Document of The World Bank FOR OFFICIAL USE ONLY FILE COI'Y Report No. 2735a-MOR STAFF APPRAISAL REPORT MOROCCO PETROLEUM EXPLORATION PROJECT March 26, 1980 Energy D)epartment Petroleum Projects Division This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. MOROCCO PETROLEUM EXPLORATION PROJECT CURRENCY EQUIVALENTS Currency Unit Moroccan Dirham (Dh) Pre-1980 1980 US$1.00 Dh 4.00 Dh 3.70 Dh 1.00 US$0.25 US$0.27 WEIGHTS AND MEASURES I ton 2,200 pounds 1 kilometer (km) 2 0.6 miles 1 square kilometsr (km ) 0.4 square miles 1 cubic meter (m ) 6.29 barrels (Bbl) ABBREVIATIONS AND ACRONYMS BRPM Bureau de Recherches et Participations Minieres GCA Gaffney, Cline and Associates (Exploration Consultants, U.K. MEM Ministry of Energy and Mines MOROCCO FOR OFFICIAL USE ONLY PETROLEUM EXPLORATION PROJECT STAFF APPRAISAL REPORT TABLE OF CONTENTS Page No. Brief and Glossary on Petroleum Exploration i and ii I. THE ENERGY SECTOR ............ .............................. 1 Energy Balance .1......... .. . 1 Sources of Energy ................................. 2 Energy Consumption . .......................... . .4 Energy Policy .5....... . .....5 Sector Investment. 5 Sector Organization . ...................... . ........ o. 6 II. THE PETROLEUM EXPLORATION SECTOR... 7 Overview ...... o ...... o..... oo................. o........... 7 Petroleum Legislation. . . 7 History of Exploration. 7 Petroleum Prospects 9. . ..... . .......9 Doukkala Basin ............o ...... 12 Hauts Plateaux Basin. . . 12 Boudnib Basin .... 12 Deep Riff Basin. ... . ...... .... . ... .... 12 Essaouira Basin .... . ... ........ . . . 12 Role of the Bank. .. ........ 13 III. THE BORROWER .. o... .o..... ...o ..o. .,14 History ..... .. 14 Statutory Organization and Functions . . .14 Management and Functional Structure . . 15 Accounts and Audit .... ................... . ........... 17 IV. THE PROJECT .... . .... o............ o .... .. 17 Objectives . . 17 Project Description ....o....o.....o................. o. 18 The Exploration Program . . .18 Master Work Program . . .18 Initial Work Program ... .. .19 Subsequent Work Programs . . .20 Exploration Equipment ...... .... ... .... ..... 22 Technical Assistance ... . ..o.....o........... .. 22 Status of Project Preparation ......... .............. 23 This report was prepared by P. Moulin and I. Zurayk and is based on information obtained during two missions to Morocco in March/April and August 1979, and from reports submitted by the consultants GCA and A. Dumestre.. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Elank authorization. TABLE OF CONTENTS (Continued) Page No. Cost Estimates ....... ................................... 24 Financial Plan .............. ........................... 26 Lending Arrangements . ............................ ...... 26 Project Implementation and Management ........ .......... 27 Procurement ....................... ..................... 27 Disbursement .............. ............................ . 28 Environmental Impact ................................... 29 Reporting Requirements ................................. 29 Project Risk .................. ......................... 29 V. FINANCIAL ASPECTS ...... ..................................... 29 Past Finances ....... . ................................... 29 Assets .................................................. 30 Capitalization ....... .................. ................ 31 Past Earnings .......................................... 31 Past Financing ................................. ........ . 31 Future Finances ........................................ 32 VI. PROJECT EVALUATION ....... ............... .................... 34 Project Benefits .. .................................. . . 34 Least Cost Program ................. .. .................. 35 VII. AGREEMENTS REACHED ........................................... 35 ANNEXES 1.1 Production of Hydrocarbons in Morocco 3.1 Activity of the Principal Branches of BRPM 4.1 Methodology Used in Prospect Evaluation 4.2 An Evaluation of Petroleum Exploration Prospects and Strategy for the Essaouira Area (Report from Gaffney, Cline and Associates) 4.3 The Essaouira Basin: Assessment of Prospect Values 4.4 A. Dumestre's Comments on Gaffney & Cline's Report 4.5 Bank's Geologic Panel: Assessment of the Exploration Program Proposed for the Morocco Project 4.6 Work Program for the Initial Period 4.7 Assumptions on Project Cost Estimates 4.8 Estimated Schedule of Bank Disbursements Brief and Glossary on Petroleum Exploration 1. Hydrocarbons are generated by living "debris" that have fallen on the seafloor and have been covered by layers of sediment. As thick sediments with organic content ("source" rocks) progressively sink and eventually fold and fracture, the hydrocarbons migrate upwards until they are trapped in "reservoir" rocks properly structured and sealed by impermeab:Le "cover" rocks. However, hydrocarbon generation depends on many environmental factors and only a fraction of hydrocarbons generated over time accumulate in sizeable quanti- ties, whiLle a larger portion either remain in source rocks or migrate to the surface and disappear. 2. Therefore, marine sedimentation basins of a certain extent and thickness promise petroleum prospects a priori, while accumulations of oil and gas are ithe evidence a posteriori of a successful completion of the generation/ migration/trapping process over geological ages. 3. However, traps filled by oil and gas are normally scarce "anomalies" of extemely small dimensions in comparison with the extent and volume of the containing basin. Their direct finding by well drilling, the only presently available method to detect the presence of hydrocarbons, would thus have a very low probability of success and would be excessively hazardous and expensive. 4. Exploring for oil and gas is therefore a lengthy search for inform- ation which leads to the understanding of the generation/migration process and to the identification of the in-depth geometry of sediments. A step by step approach is followed using methods in succession of increasing reliability and also cost: - geological survey (pre-reconnaissance) to identify and select potentially promising basins or areas within basins, - large-grid geophysical surveys (reconnaissance) consisting mainly of field or airborne magnetometry and gravimetry, and seismic lines, associated with a few stratigraphic wells (wildcat) to obtain a better correlation of data, with the view to developing "leads" and identifying "prospects" on selected areas, - detailed seismic surveys of the most promising prospects to delineate structural traps, and eventually - well drilling to prove the presence of hydrocarbons in these traps. After a discovery is made, reservoir conditions and field reserves are appraised by further drilling and production tests to assess whether develop- ment wotuld be feasible under given economic conditions. 5. In reality, these activities overlap, and the approach applies either to unexplored basins or to deeper horizons in a basin where only shallower sediments have been explored. Over past decades, exploration efforts were - ii - concentrated on shallow depth objectives whose exploration was relatively inexpensive and could be carried out with existing techniques. As time passed and techniques improved, exploration has moved to more difficult prospects in new basins as well as to deeper horizons of previously explored basins, where more costly exploration is now justified by world shortage of petroleum resources and prevailing prices. 6. Although discoveries have been made and will continue to be made early in the exploration cycle, exploration in its initial phases remains essentially an obstinate quest for information, for which a price has to be paid. In this respect, exploratory drilling and seismic surveys are comple- mentary in bringing about information, and each well has informative merits, irrespective of its success or failure to strike oil. 7. When exploration results fall below initial expectations, the decision to abandon an area does not mean that there is no potential for oil, but rather that this potential is currently considered by the operator less attractive than alternative prospects. Many important discoveries have been made on areas which had been relinquished by reputable companies, mainly because a new operator had a different interpretation of the results produced by previous exploration. 8. Exploration programs have consequently to be assessed and designed in view of their main objective - developing information or finding oil - which to a large extent depends on the stage of past exploration and is a function of the resources available to the operator. a. The rationale for exploring new basins or deeper horizons is to clarify their potential and develop "leads" for further detailed exploration for oil. Areas to be explored are selected on the basis of geological/geophysical surveys and initial wells, if any, and on the likely evidence that all the elements which are necessary for the generation and accumulation of hydrocarbons are present (source, reservoir and cover rocks). Programs are therefore designed to maximize the collection of valuable information within a given budget. When the information gathered is sufficiently attractive, then the operator will start looking for oil, either by himself or with partners. b. Exploration for oil and gas in already known basins and horizons pursues objectives and follows leads previously identified. Objec- tives are structural traps or extensions of trends which are produc- ing locally or nearby. In this process, operators move generally from prospects which have the highest "expected economic value" towards more and more marginal prospects, whose development may be justified by the existence of infrastructure. It should be pointed out, however, that even in a producing basin other objectives or deeper sediments than the productive horizons may justify a new round of exploration of the "information collection" type until these prospects have been proved productive or have to be abandoned. I. THE ENERGY SECTOR Energy Balance 1.01 At present Morocco's main indigenous energy resources are coal and hydropower. Known oil deposits are nearly depleted and proven gas reserves are small. Large deposits of oil shales exist, but it is not clear that their development is justified economically with present technologies. Uranium, directly mined or extracted from phosphoic acid, could become a source for power generation in the future. 1.02 As a result of the present limits on the availability of indigenous resources, domestically produced energy can currently provide Morocco with at most 20 percent of its primary energy needs, leaving the country dependent for the significant balance on the import of oil and oil products. Unless further exploration can result in newly discovered oil and gas resources in the near term, the strain on the economy caused by oil import bills is expected to become increasingly severe for the better part of the next deciade. ENERGY BALANCE 1978 (Thousands tons oil equivalent) 1/ Production Consumption Coal 463 Coal 459 Hydroelectricity 368 Hydroelectricity 368 Crude Oil 23 Refinery Losses 170 Natural Gas 62 Petroleum Products 3,331 Natural Gas 62 Total Production 916 Total Domestic Consumption 4,390 Imports Exports Coal 27 Coal 31 Crude Oil 3,222 Stock Change 551 Petroleum Products 807 Total Imports 4,056 Total Availability 4,972 Total Use 4,972 1/ 1 tcn petroleum products = 1 Toe; 1 ton imported coal- 0.66 Toe; 1 ton Jerada anthracite = 0.56 3Toe; 1 ton crude oil = 0.93 Toe; 1,000 Kwh = 0.26 Toe; 1,000 Nm natural gas = 0.76 Toe. -2- Sources of Energy Coal 1.03 Anthra-ite coal at Jerada constitutes at present Morocco's main indigenous fossil fuel resource. The Jerada mine has estimated probable reserves of about 36 million tons (20 million Toe), and the coal is of relatively high calorific value in most part of the deposits (6,600 to 7,000 kcal/kg); but no other economic deposits have as yet been discovered. Annual production at Jerada has increased from about 570,000 tons in 1972 to about 830,000 tons in 1978 and will be raised, with the expansion of the mine now underway to a level of 1 million tons per year by 1981. Current production supplies about 10% of domestic demand for primary energy, 90% of the coal being consumed in the generation of electric power. Electric Power 1.04 Morocco's hydroelectric resources are developed in three main basins of the Moulouya, Sebou, and Oum R'bia rivers, where existing hydropower facilities currently yield an average annual generation of about 1,470 GWh. Future development of potential hydrosites is constrained by the short rainy seasons, and the rapid growth of Irrigation which is given precedence over hydropower in water use. Through loans for irrigation and power, the Bank has helped finance a Government Master Plan for the Oum R'bia river (Loans 936, 1201, 1299, and 1416-MOR), and the Sidi Cheho Al Massira dam project including a 120 MW hydropower plant to be commissioned in early 1980 (Loan 1299-MOR). In addition, Morocco is being assisted by consultants financed by the Bank (Loan 936-MOR) in completing feasibility studies and preliminary design for a 1984-1990 hydro developments program expected to add another 1,400 GWh to current hydropower generation capability. 