British Columbia Mine Reclamation Symposia

A decision analysis based cost–benefit framework for evaluating decommissioning options for potash mine.. Sparks, Gordon; Christensen, Paul; Kulshreshtha, Surendra N. (Surendra Nath), 1941-; Neal, Dick, 1943-; Cooper, Lorne 2004

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A DECISION ANALYAIS BASED COST – BENEFIT FRAMEWORK FOR EVALUATING DECOMISSIONING OPTIONS FOR POTASH MINE SITES IN SASKATCHEWAN Gordon Sparks1, Paul Christensen1, Suren Kulshreshtha2, Dick Neal3, Lorne Cooper4 1. 2. 3. 4.  VEMAX Management Inc., Saskatoon, Canada Department of Agricultural Economics, University of Saskatchewan, Saskatoon, Canada Department of Biology, University of Saskatchewan, Saskatoon, Canada IMC Potash, Colonsay, Canada  ABSTRACT Due to concerns regarding potential environmental impacts of brine contamination in future, potash producers in Saskatchewan are required to submit decommission and reclamation plans for each of their mine sites to Saskatchewan Environment by July, 2005. While a number of technically feasible decommission, reclamation and related tailings management (DRTM) options exist, it is important to employ a credible and pragmatic method of evaluation in order to select the ‘best’ option from the standpoint of all stakeholders and thereby avoid potentially wasteful expenditure. For this reason, the authors worked with both industry and regulators to develop a generic, computer-based, cost-benefit modeling framework that supports a rational evaluation of considered DRTM options. Since both industry and regulators are committed to the modeling framework and related quantitative process, the modeling results and rankings reached will ultimately support the decommission and reclamation plans submitted by potash producers.  INTRODUCTION AND BACKGROUND Both government and industry recognize the need for potash mining operations to carry out decommissioning and reclamation activities both during and following a mine’s useful life. In many cases, decommissioning and reclamation occur when mining revenues have diminished or ceased. Where no financial assurance has been established, therefore, taxpayer dollars could be required to finance efforts necessary to mitigate the potential impacts of brine movement from salt tailings areas to surrounding environmental receptors. To avoid this situation, Saskatchewan Environment and Resource Management (SERM) partnered with other government agencies to consult industry representatives regarding financial assurances for decommissioning and reclamation of mine sites in Saskatchewan. In time, these consultations led to changes in existing legislation governing the decommissioning and reclamation of potash mines in the province. In response to the regulatory changes, each mining company developed and submitted decommissioning, reclamation and financial assurance plans for each of the mine sites owned and operated. These plans—completed in 1997—received approval conditional upon several requirements. To satisfy these requirements, SERM and industry representatives formed a steering committee early in the fall of 2000. The steering committee, in turn, formed a Technical Working Group  (TWG) assigned the task of resolving certain scientific and technical issues associated with the requirements specified in the conditionally approved decommissioning, reclamation and financial assurance plans. As discussed in an action plan developed by the TWG, three key areas requiring study involve: 1) the development of containment or disposal options; 2) the development of brine transport models; and, 3) the development of cost/benefit, risk and decision analysis methodologies appropriate to evaluate a full range of decommissioning and rehabilitation options. In order to address the requirements of (3) above, the TWG recommended that the services of a consulting firm be commissioned to develop the required methodologies. For this reason, VEMAX Management Inc.—in association with M.D. Haug and Associates Ltd.—were awarded a contract to develop cost-benefit methods and models needed to evaluate a full range of decommissioning and rehabilitation options. COST-BENEFIT METHOD The cost-benefit method is designed to facilitate the valuation and ranking of each mutually exclusive decommission, reclamation and tailings management (DRTM) scenario considered for any mine site in the province. In essence, the computational process encapsulated within this method involves: 1) Determining the initial capital and on-going cost stream corresponding to the installation, operation and maintenance of control technologies associated with each considered DRTM scenario. 