Bolivia - Gas Pipeline Project

CONFIDENTIAL Report No. 593 INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT PROJECT PERFORMANCE AUDIT REPORT BOLIVIA: YABOG GAS PIPELINE PROJECT (LOAN 635-BO) December 13, 1974 Onerations Evaluation Department  PROJECT PERFORMANCE AUDIT REPORT BOLIVIA: YABOG GAS PIPELINE PROJECT (LOAN 635-BO) Introduction This memorandum represents an audit of achievements supported by Loan 635-BO of July 22, 1969, which was closed on January 1, 1973. It is based mainly on a review of the substance of the corresponding Project Completion Report (PCR) attached, as prepared by the Latin America and Caribbean Regional Office, and other relevant reports and material from the Bank files (Loan Agreement, Appraisal Report, Lenders Trust, Gas Production and Guarantee Agreements, Progress Reports, Supervision Reports, Borrower's Annual Reports, correspondence between Bank and Borrower), and on discussions with some of the Bank staff who had been involved with the project. Thp Oricrinql Prniect Loa,n AI-R~O rircrinn1lu (zicrnpi in TiOu~ 1QAQ_ nrnutipt TMA 91~ 990 00f to Compania Yacibol Bogoc Transportadores (YABOG) for the project for which the New York Sate Common Retiremont Fund (NYSCRF) uas alnso lending an equal amount. The objective of the US$ 46.5 million project was the construction of a pipeli4ne systemr for or fr gaF from the Santas Cruz. gas fieald i04n eastern Bolivia to the Argentine border. The sale of gas to Argentina was estimated to bri ng an average annual net i nflow. of foreinn x,hnn4- 1s Bolivian economy of approximately US$ 6.5 million over the 20-year life of LAiDUJ WD )wnCu by YaILICiHU L UrCLLULLL CLU FialeUdi DUo4.LVLanos (YPFB -- the Bolivian state oil enterprise) and Bolivian Gulf Oil Company (BOGAC) a wholly owned s,bs4A4ary of Gulf Oi1 Crporation -llowing a change in Government, BOGOC's assets were nationalized in October 1969, before the Bank loan had become effective. The new c.onditio4 ns made it impossible for the Bank to declare the loan effective. The reconstitution pensation between Bolivia and Gulf was completed and the loan had been rene- OL.LaL U k1:%,D para. .J. U; NOTE: Currency Equivalents US$ 1 = pesos 11.88 until November 1972 US$ 1 = pesos 20.00 since then -2- The Reconstituted Project The nationalization of BOGOC affected the structure of the original project in three important ways. First. the country could not count on Gulf's technical assistance to supervise construction and train YPFB staff to operate the gas fields and the pipeline. Second. Gulf's suspension of further guarantee on withdrawals from the New York State Common Retirement Fund loan created a gap in the financing of the proiect of about US$ 10 million. Finally, the financial arrangements were based on the guarantee of the Bank loan by Gulf: there was serious dnubt whfthpr this guarantee would be available. The settlement between the Bolivian Government and Gulf took almost a vpar to nPQnfinfP_ nnd thp nPrP providing for compensation to BOGOC was promulgated only in September 1970. In the meantime, contacts rnnti niiPHi bpfwppn thp BolI iviaqnovernmeont, Gulf and the Bank, and the solution to the three problems mentioned above was largely worked out dulring this4 period. The Bnk -a not ina positon to declare th1e loan effective until the compensation issue was dealt with satisfactorily -- Gulif Oil was partiularly7 worriedr abou%it thiis point- -_ but, active work by all parties on the reconstitution of the project started as soon as the LL ly CL-Lange L the cUmposition o UL L oLUjecL Wd LhC excluSIO of a 140 km-long pipeline which was to have been built from the YPFB field L1ILI~a uI L_ t-LIC L. U M j_ LI kr%.,A Fal. J.L), UUUaUbU LLIZ! t!a IIIAZ 11LL bLs which Bolivia had in deriving a larger net inflow of foreign exchange from IrE fieluds, as compared with BOGOC's fields, disappeared with tHe transfer of the BOGOC's fields into YPFB hands. The 17% increase in the estimated project cost, rum USq 40.) million to US$ 5o.25 million (lable 1), was due to price