1.05 Apart from small captive plants linked to industrial enterprises and isolated diesel generators serving remote villages, thermal plants intercon- nected with the hydro plants in the present power system yielded an annual generation of 2,500 GWh in 1978. By the end of 1978, the total installed capacity of the interconnected network was 1,063 MW, of which 396 MW (37%) was in hydro capacity and 667 MW (63%) in thermal capacity; the 1978-83 program for the development of thermal generation should increase thermal capacity by 900 MW by 1983. For transmissions a 225-KV grid is progressively replacing the former 150-KV system, and a 60-KV sub-network transports energy to the distribution system at 22 KV. A village electrification project (the 1979-83 phase of a 15-year national rural electrification program) partly financed by the Bank (Loan 1695-MOR) is expected to extend electric service from the national grid to approximately 220 new centers in the Moroccan provinces. Oil and Natural Gas 1.06 Whereas in the past domestically-produced oil made small but signi- ficant contributions to Moroccan energy balances, oil fields are almost depleted now and domestic production is continuing to decline (Annex 1.1). Daily production reached a maximum of 3,000 barrels per day (BD) in 1963, a level sufficient to meet 15 percent of a requirement for oil of about 20,000 BD. By 1978, an oil production of about 486 BD, deriving in most part from the Sidi Rhalem field in the Essaouira Basin (para. 2.19(a)) accounted for - 3 - less than one percent of a requirement of about 67,000 BD. The past decades of exploration had resulted in small additions to gas reserves (para. 2.19(a)). However, at an annual level of production of about 81 million cubic meters (62,000 Toe), gas accounts at present for only 1.3 percent of total energy demand. Oil Shales 1.07 Large undeveloped resources of oil shales exist in Timahdit (in the Atlas mountain south of Meknes), Tarfaya (on the southern Atlantic coast), Tangiers and other areas in Morocco. In Timahdit, proven oil shale reserves with a yield of 100 liters per ton (l/t) amount to about 1.7 billion tons, and proven andl probable reserves with a yield of 74 l/t to 10 billion tons. Tarfaya reserves with a yield of 80 1/t are of the same order of magnitude. Total oil shale reserves in Morocco could contain over a billion tons of crude oil equivalent. 1.08 Since 1975 Morocco has carried out an expanding program of field surveys, feasibility studies and experiments on oil-shale extraction, direct burning for power plants, and oil distillation from shales either in surface retorts or in-situ. Industrial methods have been evaluated under contracts with such process holders as Tosco, Union Oil, Paraho, Klockner Lurgi, Babcock, Occidental and Neftechimpromekport. 1.09 Four development alternatives are being now actively explored (i) direct burning in a 250 megawatt power plant which will be erected in Timahdit with technical assistance from the USSR, (ii) mining extraction and surface distillation in an industrial pilot plant for which a call for bids on final process and construction specifications is under preparation with the assistance of the U.S. DOE, (iii) in-situ distillation in pre-mined underground chambers, for which a research and development contract has been signed with Occidental, and (iv) a labor-intensive scheme for surface extraction and distillation in artisanal retorts, which could be implemented on several locations even with small reserves throughout the country. 1.10 The first three alternatives would be highly capital intensive, and would invrolve technologies not yet proven on an industrial scale. Nuclear Fuel 1.11 Morocco' s large reserves of phosphate of about 50 billion tons are estimated to have a uranium content of 150-200 grams per ton. Extraction would, however, be uneconomic with present technology. The Government is exploring the possibilities of using the excract for fueling a nuclear plant, but progress has been slow and success in the immediate future is unlikely. No commercially exploitable deposits of primary uranium have so far been discoveried. Solar Energy 1.12 Morocco is favourably situated for the development of solar energy. Average insolation exceeds 3,000 hours per year, and on average the - 4- 2 country receives around 170 kcal/cm . Assessment of potential uses for solar energy will commence after the Institute for Solar Energy studies at Marrakech is operational. The institute would be assisted financially and technically by USAID. However, until the technology is fully developed, the use of solar energy would probably be limited to supporting other conventional energy resources. 1.13 The future development of wind energy in Morocco is unlikely except on a small scale; moreover, known geothermal anomalies are mostly isolated from main centers of population and are all low temperature sources of limited use. Energy Consumption Past Trends 1.14 Despite an increase at an average annual rate of 8% over the period between 1961-1978, Morocco's per capita consumption of energy remains at the lower end of the international energy consumption scale (at 0.18 Toe/capita in 1976 compared to an international average of 1.31 Toe/capita for that year). The upward trend in demand has nevertheless reflected the country's move towards a more energy intensive pattern of consumption. This pattern has been characterized chiefly by the declining share of hydropower in total primary energy supplies from about 18% in 1964 to less than 9% in 1978, and a marked shift in favor of oil, the share of which in total demand for primary energy rose from 64 percent in 1961 to 79 percent in 1978 and is projected at nearly 90 percent by 1990. 1.15 The declining importance of domestic crude production, which is now almost negligible, has left Morocco highly dependent on imported oil. Oil is mainly imported as crude for refining in two refineries at Mohammedia and at Sidi Kacem with a combined capacity of 5 million tons per year in 1978. Motor fuels (gasoline, aviation fuel, gas and diesel oil) have remained since 1961 the biggest single component of the domestic petroleum products market. In 1977, these fuels accounted for 50% of a total petroleum products consumption of about 3.2 million tons, with fuel oil and kerosene (43%) and LPG (7%) representing the balance. Four industries, phosphates (18%), power generation (25%), cement (20%), and sugar (12%), account at present for approximately three quarters of the fuel oil consumed. Between 1962 and 1977, average annual demand for fuel oil increased about 10% per year, for motor fuels about 7% per year, for kerosene about 2% per year and for LPG (which is increasingly substituting kerosene) about 15% per year. Pricing 1.16 Prices for all types of energy are fixed by the Government. Except for gasoline, the price of petroleum products remained unchanged from 1962 until the end of 1975. Throughout this period, the Government subsidized, through a compensation account, the prices of fuel oil, gas oil and kerosene, which are typically used for industrial and low income domestic purposes, and levied special taxes on gasoline. Until the end of 1973, the cost of subsidies was more than offset by revenue from special taxes. The sharp increase in oil prices in 1973-74 resulted in large deficits for the compensation account in - 5 - 1974 and 1975. A revised policy aimed at increased conservation led to a sharp increase in the prices of petroleum products at the end of 1975. The deficit declined from $115 million in 1975 to $23 million in 1976. Further price increases, including the last one in July 1979, have resulted in the elimination of price subsidies for all petroleum products except LPG. The Government also plans to eliminate existing subsidies in the power-subsector and has agreed to review with the Bank all future changes in the tariff structure (loan 1695-MOR). Future Trends 1.17 Morocco's demand for primary energy is expected to grow at an average annual rate of 10% over the next decade, reflecting increased emphasis on industrialization, on the mechanization of agriculture and on the Govern- ment's efforts to improve the access of the rural population to energy. Because of the constraints on future development of coal and hydro resources, the only supply option in the near-term is oil either imported or domestically produced. Aside from nuclear power and marginal possibilities in non- conventional sources, the development of oil-shale resources represent the country's only other supply option in the medium and longer-term. 1.18 Consequently, unless new indigenous resources of oil and gas are discovered in the near-term, continued increase in demand as estimated together with the probable rise in world oil prices, will present even greater diffi- culties for a country whose short and medium term balance of payments problems are acute. In 1977, oil imports amounted to DH 1.7 billion (US$425 million), representing about 70 percent of phosphate exports, Morocco's main source of foreign exchange, and 12 percent of total imports. Given the limits on supply of other indigenous resources, in the absence of new oil or gas discoveries in the near future, the major share of the increase in consumption will have to be covered by additional imports of oil. The estimated cost of oil imports has been projected, on this basis, to rise from DH 2.7 billion in 1980 to DH 3.8 billion by 1982, an increase of nearly 25 percent in two years. Energy Policy 1.19 In order to decrease the country's dependence on imported oil and ensure, in the absence of alternatives, a minimum supply of energy for future needs, the Government continues to give priority to (i) the acceleration of exploration for oil and gas, (ii) the acquisition of technology for the development of oil-shale deposits, (iii) increased conservation in the con- sumption of energy by maintaining prices of energy resources in line with their opportunity cost to the economy. Sector Inivestment 1.20 During the Third Plan period (1973-77), total investment in the energy sector amounted to DH 3.2 billion, more than three times the figure for the previous Five-Year Plan. Of this investment, 40 percent was spent for development of the power subsector, 36 percent for increasing petroleum refining and distribution capacity, and 8% for increasing domiestic coal production. The balance (16%), or DH 521 million, was spent on the exploration - 6 - for oil and gas. Recent economic problems have led the Government to adopt austerity plans which cut substantially the level of its envisioned investments in all energy sector activities. In order to maintain a pace of exploration consistent with the country's perceived potential, the Government has been keenly aware of the necessity to promote increased foreign investment in any country-wide 'uture exploration plan. Sector Organization 1.21 The Ministry of Energy and Mines (MEM) is responsible for overall planning and policy making in the sector. It also supervises several public (or semi-public) enterprises which manage the sector's key activities, most notably: (i) the Bureau de Recherches et de Participations Minieres (BRPM) in oil and gas exploration, the Societe Anonyme Marocaine de l'Industrie du Raffinage (SAMIR) and the 50% BRPM owned Societe Cherifienne des Petroles (SCP) in refining, the Societe Nationale des Produits Petrolier (SNPP) in the distribution of petroleum products, and the 100% BRPM Owned Charbonnages Nord-Africains (CNA) operator of the Jerada coal mine. It also has admin- istrative control over the Office National de l'Electricite (ONE), the public enterprise responsible for most of the electricity generated and transmitted in Morocco. 1.22 The Ministry was created at the end of 1977 with a view to consol- idating the decision-making process in the energy sector in one Ministry. the Ministry has two main operating departments--Energy and Mines; the Energy Department has three divisions--oil, electric power and new sources of energy. Exploration and production of oil and gas is currently dominated by the BRPM whose responsibilities include not only (i) the exploration for oil and gas either on its own or through joint ventures with foreign companies; and (ii) the production of small gas fields discovered on its permits; but also (iii) the prospection of all mineral sources except phosphates; and (iv) the management of the Government portfolio in about two dozen mining firms (including CNA), and a refinery (SCP). Of the two refineries in Morocco, one at the port of Mohammedia (SAMIR), is 100% owned by the Government with a refining capacity of 2.2 million tons per annum which is now being increased to 5.7 million tons, and the other (SCP), is located inland at Sidi Kacem with a 0.8 million ton capacity. Distribution of oil products, either imported or locally refined is carried out by several companies which are joint affiliates of international oil companies and of the SNPP, the public enterprise respons- ible for regulating the distribution and consumption of oil products throughout the country. 