of success so as to
assure that the drilling rates assumed in this report can be achieved in the USB with
experienced personnel.

The technical risks associated with the cogeneration system mainly concern adherence to gas
delivery quality and quantity specifications. A gas turbine is able to handle a wide range of gas
quality (expressed as percent methane in air) and can accommodate most quality swings
automatically. It is less able to be effective if gas flows fluctuate often so that the unit has to run
part-load for a significant percent of operating hours. The plant designer needs to take special
care that the mine degasification system can meet minimum delivery standards set by the
project. Project planning done for this report specified a turbine-generator size with a fuel
demand that would exceed projected gas supply only in the first few years. The question of fuel
supply and unit sizing will undergo much more thorough analysis during project design phase,
so an optimum turbine size might be different from the one described herein. Also, the
preliminary capital budget calls for a gas storage (surge) tank that is capable of smoothing out
gas flow fluctuations for short periods. Designers should revisit the size and operating mode of
the surge system to minimize the effects of short-term gas flow swings.

57


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58


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6.0 REFERENCES

IPCC, 1996. Radiative Forcing of Climate Change, The 1994 Report of the Scientific
Assessment Working Group of IPCC, Summary for Policymakers, Intergovernmental Panel on
Climate Change.

Kowollik, G., and H. Heimer, 1986. "Transportable Gas Turbine Cogeneration Plant for
German Coal Mine", Proceedings, Gas Turbine Conference, Dusseldorf, West Germany, June
2-8, 1986.

Nasz Holding, 1994. Obszar dziatania katowickiego Holdingu Weglowego SA, Prospectus,
No. 2.

Polish Geological Institute, 1994. Coalbed Methane Potential of the Upper Silesian Coal Basin,
Poland, ISSN 0866-9465.

U.S. EPA, 1995. Reducing Methane Emissions from Coal Mines in Poland: A Handbook for
Expanding Coalbed Methane Recovery and Utilization in the Upper Silesian Coal Basin,
EPA/430/R-95-003.

59


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60


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ATTACHMENT 1

Wesola Mine Degasification Costs


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Wesola Mine Degasification Costs

The following estimates supported the cost analysis:

•	Typical longwall panels are 200 m in width and 1200 m in length

•	Two angled gob boreholes are spaced every 30 m along the degasification gallery

•	The total cost of labor, including benefits, and workers compensation insurance at twice the
employee salary

The following data were provided by Wesola Mine personnel for this effort:

•	The wage of laborers, except working face labor, equals 6.75 PLN (US$2.47) per hour

•	The cost of casing and wellhead equipment for one average length (140 m) gob borehole would
be 680 PLN (US$250)

•	The time required to drill one average length 90 mm diameter gob borehole (140 m) is 15 shifts

•	The cost of gathering lines on a diameter basis equals 17 to 67 PLN (US$6 to $25) per meter of
length

•	The cost of mining the 416 level on a per-meter basis is 2,400 PLN (US$880)

•	Typical longwall productivity in the gassy area equals 1,875 tonnes per day

The following calculations assume an exchange rate (current in the spring of 1997), of 2.73 PLN per US
dollar. By the end of the year the rate had risen to over 3.5 PLN per US dollar.

•	Galleries: The Wesola Mine develops one gallery 1,000 m in length per longwall panel in the 416
low quality coal seam. Additionally, galleries between panels are interconnected. These are 250 m
in length and equivalent to the width of a panel plus the width of the headgate and tailgate entries.
The estimated cost of development is 3.0 M PLN, or US$1.1 million (1,250 m X 2,400 PLN per m).
Assuming that the Wesola Mine blends the 416 coal with higher quality coal (3 to 1 ratio), the amount
of clean coal mined in construction of the gallery is 7,313 tonnes per panel (1,250 m X 1.5 m X 4.0 m
X 1,300 kg/m3 X 0.75). Using the average market price of 65 PLN per tonne per year (Nasz Holding
1994), the estimated revenue from coal sales equals 475,300 PLN, or US$174,100. We estimate
that the Wesola Mine's net cost for developing degasification galleries in the 416 seam per longwall
panel is 2.5 M PLN, or approximately US$0.9 million.

•	Boreholes: Assuming that the Wesola Mine develops boreholes along the longitudinal axis of the
panel only, approximately 60 boreholes (1,000 m / 30 m X two boreholes), averaging 140 m in
length, are required. We estimate development costs as follows:

Labor - using a three-person crew, the cost of developing one borehole is 5,103 PLN (15 shifts to
drill + three shifts to case, complete and connect X 13.5 PLN per hour X seven hours per shift X
three men). Coupled with the cost of casing material and wellhead equipment, the estimated
cost to develop one complete average length gob borehole is 5,783 PLN, or US$2,120.

Drilling Consumables - assuming that one bit can be used to drill two boreholes at a cost of
US$600 per 90 mm bit, and doubling this cost for bearings, oil, and other consumable drilling
items, we estimate the total cost for drilling consumables at US$600 per gob borehole.

Depreciation - assuming a depreciable basis of US$120,000 for the drilling equipment and using
straight-line depreciation at 17 percent per year as per the Ordinance of Ministry of Finance,
January, 1995, we estimate depreciation expenses at US$410 per borehole (0.17 X US$120,000
/ 250 working days X 5 working days to drill one average length borehole).

1


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Equipment Maintenance - assuming that the drilling equipment is down for maintenance 4 weeks
per year, we estimate maintenance costs, including labor at US$1,380 (2 laborers X 7 hours per
shift X 13.5 PLN per hour X 5 shifts per week X 4 weeks) per year, and replacement parts at
US$20,000 per year, or US$430 per borehole (US$21,380 / 250 working days X 5 working days
to drill one average length borehole).

Property Insurance - assuming that the drilling equipment value is the depreciable price, we
estimate an average insurance cost of US$80 per borehole.

Other Costs - we assume an additional US$100 per borehole for other expendable items not
included above.

Total Costs - as summarized below we estimate that the Wesola Mine's costs for developing 60
angled boreholes per panel are approximately US$224,400.

Cost Component

Cost per
Borehole
US$

Cost per meter
US$

Labor

2,120

15.14

Drilling Consumables

600

4.30

Depreciation

410

2.90

Maintenance

430

3.05

Insurance

80

0.60

Other Costs

100

0.70

Total

3,740

26.69

Cost Summary for Angled Gob Borehole Development

•	Gathering Line: Assuming that a 159 mm diameter pipeline connects between wellheads to gather
and transport gas from the boreholes, we estimate that the capital and installation costs for the
gathering system is 56,000 PLN, or approximately US$21,000. These figures are based on 25 PLN
per meter, three men at 13.5 PLN per hour, seven-hour shifts, 50 m of pipe laid per shift, and a total
of 1,000 m of four m lengths of steel pipe.