2) Estimating the stream of environmental benefits (i.e., environmental cost-savings) corresponding to successful implementation of each DRTM scenario. 3) For each DRTM scenario, converting dollar-valued cost and benefit streams to equivalent Annual Worth (AW) measures given a pre-selected planning horizon (measured in years) and discount rate. 4) Subtracting AW costs from AW benefits to derive an annualized measure of Net Present Value (NPV) for each DRTM scenario. Although determining capital and on-going costs is relatively straight-forward (obtained directly through engineering cost estimates corresponding to each considered DRTM scenario), estimating the environmental costs necessary to compute the benefits of DRTM implementation presents a greater challenge. Summarized below, it should be noted that the environmental costing process developed reflects recommendations of the TWG based on consultations with the project team.  ENVIRONMENTAL AND ECONOMIC IMPACTS The environmental costing process traces a path from salt tailings areas to environmental receptors—where various means of valuation are applied to assign dollar-valued costs to potential degradation in environmental quality. The steps taken to trace this path are reviewed below. As illustrated in Figure 1, (figures at the back of the paper), brine from a salt tailings area can reach environmental receptors through lateral migration via shallow or deep aquifers. Seeping downwards, the brine eventually penetrates clay aquitards to reach flowing aquifers. The aquifers, then, serve as potential “pathways” transporting concentrated brine from a salt tailings area to surrounding environmental receptors. 1 Defined uniquely, the sheer quantity of environmental receptors surrounding potash mine sites in the province would literally overwhelm attempts at economic valuation of potential environmental damage. For this reason, it was necessary to aggregate environmental receptors into categories reflecting common characteristics and environmental concerns. It should be noted that the process of aggregation was conducted with the help of Dr. Dick Neal and Mr. Scott Halpin. 2 Ultimately, the number of environmental receptor categories was reduced to six. These include: 1) Primarily Agricultural Land: acreages allocated to farming and/or livestock production. 2) Primarily Wildlife Habitat: wildlife habitat with limited incursion by productive activities. 3) Critical Wildlife Habitat: wildlife habitat deemed “critical” by SERM (e.g., habitat supporting endangered species). 4) Non-Flowing Waterbodies: lakes, sloughs and marshes supporting wildlife and aquatic plant species. 5) Flowing Waterbodies: rivers and creeks supporting wildlife and riparian habitat. 6) Water Wells: wells drawing groundwater for domestic use (rural household), livestock, municipal, industrial or irrigation activities. In order to translate potential brine contamination of receptors to some measure of economic impact (i.e., dollar-valued environmental cost), it is first necessary to estimate the severity and extent of environmental impact suffered by affected receptors. In practice, estimates regarding the severity and extent of environmental impact must come from contaminant transport models intended to predict the flow of brine from mine sites to receptors given information regarding the  1  As discussed in the main report, other pathways include wind (carrying salt dust or brine spray), dyke breeches and seepage through control structures. However, current tailings management at each of the mine sites in the province effectively prevent contamination via these pathways. Therefore, shallow and deep lateral migration are the sole pathways considered within the cost-benefit method and resulting models. 2 Both of the Biology Department, University of Saskatchewan. A summary of their work is provided in Appendix B of the main report.  