1.23 In the power subsector, ONE generates approximately 90% of the electic power in the country, transmits it Lo the load centers, and distributes about 40% of its production outside the large cities. Distribution of power in large urban areas is the responsibility of 13 Regies which are autonomous public enterprises under the supervision of the Ministry of the Interior (MI). MI also participates in formulating the plans for the develop- ment of infrastructural facilities in the rural areas, including village electrification whose implementation is entrusted to ONE. A Government appointed interministerial committee is currently drawing up plans for the streamlining of responsibilities and improvement of control over the power subsector; and has undertaken through several loan agreements to periodically exchange views on these matters with the Bank. - 7 - II. THE PETROLEUM EXPLORATION SECTOR Overview 2.01 Oil and gas exploration has been going on in Morocco since 1928. Before independence one French company Societe Cherifienne des Petroles (SCP), was the on:Ly company active in petroleum exploration. After independence a petroleum code was enacted in 1958. Exploration has since been carried out by both the state agency, Bureau de Recherches et Participations Minieres (BRPM) and by foreign oil companies. Since then the pace of foreign investments has varied widely and the Government has reacted by adjusting its exploration investments accordingly. The present economic difficulties present a new challenge for Morocco's efforts to develop its indigenous petroleum resources. The Government is now seeking ways to raise the overall petroleum exploration effort to an appropriate level. Petroleum Legislation 2.02 Under the petroleum code, private investors are granted exclusive exploration rights awarded for successive four-year periods, and, in case of commercial discovery, a fifty-year development concession. However, clear preference has been given to those foreign investors who offered to the state agency a participation in an exploration/development venture of at least 34%. As a result, foreign investment in oil exploration has been almost exclusively associated with BRPM. Under 50%-50% joint venture agreements with BRPM, foreign partners are liable for all exploration expenditure, half the develop- ment costs, a royalty on oil of 12.5% and on gas of 5%, and income taxes of 55%. In case of discovery and development, these agreements imply a minimum split of about 20%-80% of profit from production in favor of the State. Several foreign oil companies have taken part in oil exploration under such arrangements at one time or another. Only one group led by Petrofina (Apex) under a joint venture with BRPM has applied for a development concession in the Rharb basin in 1970. BRPM, either directly or through its subsidiary SCP 1/, has also been awarded exploration permits and development concessions. History of Exploration 2.03 Prior to independence, SCP explored mainly the shallow-depth horizons of the Rh,arb basin, where it discovered a series of small oil and gas fields and drilled more than a thousand development wells. All fields discovered at that time are now depleted or are nearing depletion; however, Apex is still exploring in the area. 2.04 After independence, exploration extended to other basins, first onshore, then offshore, mostly through joint venture agreements entered into between ]BRPM and several foreign investors: 1/ After independence BRPM took the majority share in SCP, which, since the mid-60's, has become an instrument of BRPM's policy, mostly for production and refining, but not for exploration. - 8 - (a) Onshore, the first permit was awarded in 1958 to the joint venture AGIP-BRPM in the Tarfaya region. This was followed by agreements between BRPM and Petrofina in 1961 and 1964, AGIP in 1963 and Aquitaine in 1970 and 1973, among others; and (b) Offshore exploration started in 1967 with the award to Esso of the Tarfaya Maritime permits covering 20,000 sq. km. Further agreements and awards of permits followed so that active permits covered almost all explorable areas of the Atlantic offshore in the early 1970's. Between 1958 and 1972, 123 wells of an average depth of 1,750 meters were drilled onshore and 10 wells of an average depth of 3,300 meters offshore, at a total cost of about $80 million. In addition $20 million was spent on geological and geophysical surveys. During the same period, national invest- ment remained modest. BRPM limited its activity mainly to supporting Apex and SCP in their exploration and development of the Rharb and Essaouira basins, respectively. 2.05 The early 1970's was a turning point in the history of petroleum exploration in Morocco. Although foreign companies extended their operations northward along the Atlantic and Mediterranean offshores, this lasted for a very short period, and they withdrew because of disappointing results. Esso discovered heavy oil on the Tarfaya offshore permit and reserves in place were rumored to amount to hundred millions of cubic meters. However, their pro- duction was not considered economic at the time and Esso subsequently relin- quished all its offshore rights in Morocco. This coincided with the comple- tion of general withdrawal of oil companies from offshore exploration in West Africa. 1/ 2.06 The 1973-77 five-year plan provided for US$161 million in exploration investments, of which BRPM would account for 40%. The overall target was not achieved, mainly because foreign investments remained below expectations. 1/ Exploration by international oil companies has followed a similar path in many countries. While withdrawal does indicate that the results were below expectations, it does not mean that the prospects have been exhausted. Worldwide exploration follows "cycles" which depend largely on the ranking of worldwide prospects by oil companies and are influenced by geological, economic and political considerations, as well as by a mutual drive between companies. - 9 - BRPM's conitribution during the period increased from an initially projected US$67 million to US$86 million, accounting for 65% of total exploration expenditures. Over this period, BRPM built up an exploration capability by acquiring seismic and drilling equipment and training staff. Its efforts resulted in the discovery of the Toukimt and N'Dark fields, which opened up new prospects in the Essaouira Basin. 2.07 Encouraged by this success, BRPM had proposed an ambitious program for petroleum exploration at a total cost of about $340 million over the 1978-82 period, of which foreign partners were expected to provide about $75 million, mainly for offshore work. Public resources to BRPM for explora- tion onshore were to exceed $250 million, or an average of $50 million per year. BRPM intended to explore on 11 permits onshore using all its own equipment (four seismic drilling crews and four drilling rigs), in addition to two to three rented drilling rigs. 2.08 Economic problems led the Government to curtail the 1978-82 plan. Under the approved 1978-80 Three-Year Austerity Plan, BRPM resources for the petroleum sector were reduced from $50 to $15 million per annum. BRPM had to reformulate its activity accordingly. While seeking commercial credit to develop tlhe Toukimt field (at an estimated cost of $3 million), it limited exploration to four permits, using only two drilling rigs (one heavy, one medium heavy) and one seismic party part-time. The balance of BRPM equipment was either put on standby, offered under services contract to Apex and Phillips, or used for water exploration and production. 2.09 The slow-down in foreign investment followed by the severe curtail- ment of BRPM activity has taken place as Morocco felt the consequences of the increase in world oil prices. Since indigenous oil or gas production offers the only chance in the short and medium terms of reducing the country's dependence on imports, Morocco is seeking to re-establish the overall explora- tion effort at a level compatible with the petroleum potential of the country. Efforts are being made to attract new foreign investors; their success has been moderate to date. Two joint venture contracts have been signed with Phillips Petroleum and Societe Nationale Elf Aquitaine (SNEA) for exploration rights in northern Morocco in 1978 and early 1979, respectively, and Occidental is to confirm an option for permits on the Atlantic offshore. The Government still plans to make similar arrangements for other sedimentary basins as soon as possible. Petroleum Prospects 2.10 Published estimates place Morocco's ultimate recoverable reserves in a range between 10 and 30 million tons of oil equivalent, when about seven million tons of reserves have been discovered so far, of which three million tons have already been produced in the Rharb and Essaouira basins. Such estimates refer mainly to the few long explored areas and underquote other lairge, less explored prospects of the country. - 10 - 2.11 The few producing areas which are at a relatively advanced stage of exploration and development still offer possibilities of discovery or produc- tion of petroleum reserves. Their expected economics however appear to be too marginal to be attractive to foreign oil companies. Such possibilities exist in the followino basins: (a) The Rharb basin, where SCP drilled extensively with fair success and where Apex is still exploring; (b) The Tarfaya Maritime permit, where in the late 1960's Esso discovered and abandoned large deposits of heavy oil (para. 2.05), whose development now may be worth re-evaluating at current prices; (c) The Essaouira basin, where first SCP, then BRPM, dis- covered five oil and gas fields and identified a dozen small structures in the Jurassic horizons which remain to be drilled. New discoveries, even small ones, could be produced quickly and brought to the market through existing transportation facilities, thus minimizing development costs. 2.12 Overall, Morocco has a dozen structurally distinct sedimentary basins, which extend over a total surface of 400,000 sq. km., of which 55,000 are offshore, i.e. in water depth of less than 200 meters. All have geologi-al characteristics which normally provide opportunities for hydrocarbon generation and accumulation. However, despite past exploration efforts, most of these basins have not had their potential properly assessed. The technology avail- able prior to the mid-70's (especially seismic methods) did not make it possible to reliably identify deeper prospects, and the price of oil prevailing before 1973/74 did not encourage exploration in offshore and remote onshore areas. As a result, in many areas the average drilling density has been about one well per 2,000 sq. km., three out of four structures delineated by seismic survey have not yet been drilled, a number of wells were completed above targets, and several of the earlier exploration programs were terminated and permits released even though alternative "leads" for new rounds of explor- ation existed. 1/ Given these facts, the improved technology, especially in seismic surveying, and the Increase In the price of oil, experts now view Morocco's potential more favorably than in the past and believe that the country could attract renewed foreign exploration investments, if additional information on the value of the prospects were to be made available. 2.13 It is clear therefore that, despite the preceeding 50 years of intermittent exploration, a large part of the hydrocarbon potential of Morocco remains to be assessed. In designing a strategy for future exploration, the 1/ This explains why the BEICIP study, which forms the basis of "A Program to Accelerate Petroleum Production in Developing Countries" approved by the Board of Executive Directors in January 1979, attributes to Morocco "poor prospects and low potential resources", while recommending "re-appraisal of past exploration data and assistance to BRPM" on the basis that "possibilities onshore remained to be further explored." - 11 - Government of Morocco (GOM) recognized that public funds, even if they are supplemented by Bank loans and/or contributions from other sources, would be insufficient to maintain a level of exploration commensurate with the number of prospects remaining to be assessed. The only realistic strategy was therefore to attract foreign capital in those basins which still hold the promise of large reserves and potentially high returns. This has been confirmed by the recent agreements signed by BRPM with Philipps and SNEA for blocks where previous geophysical work carried out by BRPM had indicated interesting exploration leads. 