•	Gathering System Maintenance: We estimated these costs on a per longwall panel basis using
typical gassy area production rates and maintenance needs for a 60 borehole degasification system.
Using the average coal production in the gassy area of 1,875 tonnes per day, and assuming an
average 3.0 m longwall face height for the 501 and 510 seams, a typical panel is mined in 1.7 years
using 250 work days per year. Inspection and maintenance costs for the 60 boreholes are estimated
at 40 k PLN assuming one man shift per day at 13.5 PLN per hour, a 7 hour day, 250 work days per
yearX 1.7 years. This is approximately US$14.8 k.

•	Total: We estimate that the total cost of the gallery degasification system is 3.17 M PLN, or
approximately US$1.16 million per longwall panel. This cost is 1.86 M PLN or US$685,000 on a per
panel, per year basis (3.17 PLN /1.7 years per panel using the average production rate in the gassy
area).

2


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ATTACHMENT 2

CASE STUDY ILLUSTRATING THE APPLICATION OF
HORIZONTAL GOB BOREHOLES AT A MINE IN THE UNITED STATES


-------
CASE STUDY ILLUSTRATING THE APPLICATION OF
HORIZONTAL GOB BOREHOLES ATA MINE IN THE UNITED STATES

Case Study

The Cambria 33 coal mine, which exploits the Lower Kittanning coalbed in the Appalachian Basin,
developed nine horizontal gob boreholes over longwall panels. The cumulative length of these
boreholes is 4,877 m, with longest individual lengths exceeding 700 m. Figure A2.1 presents plan and
profiles of the boreholes over the outline of the longwall panels. The miners aimed the boreholes at the
tension zones at the ends of the panels and over the return entries to take advantage of the low pressure
influence of the mine ventilation system on gob gas migration. They experimented with various
horizontal targets to assess borehole performance.

Figure A2.2 illustrates the stratigraphic sequence immediately above the mined seam. It shows
horizontal boreholes developed into the C seam indicated on the figure, 6 m below that seam, and 6 and
12 m above the B seam. In order to overcome difficulties with water accumulation in low borehole
elevation areas and to minimize separation requirements at the wellhead, the drillers steered the
boreholes at a consistent downgrade once they passed the desired horizontal target.

Because this study was experimental in nature, the mine installed cross-measure boreholes (along the
headgate of one of the panels), and vertical gob wells in addition to the horizontal gob boreholes. This
combination enabled them to assess relative system performance. For example, they shut-in vertical
gob wells for short periods of time to assess performance of the horizontal gob boreholes.

The following general conclusions resulted from this analysis:

•	For the panel section with both cross-measure and horizontal gob boreholes, horizontal gob
borehole production rates were five times that of the cross-measure boreholes.

•	Higher production rates occurred over the tension zones alongside the tailgate entries.

•	Boreholes targeted to just below the C coal seam (30 m above mining level), recovered methane
at higher concentrations and greater rates and remained intact when under-mined.

•	Horizontal gob boreholes effectively shield the mine ventilation system from gob gas migration
because they generate a low pressure zone above the longwall gob.

•	Vertical gob well shut-in tests indicated that the horizontal boreholes were as effective as the
combined system (vertical and horizontal) at reducing gob gas emissions into the tailgate return
airway.

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CAMBRIA MINE 33
8 LEFT E - EAST LONGWALL

~~~~~EE

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~~~
~~~_
~~~~
~~~~
~~~~
~~~~
~nan

I i Lien a

~~~~
~~~u

~~~~



][IBB0DDDDDB™nnc

^ ~ c

+

162

161C

+ + + +
161g 161B 161A

162C 161D	161F

