India - Refineries Rationalization Project

Document of The World Bank -. FOR OFFICIAL USE ONLY Report No. 364*-IN STAFF APPRAISAL REPORT INDIA REFINERIES RATIONALIZATION PROJECT March 1, 1982 Industrial Projects Department 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.  CURRENCY EQUIVALENTS Rs 1.00 Paise 100 US$1.00 = Rs 8.50 Rs 1.00 US$0.11765 Rs 1 million = US$117,647 (The US Dollar/Rupee exchange rate is subject to change. Conversions in the Staff Appraisal Report were made at US$1.00 to Rs 8.50, which represents the projected exchange rate over the disbursement period). FISCAL YEAR April 1 - March 31 WEIGHTS AND MEASURES 1 Barrel (bbl) of Crude Oil (0.85 Specific Gravity/350 API) 0.135 Metric Ton l Barrel (bbl) = 0.159 Cubic Meter 1 British Thermal Unit (Btu) = 0.252 Kilocalories 1 Cubic Foot (cu ft) = 0.028 Cubic Meter 1 Standard Cubic Foot (SCF) of Natural Gas = 1,000 Btu6 1 Metric Ton of Crude Oil = 44.4 x 10 Btu 1 Mile = 1.609 Kilometers 1 Gallon (US) = 3.785 Liters PRINCIPAL ABBREVIATIONS AND ACRONYMS USED BPC - Bharat Petroleum Corporation Ltd bpd - Barrels Per Day BRPL - Bongaigaon Refinery and Petro- Chemical Ltd CRL - Cochin Refineries Ltd EIL - Engineers India Ltd FCC - Fluid Catalytic Cracker GDP - Gross Domestic Product GOI - Government of India KW - Kilowatt GWH - Gigawatt Hour HPC - Hindustan Petroleum Corporation Ltd HSD - High Speed Diesel IIP - Indian Institute of Petroleum IOC - Indian Oil Corporation LDO - Light Diesel Oil LGO - Light Gas Oil LPG - Liquefied Petroleum Gas Ltd - Limited mgd - million gallons per day MRL - Madras Refineries Ltd mtce - million tons of coal equivalent MWH - Megawatt Hour OCC - Oil Coordination Committee ONGC - Oil and Natural Gas Commission scm - standard cubic meter TOE - Tons of Oil Equivalent tpy - Metric Tons per Year UOP - Universal Oil Products, Co., US  FOR OFFICIAL USE ONLY INDIA - REFINERIES RATIONALIZATION PROJECT TABLE OF CONTENTS Page No. I. INTRODUCTION ................................................... 1 II. THE ENERGY SECTOR ........................ ..... 2 A. Introduction ............................................... 2 B. India's Energy Consumption ................................. 3 C. Commercial Energy Resources ................................ 4 1. Coal .................................................. 4 2. Electric Power ........................................ 5 3. Petroleum ............................................. 6 4. Natural Gas ........................................... 8 D. Overall Energy Supply and Demand Prospects .... ............. 8 E. Institutional Aspects of Petroleum Production .... .......... 9 F. Bank Assistance in Petroleum Production .................... 10 III. REFINERY CAPACITY AND PRODUCTION ............. .. ................ 10 A. Background ................................................. 10 B. Historical Production of Refinery Products .... ............. 11 C. Expansion Plans ............................................ 12 D. Forecast of Refinery Products Production .................... 14 IV. PETROLEUM PRODUCTS CONSUMPTION, DISTRIBUTION AND PRICING ........ 15 A. Historical Consumption of Refined Products .... ............. 15 B. Future Demand of Refinery Products .......................... 16 C. Projected Supply and Demand Balance for Petroleum Products . 17 D. Petroleum Conservation and Pricing ......................... 18 E. Marketing and Distribution of Petroleum Products .... ....... 20 V. PROJECT SPONSORS ....................... ........................ 21 A. Bharat Petroleum Corporation Limited (BPC) .... ............. 21 1. Management and Organization ............................ 21 2. Plant Facilities and Production Performance .... ........ 22 3. Financial Performance and Expansion Plans .... .......... 22 B. Hindustan Petroleum Corporation Limited (HPC) .... .......... 24 1. Management and Organization ............................ 24 2. Plant Facilities and Production Performance .... ........ 25 3. Financial Performance and Expansion Plans .... .......... 25 C. Madras Refineries Limited (MRL) ............................ 27 1. Management and Organization ............................. 27 2. Plant Facilities and Production Performance .... ......... 27 3. Financial Performance and Expansion Plans .... ........... 28 This report was prepared by Messrs. E. Segura, R. Bhan, D. Caplin and N. Krishnamurthy of the Industrial Projects Department 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.  ( ii) Page No. D. Cochin Refineries (CRL) ................................. 29 1. Management and Organization ..... ................... 29 2. Plant Facilities and Production Performance ........ 30 3. Financial Performance and Expansion Plans .... ...... 30 E. Auditing . ................................................ 31 VI. THE PROJECT . ................................................ 32 A. Project Objectives ......... ............................. 32 B. Project Description ........ ............................. 32 1. Refinery Capacity Expansion and Secondary Processing Component ...... ....................... 32 (i) BPC-Bombay Refinery ......................... 32 (ii) CRL-Cochin Refinery ..... .................... 33 (iii) MRL-Madras Refinery ..... .................... 34 (iv) HPC-Visakh Refinery ..... .................... 35 (v) HPC-Sulfur Recovery Unit ..................... 35 2. Energy Efficiency and Pollution Control Component... 36 C. Process and Technology Selection .36 D. Environmental Aspects .37 VII. ENGINEERING AND PROJECT IMPLEMENTATION ARRANGEMENTS .38 A. Engineering Arrangements .38 B. Project Implementation Arrangements .38 C. Employment and Training .39 D. Project Schedule .40 VIII. CAPITAL COST, FINANCING PLAN AND PROCUREMENT .40 A. Capital Cost Estimate .40 B. Financing Plan .42 C. Procurement and Disbursement .43 IX. FINANCIAL ANALYSIS ..44 A. Revenues and Operating Costs .44 B. Financial Projections .46 1. Project Financial Projections .46 2. Consolidated Financial Projections .48 C. Financial Rate of Return .50 D. Financial Covenants and Reporting Requirements .50 E. Major Risks .51 X. ECONOMIC ANALYSIS ..................... 51 A. Introduction .51 B. World Petroleum Prices and Economic Benefits .51  ( iii) Page No. C. Economic Costs . ..................................... 52 D. Economic Rate of Return ................................... 53 E. Foreign Exchange Savings ................................... 54 F. Other Benefits . ..................................... 54 XI. AGREEMENTS ..................................... 