2.14 GOM exploration strategy which makes use of BRPM capability is therefore two-pronged: (i) BRPM will complete exploration of the areas where discoveries have already been made and where potential structures, ad- mittedly small, remain to be drilled, to try to capture early exploitation opportunities for short-term prcduction and revenue benefits, and (ii) BRPM will carry out enough geophysical work and exploratory drilling in areas where the potential has not yet been assessed, to develop geological "leads" and generate interest of foreign investors. This BRPM exploration effort will be closely supported by GOM. MEM will assess the expediency of revamping the existing petroleum exploration legis- lation and related tax regime. Risks and promises of further investment in every basin so explored by BRPM will then be appraised, and foreign oil companies will be offered joint venture agreements and fiscaL arrangements which would reflect the expected economic value of the prospects and could be attractive enough while preserving legitimate country interests. The main geological features of the prospective areas onshore, where with Bank support this exploration strategy will be developed, are summarized below. Doukkala Basin 2.15 The Doukkala Basin is a 10,000 km Paleozoic sedimentary basin in which seven wells were drilled between 1960 and 1977 by Preussag, SNEA and BRPM to test anticline structures defined by seismic surveys. No commer- cial field has been discovered to date, although the presence of source, reservoir and seal rocks and the existence of oil and gas In limited volume was largely proven. Recent re-assessment of data offers alternative leads in reef developments of the mid-Devonian age. Prolific discoveries in similar sediments of the same age were made in Canada. But their exploration has demonstrated that reefs may be small in extent and thickness, not syste- maticalLy productive, and would necessitate dense and high q,uality seismic surveys, followed by repetitive well-drilling. - 12 - Hauts Plateaux Basin 2 2.16 The Hauts Plateaux is a very large Mesozoic area (over 30,000 km spanning the Missour and Guercif Basins) which has been sporadically explored over the last 15 years by AGIP (from 1963 to 1967) and recently by BRPM. Results from this exploration have shown the broad lines of the geology in the area, and, although hydrocarbon indications have been meager, geological and structural features warrant further investigations. Even limited positive results would greatly enhance the potential of this area eastward up to where Phillips and SNEA are now exploring. Boudnib Basin 2.17 The Boudnib Basin extends on the southern flank of the High Atlas Mountains. Its exploration would be typical of a "basin reconnaissance exploration" in the broadest sense. Only limited stratigraphic and struc- tural information is available, but geological features indicate possible large anticline prospects. Objectives are the Paleozoic sediments, as enhanced by gas shows and the Mesozoic sediments which are productive in the basin of Essaouira. Deep Riff Basin 2.18 The Deep Riff is the sedimentary substratum that pre-riff "nappes" have overlapped under orogenic thrust over later geologic eras. This area is practically unknown since no well has been drilled yet, but geophysical data have shown structural features worth being further explored. Essaouira Basin 2 2.19 The 10,000 km Essaouira basin covers as a geological unit the present BRPM permits of Essaouira, Agadir and Cap Ghir, and extends offshore. It is filled with sediments of various geological ages. To date, however, only onshore shallower horizons of Jurassic age have been explored system- atically; deeper pre-Jurassic sediments became known only from the last seismic survey carried out with improved techniques in 1976/77 and from well bottom data of a few wells eventually completed below the Jurassic objectives. (a) Jurassic horizons are productive on five fields: Jeer and Kechoula (gas) and Sidi Rhalem (oil), discovered by SCP and almost fully depleted; N'Dark (gas with 50% nitrogen content) and Toukimt (gas with condensate) discovered later by BRP4, the latter being currently developed for production. Data on in-depth sequence and geometry of Jurassic horizons onshore are good to fairly reliable and complete. The 1976/77 seismic survey has identified more than a dozen structures of small dimensions still undrilled; they are ready objectives for further testing of oil or gas accumula- tion in reservoirs known to be productive in the area. - 13 - (b) By contrast, pre-Jurassic sediments are more prospective objectives; their upper part has been shown to contain gas, perhaps condensates, but no well has yet been drilled through their total sequence so that the existence of good reservoir layers is not proven; in-depth mapping sketched fromi the last seismic survey indicates the existence of at least e!ight large anticline structures and other traps. They warrant drilling and also additional seismic surveys to delineate their exten- sion and top. Exploration objectives in the Essaouira Basin are therefore twofold: first, to complete the assessment of the Jurassic potential which may yield small accumulations which could be brought to production over a short period of time and second, to test the pre-Jurassic horizons which could contain larger accumulations of hydrocarbons. Role of the Bank 2.20 Morocco provides a typical example of the problems of oil explora- tion in maiddle income countries. An efficient Government Agency has been strengthened to supplement the efforts of foreign oil companies whose interest in Morocco's potential diminished during the 1970s. While BRPM has been reasonabLy successful, its efficient operation and the size cf its exploration program depend largely on Government allocations which in periods of economic austerity are channelled to investments of a less risky nature, thus eliminat- ing or at least reducing the chances for the country to become less dependent on imports, although a potential for indigenous supplies of petroleum exists. For such a situation the participation of the Bank group in the financing of exploration would ensure, with proper safeguards, that a minimum program compatible with the quality of the prospects Is carried out. Once sufficient "leads" have been developed, the presence of the Bank can also be instrumental in the teview of legal, fiscal and contractual framework for petroleum explora- tion and in the attraction of foreign capital. 2.21 In the absence of any other viable alternative to improve domestic energy supply, and with little room for reducing the demand substantially, without detrimental effect on overall economic development, petroleum explora- tion is a priority. BRPM needs funds to continue its effort of identifying prospecl:s which would be attractive to foreign capital and of discovering reserves which could meet part of the country's domestic energy needs and would provide an adequate cash flow for future exploration. 2.22 In addition, the Bank will, through technical assistance, improve the tramsfer of technology in prospect evaluation and drilling management, and support studies for the development of other energy sources (particularly oil shale) which could provide a solution to Morocco's energy problems in the longer run. - 14 - III. THE BORROWER History 3.01 The borrower of the proposed loan, the Bureau de Recherches et de Participations Minieres (BRPM), was created in 1928 as a State mining enterprise; however, since 1958 it has developed dual roles as the executing agency in the exploration for both minerals and petroleum (paras. 2.01-2.02). BRPM has over the years built up an extensive portfolio of holdings in coun- trywide mineral operations and in addition holds participatory agreements with almost all foreign investors in Morocco's petroleum exploration. As a result BRPM has developed into the most effective instrument available to the Government for the implementation of public policies related to the develop- ment of all national mineral and petroleum resources, with the exception of phosphates. 3.02 BRPM was instituted as a wholly-owned public enterprise by a decree (Dahir) of December 15, 1928, which has since been complemented and updated by several others, most notably the decrees of April 14, 1960, and June 30, 1962, which regulate the State's financial control of all public or State- funded establishments; and that of December 17, 1976, governing BRPM's func- tions and organization. Statutory Functions and Organization 3.03 Under its statutes BRPM is authorized to undertake all industrial, commercial and financial activity compatible with the objective of promoting the development of indigenous petroleum and non-phosphate mineral deposits. BRPM can (i) explore for and develop these deposits, (ii) form companies or take participation in companies which aim at the development of any one of these resources, (iii) promote any action by others leading to such develop- ments, and (iv) execute for the accounts of others, work related to this activity. 3.04 For administrative purposes, BRPM is placed under the tutelage of the Minister of Energy and Mines, who is Vice-President of its governing Administrative Council and President of its Committee of Directors. The main guidelines to operational and financial policy are set by the Council which is headed by the Prime Minister and includes the Ministers of Energy and Mines, Finance, Interior, Labor, and Public Works, the Heads of the planning and economic affairs authorities, and the Director of Energy and Mines. The Council is assisted by a Committee of Directors constituted from among the same officials or their representatives, to which is delegated the task of supervising the implementation of the Council's decisions and the regula- tion of related matters. - 15 - Management and Functional Structure 3.05 The responsibility for the execution of these functions, within the directives as issued by BRPM's Administrative Council and Committee of Directors, rests with the General Manager who is assisted by a Secretary General and seven divisional heads. BRPM's team of senior mana,gers, which is a well-coordinated, competent and active group, has led the company through an unprecedented expansion in all lines of its activity in the five-year period covering Morocco's 1973-77 Plan. BRPM's divisions are organized along functional lines as described in the following paragraphs. (i) Division for Mineral Exploration plans and supervises the BRPM's own activity in this domain. This division is at present staffed with more than fifty mineral geologists and geophysicists. It has managed an annual investment program in mineral exploration which grew from about $4.0 mi:Llion in 1973 to $12 million in 1977, and in total amounted to $44 million in the 1973-77 Plan period. (ii) Division for Mineral Valuation and Research manages ,extensive laboratories for mineral analysis and undertakes teclhnical and economic feasibility studies for mineral development. Among other activities, it has been engaged in an expanding program of studies and experiments for the development of oil shale resources. (iii) Division for Petroleum Exploration plans and supervises BRPM's petroleum exploration activity. This division, which would manage the implementation of the project, has undertaken invest- ment in these activities amounting to about $83 million during the period covering the 1973-77 Plan. It is at present staffed with a number of trained geologists and geophysicists, and has a large data base covering the results of past exploration in all areas of the country gathered through its own activity and the activity of BRPM's foreign partners. The Division has played a critical role in the negotiation of more than 50 parti- cipation agreements with foreign oil groups, most notably the latest; an agreement (signed August 1979) between the BRPM (45%), SNEA (45%), and SCP (10%), covering a large area in the North of Morocco. It has had regular access to foreign technical expertise and services for work related to its dril:Ling and seismic operations. However, with only one exception (the hiring of a Forex rig in 1977), it has relied in the last few years for the execution of its well drilling and seismic drilling operations on the services of BRPM's Technical Division. The technical assistance provided for under the proposed project will strengthen the petroleum exploration division's capacity (i) to undertake technical and economic appraisal of exploration prospects, (ii) to supervise and increase the efficiency of drilling operations, and (iii) to improve the accounting of exploration costs (para. 4.09). - 16 - (iv) Division for Commercialization and Participations supervises the BRPM's mineral and petroleum interest in fully or partially-owned affiliates and in joint ventures, and assists the mineral com- panies