~~~~~~~~~~
:~~~~~~~~~

BOREHOLES
	 8L-EE-1

	8L-EE-1A

800 1000 1200 1400
Horizontal Distance

2000

8L-EE-2

	8L-EE-3

8L-EE-3A

CAMBRIA MINE 33
9 LEFT D - EAST LONGWALL

CM2, VERTICAL
BOREHOLE-

]~~~~~~

innngsrinnnnnnnnnnnaHHfnnnnnnnnnnnnnnnnnnn innnnnnn

]~~~

]~~~

~~~

:~~~~

:~~~~

~~~~~

] ~ ~ ~ nnnonnnooonn^nnonnnnnnnnooa ~ oi

innnl ELEVATION vs lw horizontal position

]fc'1020

~~~[
~~[

Dane
~~[
pane

pane

800 1200 1600
Horizontal Distance

2000

2400

1200 800 400 O
Horizontal Distance

BOREHOLES
	 9L-DE-1

	9L-DE-2

	 9L-DE-3

BOREHOLES

9L-CE-1	

9L-CE-2	

9L-CE-3 	

9L-CE-4	

Figure A2.1: Plan View of Horizontal Gob Wells Developed at the Cambria 33 Mine
(Dimension in US Units)

2


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Figure A2.2: Stratigraphic Sequence Above the Mined Seam at the Cambria 33 Mine.
(Dimension in US Units)


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ATTACHMENT 3

Downhole Directional Drilling Equipment


-------
Downhole Directional Drilling Equipment

Steerable Downhole Motor Assembly

Independent bit rotation is achieved without rotation of drill rods with downhole motors. A positive
displacement hydraulic motor rotates the bit with high pressure water provided through the drill rods. The
motor consists of a 4 m long helical rotor fitted inside a high density rubber lined stator. Most of the
water discharges to facilitate cuttings removal just behind the bit, and the remainder flows to the front of
the bit to assist in the cutting process. Performance specifications of a typical downhole motor are
summarized in the table below.

1-2 Stage Downhole Motor Performance Specifications (60 mm)

Water Pressure Requirement

4.8 MPa

Water Flow Rate

2 to 4 l/s

Rotational Speed

550 to 1370 rpm (for range of flow above)

Torque

108 Nm

Power

6 to 16 kW (for range of flow above)

Diameter

60 mm

Weight

81 kg

Downhole Motor Performance Specifications

Boreholes are steered by orienting a bent housing or shoe installed ahead of the downhole motor as
shown on Figure A3.1. Desired borehole trajectory (azimuth and pitch) is attained by orienting the bent
housing to exert a side force against the borehole wall opposite to the intended bit direction.

Side Force Diagram
Downhole Motor (top) and Side Force Schematic (bottom)

Bent Housing Tool face at 180°
(low side)

Downward direction of
force exerted on bit
(reaction of side force with
tool face at 180°)

Bent Housing Tool face at 180°
(low side)

Direction of force exerted
on bit resulting in vertical
drop of hole trajectory

Figure A3.1: Downhole Steering Tools

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Downhole Surveying System

Two general types of permissible borehole survey systems are available for use with longhole directional
drilling equipment. The first provides on-request electronic directional data while drilling, the second
involves a manually inserted downhole compass and camera. This report presents the latter system
because of its favorable reliability and durability characteristics, necessary for import equipment. A single
shot camera survey system provides driller's borehole azimuth, pitch, and tool-face orientation.

Operators pump this permissible wireline survey tool within the drill rods to the back of the down-hole
motor. At a pre-set time the camera photographs the bearings indicated by an integrated compass.
Operators retrieve the camera with the wireline system after exposure and remove the film disk for
developing. Surveying time varies from 10 to 20 minutes depending upon hole depth. Figure A3.2
shows a developed film disk from a single shot survey.

Figure A3.2: Developed Single Shot Survey Disc

Drill String

Sections of BQ wireline (3 m sections), flush joint, drill rod (56 mm diameter), comprise a typical
directional drilling drill string. Operators use nonmagnetic rods (stainless steel or copper beryllium), for
the first three to four sections behind the downhole motor to eliminate magnetic interference from the
drill string during surveying.

Drill Bits

Typically operators use 76 mm diameter bits with the BQ rod assembly described above. Bit selection
must consider the rotational speed and torque produced by the downhole motor. Drillers use various bits
with polycrystalline diamond cutter (strata-pax), polycrystalline chip (geoset), and impregnated diamonds,
depending upon coal or rock characteristics (hardness and friability). The bits are designed so that the
drilling fluid pressure drop across the bit is minimized to provide maximum fluid pressures to drive the
downhole motor. Operators use a range of bit types during initial horizontal gob borehole development
and selectively optimize the downhole configuration to maximize the penetration rate.

2


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ATTACHMENT 4

Information for Foreign Producers


-------
Higher Mining Authority
Katowice, 17 July 1995

Information for Foreign Producers

on the procedure of approving machines, devices and materials
to be used in the Polish mining industry
[Translated from Original Polish Text)

This information defines the procedure to be followed by the foreign producers of machines, devices and
materials during the process of their approval to use in the mining industry (according to regulations in
force since 2 September 1994).

1.	The requirement of approving (licensing) machines, devices, and materials as well as explosives
and related equipment before their use in the mining enterprises derives from the provisions of
Article III of the Act of 4 February 1994, entitled Geological and Mining Law, published in the
Dziennik Ustaw Rzeczypospolitej Polskiej of 1994, No.27, item 96. The types of machines,
devices and materials as well as explosives and related equipment must be approved for use in
the mining enterprises along with the approval procedure, have been defined in the decree
issued by the Prime Minister on 24 August 1994, and published in the Dziennik Ustaw
Rzeczypospolitej Polskiej of 1994, No. 92, item 434. The approval decision related to machines,
devices and materials as well as explosive materials and equipment is issued by the President of
the Higher Mining Authority in Katowice. This decision confirms that the subject of approval
meets the requirements of work safety and hygiene as well as fire safety requirements that are
defined by the obligatory regulations and standards in force in Poland, according to the decree
by the Minister of Industry and Trade (in accordance with the Acts published in the Dziennik
Ustaw Rzeczypospolitej Polskiej). The approval decision can be issued as a result of an
application submitted by the producer or his plenipotentiary representative who has the office in
the territory of Republic of Poland. The above mentioned decision shall be obtained before the
product is sold to the Polish user. The approval obligation refers to any machines, devices or
materials defined in §2 of the above mentioned decree by the Prime Minister, dated 24 August
1994. During the approval procedure the machines, devices, or materials are subject of the
attestation research carried out by attesting institutions pointed out by the President of the