increases, the appreciation of the German mark, financial and storage charges, anu Le contractor's aemouiizacion anca remobilization expenses (PCR para. 3.2). The financial gap created by the withdrawal of NYSCRF and by the cost increases was covered by a US$ 19 million loan from the inter-American Development Bank (IDB). The Bolivians would have preferred to see the Bank raise its loan in the amount necessary to finance the gap but the Bank considered that IDB's participation resulted in a more satisfactory finacial arrangement. Also, the Argentine Government, instead of Gulf, guaranteed the IBRD loan. Thus, the final financing comprised the two bank loans (IDB and IBRD) plus the US$ 14 million made available in 1969 by the NYSCRF (PCR para. 3.3). Any cost overrun was to be met by Gulf. On the issue of the need for suitable managerial and technical assistance for the construction and operation of the pipeline and for the operation of the gas fields, the Bank recommended the use of consultants, - 3 - but this solution was not acceptable to the Bolivians. Finally, agreement was reached on the creation of the Santa Cruz Division of YPFB, which would have the help of expatriate personnel. A Bank representative was expected to observe the functioning of the Division through participation in the bimonthly meetings of the Management Committee (reduced in frequency in February 1974, at the Bank's request, to quarterly). The reconstituted Bank loan, as finally signed in September 1971, contained several covenants dealing mainly with Gulf compensation, debt renympnts and the financial asnects of the Santa Cruz Division. Project Implementation and Operation Despite several minor problems during the last months of con- struction, th-oec- wasco-mleted on schedule at thp Pnd nf Anril 1972, with a cost overrun of US$ 1.4 million (PCR paras. 5.3 and 5.4). This overrun (Table D) was due to higher cost of pipeline instanllation, theP continuous appreciation of the German mark, and larger service payments on th.e VM70R floa du to th A e longer than expected constructio-nopr4od. Argentina have been 10% higher than estimated and a further increase is expected in t-e latter part of 1974 (ru para. .). Actual operating expenses of the pipeline have remained close to estimates, but gas prices have increased considerably and they are expected to rise even further (PCR para. 7.3). Thus, the actual rate of return appears to be much higher than the 21% originally estimated. Bolivia expects that ins earnings from gas exports to Argentina will be US$ 22 million in 1974, as compared to an estimated US$ 16 million in 1973. The Santa Cruz Division of YPFB has performed well. Tree of the top managerial positions have been held by expatriates but the con- sultants who blVae been giving upertional auv±c -- - - 1 Division would be ready by the end of 1974 for a changeover from permanent presence to periodic visits by experts, and a decision on this matter s expected to be made shortly. All loan covenants have been complied with. The Bank's Role me Bank playea a positive role in t[e preparation anU imple- mentation of this project which, in spite of the political difficulties, has turned out to be very successful. it is unlikely that the Bank's own regulations and the complex political circumstances following the nation- alization of Gulf's interests in Bolivia would have allowed the Bank to proceed with loan effectiveness before the issue of Gulf's compensation had been settled. However, the preparatory work done by the Bank and the other parties concerned permitted the new negotiations to proceed quickly after the agreement between the Bolivian Government and Gulf had been com- pleted. In the process, the Bank helped to put together the new financing package and highlighted the need to strengthen the managerial capabilities of the Santa Cruz Division. The project has been well supervised but, in light of the progress already made in the operations, it is unlikely that the Bank's participation in the quarterly meetings of the