geologic characteristics of underlying aquifers and aquitards. Currently, the most advanced modeling techniques suggest the leading edge of a brine “contamination plume” will possess salt concentrations of 10,000 mg/l or more. 3 At this level of concentration, any affected receptor would be rendered “unproductive”—and remain so until the contamination plume passes (potentially thousands of years hence). Hence, in instances where affected receptors are unable to continually “flush” the plume with fresh water, salt concentrations and corresponding impacts will prove devastating. On the other hand, where fresh water continually dilutes and flushes the (slowly) advancing contamination plume—as is the case for flowing waterbodies—salt concentrations and corresponding environmental and economic impacts may range from “negligible” to “severe”. These observations are reflected in the tree diagrams shown in Figures 2 and 3. TREATMENT OF ECONOMIC IMPACT CATEGORIES Having established a practicable method of estimating environmental impacts, it is now necessary to focus attention on estimating corresponding economic impacts (i.e., environmental costs). For the purposes of this study, the environmental costs attributable to varying levels of physical (environmental) impact were estimated through application of certain principles of valuation: (a) market value, (b) replacement, and (c) prevention. 4 It is important to note that the application of these principles across receptor categories were determined in consultation with the TWG. This ensures the valuation methods applied satisfy regulators influencing real-world decisions reached by individual mining companies in the province. Table 1 lists the six receptor categories and the principle of valuation applied in each case to derive estimates of environmental cost. Presumably, since the severity and extent of damage to local receptors vary across alternative DRTM scenarios, each scenario will correspond to a unique set of environmental costs. As investment in more sophisticated DRTM technology rises, then, one might well expect any additional capital and on-going operating and maintenance costs incurred are offset—to some degree—by reductions in predicted environmental costs. For this reason, each DRTM scenario may be described by the direct capital and operating costs incurred as well as the environmental benefits (i.e., cost savings) enjoyed. The DRTM scenario that generates the greatest net benefit (i.e., NPV), then, nominally constitutes the “best” scenario available. MODEL CONSTRUCTION AND DATA As discussed in the introduction, any cost-benefit models constructed must be able to facilitate scenario management as well as sensitivity and risk analyses. For this reason, a combination of DPL (a special-purpose decision analysis software) and Excel (a spreadsheet software package) were applied to develop a model suited to the needs expressed by the TWG. In this arrangement,  3  Estimate provided by MD Haug and Associates Ltd. A more detailed discussion regarding principles of economic valuation is provided in chapter 2 of the main report.  4  the custom-programmed DPL component facilitates scenario management as well as sensitivity and risk analyses. Excel, in contrast, embeds custom-programmed worksheets intended to compute annualized environmental and other costs. DPL “communicates” with Excel in order to control the computations that ultimately establish rankings among available DRTM scenarios. MODEL COMPONENTS The DPL-Excel model contains 11 individual components. Corresponding to each of the numbered components is a unique spreadsheet in Excel that facilitates model computations. Below, the function of each numbered model component is discussed in turn. For more detailed information, see chapter 3 of the main report. ¾ Model Component 1 (DRTM): This component computes the total annualized cost of initial investment and on-going expenditure corresponding to each DRTM scenario considered within the model environment. ¾ Model Component 2 (FVM): Component 2 applies market land values and affected acreage (i.e., farmlands rendered “unproductive” due contamination) data to derive associated annualized cost estimates within the DPL-Excel model. ¾ Model Component 3 (PWH): This component mirrors model component 2 but includes pertinent enhancement cost and SERM replacement factor data to estimate the total annualized cost of replacing primary wildlife habitat affected by brine contamination. ¾ Model Component 4 (CWH): This model component is identical in structure to model component 3 (PWH) and is directed towards Critical