Higher Mining Institute. Before the approval procedure related to machines, devices, or
materials to be used in mining industry is started or in the situation of any difficulties, necessary
comments and detailed information can be obtained from the appropriate representatives of the
Higher Mining Authority. Names of those representatives and their phone numbers are listed in
the Appendix to this information.

2.	The approval process related to machines, devices, or materials to be used in the mining
industry comprises the following:

•	Producer's application to the President of the Higher Mining Authority for pointing out the
institutions that shall issue the attesting opinions

•	Pointing out by the President of the Higher Mining Authority the institution(s) that should
issue the attesting opinions, each one in the determined range

•	Research on the compliance of the product with the standards introduced as obligatory
Polish Standards and relevant legal regulations; technical and operational
documentation, references, laboratory and on-site examination results, and approval
documents issued by the mining authorities in the producer's country; production quality
control systems used by the producer

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Research connected with work safety and hygiene, fire safety and rules of ergonomy,
carried out at the on-site research stands

•	Application of the producer to the President of the Higher Mining Authority to issue
approval document for the machine, device, or material to be used in mining industry

•	A decision by the President of the Higher Mining Authority to approve the machine,
device, or material to be used in the mining industry and issuing approval mark

•	Optionally, obtaining an attestation opinion and decision permitting the introduction of
design changes in the machines, devices, and materials approved for use

1.	The producer shall attach the following appendices to the approval application related to
machine, device, or material:

a)	Documents and documentation defined in §4 (taking into account the provisions of §7),
of the a/m decree

b)	Attestation opinions issued by the institution(s) pointed out by the President of the Higher
Mining Authority. Every attestation opinion shall comprise explicit assessment of the
machine, device, or material regarding its compliance with the regulations on work
safety and hygiene as well as on fire safety that are determined by the obligatory
standards and regulations in force in the Republic of Poland

c)	Treasure Fee in the form of Treasure Stamps; the amount of this fee is determined by
the provisions of the decree by the Minister of Finance, issued on 26 June 1992,
published in the Dziennik Ustaw Rzeczypospolitej Polskiej, 1992, No. 53, item 253 with
later amendments published in Dz. U., 1993, No. 56, item 261, Dz. U, 1993, No. 64 item
307 and 1994, No.115, item 555.

The documentation and opinion attached to the application or the attestation opinions should be
issued as a bounded (tied) issue, in two copies in a way that will prevent the particular sheets
(text and drawings), from accidental removal from the sewed and plumbed unit copy, and shall
be stamped and signed by the attesting person from the authorized attestation institution (this
also refers to the attached drawings and calculations), in order to demonstrate that this is the
documentation being the base for research and that the possible amendments are introduced
under the agreement or request of the attesting person.

2.	The attestation institutions carry out the research on condition of payment, based on the order
from the producer or his plenipotentiary representative in Poland. The attestation research
comprises the assessment of the machine, device, or material related to the requirements on
work safety and hygiene and fire safety. This assessment is carried out based on the submitted
technical and operation documentation and on the results of laboratory and on-site research
(including examinations on research stands). The methods and range of the laboratory and
on-site research shall include only research that is necessary for the a/m assessment. The
attestation institutions can accept the research results submitted by the applicant and carried out
in laboratories located out of the territory of Poland. This especially applies to the situations in
which the Polish attestation institutions have signed cooperation agreements with the foreign
attestation institutions related to mutual acceptance of the comparable research results.

3.	In case of introductory changes in the machines, devices, or materials that have previously been
approved in the mining enterprises, one shall distinguish changes that significantly impact the

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work safety level. Such changes include the changes listed in the §12 of the a/m decree by the
Prime Minister of Poland.

a.	Introduction of the a/m changes causes the necessity of obtaining the approval issued by
the President of the Higher Mining Authority. The procedure is the same as described in
paragraphs II. 1 and II. 2, relevant to the range of the introduced changes.

b.	In case of introducing changes in the machines, devices, and materials that have
previously been approved for use in mining enterprises, and which do not significantly
impact the work safety and hygiene and fire safety, the decision issued by the President
of the Higher Mining Authority is not required. It is however necessary to inform the
Higher Mining Authority about their introduction in order to make supplements in the
approval documentation.

b. The decision on whether the changes significantly impact the work safety and hygiene
and fire safety of machines, devices and materials is made by the producer.

Additional comments and information.

a.	The decision issued by the President of the Higher Mining Authority related to the
approval of a machine, device, or material does not comprise assessment of the product
in terms of any other requirements important to the user (e.g., product price, working
ability, lifetime). These are the elements of market behavior and therefore are not
subject to the Higher Mining Authority activities.

b.	The decision issued by the President of the Higher Mining Authority related to the
approval of machines, devices, and material for use in mining enterprises expires under
law: 1) in case of any hidden failures in the subject of approval (product) and 2) in case
of worsening the quality or omitting the conditions determined in the decision itself and
which might be harmful in terms of work safety and hygiene and environmental
protection during the operation of the mining enterprise. The Higher Mining Authority
reserves the right to order the authorized attestation institution to examine, on charge of
the producer, a previously approved machine, device, or material in order to check
whether the machine, device or material meets the approval requirements and the
parameters of the piece that is the subject of attestation research.

c.	Due to a lack of mutual agreements between the Higher Mining Authority in the Republic