Management Committee will continue to be iustified, although it should be noted that the costs involved have not been high insofar as Bank staff have generally combined attendance at the meetings into nthgr qq-icnment in thp rpafnn. -- ----------- ------- ---- Conclusions In spite of the political difficulties raised by the nationali- zation of Gulf interests- i n Blivia, tHea proet hase tuwrnedl outf ton be more successful than expected. The main reasons for this success are higher gas pries, aconstructio4n proces wthoutl.n. mao nr probl ~es , anenpdiis reconstitution of the project. The Bank had a positive role in solving somt ittioa pificu la tse A in le in t oation . n 111 ll institutional difficulties involved in the operation. n^/T 'rTrr A nafa turA wn-nar man an mana nnanmaS nanw 1junrALLA 1AUDUL DUAUj 1AIOTURIADURDO Table I : ACTUAL VS ESlIATED PROJECT COS (US$ 000's) Actual Estimated E6timateu 1971 1969 Buildings and Land 443 Construction Cost 24,990 24.,1500 Material and Equipment 19,983 19,600 Trucks and Storage 1,u&) Engineering and Administration 3,360 3,oo Maintenance of Equipment, Vehicles and Other 449 Sub Total 50,270 4 7, h0, 30 Initial Working Capital - - 700 Loan Interest and Other Charges 5,066 5,600 1,300 Miscellaneous (including contingencies) 2,316 _190 7JY0L Total Project Cost 57.652 56,250 46.ou Source: Appraisal Report of May 22, 1969, President's Report of June 16, 1971, and YPFB's "Balance General," 1973  A lI%nrMNA CflfAfllf- IilabHuL'lLivi PROJECT COMPLETION REPORT BOLIVIA LOAN 635-BO YABOG Gas Pipeline Project Project Data 1.1 Amount of Loan US$23,250,000 Amount disbursed as of January 1- 1973 TUS1225000 Date of Loan Agreement September 23, 1971 Effective Date November 2 1971 Closing Date December 31, 1972 fAt of T.Aet vinprvizin Missinn Anril 13 1079 Date of Last Visit October 1973 Current Exchange Rate TTC$ 1 = 0h.9 1.2 As completed, the project consists of approximately 530 km of h, ih .r aaraa-1o -4.1. l4n of 2 94 inch. diam-ter, approxi m.4-a1- 90 A Inaf high pressure steel pipeline of 10-3/4 inch diameter, and four major and anumbeI-.r of mno .r river rossi,ngs, togetnlher with-1 meteri ng an reg.ulating stations, operating and maintenance facilities, cathodic protection and a %,LULULLL a L CLt.L %JLLD 0 LY LL 0LI UJU pJCW 9J. SM4~.U L . L I) L. iaI. IQL ~. couuunscounooyo TheLu purpoS.e o.- thne prlUoject s to tr anosut natural gas for export to Argentina from the oil and gas fields around Santa Cruz il easLL DULVia LU IULUi, UH L o DULVlian-ArgenLine UULUCL. Summary and Conclusions I-iI UL.dL LLUU11 WaD M.LiLCU JLI JULY 17U7 UUL L11 CCULLUH UL the project was interrupted later in the same year as a result of the nationalization or Gulf' Ol's interests in Bolivia (para. 3.1). TIe project was reconstituted and a new financing plan was approved in 1971 (paras. 3.2 and 3.3). Completion of the project took place on schedule kpara. 5.4) and the actual economic rate of return is much higher than originally estimated kpara. 7.1). Renegotiation o. Lie Loan anu Changes in tne Pru]ect 3.1 Loan 03D-BO to Compania Yacibol Bogoc Transportadores 'YABOG) was first approved by the Executive Directors on July 1, 1969 and signed on July 22, 1969. However, before the conditions for making it effective had -2- been met. Rol ivia nationalized t-he nronrtHi, of 'ol i-7,ivAn r-il f Ci Ioenmmany (BOGOC), co-owner of YABOG and a party to the YPFB*- BOGOC Guarantee Agorr eeme-ant with the Ban-k. Tn conelunce theoraiorn hadr t-% o bearestruP- tured. On September 10, 1970, the Bolivian Government promulgated a determined by independent consultants. This enabled the Bank to proceed wiLh L Lle tcLUlibtitutiU Ut Lie prUject. AgCLLLN 11cdU PtVLUU.Ly ULLCLCU to give its guarantee for the Loan in substitution for the guarantee by Gulf Oil Corporation of BOGOC' obligations LU Li DaU. aLLeL Lenegoti - tion of the Agreements, the Executive Directors approved the Loan on July 1, 1971 and the signing took place on September 23, 1971. 