Nepal - Petroleum Exploration Promotion Project

Document of FILE COPY The World Bank FOR OFFICIAL USE ONLY Repot No. P-3211-NEP REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE KINGDOM OF NEPAL FOR A PETROLEUM EXPLORATION PROMOTION PROJECT May 20, 1982 This document hbs a restricted distribution and may be used by recipients only in the performnce of their official duties. Its contents may not otherwise be disoeld witbout Wodd Bank authorimalon.  CURRENCY EQUIVALENTS Currency Unit - Nepalese Rupee (NR) Since September 19, 1981 US$1.00 = NRs 13.2 WEIGHTS AND MEASURES 1 cm = centimeter = 0.39 inches 1 m = meter = 3.28 feet 1 m3 = cubic meter = 264 US gallons 1 1 = liter = 0.26 US gallons 1 bbl = barrel = 42 US gallons 1 kg = kilogram = 2.2 pounds I km = kilometer 0.62 miles 1 km2 = square kilometer = 0.39 square miles 1 t = ton 2 2,205 pounds 1 kW = kilowatt = 1,000 watts 1 MW = megawatt = 1,000 kilowatts 1 kWh = kilowatthour = 1,000 watthours 1 GWh = gigawatthour 1 million kilowatthours ABBREVIATIONS AND ACRONYMS CIDA - Canadian International Development Agency DMG - Department of Mines and Geology NOC - Nepal Oil Company PPF - Project Preparation Facility $ - US Dollars NEPAL FINANCIAL YEAR July 16 - July 15  FOR OFFICIAL USE ONLY KINGDOM OF NEPAL PETROLEUM EXPLORATION PROMOTION PROJECT Credit and Project Summary Borrower: Kingdom of Nepal Beneficiary: Department of Mines and Geology (DMG) Amount: Special Drawing Rights (SDRs) 8.3 million * ($9.2 million equivalent) Terms: Standard Project Objectives The project aims at fostering interest amongst foreign and Description: oil companies to explore for petroleum in Nepal. There has been virtually no exploration for petroleum in Nepal except for limited surface geology survreys undertaken during the 1960's. An IDA-financed aeromagnetic survey in 1980 demonstrated the existence of thick sedimentary zones and basement anomalies in the Terai Basin which could be indicative of geologic structures capable of trapping hydrocarbons. However, while these indications are encouraging, they are as yet too preliminary to attract foreign oil companies to undertake exploration work without the acquisitiont of substantial additional geological and geophysical data. The project would consist of: (i) a seismic survey of about 800 line-km in the Terai Basin; (ii) preparation of draft petroleum legislation; (iii) geochemical analysis and other studies; (iv) exploration promotion; and (v) training of staff in geology, geophysics and legal aspects of the petroleum industry. The major benefit of the project would be to enhance the attractiveness of Nepal as a petroleum prospect, thereby encouraging foreign oil companies to, undertake the most costly phases of exploration. The project would also provide temporary employment for some 400-500 laborers. The major risk is the possibility that the results of the seismic survey might not be sufficient to attract foreign oil companies. While this risk is Et real one, the current project represents the most promising way for the country to induce exploration in the Kingdom which could result in major foreign exchange earnings. This document has a restricted distribution and may be used by recipients only in the perforrance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  - ii- Estimated Cost: a/ In Thousand $ Local Foreign Total Technical Assistance Legal 10 80 90 Geophysical/Geological 60 600 660 Special Studies 100 100 200 Seismic Survey 800 6,400 7,200 Special Project Unit 360 - 360 Training 20 200 220 Material and Equipment 70 350 420 Base Costs 1,420 7,730 9,150 Contingencies: Physical 140 770 910 Price 140 700 840 Total Project Cost 1,700 9,200 10,900 Financing "'- In Thousand 8 Local Foreign Total Government 1,700 - 1,700 IDA - 9,200 9,200 Total 1,700 9,200 10,900 Estimated IDA FY FY83 FY84 FY85 Disbursements: Annual 7,100 1,480 620 Cumulative 7,100 8,580 9,200 Economic Rate of Return: Not Applicable. Staff Appraisal Report: Not Required. Map: IBRD 16223 a/ Project cost includes items financed with an advance of $300,000 from the Project Preparation Facility (PPF) which is to be refinanced out of the proceeds of the proposed credit.  INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE KINGDOM OF NEPAL FOR A PETROLEUM EXPLORATION PROMOTION PROJECT 1. I submit the following report and recommendation on a proposed development credit to the Kingdom of Nepal in an amount of Special Drawing Rights (SDRs) 8.3 million ($9.2 million equivalent) on standard IDA terms to help finance a Petroleum Exploration Promotion Project. PART I - THE ECONOMY 1/ 2. The most recent economic report, "Nepal - Policies and Prospects for Accelerated Growth" (Report No. 3577-NEP) was distributed to the Executive Directors on October 15, 1981. The principal findings of the report and recent developments are described below. Country data are shown -in Annex I. 3. By almost any standard, Nepal is one of the least developed countries in the world. Per capita income is estimated at $140 (1980) and health and education standards are well below the average for South Asia: life expectancy at birth is only about 44 years, infant mortality is 150 per thousand, and adult literacy is only about 20%. The population, estimated to be 15.0 million (1981), grew at a rate of about 2.7% per year during 1971 to 1981. About 95% of the population live in rural areas. 4. Population density with respect to arable land has reached alarming levels and is threatening to overwhelm the resource base of the economy. Cultivation has been extended beyond economically feasible and ecologically safe limits in the Hills, and together with denudation of forests to meet housing and fuel needs, soil erosion has become a critical problem. Firewood and water have become more difficult to obtain as the forests are reduced and springs and streams dry up. This degradation of the agricultural base has made even the present low level of living standards difficult to maintain, and instances of food shortages and malnutrition have become commonplace. 5. Agriculture accounts for nearly 60% of Nepal's GDP and 75% of merchandise exports, and provides the main source of livelihood to over 90% of the 'population. Crop production accounts for about 60% of agricultural output, livestock for 30%, and forestry for 10%. Rice is the predominant food crop (planted on about half of the total cropped area), followed by 1/ Parts I and II of this report are substantially the same as in the President's Report (Report No. P-3158-NEP) dated December 3, 1981 for the Second Education Project in Nepal, distributed to the Executive Directors under cover of the Secretary's Memorandum IDA/R81-137.  -2- maize, potatoes, wheat and millet; cash crops (oilseeds, jute, sugar and tobacco) are grown on about 10% of the cropped area. About 25% of total rural incomes arise from nonagricultural activities. Cottage industries are one of the more important of these, engaging over one million people on a part time basis, and providing basic consumer goods in the many small isolated markets where such goods would otherwise not be available. 6. Apart from agricultural land, Nepal's only other important exploitable resources are hydropower and tourism. I'he exploitation of the vast hydropower resources, however, beyond that required to satisfy the country's own power demand, will depend crucially orn Nepal's ability to enter complex financial, exploitation and export agreements with neighbouring countries. The tourism sector, based on Nepal's magnificent landscape and rich cultural heritage, has been dynamic though it still accounts for only about 1% of GDP. 7. When Nepal started its modernization efforts in the early 1950s, there was virtually no economic or administrative infrastructure, and initial development efforts were necessarily concentrated on, establishing a foundation for future development. Investments in the transport sector absorbed a large part of development spending. The Fifth Development Plan (1975/76-1979/80) marked a shift in development objectives; acceleration of economic growth, employment creation and raising living standards of the population became major plan objectives. Development expenditures rose fairly rapidly during this period and there were substantial shifts in the composition of spending away from transport to agriculture, power and social E2rvices. GDP growth, however, barely kept up witn1 that of population, and while it was inevitable that per capita income growth would remain slow in the early stages of development, the continued economic stagnation since the mid 1970s is disturbing. 8. Part of the reason for this stagnation lies in factors beyond Nepal's control. The difficult topography and poor resource base are obviously important in retarding growth. Nepal