of Poland and relevant institutions in the producer's countries related to mutual
acceptance of approval decisions, the fact of having such decision in another country
does not authorize its acceptance, and causes the necessity of initiating approval
procedure in Poland.


-------
Directory

of the Higher Mining Authority Officers
who provide information on the issues of
machines, devices and materials approval

1. Power-Mechanical Department:

1.	mar inz. Marian Mazur

2.	mar inz. Stanislaw Budzowski

3.	mar inz. Miroslaw Zapart

Head of Department, ext. phone 116
Deputy Head of Dpt, ext. phone 126
Deputy Head of Dpt, ext. phone 128

2. Mining Department:

1.	mar inz. Roman Starosielec

2.	mar inz. Wojciech Magiera

3.	mar inz. Antoni Mueller

Head of Department, ext. phone 267
Deputy Head of Dpt, ext. phone 115
Deputy Head of Dpt, ext. phone 117

4


-------
Attachment 5
Directional Drilling Costs


-------
Directional Drilling Costs

Development of Drilling Site

Assuming a drill site of dimensions 3m WX 2.5m H X 7m L is required and is constructed as an alcove
off a main entry, development costs of 28,000 PLN, or US$10,250 are estimated. This is based on 533
PLN per cubic meter calculated from 2,400 PLN per meter for development of 1.5 m X 3 m
degasification gallery.

Wellhead Equipment and Casing

Procurement costs for horizontal borehole wellhead materials (gas/water separator, valves, monitoring
and measuring system) are approximately US$4,500. Assuming that these materials can be procured in
Poland, estimated Polish costs are US$3,600 (assuming 80 percent of US costs).

Directional Drilling

United States directional drilling contractors charge between US$65 to US$95 per meter for drilling in
rock (overlying strata). Labor costs, including employee benefits, typically account for between 40 and
50 percent of the costs of drilling. Assuming a profit margin of 15 percent, other costs of sales
(equipment depreciation, maintenance, expendable materials, and insurance) range between US$35 and
US$50 per meter. Noting that labor and benefits rates for similarly trained technicians in Poland are
approximately 35 percent of those in the United States, comparable directional drilling rates charged by
contractors in Poland would range between US$50 and US$70 per meter for drilling in rock. For the cost
analyses presented in this report we use a rate of US$50 per meter. An estimate of actual costs for a
Polish directional drilling contractor is presented below:

Operating Costs for Drilling Unit

Component

Value

Basis







Drilling Performance





Drilling Advance Rate fm/shifh

3?

Average rate for drilling in rook

Drilling Shifts Per Year

495

9 shifts/d X 950 d/year X 75% availahilitiy

Meters Drilled Per Year

13 600













Drilling Costs

Value

Basis

Annual Cost

Costs per Meter

Manager with Renefits ffi/hrl

$ 90 00

Professional Rate X 1 48

$ 40 000

$ 9 94

4 1 ahnrers with Renefits ffi/hrl

$ 44 00

Technician Rate X 1 48

$ 88 000

$ fi 47

Direct Fypenses ffi/hr/manl

$ 5 00

$5 per hour per lahorer

$ 40 000

$ 9 94

Consumables ffl/ml

$ 15 00

S 15 00 per meter

$ 904 000

$ 15 00

Insurance ffi/yrl

$ 19 000

I iahility and Property

$ 19 000

$ 0 88

Depredation ffi/yrl

$ 49 R00

Fqnipment Amorti7ed over 90 yi

s$ 49 R00

$ 3R5

Maintenance and Repair ($>lvrl

S 75 000

Parts and Outside I abor

S 75 000

S 5 51

General and Administrative*7.4;/yr1

$ 19 000

G&A from ahove tahle *0 5

$ 19 000

$ 0 88











Totals





S 590 R00

S 38 98

* Assumes some General and Administrative also supported bv ZOK or Wesola Mine


-------
ATTACHMENT 6

Vendor List, Drilling Equipment


-------
Vendor List, Drilling Equipment

Equipment

Vendors

Longhole Drilling

J.H. Fletcher & Co.



P.O. Box 2187



Huntington, West Virginia 25772



USA



TEL: 304 525-7811



FAX: 304 525-3770

Longhole Drilling

Acker Drill Company, Inc.



P.O. Box 830



Scranton, Pennsylvania 18501



USA



TEL: 717 586-2061



FAX: 717 586-2659

Downhole Directional

Directional Drilling Services

Drilling

4446 West 1730 South



Salt Lake City, Utah 84130



USA



TEL: 801 972-3333



FAX: 801 974-1084

Rods and Bits

Directional Drilling Services



4446 West 1730 South



Salt Lake City, Utah 84130



USA



TEL: 801 972-3333



FAX: 801 974-1084

Rods and Bits

Boart Longyear



2340 West 1700 South



Salt Lake City, Utah 84127



USA



TEL: 801 972-6430



FAX: 801 977-3373

Drill Rods and Tools

MINEX Inc.



194 Arden Drive



Belgrade, Montana 59714



USA



TEL: 406 388-1776

Drill Bits

Moab Bit and Tool Co.



995 West 4th North



Moab, Utah 84532



USA



TEL: 801 259-7763



FAX: 801 259-2968

1


-------
ATTACHMENT 7

Wesola Mine Power Analysis for 1996


-------
Wesola Mine Power Analysis for 1996

WESOLA POWER DEMAND

Months



January

February

March

April

May

June

July

August

September

October

November

December

Totals

TWA

Days Per Month*

(Days)

31

28

31

30

31

30

31

30

31

30

31

30

364



































Demand Power

(MW)

32

32

32

32

32

32

32

32

32

32

32

32

384



Cost of Demand

$ US

50,743

50,743

50,743

50,743

30,363

30,400

30,400

30,400

30,400

30,400

30,400

30,400

446,135



Cost per MW

$ US/MW

1,586

1,586

1,586

1,586

949

950

950

950

950

950

950

950



1,162

































15 Min Peak

(MW)

31

32

32

32

23

22

23

21

23

23

24

26

310



Cost of Peak

$ US

82,078

82,508

82,870

82,344

35,243

34,330

36,261

32,610

35,776

35,162

37,414

40,508

617,106



Cost per MW

$ US/MW

2,607

2,607

2,608

2,607

1,564

1,564

1,564

1,564

1,562

1,563

1,565

1,570



1,990

































Peak AM

(MWh)

4,813

4,953

3,335

2,490

2,327

1,639

2,453

1,962

2,176

2,426

2,236

2,415

33,225



Cost of Peak AM

$ US

257,837

265,358

178,688

133,405

116,003

81,693

122,246

97,792

108,450

99,873

92,057

99,420

1,652,821



Cost per MWh

$ US/MW

53.57

53.58

53.58

53.58

49.85

49.84

49.84

49.84

49.84

41.17

41.17

41.17



49.75

































Peak PM

(MWh)

3,959

4,213

5,749

5,806

1,148

674

1,033

839

1,000

2,258

2,144

2,154

30,977



Cost of Peak PM

$ US

113,139

120,376

164,282

168,187

77,635

45,551

69,843

56,698

67,609

151,909

144,230

144,931

1,324,390



Cost per MWh

$ US/MW-h

28.58

28.57

28.58

28.97

67.63

67.58

67.61

67.58

67.61

67.28

67.27

67.28



42.75

































Night

(MWh)

5,159

5,597

5,807

5,143

9,579

8,217

9,591

8,813

9,040

8,916

9,046

9,920

94,828



Cost of Niqht

$ US

92,133

99,960

103,711

92,061

216,968

186,121

217,251

199,633

204,774

183,450

186,134

204,110

1,986,306



Cost per MWh

$ US/MW-h

17.86

17.86

17.86

17.90

22.65

22.65

22.65

22.65

22.65

20.58

20.58

20.58



20.95

































Total Consumption

(MWh)

13,931

14,763

14,891

13,439

13,054

10,530

13,077

11,614

12,216

13,600

13,426

14,489

159,030



Total Cons. Cost

$ US

463,109

485,694

446,682

393,653

410,606

313,366

409,340

354,123

380,833