3.2 Between 1969 and 1971, the project was reduced in scope, contracts with the contractor and the suppliers were renegotiated, the project cost went up and the financing plan was reorganized. For reasons related to the transfer of BOGOC's oil and gas fields to YPFB, the installation of a 140 km long 12-3/4 inch pipeline to connect the YPFB tield at Monteagudo with the Santa Cruz-Yacuiba line was eliminated from the project. The construction contract with the Williams Brothers Company of the US and the pipe supply contract with Ferrostaal of Germany were revised to take account of cost and price increases, financial and storage charges, and demobilization and remobilization expenses. In view of the appreciation of the German mark, the estimated dollar cost of the project (despite its reduced scope) went up from US$ 46.5 million to US$ 56 million. 3.3 The 1969 financing plan provided for US$ 23.25 million from the Bank and up to US$ 25 million from the New York State Common Retirement Fund (NYSCRF). The NYSCRF loan to YABOG had been guaranteed by the Gulf Oil Corporation. At the time of the BOGOC nationalization, the NYSCRF cancelled the undrawn balance, reducing its loan to US$ 14 million. The gap resulting from the cancellation, and from the rise in the project cost, was covered in 1971 by the Inter-American Development Bank (IDB). Its loan amounted to US$ 19 million, 60% of it in U.S. dollars and 40% in Nether- lands guilders. Added to the Bank's US$ 23.25 million and the NYSCRF's US$ 14 million, the IDB contribution completed a US$ 56.25 million financing plan meeting the project cost. Project Execution in 1969 4.1 Construction of the project began in the middle of 1969, before the effective date of the Bank's Loan. Accordirg to the Back-to-Office Report of a Bank mission which visited Santa Cruz in December 1969, 161 km *Yacimentos Petroliferos Fiscales Bolivianos - 3 - or 30% of the trunk line had been laid by that time. Materials purchased for the project were scattered in Argentina, Chile, the US and Germany. Production of further materials had been suspended, The contractor had demobilized and had withdrawn construction equipment from Bolivia. YABOG met thp exnenses on the nrniect bv drawing down TTA QA million (the balanr of the NYSCRF loan was released early in 1971) of the NYSCRF loan and by ncriringy oliattins toconntfrnct-fires n an suppliers in thek ant oiif nFS$Z 10 million. 4.2 This information was refined and updated by a Bolivian delegation, headed bt Ly 11inisterU~J CaOprles, ~ III Vwhich. viste LI ank Ucin Sete,De AsfLLC . ,l l of December 31, 1969, 202 km of pipe had been laid, including the 20 km long - J.Jf *t £ ILII L LCU. ILLL ui faIII .LIJ I ipeJ aLIt p.lat su f ci n OULLL L I. UL- another 221 km of trunk line were stored in Argentina. Orders for 130 km 1.L CLLIAHU LU Us t1LU. iL L- CHu UL 7 U LC G dLLLVLy HoU JuIJ sided, and for about 15 months, construction of the pipeline was practically at a stanustill. During that time, 1UWever, UU1 UL. ULULUL ULLU11o WU: LCL- tain payments on behalf of YABOG for pipe, other materials, freight, storage and financial charges. As a result of these payments, expenatures on the project reached the amount of US$ 27.5 million, or about one-half of the revised cost estimate prepared in 1971. 4.3 At the end of 1970 and the beginning of 17/1, tne Bank and the DB agreed on the allocation of the proceeds of their loans. The Bank undertook to finance the foreign exchange cost, estimated at US$ 20.85 million, or the pipeline installation contract, a small amount of consulting services rendered in 1968/69, and the interest on its loan during construction. The IDB agreed to meet the cost of the pipe purchase contract, the consulting services of van Houten Associates, and its loan interest during construction. The remainder of the project expenditure, including the various services, financial charges, and all local expenses, was allocated to the NYSCRF. Completion of the Project 5.1 Construction activity resumed in the suner of 1971 after the re- negotiation of the contracts with Williams Brothers