Wildlife Habitat. However, since cost and other data may vary, it is treated separately within the model environment. ¾ Model Component 5 (NFLW): This nonflowing waterbody model component identically mirror components 3 and 4. Again, it is treated separately within the model since cost and other data may vary substantively. ¾ Model Component 6 (DOM): Here, the cost of replacing contaminated domestic (i.e., rural household) wells is considered. Note that adequate replacement may be supplied by either water hauling or through the construction and operation of a rural pipeline network. ¾ Model Component 7 (LIV): The cost of replacing contaminated livestock wells is computed within this model component. ¾ Model Components 8a and 8b (MUN1 and MUN2): The computational process involved in estimating the costs of municipal well replacement are sufficient complex to necessitate a model sub-component for each municipality potentially affected by brine contamination. ¾ Model Component 9 (II1): The costing process used to estimate replacement of industrial or irrigation wells is sufficient similar to allow similar representation within the modeling environment (hence, “II” stands for “Industrial/Irrigation”). ¾ Model Component 10 (FLW): Recall that costing within the flowing waterbody model component is based on the principle of prevention. Hence, all pertinent capital and ongoing costs (among other data) are used to compute the total annualized prevention costs across DRTM scenario.  ¾ Model Component 11: As discussed above, model component 11 deals with taxation issues. Through information generated within the model environment (e.g., value node “Total Cost ($/yr)” is determined through internal model computations) and added externally by model users (e.g., value nodes “Avg K2O Price”, “K2O Quantity”, etc.), model component 11 computes all associated “tax costs” (as expressed in value node “Tax Cost ($/yr)”). Since each DRTM scenario likely generates unique total costs, “Tax Cost ($/yr)” is likely to vary across scenario. In sum, model components 1 through 10 are directly involved in the computation of “Total Cost ($/yr)”—the criteria used to rank all scenarios considered. In turn, the total costs computed are used to calculate the share of costs absorbed through taxation (as expressed in model component 11). Hence, through model modification—as demonstrated in the training CD’s—users can choose to generate either “Total Cost ($/yr)” estimates for each DRTM scenario, or “Tax Cost ($/yr)” estimates for each DRTM scenario. In either case, the ranking of scenarios will remain constant (since taxes are simply proportional to total costs). To illustrate a basic outcome of a model run, hypothetical data was used to generate results for a fictitious “Base Case” and “Scenario A”. The results of this exercise are presented as a policy tree within Figure 4. As Figure 4 illustrates, four mutually exclusive alternatives face decision-makers in this contrived exercise. These include: “Base Case / Pipeline”, “Base Case / Water Haul”, “Scenario A / Pipeline”, and “Scenario A / Water Haul”. 5 According to the total annualized cost estimates generated by the model, the preferred (i.e., cost-minimizing) alternative is “Scenario A / Water Haul” at $198,260. 6 Next is “Scenario A / Pipeline” at $198,349. “Base Case / Pipeline” and “Base Case / Water Haul” follow at $271,106 and $278,627, respectively. As this simple example demonstrates, then, the model effectively manages the unique set of data and computations corresponding to each mutually exclusive alternative—facilitating a consistent ranking of all DRTM / Water Supply alternatives in accord to total annualized costs. CONCLUSION The purpose of this summary was two-fold. First, to briefly outline the cost-benefit method underlying the evaluation of considered, mutually exclusive DRTM scenarios at each potash mine site in the province. Second, to succinctly describe the DPL / Excel costing model resulting from the established cost-benefit method. Clearly, this has been accomplished.  5  Recall that decision alternatives “Pipeline” and “Water Haul” correspond to model component 6 (where nodes are prefixed by “DOM”). The decision at-hand involves the means by which water is to be replaced where domestic (i.e., rural homestead) wells are contaminated by brine. Alternative “Pipeline” indicates replacement with a rural pipeline network. Alternative “Water Haul” indicates replacement by hauled water. Each decision alternative corresponds to a unique set of costs and other data. 6 Note that the policy tree presented in Figure 6 presents costs as negative cash flows. This simply reflects computational conventions within DPL.  