435,232

422,420

448,460

4,963,518



Average Cons Cost

$ US/MW-h

33.24

32.90

30.00

29.29

31.45

29.76

31.30

30.49

31.17

32.00

31.46

30.95



31.211

































Total Cost

$ US

595,930

618,945

580,295

526,740

476,213

378,095

476,001

417,134

447,010

500,794

490,235

519,368

6,026,758



Total Cost per KWh

$ US/kW-h

0.043

0.042

0.039

0.039

0.036

0.036

0.036

0.036

0.037

0.037

0.037

0.036

0.038



Note: Power invoice periods do not always coincide with the number of days in a calendar month.

1


-------
~	Night Use
¦ PM Use

~	AM Use


-------
ATTACHMENT 8

ABB Turbine Specifications


-------
ATTACHMENT 9

Basic Differences between Limited Liability
and Joint Stock Companies


-------
Basic Differences between Limited Liability
(Sp. Z o.o.) and Joint Stock (S.A.) Companies

No. of founders
persons

Polish and foreign
Minimum initial capital (zlotys)

Capital to be paid in prior to registration

Capitalization of pre-operational period costs

Capital increase requires General Assembly approval

Minimum number of Board Members

Supervisory Board or Auditing Committee

members)

Obligatory reserve out of after-tax earnings
Obligatory audit

General Assembly convenes if company bears loss

Earliest time after liquidation
announced for distribution of assets

Notarial reports of General Assembly required

Sp. Z o.o	S.A.

At least 1 person At least 3

4,000 zlotys
(40 min old zlotys)

100%

Not allowed
66.7% votes
1

100,000 zlotys
(1,000 min old zlotys)

25%

Max. 5-year write off
75% votes
1

Either or both may exist At lease one must exist
(min. 3 members) (min. 5

No

8%

Yes if:	Always

paying dividend abroad;
size criteria are met

If loss exceeds reserve If loss exceeds
capital and 50% of reserve capital and
share capital	33.3% of share capital

6 months

12 months

If company articles are Always
altered

1


-------
ATTACHMENT 10

Discussion of Project Financing Options


-------
Discussion of Project Financing Options

Presented below are a variety of sources of funds, ranging from small development grants to major
loans. We have segregated them into categories: development funding, government project financing,
and financing from commercial sources, although some agencies may provide both development funds
and permanent financing. Additionally, excerpts from the USAID handbook entitled "Market for
Financing of Environmental Investment Projects in Poland," are included as Attachment 11.

Project Development Funding Sources and Assistance

Within Poland several governmental and quasi-governmental funding sources have expressed the
willingness to advise the project developer. There are also some foreign programs that may be
interested in the project. Contact information is appended to this attachment.

Polish Oil and Gas Company (POGC)

Representatives of the POGC stated that some project development funding may be available if the
proposed project fits their goals and if they can obtain an equity interest. They indicated that they would
consider the longhole drilling and power and heat generation project proposed at the Wesola Mine.

USAID

USAID will provide in-kind assistance, e.g., contractual, legal, and technical consulting advice, and
potentially some development funds for energy projects that meet their criteria. The proposed project at
the Wesola Mine meets their general critiera: energy efficiency, American technology, replicability, and
employment. Note that the USAID program in Poland will end in 1999.

Bank Ochrony Srodowiska (BOS)

The BOS Bank, the Bank of Environmental Protection, which manages the funds for the National Fund,
works with the United States to develop projects through a development company called PAKTO.
PAKTO, which has an agreement with EXIMBANK for funding support, has about US$3 to $30 million
available for developing viable environmental related projects.

Joint Implementation Programs

Climate change is a global issue requiring internationally coordinated solutions. The United Nations
Framework Convention on Climate Change (FCCC), encourages Joint Implementation (Jl) to accelerate
greenhouse gas reduction. Jl projects are partnerships that coordinate interested parties from developed
countries with projects in developing countries and countries with economies in transition. The first
Conference of Parties of the FCCC in Berlin in 1995, authorized an international pilot phase of activities
implemented jointly (AIJ) to gain practical experience and develop a working methodology for guiding
future Jl projects. The results of the pilot phase AIJ projects will guide post-2000 GHG offset credit
commitments.

Countries such as the United States, Japan, Canada, the Netherlands, France, and Switzerland have
active, multiple project AIJ programs which can provide grant assistance or concessionary finance for
climate change projects such as the Wesola project. Germany also has a history of providing technical
and financial assistance to Central and Eastern Europe.

1


-------
United States. An Interagency Work Group, chaired by the U.S. State Department, is responsible for
overall policy development on joint implementation. An independent technical review board of eight U.S.
government agencies, the Evaluation Panel, reviews potential projects. The U.S. program offers
technical assistance and facilitates investment in joint implementation projects and technologies. Two
examples follow:

•	Center for Clean Air Policy, Wisconsin Electric Power Company, NIPSCO Industries, Inc. (energy-
based holding company), Unicom Enterprises (Edison Development Company), and City of Decin in
the Czech Republic partnered in a coal-to-gas fuel switching project.

•	Sustainable Development Technology Corporation, Oregon State University (OSU) , Sealweld Corp.,
GAZPROM, Center for Energy Efficiency, and the cities of Saratov and Pallasovka in Russia may
join resources for a fugitive gas capture program (natural gas distribution system).

European countries such as the Netherlands. France. Norway. Switzerland, and Germany operate
programs that grant concessionary finance for international projects, preferably with corporate
participation or hardware from the donor country used in the project.

The Netherlands. The Dutch Foreign Ministry in the Hague manages the Joint
Implementation Fund (JIF), which grants concessionary finance for international projects.
As AIJ efforts do not yet involve commitment of credits, the JIF funds can also be used
to leverage the project's financal structure to assure sufficient project return for the
participants. Because of the geographical proximity and historic links between Poland
and the Netherlands, the JIF program may enhance financing options for a CBM project
in Poland.

France. The French Global Environment Facility (FGEF), a bilateral resource, uses
grants to support projects which have a positive impact on the global environment.

FGEF granted 13 percent of its resources in 1994 through 1996 to projects in Eastern
Europe.

Norway. Norway partners with the World Bank by setting up bilateral AIJ demonstration
projects in a number of regions, including fuel switching in Poland. (Specifically, Norway