54 LIST OF ANNEXES 2-1 Sectoral Breakdown and Growth of Commercial Energy, 1961-79 2-2 Actual Coal Production and Plan Targets, 1975-81 2-3 GOI's Coal Demand and Production Projections, 1982-1990 2-4 Electric Power Supply/Demand Projections,1981-85 3 Refinery Locations, Capacities and Crude Oil Processed, 1975/76-1980/81 4-1 Sectoral Breakdown and Growth of Oil Petroleum Products Consumption, 1954-79 4-2 Regional Consumption of Principal Petroleum Products, 1978-81 4-3 Assumptions and Factors Affecting Projected Consumption of Petroleum Products 4-4 Regionwise Supply/Demand Balance Projections 1990/91 6 Crude and Product Slates--Before and After Project 7-1 EIL Organization: Project Organization (Typical) and Corporate Organization 7-2 Project Schedules for Visakh, Madras, Cochin and BPC 8-1 Capital Cost Estimates 8-2 Project Financing Plan 8-3 Estimated Disbursement Schedule for Bank Loan 9-1 Assumptions Used for Financial Analysis 9-2 Pro Forma Financial Statements of HPC 9-3 Pro Forma Financial Statements of BPC 9-4 Pro Forma Financial Statements of CRL 9-5 Pro Forma Financial Statements of MRL 9-6 Financial Rate of Return 10-1 Assumptions Used for Economic Analysis 10-2 Economic Rate of Return MAPS IBRD 15947 - Location of Petroleum Refineries DOCUMENTS AVAILABLE IN THE PROJECT FILE Reference A - Detailed Historical Financial Statements of BPC Reference B - Detailed Historical Financial Statements of HPC Reference C - Detailed Historical Financial Statements of MRL Reference D - Detailed Historical Financial Statements of CRL Reference E - Analysis of the Merits of Hydrocrackers - Vs - FCCs in the Indian context. Reference F - Consolidated Financial Projections of HPC, BPC, MRL and CRL   INDIA - REFINERIES RATIONALIZATION I. INTRODUCTION 1.01 The Government of India (GOI) has requested Bank financing for a Refineries Rationalization Project (the Project). The main objectives of the Project are to expand and modify refining capacity in order to reduce the imbalance between the domestic demand for and supply ol petroleum products in the country and to improve the energy efficiency of the sector. Most existing refineries in India currently have very simple configurations, consisting principally of distillation units. The Project represents a major effort to install additional capacity and secondary processing capabilities at four major refineries to convert fuel oil into higher valued products. Two of these refineries are wholly owned by GOI; the other two refineries have also private shareholders. The Project will include two major components: (i) the capacity expansion and secondary processing component; and (ii) the energy efficiency and pollution control component. The first component will include: (a) at Cochin Refineries Ltd., expansion of crude processing capacity from the present 3.3 million metric tons per year (tpy) to 4.5 million tpy with a new fluid catalytic cracker (FCC) facility of 1.0 million tpy; (b) at Madras Refineries Ltd., doubling the crude processing capacity from the present 2.8 million tpy to 5.6 million tpy with a new FCC facility of 0.6 million tpy capacity; (c) at the Visakh refinery of Hindustan Petroleum Corporation, expansion of crude processing capacity from 1.5 million tpy to 4.5 million tpy with a new FCC facility of 0.6 million tpy capacity; (d) at the Bombay refinery of Bharat Petroleum Corporation, revamping and expansion of crude processing capacity from 5.0 million tpy to 6.0 million tpy and installing a new FCC unit of 0.6 million tpy capacity; and (e) at the Bombay Refinery of Hindustan Petroleum Corporation, installation of a sulfur recovery unit. All the above subprojects will also include modifications and additions to utilities generation, tankage, distribution and other infrastructural facilities to the extent necessary to achieve sustained operation at the enhanced capacities. Under the energy efficiency and pollution control component, facilities for these purposes will be installed at the above mentioned refineries as well as at six other refineries in India. 1.02 The Government of India attaches highest priority to the development of the energy sector, since inadequate domestic supplies of energy have been a major constraint hindering India's economic growth. Up to now, however, GOI has dedicated a substantial portion of its investments in the energy sector in projects such as coal, gas, and hydropower which are primarily designed to substitute for fuel oil. However, this program cannot address the problem of middle distillates, since it is not economic at present to substitute for them on a large scale. As a result, the country is currently importing large amounts of diesel oil and kerosene, which in 1980/81 represented about 75% of the cost of petroleum products imports. The proposed Project is intended to resdress this imbalance by increasing the production of middle distillates in four major Indian refineries. The Project, thus, will complement other energy  - 2 - supply projects, help overcome structural problems in the refinery subsector and have a significant impact in alleviating the country's balance-of-payments burden. The Project is also needed to handle the increased volume and unusual characteristics of Bombay High crude. It will involve expansion of facilities at coastal refineries that were originally designed to be expanded. As shown in Chapter X, the Project will enjoy very high economic rates of return. 1.03 The financing requirements of the Project, including escalation, contingencies, interest during construction and working capital, are esti- mated at US$1,086 million, of which about US$968 million are for the capacity expansion and secondary processing component and US$118 million, for energy efficiency and pollution control. The total foreign exchange cost of the Project is US$468 million. The proposed Bank loan of US$200 million would cover about 18% of the financing requirements. The balance of US$886 million (or about 82% of Project cost) will be provided from internally generated funds of the sponsoring companies and from Government resources. 1.04 The proposed Project was identified in November 1980 by a mission consisting of Messrs. H.S. Kohli and E. Segura. It was appraised in July 1981 by Messrs. E. Segura (Chief), R. Bhan, D. Caplin, and N.C. Krishnamurthy, of the Industrial Projects Department. II. THE ENERGY SECTOR A. Introduction 2.01 Inadequate domestic supply of energy has been a major constraint hindering India's economic growth. Despite the extensive development of domestic energy resources such as coal and hydroelectricity, and the recent development of offshore petroleum resources, the country has not attained energy self-sufficiency and remains dependent on imported oil to meet its primary energy requirements. Since 1977, energy shortages have become more acute, affecting several sectors of the economy. Although these shortages were met by imports, and were due to unexpected circumstances--such as poor monsoons which curtailed hydroelectric power generation, supply disturbances in the oil-producing State of Assam, and extraordinary increases in inter- national oil prices--they produced a serious deterioration in the country's balance-of-payment situation. In fact, in 1980/81 the cost of imports of crude oil and petroleum products increased by 75% over 1979/80 to US$6.5 billion, representing 42% of total merchandise imports and absorbing about 77% of total merchandise export earnings. In the future, the domestic energy supply situation is expected to improve due to resumption of supplies from Assam and anticipated additional oil production from offshore fields. Nevertheless, given the expected high rate of growth in energy demand, India would not be able to reach self-sufficiency in energy. In order to minimize shortfalls, the Government has undertaken a concerted effort to further explore and develop the country's domestic energy resources, including petroleum (for which foreign oil companies have been invited to participate), coal, hydroelectric and nuclear power, natural gas and wood. On the demand management side, GOI has also introduced policy changes, including improving the railways transport capabilities, helping  - 3 - increase the energy efficiency of existing industrial companies, and su'bstantially increasing energy prices to provide incentives for