From users’ standpoint, this summary provides a basic introduction to the methods and models developed. To gain sufficient knowledge to undertake evaluations at each mine site, however, users are encouraged to investigate the remaining deliverables resulting through this project. These include the main report, a training summary, and CD copies of the training seminars conducted as part of this project. REFERENCES Champ, P.A., Boyle, K.J. and Brown, T.C. (eds.). 2003. A Primer on Nonmarket Valuation. Kluwer Academic Publisher, London. Ewel, K.C. 1997. Water Quality Improvement in Wetlands. In Nature’s Services: Societal Dependence on Natural Ecosystems. G.C. Daily (ed.). Island Press, 329-344. Kulshreshtha, S. 2002. A Survey of Studies involving Value of Natural Resources / Goods provided by Nature to Society. In Cost-Benefit Analysis of Decommission, Reclamation and  Tailings Management Scenarios for Potash Mine Sites in Saskatchewan: A Decision Analysis Modeling Approach, Appendix A. VEMAX Management Inc., January, 2003. Langston, C.A. and Ding, G.K.C. 2001. Sustainable Practices in the Built Environment. 2nd ed., Butterworth-Heinemann. Mortensen, P.R. 1994. Implications for North American natural gas volumes and prices of the increased use of natural gas for electricity generation. M.Sc. Thesis, University of Saskatchewan, Saskatoon Saskatchewan. Neal, B.R. and Halpin, S. 2001. Decommissioning and Reclamation Analysis of Saskatchewan Potash Mines: Impacts on Surrounding Ecosystems. In Cost-Benefit Analysis of  Decommission, Reclamation and Tailings Management Scenarios for Potash Mine Sites in Saskatchewan: A Decision Analysis Modeling Approach, Appendix B. VEMAX Management Inc., January, 2003. Saskatchewan Environment and Resource Management. 1995. Surface Water Quality Objectives. MB#110, December. VEMAX Management Inc. 2003. Cost-Benefit Analysis of Decommission, Reclamation and  Tailings Management Scenarios for Potash Mine Sites in Saskatchewan: A Decision Analysis Modeling Approach. January.  Figure 1 Salt Pathways  Tailings Pile  Dyke Pond  Surficial Aquifer 1. Shallow lateral migration  Aquitard Intertill Aquifer  2. Deep lateral migration  Basal Aquitard  Figure 2 Shallow Lateral Pathway  Primarily Wildlife Habitat  Critical Wildlife Habitat  Shallow Lateral Migration (Surficial Aquifer)  Non-Flowing Waterbodies (Small lakes & marshes)  Waterways  Flowing Waterbodies  Domestic  Wells  Total  Background  None  > 10,000 mg/l  Total  Background  None  > 10,000 mg/l  Total  Background  None  > 10,000 mg/l  Total  Mass of salt / unit over time Volume of water / unit of time  Function of concentration (variable)  Background  None  > 10,000 mg/l  Total  Background  None  Municipal  Industrial  > 10,000 mg/l  Total  Background  None  > 10,000 mg/l PATHWAYS  RECEPTORS  None  > 10,000 mg/l  SALT CONCENTRATION  Total PHYSICAL IMPACT  ECONOMIC IMPACT  Background  Primarily Agricultural Land  Figure 3 Deep Lateral Pathway  Non-Flowing Waterbodies (Small lakes & marshes)  None  > 10,000 mg/l  Total  Mass of salt / unit over time  Flowing Waterbodies  Volume of water / unit of time  Function of concentration (variable)  Background  None  Deep Lateral Migration (Intertill Aquifer) Domestic  Wells  Total  Background  None  Municipal  Industrial  PATHWAYS  > 10,000 mg/l  RECEPTORS  > 10,000 mg/l  Total  Background  None  > 10,000 mg/l  Total  SALT CONCENTRATION  ECONOMIC IMPACT  Waterways  Background  PHYSICAL IMPACT  Figure 4 Policy Tree  DOM__Water_Supply Base_Case [-271106]  Pipeline Water_Haul  DRTM_Scenario [-198260] DOM__Water_Supply Scenario_A [-198260]  Pipeline Water_Haul  [-271106] -271106 [-278627] -278627 [-198349] -198349 [-198260] -198260  Table 1 Valuation Principles applied to  Environmental Receptor Categories Primarily Agricultural Land Primarily Wildlife Habitat (PWF) Critical Wildlife Habitat (CWF) Non-Flowing Waterbodies (NFLW) Flowing Waterbodies (FLW) Water Wells  Valuation Principle Applied Market Value Replacement Replacement Replacement Prevention Replacement  

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