has teamed with Poland and the World Bank's GEF to finance the retrofit of district
heating boilers from coal to gas and technical assistance after the conversion.)

Switzerland. The Swiss AIJ Pilot Program identifies potential projects through bi- and
multi-lateral channels already in place for Swiss government cooperation with
developing and Central and Eastern European countries.

Germany. Germany's AIJ agency provides technical assistance to Central and Eastern
Europe.

Contact information for American and European Jl programs is attached.

Private Sources

Often a project will interest an equipment supplier or a supplier of services because it represents a
significant source of new business. The company may be willing to advance some limited development
funds to help the project, on the condition that the company make its sale and that it is well reimbursed at
closing. For the proposed project we identified the large turbine manufacturer, ABB. Note that private
firms willing to assume the high risks of an undeveloped project expect to be rewarded at a high rate of
return.

2


-------
Project Financing: Polish Government Sponsored Sources

The proposed project at the Wesola Mine qualifies for Polish governmental assistance because of its
strong environmental benefits. For these reasons part or all of the equity (including some in the form of
a grant), and some debt will likely come from national or bilateral agencies. Some of the more promising
sources of other equity and debt sources are discussed below.

ECOFUND

The ECOFUND is the institution that manages the "Polish Debt for Environment Swap"; approximately
10 percent of outstanding Polish debt lent by 16 countries in the 1970's which is forgiven if converted and
spent on environmental projects. The fund gives highest priority to greenhouse gas mitigation projects,
particularly those that will also promote US trade (the U.S. 10 percent contribution is the highest at
US$370 million). The ECOFUND provides grants which may be up to 20 percent of commercial project
financing, preferably to pay for equipment or technology. The ECOFUND is also willing to sign a
conditional letter of intent early in the project development process to help the developer convince other
capital sources of the validity of the project.

Additionally, equipment procured under ECOFUND grants can be exempt of import duties provided that
it is imported from one of the lender countries that have agreed to the debt swap.

The ECOFUND management seemed very receptive to the proposed project and would be willing to be
involved at the development stage. The fund accepts applications in March, June, and October of every
year, and awards approximately US$30 million per year to about 15 percent of the applicants. About 20
to 25 percent of this funding is appropriated to greenhouse gas mitigation projects.

The ECOFUND selects projects based on economics, environmental benefit, and replicability. Projects
for consideration must be economically viable with and without the grant, preferably with short pay back
periods. The ECOFUND's priorities, selection criteria, and procedure are presented in Attachment 12.

National Fund

The National Fund is the principal institution responsible for defining and carrying out Poland's
environmental policy under the auspices of the Minister of Environmental Protection. The National Fund
is supported by fees and fines charged to industry for exploitation of the environment (9 percent of
funding is from mines), and in return, provides grants, loans, and cash equity (with ownership position),
to support environmental projects, specifically to support procurement of hard assets. In 1995 the fund
supported over US$30 million in undertakings for environmental projects associated with mines.

Projects applying to the National Fund typically encompass more than one Voivodship, or implement
new and innovative technologies not yet demonstrated in Poland. Projects that do not satisfy these
categories can seek similar funding at the Voivodship level (The Voivodship Fund), while those that do,
can actually apply at both agencies. The proposed project at the Wesola Mine should apply to both the
Voivodship and National Funds as per discussions with fund managers.

The National Fund's preference is to provide loans with remission provisions (amounts from US$1.2
million to US$100 million) at favorable rates, about 6 percent below current commercial market rates.
The National Fund can grant remission of up to 40 percent of the outstanding principal after 50 percent
of it is paid if the project fullfills all of its environmental requirements and is implemented within the
agreed upon period. Typical loan terms are 3.5 years. Additionally, the National Fund could also forgive
environmental debts using dividends gained from project investments at the mine as stated previously.

Voivodship Fund

3


-------
The regional counterpart to the National Fund has less money for projects but should also be approached
with the proposed project. The Voivodship Fund provides similar funding and both indicate that a
maximum contribution of 40 percent from both funds would be reasonable; 10 percent cash equity, and
30 percent debt. The cash equity would be secured by a 33 percent ownership position in the project.

Information on the National and Voivodship Funds, including contact information, can be found in
Attachment 13.

Project Financing: Other and Commercial Sources

Polish Oil and Gas Company (POGC)

As indicated above, the POGC expressed an interest in the proposed project, particularly as it promotes
technology for increased gas recovery (directional drilling). The POGC indicated that they would indicate
their interest after review of feasibility analyses and if interested, would be able to provide cash equity for
an ownership position.

Bank Ochronv Srodowiska (BOS')

As presented above, the BOS bank expressed an interest in the proposed Wesola Mine project and
could provide both equity or debt with or without the involvement of PAKTO as previously discussed.
Seventy percent of BOS loans are for environmental projects.

Joint Implementation Programs

In some cases the financial assistance coming from Jl programs may amount to much more than
development grants. (See Jl discussion above.)

Commercial Banks

The Wesola project developer should also approach commercial banks, Polish banks and international
banks that do business in Poland. We discussed the potential project with Citibank representatives and
they indicated that they have provided many loans to coal mining operations in the Upper Silesian Basin.
Contact information for commercial banks can be found in the AID Guide included as Attachment 11.

4


-------
Summary

The table below summarizes the various types of funding sources discussed in this section. It also
presents roles that the Wesola Mine and other participants might play in the financing structure.

Potential Source

Development
Funds

Equity

Grant

Loan

POGC

Yes (if equity)

Yes

-

-

BOS Bank

-

Yes

-

Yes

PAKTO

Yes

Yes

-

-

Jl Programs

Yes

Yes

Yes

-

Citibank



Yes



Yes