and Ferrostaal, and after Gulf Oil Corporation agreed to release to YABOG the pipe and materials stored in Argentina. In May, YPFB made arrangements with the First National City Bank of New York for a short term loan of US$ 10 million to tide YABOG over until the effective date of the renegotiated Bank loan and the IDB loan. 5.2 Once the work had been started again, the execution of the project proceeded smoothly and rapidly with a view to beginning gas deliveries to Argentina on May 1, 1972. By the end of 1971, trenching had been completed on 380 kIn, stringing and welding on 350 km, coating on 335 km and hydro- static testing on 125 km; this reflected progress at the rate of 2.5 km per day since resumption of construction. Two of the four major river crossings had been completed and work on the other two was well advanced. Practically all materials for the project had been delivered to YABOG, and about two-thirds of thp Rank's loan, i.e P-$ 15.3 million had hen dis- bursed and applied to the project. 5.3 In mid-March 1972, trenching had advanced to km 504, welding to of faulty pipe had occurred during the testing; this hampered the progress oft.li Lsl opr S~tL.iln, which .11a een neglecte by5~C LC he. LIcontraLictor, aniu.3. raised the question of whether the completion date would be met. There had abene------- i-ra---------------------------- .LOU V U11 L Vivi L i L.LVLIC L UL L LLC LHLCJUL Li VVL L. UZ0 hLlr, h 17lUL C over, some friction had arisen between YABOG and van Houten Associates, L[e supervision consuLant, wose pUL1LULU11( C LnIU UtLtuLa4eE dLLeL LueC death of the vice president in charge of the project. 5.4 Despite these problems, and mainly owing to the intense pressure applied vy te Bank and ID to [ne Wiliuams Bruters uumpany, the main con- tractor, the hydrostatic tests were accelerated, the pipeline was completed on time, and it was inaugurated on April 29, ii. The actual cost, at US$ 57.1 million, exceeded the 1971 estimate by about US$ 1 million but re- mained within the amount of the financing arranged, because the Netherlands guilder component of the IDB loan had meanwhile appreciated in terms of US dollars. The reasons for the modest cost overrun were the following: higher cost of pipeline installation; higher dollar cost of German-produced pipe, resulting from the appreciation of the German mark; and larger ser- vice payments on the NYSCRF loan, arising from a construction period longer than that envisaged in 1969. These changes called for some reallocation of the proceeds of the Bank's loan: the pipeline installation category was raised by drawing on the small balances of the categories or consulting services and loan interest. Performance Since Pipeline Completion 6.1 Since the gas began flowing on April 29, 1972, the pipeline has been operating quite satisfactorily. The very few brief interruptions in the transmission, which occurred in the course of 20 months, were caused by minor technical faults on the Yacuiba/Buenos Aires trunk line. The only flaw in the performance has been pipeline vibration at the Parapeti and Piray rivers suspension bridges. Corrective measures were successfully applied at the Piray bridge, and the Borrower intends to apply similar measures at the Parapeti bridge in the near future. 6.2 Withdrawals from the Loan Account proceeded smoothly. The last disbursement was made on January 1, 1973, to credit the Bank for part of the interest payment falling due on that date. Economic Justification 7.1 The economic rate of return on the revised project was estimated at 21% (the 1969 return estimate was 24%). The actual rate of return now appears to be very much higher. Practically from the start of operation, deliveries to Argentina have been larger than planned, and, as of September 1, 1973, higher prices for gas have been agreed on. 7.2 The gas sales contract with Argentina provides for an average daily delivery of 141 million cu ft during the first seven years and of 159 million cu ft during the remaining 13 years, for a total dedication of 1.1 trillion cu ft of gas. Because of strong Argentine demand, daily deliveries in 1972 and 1973 have averaged 150-155 million cu ft, or up to 10% more than provided for in the contract. Due to technical difficulties on the Argentine side they fell to an average of 145 million cu ft for the first half of 1974 but already achieved an average of 170 million cu ft per day for the month of June. 7.3 The changes in the gas sales contract also provide for price in- creases. The price of residual gas was, in fact, raised as of September 1. 