conservation. Therefore, India has entered its Sixth Five-Year Plan (1980/81-1984/85) period with most of the key policy issues in the energy sector addressed and an aambitious production program backed by a substantial financial commitment. In the Sixth Plan's investment targets, the share of the energy sector (gas, oil, coal and power) in total plan outlay stands at 27.2% (compared with 25.1% in the Fifth Plan). Of this share, about 16% is allocated to the oil and gas sector. Investments in the transportation sector to move coal and oil will bring the share of the energy-related investments sector close to 35% of the total plan outlay. B. India-s Energy Consumption 2.02 Commercial primary energy (coal, oil and electricity) accounts for about 47% of total energy consumption in India, while 53% is derived from non-commercial sources such as firewood, agricultural and animal dung. In the period 1953/54-1978/79, total energy consumption grew at an average annual rate of 3.1%. Commercial energy consumption grew at about 5.1% per annum in the same period, whereas non-commercial energy consumption grew at only 1.9% as shown in the table below: India - Energy Consumption, 1953/54-1978/79 (million tons of coal equivalent (mtce))a/ Average Annual Growth Rates 1953/54- 1975/76- 1953/54 1975/76 1978/79 1978/79 1978/79 mtce % mtce % mtce % % per year % per year Commercial Energy 36.3 29.0 117.5 46.1 126.8 47.4 5.1 2.6 Coal b/ 28.7 23.0 71.0 27.9 68.8 25.7 3.6 (1.0) Oil products b/ 5.1 4.0 24.7 9.7 30.1 11.2 7.4 6.8 Electricity 2.5 2.0 21.8 8.5 27.9 10.5 10.1 8.6 Non-Commercial Energy 88.7 71.0 137.3 53.9 140.6 52.6 1.9 0.8 Firewood 58.7 47.0 90.5 35.5 92.7 34.7 1.8 0.8 Vegetable waste 15.9 13.0 24.7 9.7 25.3 9.5 1.9 0.8 Animal dung 14.1 11.0 22.1 8.7 22.6 8.4 1.9 0.8 Total Energy 125.0 100.0 254.8 100.0 267.4 100.0 3.1 1.6 a/ Conversion factors assumed as follows: 1 ton of coal equivalent to 0.72 tons of crude oil, 3,030 kilowatt hours, 1.47 tons of firewood, 1.66 tons of vegetable waste and 3.3 tons of animal dung. b/ Excluding requirements for power generation. ISource: Working Group on Energy Policy and Bank Staff Estimates.  - 4 - 2.03 The share of oil products in total and commercial energy consump- tion is growing rapidly and in 1978/79 accounted for 11.2% of total energy consumption, compared with 4% in 1953/54. Electricity has shown the sharpest growth but remains the least important source of commercial energy, accounting for 10.5% of total energy consumption in 1978/79, compared to 2.5% in 1953-54. The share of coal in total energy supply has remained more or less steady at the level of about 23-28%. Firewood is the most important fuel in India, with about 140 million tons being consumed in 1978/79; the main source of firewood is forest land which accounts for 75 million ha or 23% of the total land area. Another major non-commercial fuel in India is animal dung, obtained from cattle owned by the rural population. It is estimated that approximately 72 million tpy of cow dung are used as fuel, equivalent to 8.4% of total energy consumption in 1978/79. About 42 million tpy (9.5% of total energy) of vegetable wastes such as bagasse, paddy husk and sawdust are also used. 2.04 The sectoral breakdown of commercial energy used in India is given in Annex 2-1. In 1978/79, in terms of coal equivalent, industry accounted for about 56% of commercial energy consumption, with transportation accounting for an additional 20% of the total. Although the share of agriculture has increased threefold over the last twenty years (as commercial energy has replaced animal and manual power, agricultural activity has increased, and irrigation has been developed), it only stands at about 8% of the total. Household use of commercial energy (11% of the total) is relatively small because of the relatively low share of urban population, minimal heating requirements and the consumption of firewood and other non-commercial energy sources, particularly in the rural areas. The industrial sector uses prin- cipally coal and electricity, with a limited demand for oil products (mainly as feedstock), i.e., it uses only 6% of total oil consumption (Annex 4-1). The transportation sector, on the other hand, is the largest user of petro- leum products in the country, absorbing about 53% of total oil consumption. C. Commercial Energy Resources 2.05 Domestic resources of coal and hydroelectricity are significant and could be able to meet a large portion of India's future potential commercial energy requirements, particularly for industry (heat) and power generation. However, known oil and gas resources would not be sufficient, at least in the short run, to meet the demand in sectors where the possibility of further substitution by other fuels is limited (transportation and industry-feedstock). Therefore, the exploration for new, and development of existing, petroleum reserves is one of India's most pressing priorities. The supply prospects of India's main commercial energy sources are briefly discussed below: 1. Coal 2.06 Coal is the main domestic source of commercial energy in India with reserves (in seams greater than 1.2 meters thick and at depths less than 600 meters) estimated at about 85 billion tons, of which about 25 billion tons are in proven reserves. The 1980/81 coal production is estimated at  107 million tons, an increase of 3% over the previous year's output (Arnex 2-2). Coal production in recent years has suffered because of extensive flooding in 1978, serious power shortages, delays in commissioning nesi mines, lack of explosives, labor unrest, particularly in the eastern part of the country, and transportation bottlenecks. Most of these problems are being addressed. For example, the Sixth Plan embodies further measures to overcome the infrastructure-related constraints, and labor relations have improved in the past year. The Plan also includes significant investments to bring new mines into operation. In order to increase productivity, a high proportion of these new investments will be in open pit mining. Since in the past most of the delays in bringing new mines into operation were experienced in underground projects, the shift to open pit mining is expected to help in reducing delays in project execution and commissioning. The environmental effects of open pit mining, however, will have to be carefully assessed. The share of open pit mining is projected to increase from 31% in 1980/81 to 55% by the end of 1989/90, when coal output is projected by the Government to reach 260 million tons. GOI demand projections for coal in the coming decade show a more than doubling in demand from 107 million tons actually consumed in 1980/81 to 246 million tons in 1989/90 (Annex 2-3). Of the 1989/90 coal demand, power generation would account for about 45%, steel would utilize about 20% and cement about 5% of the total. Of the projected 1989/90 coal production of 260 million tons, just under half would come from existing mines, 40% from sanctioned new mines and 10% from projects not yet sanctioned. In order to fulfill this program, the coal industry will need not only to overcome those problems referred to above of power shortages and labor unrest, but also to avoid delays in project preparation and implementation, and improve the ability of local equipment manufacturers to provide new equipment and spare parts in a timely manner. Also, present training levels for operational and maintenance personnel are not considered adequate even for present requirements, and although an action plan has been drawn up for future training centers and training procedures, it has not yet been implemented. It may therefore prove difficult for the country to meet its 1989/90 coal production targets. A more realistic achievement would be to increase coal production to about 200-220 million tons by 1989/90. A detailed review of the coal sector is given in the Bank's sector report, "India's Coal Sector," dated July 1981. 