in the marketing of their products. The major share of BRPM investments represents holdings in mining affiliates whose cumulative activities span Morocco's non-phosphate mineral-produ- cing sector (Annex 3.1); BRPM has a 99% ownership of Charbonnages Nord Africains, producer of the country's indigenous coal (para. 1.21), and a 50% interest in SCP. Since 1968, the SCP has limited its exploration activity to work done in association with BRPM's Division for Petroleum Exploration (see (iii)) and other foreign companies. It derives a small part of its income from a limited production of gas from the Essaouira region (para. 2.19(a)). Its main activity consists at present in the operation of its refinery complex at Sidi Kacem which supplies approximately 30% of the national petroleum products market, and in the bottling of LPG (para. 1.22). BRPM has, in addition, a 22% share in an LPG storage company, formed in 1978, in association with the SCP and other partners; and has a joint venture with APEX producing limited amounts of natural gas in the Rharb Basin (para. 2.02). (v) The Technical Division executes BRPM's exploration work and the work contracted for by third parties which has until recently consisted essentially of extensive drilling for water authorities and mining affiliates. It is also in charge of BRPM's overall plant, equipment maintenance and procurement and storage of its materials and consumables. It would be responsible for the execution of the seismic and drilling work provided for under the proposed project, and for the procurement of all necessary goods. The Division disposes of several portable rigs suitable for hydraulic, mineral and seismic drilling which by now however require rehabilita- tion to be fully efficient. The Division has also three well drilling rigs: an IDECO H525 capable of drilling to depths of 2,500 meters and two IDECO H1700's capable of drilling to depths of 4,500 meters; however, one of the latter rigs needs to be reconditioned. The Technical Division has staff capable of manning its seismic equipment and well drilllng rigs. Through the provision of funds, which would help rehabilltate BRPM's equipment and keep its equipment and staff employed for a period of about three years, and through technical assistance to improve drilling management and techniques, the proposed project would enhance the efficiency and ensure the competitive cost of the Division's petroleum drilling operations. (vi) Two other divisions, the Administrative Division and the Financial Division maintain overall responsibility for personnel, training, financial and accounting matters. The latter will be instrumental in maintaining appropriate accounting procedures for recording exploration expenditures under the proposed project. - 17 - Accounts and Audit 3.06 BRPM follows the French system of accounting and operates an effi- cient accounting department. The analysis of the accounts and cost alloca- tions are satisfactory, the system is flexible and there is no difficulty in adapting it to specific sectors of activity. Nevertheless, for the pur- poses of the proposed project, BRPM now needs to develop additional accounting procedures prior to the first disbursement from the loan (para. 4.19). BRPM has agreed to hire consultants by May 31, 1980 to assist it in this work. 3.07 Like all other public or State-funded institutions, BRPM must submit to a strict financial control of the State, as stipulated by the decrees of April 14, 1960 and June 30, 1962. For almost all financial decisions, trans- actions and accounts, it must seek the prior consent of the Minister of Finance, a BRPM controller appointed by him, or the controllers' delegated agents. The decrees also stipulate that the controller must prepare separate exten- sive accounts of budgets and operations. However, BRPM's accounts have never been subject to an independent audit. BRPM has agreed to appoint independent auditors satisfactory to the Bank to conduct semi-annual audits of project accounts and annual audits of BRPM accounts. BRPM has also agreed to submit its audited project accounts not later than three months after the end of every semester and its complete audited accounts not later than six months after the end of each financial year. lV. THE PROJECT Objectives 4.01 The Project will contribute to Morocco's efforts to accelerate the exploration for and development of its petroleum potential. It will supplement the efforts of BRPM and of private oil companies in: (a) completing the exploration of producing areas, where marginal prospects still exist which may be developed economically, and (b) assessing the petroleum potential of basins yet insufficiently explored and developing "leads" which, together with fiscal and contractual arrangements reflecting appropriately the promise and risk of their further exploration, could attract foreign investments. In addition, the Project will help BRPM restore and then maintain the full efficiency of its equipment and improve the management of its exploration activity. The Project will also assist BRPM in its plan for the development of the country's oil shale resources, which could complement petroleum in the longer run. - 18 - Project Description 4.02 The Project is essentially a three and a half year time slice of BRPM's petroleum exploration activity, a period which would ensure a sufficient continuity in the exploration process and achieve a meaningful coverage on the main prospective onshore basins of Morocco. The project will consist of (i) a continuous exploration program to be implemented in several basins in successive steps, (ii) the initial rehabilitation and subsequent maintenance and repair of BRPM's seismic and drilling equipment, and (iii) technical assistance to BRPM for its petroleum and oil shale activities. A. The Exploration Program 4.03 Given the number and variety of exploration prospects in Morocco and BRPM's technical capability and financial resources, priorities had to be established in designing an exploration program for the Bank-financed project. The BRFM and Bank staff have concurred in adopting a program which is a compromise between: (i) "low risk and low return" exploration for oil and gas in structures identified in the shallow producing Jurassic of the Essaouira basin, where additional hydrocarbon accumula- tions of small size are likely to exist, whose potential for early production justifies a limited drilling program; (ii) "higher risk and higher return" exploration of the deeper pre-Jurassic prospects in Essaouira, which may yield larger reserves of gas and perhaps rich condensate, provided that good reservoirs are found by drilling and structural traps presently identified are confirmed, which may require limited additional seismic surveys; and (iii) "exploratory" 1/ seismic and drilling in other potentially promising basins, where only limited exploration has taken place, with the objective of developing "leads" for their further exploration. Master Work Program 4.04 The Master Work Program, which BRPM will implement in successive steps over the total project period, aims essentially at completing about 3,400 line kilometers of seismic survey through 36 months of work with both conventional and non-conventional seismic methods, and drilling about 17 wells of various depths through the use of three drilling rigs, for a total of about 100 rig months, in the following onshore basins of Morocco: 1/ "exploratory": Initial wTork in a basin where little knowledge of pos- sible hydrocarbons has been assembled, or a new round of work in an explored basin for reaching potentially producing deeper horizons which have not yet been surveyed and tested. (See Brief and Glossary for a more detailed discussion of petroleum exploration.) - 19 - Basins Wells Seismic Cost (No.) (Months) ($ million) Essaouira Jurassic 3 5 15 Essaouira Pre-Jurassic 2 Doukkala 4 5 12 Hauts Plateax 2 5 9 Boudnib 2 5 9 Deep Riff 1 10 11 Unallocated 1/ 3 6 13 To adequately plan, monitor and support these seismic and drilling works and all related operations (such as site preparation, equipment tIansportation, and the provision of access roads and water supply), BRPM's exploration management and staff, with the assistance of consultants and specialists and through the commissioning of external studies, will (i) initiate during the first project period and thereafter update systematically on the basis of exploration results, regional studies showing the depositiona:L and structural history of all basins explored under the Project with emphasis on basic exploration parameters; (ii) carry out evaluation studies of the "expected value" of drilling prospects identified in these basins in ordler to choose between alternative objectives for subsequent well drilling; and (iii) assess the technical and economic feasibility of developing and bringing into production any oil or gas accumulation discovered and expected to be commercial. Initial Work Program 4.05 Of the exploration activities described above, the following have been selected for the work program for the initial 9 to 12 month project period: (i) three Jurassic and two pre-Jurassic wells to be drilled in the Essaouira basin; (ii) seismic surveys to be completed in both Essaouira amd Boudnib basins; (iii) updated assessment of the Essaouira basin and other regional basin studies to be initiated; and (iv) evaluation studies of drilling prospects' "expectedl value" required for designing the following work program in due course. 1/ Unallocated: see para. 4.06. Corresponding costs are accounted for as physical contingencies in project cost estimates (para. 4.15). - 20 - An understanding on this work program and its related timetable (see Annex 4.6) has been reached with BRPM. As explained in para. 4.11, of all the potentially promising basins in Morocco, the Essaouira basin deserved special interest and offered a data base large and reliable enough to develop during project appraisal the evaluation studies required for an informed decision on an initial program of exploration work. Subsequent Work Programs 4.06 Subsequent exploration work programs beyond the first project period are more difficult to determine precisely. As customary in the petroleum industry, each step of the program will be determined after evalua- tion of the results obtained from previous work and studies. Two main alternatives or more likely a combination of the two can presently be projected and will be decided upon on the basis of the results of seismic, drilling and studies made during the first period: (a) Should the exploration of Essaouira have produced results significant enough to justify further drilling of exploratory or appraisal wells in the basin, unallocated well drilling and, if needed, seismic surveys (para. 4.04) would then be used for this purpose; and (b) Should no significant results have been obtained in Essaouira, then subsequent BRPM efforts have to be fully applied to other basins. As indicated, the assessment of Moroccan prospects by BRPM and by Bank staff and consultants during project appraisal makes it very likely that other selected basins (paras. 2.15 to 2.18) would warrant initial exploratory work or new rounds of exploration over the full project period. The regional and evaluation studies that BRPM will carry out (para. 4.04(i) and (ii)), will provide a rational basis for the formulation of defined programs in these basins, as the studies commissioned by the Bank on the Essaouira basin did for the initial period program (para. 4.11). 