1973, from US( 22.5 to US 35 per 1,000 cu ft. For condensates, the price of US$ 27.86/metric ton has been set for one year as of September 1. 1973: this compares with US$ 19.90 previously. In the latter part of 1974, the new prices may be reviewed in the light of the price situation in other markets and the exchange rate of the US dollar. Bolivia expects that its earnings from gas exports to Argentina will be about UTS 22 million in 1974- as compared with an estimated US$ 16 million in 1973. The Gas Fields 8.1 As indicated in paragraph 1.2 preceding, the natural gas being tranqmi tted thronih the nippline comes from oil and qns fields sit-iuted around Santa Cruz. The fields were discovered and subsequently exploited byv BRc. After thp 1C)6C nationali7.ainn of ROMP.ff qnri Hp withbra1rqn of Gulf personnel, the Bank decided that it could remain associated with the ra-lne nropet nly f th focrmer Tkrl foipltcz of a -rdinte rln on Pe- Grande were competently and efficiently operated and administered. Conse- riiant-1% wo 4 n 4 c t- A n f n n t trninia ant -4 f-xT 1i a -r A f-iqT4 i n- VT)rTZ 4- - 6 - take charge of the operation and that this entity have access to specialized consulting services, mainly to deal with production and reservoir engineering. There was a strong feeling within the Bank that, while the operation of a pipeline was a simple task, proper experience and skills were required to produce the gas to meet the export comnitment given to Argentina in 1968- 8.2 The creation of the Santa Cruz ivigion of VPPR An a rainal entity with administrative, technical and financial autonomy was authorized by a decree-law on Anril 19, 1971 Th ) n4icinn w acaf n nA 4 h-l.r.k- approved, by a resolution of the YPFB Board on April 22, 1971. The responsi- bii- fthp di-viginnnl nrt-it-iic i4e i7acot-aq in,n M~ngment e consisting of the General Manager of YPFB, another ranking YPFB official and the Mannager of thei Division. In conformity with the Gas ProducdJon Agreement between the Bank, YPFB and the Santa Cruz Division, a Bank observer attends the meetings of9 the Cotranittee. *The chiefrxctv fteDvso has to be a qualified Bolivian engineer with no less than ten years of ex- .7 - -15 -C - 5. rJLU .U LL L cc U iLL9 the appointment of the Manager shall be made in agreement with the Bank; it S fL.CL OL .J[1- L LitLC Lilct i tLJCaL flLCCuILCLLL WI L DL%Ukj, L1IC DULLUWeL, does not include a provision of this nature. The consulting firm of deGolyer- 11UivaU ILI LL A. 11.LOI11U DEVClai CA)CLLS LU L[it JLVJbLU11 tLU HUb PiUVLueu it with specialized advice. The autonomy of the Division enables it to by- d lsrD UIHLUCLDUHIC yLULULCHICHL yiUCCUL CHU LHUS CIIULCH EdiliiL U" livery of equipment and materials than would be possible otherwise. 8.3 After two prominent Venezuelans had resigned, one after the other, from tHe position of Bank observer on the Santa Cruz Division Management Committee, it was decided that the function of Bank observer should be per- nrmed by staff members, who nave duly attended most of the meetings and have used the opportunity to carry out the supervision of the pipeline. The routine presence of a Bank staff member at the Committee meetings is considered by some of the Bolivian officials involved to be of great sig- nificance in the event of political change in the country. The consultants also consider the interest of the Bank in the operation of the gas fields as beneficial in the long run. Latin America and the Caribbean Regional Office January, 1974