2. Electric Power 2.07 Total installed electrical generating capacity in 1980/81 is estimated to have been 33,200 MW, including about 30,300 MW capacity installed at utilities and about 2,900 MW captive capacity owned by industrial users. Of this capacity, about 11,000 MW are derived from hydroelectric plants, and most of the balance from thermal power plants; three nuclear power units have been installed to date and two more are under construction or advanced planning. It is estimated that potential resources of a further 60,000 MW of economically exploitable hydro- electric power exist in the country. Potential demand for power has consistently exceeded supply in the last decade. The gap has widened in recent years and the shortage in 1979/80 is estimated to have reached over 16%. The basic reasons for the gap between demand and supply are delays in completing planned thermal generation capacity and low capacity utilization. Capacity utiliza- tion of thermal power plants declined from about 55% in 1976/77 to below 43%  -6- in April-December 1980. This was partly due to difficulties in commissioning and unusually long stabilizing times in a large number of new plants; other major factors are delayed maintenance in boilers and turbogenerators, lack of spare parts, shortages of appropriately trained manpower, problems relating to design and fabrication of domestically produced equipment and deterioration in the supply and quality of coal available. A high-level commission has recently carried out a comprehensive analysis of the situation and has sub- mitted its findings to the Government. Several measures are being introduced with Bank assistance to improve the efficiency of thermal plants, including: (a) improved preventive and planned maintenance; (b) better availability of spare parts; (c) improved training; (d) adequate coal supplies of acceptable quality; and (e) more effective management. The results of these measures are already having an impact in the sector and in 1980/81 power shortages dropped significantly. With the implementation of the above measures more progress is projected for the medium term. 2.08 In the Sixth Plan period (1981/85), power generation capacity is planned to increase by 17,810 MW (an average annual growth rate of 12.3%), as shown in Annex 2-4. Of this increase, 69% will come from thermal power plants, 25% from hydroelectric units and 6% from nuclear plants. With the implementation of this program, the country's overall average power energy requirements would be met from 1984/85 onwards, although a peak capacity deficit would most likely continue to exist until the early 1990s. While the projected growth in installed capacity is higher than has been achieved in the past, the targets are considered achievable in light of the high priority now being given to the sector by the Government. Marked improvements have taken place in recent years in overall power planning and project formulation, all the projects in the Sixth Plan have been identified and approved by the Government, and investment requirements (about US$25 billion) have been included in the Sixth Plan. The Bank Group has been actively involved in the financing of investments in the sector, and has so far lent US$2,455 million through 25 power projects. These projects have been successful in helping India to cope with complex problems which had confronted the Indian electricity supply industry since Independence. The main achievements of Bank Group operations in the power sector have been to: (a) accelerate the installation of generating capacity and promote measures to improve the technical levels of operation and maintenance of existing plants; (b) foster development of comprehensive long-range regional and national system plans which would assure implementation of a least-cost power development program; (c) strengthen sector organization and training; and (d) strengthen the finances of the institutions involved in the sector. 3. Petroleum 2.09 Given its large sedimentary basins, both offshore and onshore, India's prognostic recoverable hydrocarbon reserves 1/ were recently estimated at 6.5 billion tons, of which about two-thirds are offshore. Proven and probable reserves of oil initially in place in existing deposits were estimated at 1.6 billion tons as of January 1978. Since these reserves 1/ Prognostic estimates give a broad indication of the total oil resources and are based on a large number of assumptions. They should be used with caution.  -7- are not sufficient to meet the country's demand for oil, GOI has accelerated its petroleum exploration activities in the country. It has opened up selected areas to foreign exploration firms under production-sharing contracts, and discussions are now being held, with interested foreign companies, to further accelerate the exploration of India's petroleum resources. 2.10 Consumption of petroleum in India has increased at an annual rate of 8.2% over the last three decades as shown in the table below. However, pro- duction increased at a faster pace than demand, allowing India to increase its crude self-sufficiency from 6% in the early 1950s to a projected 45% in 1981/82. India - Supply and Demand of Petroleum, 1953-1981 (thousand metric tons of crude equivalent) Production as a/ Apparent % of Production Imports Consumption Consumption 1953/54 260 3,850 4,110 6 1960/61 450 7,930 8,380 5 1965/60 3,022 9,540 12,562 24 1970/71 6,820 12,760 19,580 35 1979/80 11,770 20,990 32,760 36 1980/81 (Est.) 10,600 24,100 34,700 31 1981/82 (Proj.) 16,700 20,800 37,500 45 a/ Imports of both crude and products, expressed in crude equivalent. In 1979/80, petroleum product imports represented 35% of total petroleum imports, in tons. 2.11 In 1980/81, the crude production of 10.6 million tons included 5.2 million tons from the Bombay High field, 3.6 million from Gujarat and 1.8 million from the Eastern Region. As mentioned, because of the political situation in Assam, supply of crude oil to refineries in the Eastern region ceased at the beginning of 1980, and although limited crude supplies to the Assam refinery recommenced in late 1980, an embargo was maintained through 1980 on movements outside Assam of both crude oil and petroleum products. As a result, production of about 3.5 million tons of crude oil was lost in 1980/81. Production from Assam has now returned to its normal level of about 5.0 million tpy. 2.12 A rapid increase in domestic oil production is planned in the medium term mainly from offshore fields; besides Bombay High, two other fields, North Bassein and Ratnagiri, are expected to become producers by 1984/85, when domestic production is conservatively planned to supply about 52% -f Tndia's petroleum requirements, on the basis of demand growth of 8% p.a. A conservative estimate of planned domestic oil production is shown in the following table:  - 8 - India - Planned Production of Crude Petroleum, 1979/80-1984/85 (million metric tons) Offshore Bombay Gujarat Eastern Region Total 1979/80 (actual) 4.4 3.4 4.0 11.8 1980/81 (estimated) 5.2 3.6 1.8 10.6 1981/82 (projected) 8.4 3.2 5.1 16.7 1982/83 11.9 3.1 5.2 20.2 1983/84 14.0 3.0 5.3 22.3 1984/85 16.6 2.8 5.3 24.7 Source: Ministry of Petroleum. 