4.07 To ensure therefore that exploration programs for the Project give priority to the best prospects available at any moment the following has been agreed: - 21 - (i) To support present plans for further exploration in the Essaouira and other basins selected under the agreed Master Work Program, BRPM shall submit to the Bank for review the regional basin studies referred to in para. 4.04(i); (ii) 'Work programs for the successive 12-month periods of the Project shall be established through consultations between BRPM and the Bank starting not later than six months after the beginning of an on-going program. BRPM shall prepare and submit to the Bank for review and comments a report on the results obtained to date and a fully documented proposal for (a) revisions of the on-going program, if any are justi- fied, and for (b) seismic surveys, well drilling, studies and related activities to be carried out over the next period. The finalization of work programs and related timetables will be the prerogative of BRPM, provided that adopted work programs are in compliance with the two following provisions; (iii) Well drilling to be financed by the loan in a given basin shall be carried out only on those drilling prospects which the Bank has found to be eligible for Bank financing, upon review of BRPM's regional basin studies and (to the extent that the progress of exploration in a basin and the information then available warrant their execution) evaluation studies of the "expected value" of alternative drilling prospects ; and (iv) The disbursement of Bank funds for exploration work in a given basin shall not exceed a fixed percentage of the portion of the loan attributed to the financing of exploration expenditures. In accordance with the agreed Master Work Program (para 4.04), ceiling disbursement percentages are 35% for the Essaouira basin and 20% for every other selected basin. However, in the course of the project, BRPM could submit to the Bank for its review and concurrence, evidence supporting a request that (i) either unallocated work be carried out in one of the selected basins under a ceiling disbursement percentage increased accordingly, or (ii) new basins be added to or substituted for those presently selected, and disbursement percentages per basin be reconsidered accordingly. Such arraLngements have been devised to satisfy the BRPM that its exploration activities under the Project can be carried out on a continuous basis with the necessary flexibility. At the same time, the Bank will be assured that funds from the loan would not be spent on drilling prospects not previously approved or in a given basin beyond the overall amount agreed upon for this basin. - 22 - B. Exploration Equipment 4.08 To carry out seismic surveys and well drilling under exploration programs of the project, BRPM will use the Division Technique's departmental forces (para. 3.05(v)) consisting of one "conventional" seismic party (equip- ment and crew) and three well drilling rigs, one H525 and two H1700's, operated by its own crews. However, to be cost efficient this equipment requires (i) initial reconditioning consisting of (a) the replacement of three seismic truck-mounted rigs and related service vehicles and ancillary equip- ment, and (b) the purchase and mounting of a new drilling mast for one H1700 rig, and (ii) maintenance and repairs in the course of the project through the replacement of those parts, which by industrial standards have a life period shorter than the equipment itself. The project will finance the foreign exchange cost of these pieces of equipment and replacement parts. However, in the course of the project, BRPM may eventually use its drilling equipment so financed in part by Bank funds to carry out exploration work on its own outside of the project for limited periods of time. Replacement parts used for the maintenance and repair of such equipment during these periods and for its rehabilitation, if needed at the end of such periods, will not be financed by the loan but by funds set aside by BRPM for that purpose. Technical Assistance 4.09 Although BRPM is capable and adequately staffed to carry out ex- ploration work, specific improvements in exploration management as well as use of external expertise in specialized techniques are required. The proposed project provides therefore for assistance to BRPM in: (a) developing an appropriate methodology to evaluate and compare the "expected value" of drilling prospects and to design optimal exploration programs; (b) improving drilling management with particular attention to the distribution of responsibilities to headquarters and field managers and the expedient use of specialized services in exceptional circumstances (high pressure, well deviation, tool fishing, etc.); and (c) designing appropriate cost accounting procedures for recording of exploration expenditures. This assistance, whose cost is estimated at $4 million, will require assign- ment of consultants and specialists, commissioning of studies for prospect evaluation and project feasibility, use of specialized drilling expertise and services, and the possible purchase of laboratory equipment. BRPM will hire consultants at the beginning of the project (para. 4.19). Other components of the technical assistance will be included, when needed, as part of the defined work programs (para. 4.07(ii)). 4.10 The loan also includes provision of $1 million for assistance to BRPM 1/ in assessing Morocco's options for the development of oil shale 1/ The Division for Mineral Valuation and Research of BRPM (para. 3.05(iii)) will be responsible for implementing this part of the project. - 23 - resources through alternative projects, especially a labor-intelasive scheme of surface extraction and distillation. Such assistance will consist of assignment of consultants and commissioning of specific studies. BRPM has agreed to hire such consultants by June 30, 1980 and to make available for review by the Bank the recommendations of the ecnsultants and -le res- ,s G_ the studies. Status of ]?roject Preparation 4.11 On the basis of periodic assessments carried out by BRPM (the latest exhaustive one was made for the preparation of the 1978-82 development plan), a large number of prospects had been identified in several basins for future exploration (paras. 2.15 to 2.19). Of all areas considered, the Essaouira basin deserved special interest: production existed, exploration was more advanced than in other basins, numerous structures had been identified by recent modern seismic surveys and a large data base made it possible to carry out a statistical risk analysis (Annex 4.1) to select the best prospects and devise an optimal drilling sequence. The Bank thus commissioned Gaffney, Cline and Associates (GCA) (Consultants, UK) to evaluate the potential of this basin and recommend a drilling program. In addition, the Bank secured the services of an independent explorationist, A. Dumestre (Consultant, Spain) to review BRPM's assessment of all Moroccan basins, including ECssaouira, and select basins which could warrant a resumption of exploration. 4.12 The methodology used in the GCA study (Annex 4.2) favored high risk prospects of the pre-Jurassic and discounted the value of lower risk prospects of the Jurassic, which although they are small could, in the opinion of the Bank staff' (geologists and petroleum engineers) and of BRPM staff, be produced economically. In particular, GCA recommended that no further drilling be carried out in Jurassic structures and that all new exploratory drilling be done in pre-Jurassic prospects. The main shortcomings of the initial GCA report were the extrapolation of parameters on the basis of limited samples which are not necessarily representative, and likely weaknesses in the economic evaluation of future discoveries, as the investment/production profiles used are not discussed and justified. Upon the request of the Bank, GCA carried out additional sensitivity analyses to take better account of the present uncertainty on the value of geological parameters (Annex 4.3). 4.13 As regards the Essaouira basin, the outcomes of GCA's study (which is available in the project file) and the use of other methods of prospect appraisal currently used in the industry (Annex 4.1, para. 3) indicated that a limited drilling program was justified (Annexes 4.4 and 4.5) in both Jurassic structures and pre-Jurassic prospects. However, well drilling should be complemented by a systematic evaluation of new data to assess whether further exploration in this basin is justified (4.05(iii)). - 24 - 4.14 Concerning the other basins of unassessed potential (paras. 2.15 to 2.18) which A. Dumestre had selected for a resumption of exploration, the conclusions of the Bank staff (geologists and petroleum engineers) were that, on the basis of available information, the most suitable approach would be to complete a reasonable seismic coverage and to drill a limited number of stratigraphic wells. However, before embarking on an exploratXvn program costing $10 million per basin (para. 4.04), additional assessment of prospects should be made (para. 4.05(iii)). Cost Estimates 4.15 The estimated cost of the project is DH333.0 million (US$90 million) of which DH185.0 million (US$50 million) is foreign exchange. The costs are summarized in the attached table and assumptions are detailed in Annex 4.7. Exploration cost estimate was developed by the Bank staff and BRPM on the basis of statistical information provided by BRPM's Exploration Division for the period 1976-78 and on the basis of recent costs in Morocco and neighbor- ing countries for similar exploration operations and services. The cost of equipment, materials and consumables is based on end-1979 prices. Foreign exchange costs of the project are $3 million for initial equipment rehabilita- tion, $6.5 million for replacing parts of drilling rigs, $20.5 million for goods and consumables used by BRPM to carry out exploration work, $15 million for specialized seismic and well services and $5 million for technical assis- tance. The foreign exchange cost of technical assistance is based on: - 125 man-months of consultants and specialists in exploration, drilling, accounting and auditing at an average cost of $10,000 per month, - a sum of $2 million to cover prospect evaluation and develop- ment feasibility studies and special drilling operations' expertise, - a sum of $0.5 million for the purchase of laboratory equipment, and - a sum of $1 million for assistance to BRPM in the assessment of oil shale development. A 20% physical contingency has been applied to the total base cost of the project to allow for unallocated seismic and/or well drilling (para. 4.04) which may be required to evaluate a potential discovery or to expand pro- posed programs. Price contingencies have been applied both to the local currency and foreign exchange cost components to account for projected price escalation of 10.5%, 9%, 8% and 7% during the years 1980, 1981, 1982 and 1983 respectively. Project Cost Estimates DH Million US$ Million Exploration Work Local F.E. Total Local F.E. Total Seismic Surveys BRPM Equipment & Crews 11.1 7.4 18.5 3.0 2.0 5.0 Explosives & consumables 1.7 5.8 7.5 0.5 1.5 2.0 Recording/Processing 3.7 14.8 18.5 1.0 4.0 5.0 Seismic: Sub-total 16.5 28.0 44.5 4.5 7.5 12.0 Well Drillings BRPM Equipment & Crews 64.8 27.7 92.5 17.5 7.5 25.0 Consumables 1.8 9.2 11.0 0.5 2.5 3.0 Well Equipment 3.7 31.3 35.0 1.0 8.5 9.5 Well Services 3.7 20.3 24.0 1.0 5.5 6.5 Drilling: Sub-total 74.0 88.5 162.5 20.0 24.0 44.0 Total 90.5 116.5 207.0 24.5 31.5 56.0 Exploration Management BRPM Consultants, ( 4.8 ( 1.3 5 Management Specialist 12.2 ( 24.0 3.3 ( 6.5 s & Staff & Studies (7.0 ( 1.9 LI' Laboratory Equipment 0.3 1.5 1.8 0.1 0.4 0.5 Oil Shales 6.0 3.2 9.2 1.6 0.9 2.5 Total 18.5 16.5 35.0 5.0 4.5 9.5 Project Total Base Cost 109.0 133.0 242.0 29.5 36.0 65.5 Contingencies Physical 22.0 28.0 50.0 6.0 7.5 13.5 Price 17.0 24.0 41.0 4.5 6.5 11.0 Total Project Cost 148.0 185.0 333.0 40.0 50.0 90.0 - 26 - Financing Plan 4.16 The proposed Bank loan of US$50 million is intended to finance the foreign exchange cost of the project. However, exploration programs are not precisely defined, so that actual foreign exchange and local costs of the project could differ from present estimates. The proposed loan can thus be viewed as a fixed contribution of the Bank to the continuing BRPM exploration activities, until accrued disbursement from the loan reaches the $50 million ceiling amount. BRPM and the Government will have to finance the corresponding local cost of the actual project, which is estimated to amount to $40 million equivalent. The funds required will be provided to BRPM by the Government through annual budget allocations. Since allocations are known to be limited under current and coming austerity budgets, the Government and BRPM have provided assurances that enough funds will be made available out of BRPM budget allocations or otherwise to cover the local currency cost of the project. Lending Arrangements 4.17 In order to ensure that the funds provided by the Bank are clearly additional to the Government contribution to the project, the proposed Bank loan will be made to BRPM. The loan will be made on terms and conditions simi- lar to those of engineering loans 1/, i.e., a period of ten years at the prevailing interest rate, including a grace period of four years, and would be refinanced in whole or in part, at the Bank's option, from a subsequent loan for development/production of petroleum resources identified under the project. The term of the loan would be extended to 17 years if the exploration project does not lead by March 31, 1984 to a development/production project suitable for Bank financing. BRPM therefore will submit to the Bank for review the feasibility studies of the development of any discovery expected to be commercial (para. 4.04(iii)). 