USAID

Small grants and
in-kind services

-

-

-

ECOFUND

-

-

Yes

-

National Fund

-

Yes

-

Yes

Voivodship Fund



Yes



Yes

Wesola Mine

In-kind

In-kind

-



ZEC

In-kind

In-kind

-

-

ZOK

In-kind

In-kind

-

-

ABB

Yes

Yes



Yes

Potential Sources of Funding for Proposed Project at the Wesola Mine


-------
Contact Information

Polish Oil and Gas Company, Geological Office Geonafta

Mr. Marek Hoffmann, Director
76 Jagiellonska Street
03-301 Warsaw
Poland

TEL: (48-22) 11-26-06
FAX: (48-22) 11-28-78

U.S. Agency for International Development (USAID)

Maria Yakubowicz
email: mjakubowicz@usaid.gov
TEL: (48-22)63-24-80
Warsaw, Poland

Bank Ochrony Srodowiska S.A. (BOS)

Mr. Jan K. Wielgus, Director
Capital Investment Department
ul. Przasnyska 6A
01-756 Warszawa, Poland
TEL: (48-22)633-55-22
FAX: (48-22) 639-73-10

Joint Implementation Programs

American Jl program:

Mr. Robert K. Dixon, Director

Ms. Ramola Gupta, Central Europe/Newly Independent States and Energy/Methane

United States Initiative on Joint Implementation

PO-63

1000 Independence Avenue, SW
Washington, D.C. 20585
(202) 586-3288 Telephone
(202) 586-3485 Facsimile

French Jl program:

Ms. Catherine Garreta, Executive Secretary

Mr. Christian de Gromard, Greenhouse Effect and Ozone Layer

Secretariat du F.F.E.M

Caisse Frangaise de Developpement

35, rue Boissy D'Anglas 75379 Paris cedex 08

+33 1 40 06 32 55 Telephone

+33 1 01 40 06 32 48 Facsimile

Netherlands Jl program:

Mr. Ard D. Kant

Fund Manager Joint Implementation

Division Climate, Energy, and Environmental Technology

6


-------
Ministry of Foreign Affairs
Bezuidenhoutseweg 67
P.O. Box 20061

2500 EB The Hague, The Netherlands
31-70-3486057 Telephone
31-70-3484303 Facsimile

Norweigan Jl program:

Geir Sjoberg

Royal Ministry of Foreign Affairs
PO Box 8114 Dep
0032 Oslo
Norway

+47 22 24 36 00 Telephone
+47 22 24 95 80/81 Facsimile

Swiss Jl program:

Anne Arquit Neiderberger

Program Manager SWAPP

Federal Office for Foreign Economic Affairs

Effingerstrasse 1

CH-3003 Berne

Switzerland

+41 31 323 08 85 Telephone
+41 31 324 09 58 Facsimile

German Jl program:

Mr. Franzjosef Schafhausen or Ms Annette Jochem

Federal Ministry for the Environment, Nature Conservation and Nuclear Safety
Division G I 16

Environment and Energy, Environmental Technology, Environment and Products
PO Box 12 06 29
D-53048 Bonn
Germany

+49 2 28 3 05 23 50 Telephone
+49 2 28 3 05 33 36 Facsimile

ABB Prvni brnenska strojirna Brno, Ltd. (ABB)

Mr. Mike Burgess

ABB Prvni brnenska strojirna Brno, Ltd.

Olomoucka 7/9

656 66 Brno. Czech Republic

TEL: 420 5 514-2602

FAX: 420 5 514-3013

7


-------
ATTACHMENT 11

Excerpts from USAID's Guide:

"Market for Financing of Environmental Investment Projects in Poland"


-------
ATTACHMENT 12

ECOFUND Polish Debt for Environmental Swap


-------
ATTACHMENT 13

The National Fund for Environmental Protection and Water Management


-------
ATTACHMENT 14

Details of Economic Analyses


-------
Projected Turbine Performance

123,098
20,760
17%

1996 Average Emissions
1996 Average Drained Volume
1996 Degas Efficiency

Methane Emissions Projections for 10 Years



Year

Drain Eff.

Projected Liberated

Drained

Turbine Load

Gen Eff

Elev. F

Losses

Gen

Heat

HWB (kWth)







(cmpd)

(cmpd)



27.4%

%

%

kWe

kWth

40%

1

1996

17%

123,098

20,760

0.82

24.6%

0.97

0.9

1,748

6,392

2,556

2

1997

18%

126,488

22,398

0.88

26.0%

0.97

0.9

1,989

6,775

2,908

3

1998

19%

129,877

24,148

0.95

27.0%

0.97

0.9

2,223

7,208

3,250

4

1999

20%

133,267

26,017

1.00

27.4%

0.97

0.9

2,371

7,541

3,466

5

2000

20%

136,656

28,013

1.00

27.4%

0.97

0.9

2,371

7,541

3,466

6

2001

22%

135,389

29,141

1.00

27.4%

0.97

0.9

2,371

7,541

3,466

7

2002

23%

134,122

30,312

1.00

27.4%

0.97

0.9

2,371

7,541

3,466

8

2003

24%

132,854

31,527

1.00

27.4%

0.97

0.9

2,371

7,541

3,466

9

2004

25%

131,587

32,787

1.00

27.4%

0.97

0.9

2,371

7,541

3,466

10

2005

26%

130,320

34,095

1.00

27.4%

0.97

0.9

2,371

7,541

3,466

Heating Value Methane (100%)	32911.6	kJ/cm

Total Turbine Fuel Required	26021	cmpd

Fuel for Turbine	23861	cmpd

Compressor Fuel	1550	cmpd

Fuel Available from Vent	2160	cmpd

Total Fuel Requirement
Total Gob Gas for 100% Load

27571	cmpd

25411	cmpd at 100% methane

Heat Rate

13,245

kJ/kW-hr

1


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Projected Annual Power, Heat and Drilling Revenues to Project





I I I I I



I I I



I I







Pcwer Revenues



Heat Revenues



Drilling Revenues



Year No.

Years

Gen Pcwer

Energy Cost Escalation

Pcwver Price

Availability

Paras. Use

Revenues



Gen Heat

Heat Price

Revenues

Revenues



Drilling

Drilling Rate

Revenues







m

5%

$/kW-h

95%

m

$US



GJ

$/GJ

$US

$US



(rrVyeaar)

$/m

$US



1

1997

1,748

1.00

0.032

95%

55

$ 456,540



76,571

2.43

$ 185,686

$ 450,288



11,250

$ 50

$ 562,500



2

1998

1,989

1.05

0.034

95%

55

$ 547,635



87,133

2.55

$ 221,863

$ 564,918



11,250

$ 50

$ 562,500



3

1999

2,223

1.10

0.036

95%

55

$ 644,474



97,367

2.67

$ 260,317

$ 695,974



11,250

$ 50

$ 562,500



4

2000

2,371

1.16

0.038

95%

55

$ 722,889



103,849

2.81

$ 291,529

$ 818,391



11,250

$ 50

$ 562,500



5

2001

2,371

1.22

0.039

95%

55

$ 759,033



103,849

2.95

$ 306,105

$ 902,276



11,250

$ 50

$ 562,500



6

2002

2,371

1.28

0.041

95%

55

$ 796,985



103,849

3.09

$ 321,410

$ 994,760



11,250

$ 50

$ 562,500



7

2003

2,371

1.34

0.043

95%

55

$ 836,834



103,849

3.25

$ 337,481

$ 1,096,722



11,250

$ 50

$ 562,500



8

2004

2,371

1.41

0.046

95%

55

$ 878,676



103,849

3.41

$ 354,355

$ 1,209,136



11,250

$ 50

$ 562,500



9

2005

2,371

1.48

0.048

95%

55

$ 922,610



103,849

3.58

$ 372,073

$ 1,333,073



11,250

$ 50

$ 562,500



10

2006

2,371

1.55

0.050

95%

55

$ 968,740



103,849

3.76

$ 390,676

$ 1,469,713



11,250

$ 50

$ 562,500



Projected Annual Costs to Project Constant Dollar Excen

tfc

r Real Escalati

on (Enerav)

























Year No.

Years

Gas Vol

Enerav Cost Escalation

Gas Price

Costs



Facilitv Od



Drillina Exd



Total





cm

5%

$/cm

$US



$US



$US



$US

1

1997

7.198.530

1.00

0.022

$159,033



$ 283.673



$ 520.600



$ 963.306

2

1998

7.766.578

1.05

0.023

$180,162



$ 283.673



$ 520.600



$ 984.435

3

1999

8.373.435

1.10

0.024

$203,951



$ 283.673



$ 520.600



$1,008,224

4

2000

8.811.264

1.16

0.026

$225,346



$ 283.673



$ 520.600



$1,029,619

5

2001

8.811.264

1.22

0.027

$236,614



$ 283.673



$ 520.600



$1,040,886

6

2002

8.811.264

1.28

0.028

$248,444



$ 283.673



$ 520.600



$1,052,717

7

2003

8.811.264

1.34

0.030

$260,867



$ 283.673



$ 520.600



$1,065,139

8

2004

8.811.264

1.41

0.031

$273,910



$ 283.673



$ 520.600



$1,078,183

9

2005

8.811.264

1.48

0.033

$287,605



$ 283.673



$ 520.600



$1,091,878

10

2006

8.811.264

1.55

0.034

$301,986



$ 283.673



$ 520.600



$1,106,258

2


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