4. Natural Gas 2.13 Until the late 1970s, natural gas supply was limited to associated gas from the Assam and Gujarat onshore fields, and played a relatively minor role in the energy sector. Recently, natural gas has assumed greater importance as an energy source with the development of the Bombay High offshore fields that provide associated gas and the expected development of the Bassein fields, which would provide non-associated gas. At the end of 1978, gas reserves were estimated at 344 billion standard cubic meters (scm), a five-fold increase over the gas reserves of 68 billion scm in 1973. Although there were marginal increases in onshore gas reserves, most of the increases came from offshore fields--30 billion scm from the Bombay High field, about 160 billion scm from the Bassein field and at least 70 billion scm from the Tapti fields. While, due to the delay in the completion of some industrial projects, part of this gas is now being used for electric power generation, it is intended that over the medium term it will be used primarily as fertilizer and petrochemicals feedstock; the heavier fractions will be sold as bottled household liquefied petroleum gas (LPG) to substitute for kerosene and noncommercial energy sources. The Bank is assisting GOI in the development of some of these fields and in the execution of nitrogenous fertilizer projects, which will be the main users of these gas resources. D. Overall Energy Supply and Demand Prospects 2.14 GOI has recently carried out a comprehensive study of India's future energy supply and demand prospects, 1/ and has concluded that (i) commercial energy availability may become a serious constraint to economic development, either because domestic energy sources would be insufficient to meet demand, or because the financial resources required to develop such sources may not 1/ "Report of the Working Group on Energy Policy," GOI, 1979.  - 9 - be available; (ii) a coordinated energy conservation program in the industrial, transport and household subsectors should be initiated, since it will have a significant impact on reducing commercial energy demand; and (iii) the most critical aspect on India's energy policy is to contain (within economic limits the demand for petroleum products. As mentioned, the Sixth Plan contains significant investments to achieve a better balance between energy supply and demand. Nevertheless, as shown in the table below, the projected commercial energy demand and supply balance for the Sixth Plan period shows that the Indian economy will need to continue importing energy in the next five years. India - Projected Commercial Energy Supply and Demand Balance 1980/81 1982/83 1984/85 Coal (million metric tons) Unconstrained Demand 125.7 149.0 183.2 Production 107.0 140.3 179.2 Imports 1.2 1.5 2.0 Deficit 17.5 7.2 2.0 Deficit/Demand (%) 13.9 4.8 1.1 Power (GWH) Energy Requirement 125,802 152,142 182,077 Energy Availability 110,702 141,990 183,459 Surplus (Deficit) (15,100) (10,152) 1,382 Deficit/Requirement (%) 12.0 6.7 - Petroleum (million tons) Demand a/ 34.7 41.5 47.0 Crude Production 10.6 20.2 24.7 Imports a/ 24.1 21.3 22.3 Production/Demand (%) 31 49 52 a/ Crude petroleum equivalent with a product/crude ratio of 0.93. Source: "Economic Situation and Prospects of India," Report No. 3401-IN, 1981, and mission estimates. E. Institutional Aspects of Petroleum Production 2.15 The Ministry of Petroleum, Chemicals and Fertilizers is in charge of policy-making in the petroleum sector. It monitors and coordinates all activities in the sector, and approves all investments and the budgets of public companies operating in the sector. The Oil and Natural Gas Commission (ONGC) and Oil India Limited (OIL) are engaged in the exploration and develop-  - 10 - ment of indigenous hydrocarbon resources. ONGC is the main company in the sector and is the principal entity through which GOI intends to explore and develop hydrocarbon resources. At present, both ONGC and OIL have active exploration programs. In the next five years, ONGC plans to drill another 260 exploratory wells onshore and 95 offshore; OIL plans to drill 140 exploratory wells in the Eastern onshore region, as well as a number of offshore wells. As mentioned, GOI has also decided to open selected prospective areas to foreign firms. The institutional aspects of petroleum production are discussed in more detail in the Appraisal Report of the Second Bombay High Offshore Development Project dated November 5, 1980. F. Bank Assistance in Petroleum Production 2.16 The Bank has made two loans totalling US$550 million for the development of the offshore Bombay High oil fields. The first loan (Ln 1473-IN) was made in 1977 and financed Phase III of ONGC's Bombay High development program. The Project was completed in March 1981, about nine months behind schedule. The facilities are operating satisfactorily. A Project Performance Audit is under preparation. A second loan for US$400 million (Ln 1925-IN) was made in December 1980 to assist in the financing of Phase IV and advanced action on Phase V of the program. Project implementation is proceeding satisfactorily. III. REFINERY CAPACITY AND PRODUCTION A. Background 3.01 Six companies--in both public and joint sectors--operate eleven petroleum refineries in the country.l/ (See Map IBRD 15947 for the location of the refineries.) Four of these companies are wholly Government owned, viz., Indian Oil Corporation (IOC), Bharat Petroleum Corporation (BPC), Hindustan Petroleum Corporation (HPC), and Bongaigaon Refinery and Petro- chemicals Ltd (BRPL). Of the two companies with partial private ownership, one, Cochin Refineries Limited, is jointly owned by GOI and Phillips Petroleum Company (USA). The second company, Madras Refineries Ltd., is owned by GOI, the National Iranian Oil Company and AMOCO (USA). The largest refinery company is IOC which operates five refineries and is also responsible for the country's import of crude oil and petroleum products. Marketing and distribution are mainly in the hands of IOC, HPC and BPC. All other companies rely on IOC for the marketing and distribution of their products. Retail outlets are operated almost entirely by private dealers. 3.02 The existing refineries have simple processing configurations, consisting principally of atmospheric and vacuum distillation units. Only three refineries have catalytic crackers, four have coking units, two have thermal crackers, while four refineries have facilities for catalytic reforming and visbreaking. The simple configuration of the Indian refineries results in a sub-optimum crude throughput and a limited production of middle distillates. As mentioned in para 1.02, given the country's current and projected demand for middle distillates, the configurations of these re- fineries are being rationalized to better meet the future demand pattern. 1/ In addition to these eleven refineries currently in production in India, a new refinery at Mathura is now under construction and is expected to be commissioned later this year.  - 11 - 3.03 The four eastern refineries at Barauni, Gauhati, Bongaigaon and Digboi are situated close to the onshore oil fields in Assam and utilize indigenous crude. All the coastal refineries use either imported crude oil or (for those situated on the West Coast) a mixture of imported crude and domestic crude from Gujarat and Bombay High. The two inland refineries in the northwestern region (at Baroda and Mathura) are connected by pipeline with the Salaya port terminal. 3.04 In March 1981, the country's total installed refinery capacity was 31.8 million tons of crude, as shown in Annex 3. The current capacity of most of the existing refineries is small, and only Baroda and BPC Bombay have a capacity of more than 100,000 bpd (4.7 million tpy). The new refinery at Mathura will have a capacity of 125,000 bpd (6 million tpy). Overall capacity utilization was 86% in both 1977/78 and 1979/80, which is satisfactory by international standards and is the highest among major process industries in India. Capacity utilization, however, fell to 81% in 1980/81 (Annex 3), principally due to a shortage of crude oil caused partly by the Iran-Iraq War and partly by political problems in Assam. Since March 1981, however, these problems have been contained, and under normal conditions of crude availability, an all-India refineries utilization of 90% is expected in the future. B. Historical Production of Refinery Products 3.05 The growth of production of major oil products from all Indian refineries for the period 1970/71 to 1980/81 is shown in the following table. India - Production of Refinery Products, 1970/71 - 1980/81 (million metric tons) Average Annual Growth Rates (%) 1970/71 1975/76 1979/80 1980/81 % 1970/71-1979/80 a/ LPG 0.2 0.3 0.4 0.4 1.6 8 Naphtha 1.2 1.9 2.4 2.1 8.1 8 Motor Gasoline 1.5 1.3 1.5 1.5 5.8 - Jet Fuel 0.7 0.9 1.1 1.0 3.9 5 Kerosene 2.9 2.4 2.5 2.4 9.3 (2) High Speed Diesel Oil 3.8 6.3 8.0 7.4 28.7 9 Light Diesel Oil 1.0 0.9 1.2 1.1 4.3 2 Fuel Oil 4.1 5.1 6.4 6.1 23.6 5 Other 1.7 1.7 2.3 2.1 8.1 3 Total Production 17.1 20.8 25.8 24.1 93.4 5 Refinery Fuel and Loss 1.3 1.4 1.6 1.7 6.6 2 Total Crude Processed 18.4 22.2 27.4 25.8 100.0 5 a/ The average growth rates are based on 1979/80 figures, rather than 1980/81 since the latter year was abnormal.  - 12 - 3.06 In 1980/81, of the 25.8 million tons of crude processed, 10.6 mil- lion tons were supplied from domestic fields and 15.2 million tons from imports. During the 1970s, refinery production did not keep pace with the demand growth and pattern, particularly in the period 1975-81, when significant amounts of kerosene, high speed diesel oil and fuel oil had to be imported. In the future, the country will maintain some imports of final petroleum products, principally fuel oil. Nevertheless, since the demand for petroleum products is expected to reach about 45 million tpy by 1985/86 and 60 million tpy in 1990/91 (para 4.04), the Government has given high priority to the expansion of the country's refinery capacity. C. Expansion Plans 3.07 After the Mathura refinery comes on stream later this year, refinery capacity in India will total 37.8 million tpy, which will still be inadequate to meet India-s requirements in the 1980s. Therefore, the Sixth Five-Year Plan includes major refinery investments totalling over US$2.6 billion, mainly to (a) increase installed capacity by 55% to 58.8 million tpy; (b) add 6.1 million tpy of conversion capacity; and (c) improve the energy efficiency of existing refineries. Investments are also planned for increasing product storage (tankage) capacity. 3.08 The investment program includes expansion of existing refinery capacities at Cochin, Bombay, Madras, Visakh, Mathura and possibly Haldia. In addition, plans are underway for two new grassroots refineries, one possibly on the West Coast at Mangalore (Karnataka State), and another in the North- west, possibly at Karnal (Haryana State). The proposed refinery expansions, including Haldia, would add 12.0 million tpy of nominal capacity. The two grassroots refineries would contribute an additional 9 million tpy capacity, in order to achieve the planned total refinery capacity of 58.8 million tpy by 1987, or, assuming 90% capacity utilization, an effective crude throughput of 52.9 million tpy. The investment plans also include schemes for the revamping and debottlenecking of existing plants as well as facilities for pollution control. 3.09 In addition to capacity expansion, the Sixth Plan includes install- ation of secondary processing facilities in several of the existing refin- eries, so as to match more closely the refineries production pattern with the projected product mix demand. The intention is to convert fuel oils to higher value middle distillates through the installation of several fluid cata- lytic crackers (FCC) in existing refineries and to install in the two projected grassroots refineries either FCCs or the more expensive hydrocrackers if they prove to be more economical. An expansion of lubricating oil capacity at Haldia, and the installation of a delayed coker at Barauni are also included in the program.  - 13 - 3.10 The above capacity expansion and secondary processing programs are summarized in the table below. India - Refinery Capacity Expansion Plans Capacity Secondary Processing Estimated Projected Expansion Facilities Capacity Capital Cost a/ Year of Refinery (million tpy) (million tpy) (US$ million) Start-up Expansions Gujarat (IOC) - FCC 1.0 80 1982 Barauni (IOC) - Delayed Coker 0.5 50 1983/4 Mathura (IOC) 1.0 - 60 1983 Haldia (IOC) 3.0 Lubricating oil - n.a. 1983 Cochin (CRL) 1.2 FCC 1.0 117 1984/5 Bombay (BPL) 1.0 FCC 0.6 151 1984/5 Madras (MRL) 2.8 FCC 0.6 145 1984/5 Visakh (HPC) 3.0 FCC 0.6 154 1984/5 New Refineries-/ Haryana 6.0 Hydrocracker-/ 1.2 490 1986/7 Mangalore 3.0 Hydrocracker 0.6 300 1987/8 a/ With physical contingencies, price escalation, working capital requirements, and interest during construction, total costs would exceed US$2.6 billion. b/ No decision has yet been made as to the allocation of the 9 million tpy of new capacity to the new refineries and the conversion facilities to be used. The mission assumes that 6 million tpy will be installed at Haryana and the remainder at Mangalore. These expansions and new refineries will substantially narrow the current gap between the demand for and supply of refined products, but without additional expansions beyond those shown in the above table, domestic production still would meet only 80-85% of the projected 1989/90 product demand (para 4.05). The supply gap, particularly for middle distillates and fuel oil, are expected to be met by imports. 3.11 Of the above projects, the Gujarat, Barauni, Mathura and Haldia schemes are already in advanced stages of implementation. The proposed refinery capacity expansions and conversion facilities at Cochin, Bombay, Madras and Visakh are the subject of the Project. Feasibility studies for the two new grassroots refineries are under preparation and their implementation is expected to start in 1982/83. 3.12 The refinery investment program has high priority since it will (a) substantially reduce India's petroleum import bill by reducing imports of petroleum products and substituting for them crude imports or increased use of indigenous crude oil; (b) improve the product mix of petroleum products produced in the country as compared to demand; and (c) improve energy efficiency in most of the existing refineries.  - 14 - D. Forecast of Refinery Products Production 3.13 Estimates of future output of refinery products have been prepared by the Oil Coordination Committee (OCC) attached to the Ministry of Petroleum. The Committee consists of representatives of the Ministry of Petroleum, and of the country's production, import, refining and marketing organizations. The estimates are based on the current timetable for installation of new distillation capacity, as well as secondary processing units, and assume that all projects already approved by GOI will be operational according to the current schedule. They also assume that certain other projects currently under consideration (i.e., increase in distillation capacity plus an FCC at HPC-Bombay, a capacity expansion together with a new lube plant at Haldia, and bitumen blowing facilities in other refineries) will also be implemented during the 1980s. Since OCC's production estimates do not include output from the two grassroots refineries now in the planning stage, production from these refineries has been estimated by the mission and incorporated in the projections. The table below gives the refinery production forecasts for 1990/91, assuming a 90% refinery capacity utilization for all refineries, including the two new grassroots refineries, and for two scenarios, e.g., "Without" and "With" the proposed Project: India - Projected Refinery Production, 1990/91 ('000 metric tons) Product Without the Project With the Project LPG 1,040 2.4 1,399 2.8 Motor Gasoline/Naphtha 7,343 17.0 8,956 18.0 Jet Fuel 1,945 4.5 2,040 4.1 Kerosene 5,912 13.7 7,235 14.5 High Speed Diesel Oil 14,051 32.6 16,939 34.0 Light Diesel Oil 1,468 3.4 1,486 3.0 Lubes 660 1.5 684 1.4 Fuel Oil 7,563 17.6 7,543 15.1 Bitumen 2,130 4.9 2,519 5.0 Others 1,035 2.4 1,036 2.1 Total Production 43,147 100.0 49,837 100.0 Refinery Fuel and Loss 3,249 3,758 Total Oil Throughput 46,396 53,595 Crude Processing Capacity at 90% utilization 51,550 59,550  - 15 - 3.14 As discussed in the next Chapter, the growth in demand for petroleum products is expected to outpace the increase in supply, with the result that, except for motor gasoline and naphtha, the country will need to import significant amounts of final products in the 1980s and 1990s. IV. PETROLEUM PRODUCTS CONSUMPTION, DISTRIBUTION AND PRICING A. Historical Consumption of Refined Products 4.01 During the last decade, consumption of refined petroleum products in India grew at a rate of 5.6% per year from about 18 million tons in 1970/71 to almost 31 million tons in 1980/81, as shown in the table on the next page. The past high rate of growth of petroleum products demand has increased the share of petroleum products in commercial energy from 6% in 1970 to 11% in 1979 (para 2.03). The pattern of demand in India is such that there is only limited scope for cutting petroleum consumption by conservation because (i) consumption levels are already low; (ii) petroleum prices overall are high by international standards (para 4.08); and (iii) the demLand for most petroleum products is relatively inelastic since they are principally used by the transport and agricultural sectors for productive purposes. As shown in Annex 4-1, the demand for petroleum products by households has been declining (there is very little space heating in homes); also private automobile use is low. Most of the consumption of petroleum products is therefore accounted for by public transportation, agriculture, and industrial use, and is concentrated on diesel oil, kerosene and fuel oils, which together account for 75% of the total consumption of petroleum products. High speed diesel oil accounts for 33% of consumption, and is mainly used by buses, trucks and railways. Kerosene accounts for an additional 14% of refinery products consumption and is used in urban areas as the principal fuel for cooking, as well as for lighting in rural areas, where it substitutes in part for increasingly scarce noncommercial fuels such as firewood and cow dung. The principal use of light diesel oil (4% of total refinery products) is for driving agricultural irrigation pumps. Fuel oil represents 24% of refinery products consumption and is used in general trade (including ships' bunkers), as a feedstock and fuel source for fertilizer production, and as a primary and supporting fuel for electric power generation. Due to the relatively low level of energy consumption per capita, already high petroleum prices, supply constraints in other sources of energy (firewood, coal and hydroelectric power), the scope for inter-fuel substitution is considered limited.  - 16 - India - Historical Consumption of Petroleum Products ('000 metric tons) Average Annual Growth Rates (%) 1970/71- 1974/75- 1970/71 Year 1970/71 1972/73 1974/75 1980/81 1972/73 1980/81 1980/81 Naphtha 904 1,297 1,713 2,324 19.8 5.2 9.9 Gasoline 1,453 1,592 1,264 1,521 4.7 3.1 0.5 Jet Fuel 689 816 836 1,128 8.9 5.1 5.1 Kerosene 3,283 3,516 2,828 4,210 3.5 6.9 2.5 High Speed Diesel Oil 3,837 4,770 6,450 10,326 11.5 8.2 10.4 Light Diesel Oil 1,092 1,436 1,070 a/ 1,125 14.7 0.8 a/ 0.3 Fuel Oil 4,664 5,661 5,729 7,415 10.2 4.4 4.7 Bitumen 777 1,109 890 1,081 19.5 3.3 3.4 Others 1,213 1,519 1,325 1,660 11.9 3.8 7.9 Total 17,912 21,716 22,105 30,790 10.1 5.7 5.6 a/ Light diesel oil consumption reached its lowest level (878,000 tons) in 1975/76; the growth in consumption over the period 1975/76 to 1980/81 was 5.1% per year. 4.02 During the decade, the rates of growth of demand have been irregular for most products. Consumption of kerosene, gasoline and light diesel oil, for instance, grew steadily until 1972/73, when significant price increases took place, and then declined steeply until 1975. Thereafter, steady growth in consumption of all three products recommenced. Consumption of fuel oil grew steadily until 1973/74, when it reached a plateau for some years, and then started to increase again in 1977/78. Consumption of high speed diesel oil grew at compound rates until 1975/76, when consumption levelled off for a year; since then growth has been virtually linear. The demand for naphtha (almost entirely for the fertilizer and petrochemical industries) has exhibited a steady growth over the decade, but is now levelling off. The consumption of petroleum products on a regional basis is given in Annex 4-2. B. Future Demand of Refinery Products 4.03 Detailed projections of future demand of petroleum products were made in the first half of 1980 by the Indian Institute of Petroleum (IIP). However, it is already apparent that these growth forecasts, particularly for the next few years, were too high. Consequently, the  - 17 - Bank made some modifications to the IIP assumptions of future growth rates in the light of recent results and Bank staff's own experience and judgment. For most products, three growth scenarios have been evaluated--low, median and high. The main factors and assumptions affecting the expected evolution of demand for petroleum products are given in Annex 4-3. 