4.18 The loan would be guaranteed by the Government of Morocco. At least during the grace period, BRPM will not be in a position to service the interest and commitment charges on the Bank loan from its own funds. The Government will therefore provide through annual budget allocations or otherwise, adequate funds to BRPM to service those charges in addition to the local funds required to execute the project (para. 4.16). However, as explained in para. 5.11, BRPM future financial viability depends largely on the results (measured in terms of commercial discoveries) of either the proposed project or the currently active joint ventures with Phillips, SNEA and other foreign oil companies. By the end of the grace period, such exploration results will be reviewed as well as opportunities and requirements for further exploration, and the resulting future finances of BRPM will be assessed. A decision will be made as to whether the exploration loan would be refinanced in whole or in part under a Bank-financed development/production loan or its terms of repayment extended to 17 years, and discussions will be held on subsequent arrangements for the loan repayment. 1/ As provided in para. 86 of the "Program to Accelerate Petroleum Production in the Developing Countries," dated November 30, 1978 and approved by the Board of Executive Directors on January 19, 1979. - 27 - Project Management and Implementation 4.19 The project will be implemented by BRPM with the support of spe- cialized f'irms and the assistance of consultants whose qualifications and terms of employment are satisfactory to the Bank and the Borrower. As explained in paras. 3.05 (iii) and (iv), the Division of Petroleum Exploration (DPE) has competent management and staff capable of carrying out exploration work through the use of adequately equipped and staffed departmental forces of the Technical Division (DT). A review of the state of repair of the equipment and of the operating cost of BRPM indicated that with initial rehabilitation of exploration equipment (para. 4.08) and with the assistance of qualified specialists to improve drilling performance, DT would be cost efficient. In order to iLmprove the quality of the exploration activities (adoption of optimal programs and collection of a maximum of valuable information), it is advisable that DPE retains consultants and specialists and commissions specific studies for assistance in the geological assessment of basins, the evaluation of drilling prospects' expected value and the feasibility of any development, the preparation and follow-up of seismic and drilling programs, and the procedures for recording the cost of exploration operations (para. 4.09). For that purpose and in view of the importance of this assistance in ensuring that exploration programs, drilling performance and project accounting will be up to international standards, BRPM will recruit consultants and specialists not later than May 31, 1980, will establish appropriate project accounting pro- cedures, and will use consultants' services and commission studies at times and in quantities projected in Annex 4.7. Procurement 4.20 Goods required for the execution of the project and whose foreign exchange cost is expected to amount to US$30 million are (i) main and spare parts for the initial reconditioning and subsequent maintenance and repair of seismic and drilling equipment operated by DT's departmental forces, (ii) various materials (such as drilling bits, mud products, special cement, casings, tubings, well heads, and explosives) and (iii) consumables, to be used by DT for carrying out seismic surveys and well drilling as work progres- ses. Spare parts, materials and consumables will be purchased by DT in bulk when the market is favorable, to replenish stocks at levetls which would ensure that current needs of on-going exploration work are satisfied without delays. BRPM has agreed to purchase said goods under ICB procedures for a total cost equivalent to the accrued amount of loan disburseme!nt made for such goods used for the project. However, purchases relating to urgent needs and of an individual amount not exceeding $300,000, can be processed under BRPM's own procedures, which are in accordance with the Limited International Tender- ing (LIT) procedures of the Bank, provided that their aggregate amount does not exceed US$4 million over the project period. Should this ceiling amount be recognized later to eventually jeopardize the continuity or safety of exploration work, revision of this amount would be considered by the Bank. 4.21 BRPM will also use the services of specialized firms to assist in the carrying out of seismic surveys (field recording and data processing) and well drilling (logging, mud control and other services). Existing contracts - 28 - for such services, which have been awarded under BRPM's own procedures, will be continued to their earliest expiration provided that aggregate disbursement against expenditures under these existing contracts do not exceed US$5 million. For further specialized services required by the Project, BRPM will make new awards under Bank's LIT procedures, as is justified by the limited number of suppliers. Disbursement 4.22 Disbursement will be made monthly on the basis of statements of expenditures (SOE) and specific invoices. SOE's will relate to spare parts, materials, and consumables (para. 4.20) and to specialized firm's services (para. 4.21) used by BRPM for carrying out the project. These SOE's will be supported by a report on work progress, a list of quantities of goods and services used during the month and appropriate documentation (invoices or contracts) on the unit cost of said goods and services. Consultants, when on assignment to BRPM, will countersign the SOE's. Specific invoices will be (i) from suppliers for main parts used in the reconditioning of seismic and drilling equipment (para. 4.08(i), (ii) from consulting engineers for evalua- tion and feasibility studies and for laboratory equipment and expertise as the case may be, and (iii) from consultants and specialists assigned to BRPM under Technical Assistance. 4.23 Disbursements will be made against (i) 100% of foreign expenditures and 70%of local expenditures for all categories of goods, (ii) 80% of expendi- tures for specialized services, and (iii) 100% or 50% of expenditures for consultants and consulting engineers depending on whether they domicile outside or in Morocco respectively. It is expected that the above percentages would achieve the objective of the loan to finance the actual foreign exchange cost of the project. However, the breakdown between foreign exchange and local costs may vary significantly over the course of the project. Therefore, on the basis of semi-annual reports from the auditors on project accounts and breakdown between foreign exchange and local costs, accrued disbursement would be compared to actual project foreign exchange cost, and disbursement percen- tages would be adjusted accordingly. In the event disbursements are not supported by appropriate documentation, exceed the percentage of exploration expenditures allocated to a given basin (para. 4.07(iv) or cover unapproved program components, the Bank will limit disbursement until a satisfactory situation is restored. 4.24 Disbursements are expected to spread over a period of three and a half years at a rate of about US$1.2 million equivalent per month. Early disbursement is expected in the first semester of 1980 for the rehabilitation of equipment and for the initial period exploration work. Retroactive financ- ing of an amount not exceeding $5 million is thus proposed to cover the cost of goods and services used between the beginning of the project and the signature of the proposed loan. A schedule of disbursement is at Annex 4.8. - 29 - Environmental Impact 4.25 Seismic explosives shooting, preparation of drilling sites and disposal oif drilling residues will cause some temporary disturbance to the environment; however, sites will be restored after completion and no perma- nent damage will be made to the environment. All drilling rigs will be equipped with proper safety equipment such as blow-out preventers to avoid damages from accidental spills. However, adequate provisions are made in the project legal documents for BRPM to use funds from the loan to secure the best available expertise and necessary equipment without delay in case of a crash accident, which could develop into a catastrophic situation. Reporting Requirements 4.26 The progress reports supporting monthly statements of expenditures and specific invoices for goods and services, and the reports and proposals to be submitted by BRPM periodically for subsequent work programs will form the basis of the reporting and project supervision. Project Risk 4.27 Exploration is by nature a risky operation as positive results have on average one chance in 10 to 15 of occurring, although a better ratio could be expected in Morocco on the basis of past exploration experience. However, it should be pointed out that even a medium size hydrocarbon discovery would ln this ca,se more than offset the exploration cost and that the prime objec- tive of the main part of the proposed program is to develop leads to attract foreign investments. In this perspective, the main risk is thalt the geological potential might be less attractive than currently considered. This risk will however be monitored through the consultation process that wilL be established between BILPM, its consultants and the Bank, and the exploration program would be suitably modified. V. FINANCIAL ASPECTS Past Finances 5.01 Apart from the management of its investments, BRPM's major activities have been, until now, confined to work in mineral and petroleum exploration, performed mostly for its own account and funded predominantly by the Government. The undernentioned summary Balance Sheets for the period FY74 through FY78, are indicative of BRPM's financial position and its investment in the sectors over that period. - 30 - As of December 31: 1974 1975 1976 1977 1978 (DH million) Net Plant 23.2 40.3 66.7 95.8 87.2 Exploration 98.6 160.7 266.6 317.1 331.6 Investment in Affiliates 248.6 327.5 379.6 395.2 421.9 Working Capital 11.9 48.7 81.8 88.6 68.2 Total Assets 382.5 577.2 794.7 896.7 908.7 Government Equity 372.0 565.2 778.8 877.6 887.1 Provision for Pension Funds 8.7 10.4 12.6 14.9 17.4 Long-term Debt 1.8 1.6 3.3 4.2 4.4 Total Liabilities 382.5 577.2 794.7 896.7 908.9 Debt/Equity Ratio 3/97 2/98 2/98 2/98 2/98 Assets 5.02 BRPM's total net assets increased from DH 382 (US$96) million in FY74 to DH 909 (US$227) million in FY78. (i) Investment in Exploration As of FY78, DH 332 (US$83) million or 36% of BRPM's total assets were deployed in its petroleum or mineral exploration activities; of this sum DH 220 (US$55) million represented investment in petroleum exploration and DHI12 (US$28) million in mineral exploration. Since BRPM follows accepted standards of writing off unsuccessful exploration costs against equity, the investment represents exploration which has not yet been deemed unsuccessful. Almost 30% of the investment in the petroleum sector is attributable to the Essaouira Basin activities (para. 2.19(a)); the remaining 70% relates to countrywide drilling and seismic operations. (ii) Investment in Affiliates As of end FY78 DH 422 (US$106) million or 46% of BRPM's total assets were deployed in investments in affiliates, either totally or partially owned. 73% of the sum represents share holdings in mining companies - US$21 million in the almost totally owned Jerada coal mining subsidiary, US$19 million in the wholly-owned iron ore subsidiary, US$17.5 million in copper mining activi- ties jointly owned with third parties, and US$19 million in wholly or partially owned lead, silicone, manganese and other mining companies. BRPM's petroleum investment consists mainly of a US$9 million investment in SCP, in which it has a 50% interest, and which it owns jointly with a French Group with SNEA as a major partner. BRPM, in addition, has a 50-50 joint operating venture with APEX in gas production. - 31 - (iii) Plant BRPM's net plant as of end FY78 amounted to DH 87 (US$22) million or 10% of total assets; US$9 million of this sum represented equipment used exclusively for petroleum drilling and seismic work. Capitalization 5.03 BRPM's capital structure has essentially remained the same over the past five years and as of end FY78, 97% of the enterprise's capital was represented by Government equity. Since funds from internal sources have been small and only a small amount of long-term debt has been taken up, BRPM's investments have been financed mainly from Government budget appro- priations;; in the period FY74-78 these have amounted to DH 815 (US$204) million. Given the nature of the operations and the element of risk involved, the Government's policy of financing BRPM's exploration activities by equity financing has been prudent; the capitalization of the enterprise as of end-FY78 was sound. Past Earnings 5.04 Since FY74 BRPM's net earnings have been as follows: FY 74 75 76 77 78 DH million 11.6 25.8 25.9 23.3 18.5 Return on invested capital 3% 4% 3% 3% 2% Returns on invested capital have been extremely low (2-4%), reflect- ing the nature of the exploration operations and low dividend income from affiliates resulting from fluctuations in international mineral prices, low domestic coal prices, and the need of some subsidiaries to reinvest profits. BRPM's coal, iron ore and copper mining affiliates have yielded no significant dividends over the past few years. BRPM's returns on its petroleum invest- ments have also been low; SCP distributed dividends in FYs75, 76 and 78 of about US$0.8 million per year on an investment of US$9 million; limitation on earnings of this subsidiary has been caused by Government regulated limits on refinery margins. BRPM's only other present source of earnings from petroleum development has been a dividend of US$0.9 million on the joint operating venture with APEX. Past Financing 5.05 The undermentioned table indicates the investment made by BRPM over the period FY74-78 and the sources of finance. - 32 - In DH million In US$ million FY74-77 FY78 Total Total Investment Petroleum Exploration 315.2 62.0 377.2 94.3 Mineral Exploration 160.0 32.0 192.0 48.0 Investment in Affiliates 237.2 27.6 264.8 66.2 Plant 115.6 15.6 131.2 32.8 Working Capital 74.0 (20.4) 53.6 13.4 Total Investment 902.0 116.8 1,018.8 254.7 Sources Internal Funds 150.0 44.8 194.8 48.7 Less Debt Service (10.0) (2.0) (12.0) (3.0) 140.0 42.8 182.8 45.7 Borrowings 16.0 4.0 20.0 5.0 Budgetary Appropriatlons 746.0 70.0 816.0 204.0 Total Sources 902.0 116.8 1,018.8 254.7 Average annual debt service coverage (times) - 22 5.06 In the years between 1974 and 1977, financial discipline dictated that BRPM cover its plant, working capital, debt service and other related requirements mainly through internally generated funds. In line with estab- lished policy to accelerate development, the Government provided the funds to cover the cost of expanding programs in exploration and in BRPM investments in affiliates. By 1977, supported by budgeted appropriations, BRPM reached an annual level of investment of about $31 million on petroleum exploration and about $12 million on equipment and related materials. 5.07 This guideline to financial policy was changed, however, with the severe curtailment of budgetary allocations to public enterprises necessitated by the Government's 1978-80 Austerity Plan. A reduction in Government funding in 1978 to about a third of its 1977 level resulted in a drastic cutdown in the size of BRPM's exploration plans. With the view to keeping to a mininum the number of idle equipment and manpower, BRPM has had to reduce working capital to fund a proportion of the work done. Future Finances 5.08 BRPM is potentially in a position to benefit very favorably from any significantly successful investment by foreign partners with whom It has had the proven ability to negotiate 50%-50% joint venture agreements which hold the foreign partners liable for all exploration expenditure. It now holds - 33 - two such agreements, the first with Phillips, and the second signed in August 1979 with SNEA (para. 2.09). Nevertheless, in the event of a discovery, BRPM would have to share equally in the cost of field appraisal and development; and for sevreral years before any generation of revenue can be expected, it would be in need of possibly large amounts of funds. At present, the company has also some small promising projects of its own - development of gas and condensate reserves at Toukimt and at least one of several mine development options presently being studied and expected to be moderately profitable. BRPM also has a possibility to earn a small incremental profit from its recently expanded effort to work under contract to third parties. These small developments however will not be possible without the incurrence of some small-scale debt which will have to be serviced, and without some further investment in plant. 5.09 The proposed loan, in promoting increased foreign investment in Morocco's exploration would support a BRPM implemented program designed primarily to clarify prospects and reduce potential investors' risk. During the three-year period of project implementation the loan would, in conjunction with Government funds, allow BRPM to return to pre-1978 level of petroleum exploraticon expenditure of about US$30 million per year. If as expected the project is successful, the results should help to enlist new foreign partners in additional exploration, and should prove at least small fields which could be produced without long delays by BRPM on its own (para. 2.19(a)). In either case, however, expenditures subsequent to project investment, will be required. 5.10 Any significant improvement in BRPM's future finances depends essential:Ly on the completion of successful exploration and subsequently profitable development. However, given the nature of such operations, it is impossible to forecast BRPM's financial future with any degree of accuracy and no atitempt has been made to do this. Whatever the outcome of BRPM's future projects, the enterprise will remain for a period of presently undeter- minable duration dependent on the Government or on borrowing for the financing of the major share of its requirements for funds. These requirements may increase by several orders of magnitude if BRPM is asked to assume major responsibilties in the implementation of the Government's oil shales develop- ment plan. 5.11 As discussed in para. 4.18 above, BRPM's future finances will be reassessed by the end of the grace period on the Bank loan; in any event suitable arrangements have been made (para. 4.18) to ensure the due and practical servicing of the loan. - 34 - VI. PROJECT EVALUATION Project Benefits 6.01 The difficulties of measuring expected benefits from an oil and gas explorati LI project fall into two categories. The first is the inherent uncertainty involved in estimating probable outcomes of drilling and other exploration activities. The range of potential outcomes is large, and could depend upon many interconnected geological factors. To deal with this problem, the mission obtained geological appraisals from two independent consultants (para. 4.11). A probability analysis was undertaken to obtain estimates for the rates of return on each of the Jurassic and pre-Jurassic prospects of Essaouira. The prospects were then ranked to develop initial drilling sequences. 6.02 Based on these rankings, and taking into account all development costs associated with successful discoveries, the real rate of return on the first year program in the pre-Jurassic has been estimated at about 16% and in the Jurassic at about 9% (Annex 4.3). These figures are averages of rates of return on individual prospects which have been estimated at 17% and 15% for the pre-Jurassic Oued Tahria and Meskala structures, and at 11%, 9% and 6% for Tahrzout, Kouba bi Fassiou, and Id el Makhoud Jurassic prospects, respectively. The rates of return that would be achieved if the programs are successful (i.e., if the present most likely expectation of potential reserve levels is confirmed), has been estimated at 27% for the pre-Jurassic program and 18% for the Jurassic program. 6.03 These rates of return assume an opportunity cost for the oil of $24 per barrel and for natural gas of $3 per mcf, and exploration and develop- ment drilling costs in line with BPRM's historic performance. The analyses were based on several independent expert assessments of two key parameters for each prospect: the most likely estimate of recoverable reserves, and the probability that the drilling will result in a find of this magnitude. In the case of the pre-Jurassic prospects, these assessments came to essenti- ally the same conclusion. In the case of Jurassic prospects, there remains a divergence of views, the reasons for which are explained in knnexes 4.3 to 4.5. The rates of return as given above reflect the mission's conclusions, which are closer to A. Dumestre's judgement than to GCA's. A brief descrip- tion of the methodology used and listings of estimated parameter values are given in Annex 4.3. 6.04 The rates of return in para. 6.02 are in fact notably conservative for several reasons: (i) The pre-Jurassic structures have been assumed, based on cur- rent evidence, to contain dry natural gas rather than oil or condensates, whereas either of the latter alternatives would greatly enhance the prospects' expected potential; (ii) Both estimates are based on the assumption that the opportunity cost of the oil and of the gas will remain constant, whereas an increase of the order of 10% in this level would lead to a 2% increase in expected return; - 35 - (iii) Both estimates do not take into account the possibility that ]3PRM's drilling times may be reduced, whereas a reduction of the order of 25% in drilling cost would increase the expected rate of return by 5-8%; and (iv) The method used to estimate returns does not take into account the interdependence of prospects, whereas a successful find in one prospect may significantly enhance the probability of finds in other prospects of the same type. The eight identified structures in pre-Jurassic horizons may contain cumulatively between 500 Bcf and 3,000 Bcf of gas, and the dozen Jurassic structures up to 30 million barrels of oil or gas equivalent. 6.05 The second difficulty in measuring exploration project benefits is the problem of quantifying the value of additional information which, by reducing investor's risk, may attract additional capital participation in future exploration and development efforts. The catalytic role which the Bank would fulfill (para. 2.20) through its participation in early exploration activities such as the seismic surveys which account for nearly one-fourth of total project cost, and in drilling in the largely underexplored basins outside Essaouira during the project's second and third years, is an important but largely unquantifiable ex ante benefit of the project. 6.06 Over the longer term, this project will provide the Government with sufficient information and a sound basis on which to plan the further explora- tion and development of its oil and gas resources in most onshore areas. The results will assist it in the projection of likely schedules and volumes of future production and of the magnitude of the capital investment required from both public and private sources to achieve these objectives. And in the near term, by providing the means to make fuller use of BPRM staff and equipment, the project will help maintain the efficiency and competitive iunit costs of current exploratory work. Least Cost Program 6.07 As indicated above (para. 6.02), the first year program has been determined on the basis of a probability analysis based on current information and geological estimates for each prospect. As more and better informa- tion becones available through surveys and drilling activities, the program will be aidjusted periodically in consultation with the Bank (para. 4.07). This will ensure the rapid assimilation of information as it becomes available and the maintenance of a least cost exploration program. VII. AGREEMENTS REACHED 7.01 BRPM has agreed to: (i) carry out its exploration activities according to an agreed master program (para. 4.04), beginning with a defined work plan and - 36 - timetable for the initial period (para. 4.05) and followed by subsequent programs which comprise only drilling works eligible for Bank financing (para. 4.7(iii) and whose Bank- financed exploration cost in a given basin does not exceed a fixed percentage of the loan (para. 4.7(iv)); (ii) submit to the Bank for review regional studies of the Essaouira and other Moroccan basins (para. 4.07(i)). (iii) submit to the Bank at fixed times reports on the results obtained to date, proposals for subsequent seismic and drilling programs (para. 4.07(ii)), evalua- tion studies of the expected value of alternative drilling prospects (para. 4.04(ii)) and requests for technical assistance (para. 4.09) during the subsequent period; (iv) recruit exploration, drilling and accounting consultants under terms and conditions satisfactory to the Bank by May 31, 1980 (para. 4.19); (v) establish project accounting procedures satisfactory to the Bank (para. 4.19); (vi) employ independent auditors to review project accounts every six months and BPRM's accounts every year (para. 3.07); (vii) submit to the Bank for review the feasibility studies of the development of any expected commercial discovery (para. 4.17); and (viii) recruit consultants by June 30, 1980 and commission specific studies to assist in oil shale development, and make available for review by the Bank the recommendations of such consultants and the results of such studies (para 4.10). 7.02 The Government has agreed to provide BRPM with adequate funds to cover the local cost of the project (para. 4.16) and to service the Bank loan (para. 4.18). 7.03 The proposed project is suitable for a Bank loan of US$50 million equivalent to BPRM for 10 years, including four years of grace. If no com- mercial discovery is made before the expiration of the grace period, the terms of the loan should be extended to standard country terms. The loan will be guaranteed by the Government of Morocco. - - -~~~~~~~~~~~~~~~~~~~~~~~~~~- Rh orb I v _Xt _f fz<__iA Wi
Groupe de la Banque mondiale · Staff Appraisal Report
Morocco - Petroleum Exploration Project
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