4.04 On the above basis, the following table shows the projections under three scenarios of demand for 1985/86 and 1990/91: India - Projected Demand of Petroleum Products, 1985/86 and 1990/91 ('000 metric tons) ------------------Projected------------------- Actual 1985/86 1990/91 Product 1980/81 Low Median High Low Median High Naphtha 2,320 3,980 3,980 3,980 3,980 3,980 3,980 Motor Gasoline 1,520 1,760 1,810 1,850 2,040 2,150 2,250 Jet Fuel 1,130 1,470 1,580 1,690 1,930 2,220 2,550 Kerosene 4,210 4,850 5,400 5,840 6,790 8,340 9,690 High Speed Diesel Oil 10,330 14,290 15,890 17,370 18,240 24,440 28,510 Light Diesel Oil 1,120 1,400 1,430 1,470 1,750 1,830 1,920 Fuel Oil 7,420 9,700 9,700 9,700 10,190 10,190 10,190 Bitumen 1,080 1,740 1,740 1,740 2,800 2,800 2,800 Others 1,660 3,080 3,080 3,080 4,230 4,230 4,230 Total 30,790 42,270 44,610 46,720 51,950 60,180 66,120 Growth Rates (% p.a. - 6.5 7.7 8.7 5.4 6.9 7.9 based on 1980/81) C. Projected Supply and Demand Balance for Petroleum Products 4.05 The table below compares the median projections of demand given in the preceding paragraph with the projections of production of refinery products given in para 3.13. Production projections include the output from the two new grassroots refineries, which are still in the planning stage. Projections were estimated for two scenarios, e.g., "With" and "Without" the proposed Project. It is anticipated that LPG produced under the Project will replace part of the consumption of kerosene in the urban household sector; therefore, the consumption of kerosene in the "With the Project" scenario is lower than in the "Without the Project" scenario.  - 18 - India - Projected Demand/Production Balance, 1990/91 ('000 metric tons) Without the Project With the Project (Deficit)/ (Deficit)/ Product Demand Production Surplus Demand Production Surplus Naphtha and Gasoline 6,130 7,343 1,213 6,130 8,956 2,826 Jet Fuel 2,220 1,945 (275) 2,220 2,040 (180) Kerosene 8,340 5,912 (2,428) 8,094 7,235 (859) High Speed Diesel 24,440 14,051 (10,389) 24,440 16,939 (7,501) Light Diesel Oil 1,830 1,468 (362) 1,830 1,486 (344) Fuel Oil 10,190 7,563 (2,627) 10,190 7,543 (2,647) Bitumen 2,800 2,130 (670) 2,800 2,519 (281) LPG,Lube & Other 4,230 2,735 (1,495) 4,476 3,119 (1,357) Total 60,180 43,147 (17,033) 60,180 49,837 (10,343) 4.06 The above table shows that when fully operational, the proposed Project will reduce the country's deficit of final petroleum products by 6.7 million tpy. Import requirements of diesel oil and kerosene will be reduced by 4.5 million tpy. The amount of fuel oil imports will remain at about the same level. There will be an additional excess of naphtha/gasoline of 1.6 million tpy which will need to be exported or, if economical, could be used to substitute for some of the fuel oil uses. The need for additional refinery capacity over and above existing plans as well as the justification of the proposed Project is evident from the above figures. As shown in Chapter X, these investments will yield attractive economic rates of return to the country. 4.07 Demand/supply projections, on a regional basis for 1990/91 are shown in Annex 4-4. The greatest imbalances would appear in the North- western Region, but the Eastern and Western areas will also be in supply deficit for middle distillates. D. Petroleum Conservation and Pricing 4.08 As discussed, during the 1980s total consumption of petroleum products is expected to grow between 5.4% and 7.9% per year, with a median estimate of 6.9% p.a. GOI is aware that a high rate of growth in petroleum products consumption may lead to unsustainable levels of petroleum imports. It is, therefore, taking several measures to control the future rate of growth of consumption of petroleum products relative to the expected rate of growth in GDP of 4% to 5% in the 1980s. One of the measures to curb consumption of petroleum products, in particular fuel oils, is to channel some of this demand into other domestic sources, such as coal and hydroelectric power,  - 19 - which are relatively plentiful in the country. -Another measure is to shift goods and passenger traffic from diesel motor vehicles to railways, and provide the railway with electrification capacity. As mentioned before, however, the structure of petroleum consumption in India is such that the scope for significant inter-fuel substitution is limited. Therefore, the most important tool being used by GOI as a conservation measure is to set petroleum prices at a level that will reduce the energy intensity of the economy. The Government has set retail prices for most petroleum products at levels which are comparable to or higher than prices elsewhere in the world, as shown below: India - Retail Prices of Petroleum Products (in US$ per gallon) Current Prices Prices in Prices as of Import as % of India a/ December 1980 CIF Bombay Import Prices June Aug. Turkey France USA Price b/ India 1981 1981 Gasoline 2.45 2.70 2.45 2.93 1.34 1.04 260 Kerosene 0.73 0.81 1.53 1.95 1.20 1.10 74 Diesel Oil 1.19 1.34 1.53 2.11 1.16 1.10 122 Fuel Oil 1.11 1.24 1.06 1.46 1.15 0.72 172 a/ Prices in New Delhi, which approximate average prices in India. b/ Based on crude oil at US$34 per barrel, and recent ratios of crude oil prices to product prices in the Far East. 4.09 In July 1981, GOI increased petroleum prices, with the result that the prices of gasoline, high speed diesel and fuel oil are significantly above comparable CIF prices. Kerosene prices were also increased, but they still remain below CIF prices: this gap, however, is more than compensated by the higher prices for other products. Therefore, the average price for all petroleum products is satisfactorily above the average CIF import prices. I'he price of kerosene is kept low by GOI principally for social reasons. As noted before, kerosene is used by households in urban areas as the principal fuel for cooking, and lighting in rural areas, where it substitutes in part f'or scarce fuels such as firewood and cow dung. Low kerosene prices are not likely to result in significant diversion of kerosene to other uses such as diesel oil, as evidenced by the fact that kerosene consumption presently represents only 14% of total petroleum products (which is lower than in many developing countries) and in the decade from 1970 to 1980 grew at a rate lower than the rate for diesel oil. Furthermore, the supply of kerosene, considered as an essential commodity, is closely monitored by GOI and it is released only in small quantities and through fair price shops, primarily to restrain diversion to uses other than essential household needs. Therefore, the level and structure of petroleum prices in India is appropriate. GO0 periodically reviews petroleum prices and generally raises them at least once a year to reflect changes in international and domestic conditions. In July 1981, the price of indigenous crude was also increased substantially to US$19 per barrel and now provides adequate cash flows to the oil producing companies lo carry out their investment programs.  - 20 - 4.10 Regarding petroleum prices received by the refineries, GOI sets for each refinery company a "retention price" per ton of crude equivalent, which allows it to cover its total costs and earn a return of 15% on its capital employed. The cost elements include crude oil and operating costs based on operation at efficient, defined norms particular to each refinery. To the extent that an individual refinery does not have an unrestrained choice in selecting its crude mix, the unit cost of crude oil to the refinery is computed as a notional one, representing the weighted average of the total price of local and imported crudes processed by all refineries taken together. The difference between the computed notional crude oil price to the refinery and the actual prices paid by the individual refinery for its crude oil procurement is pooled and redistributed among the refineries periodically, under the crude oil price equalization account administered by OCC. Other refining costs particular to each refinery are computed on the basis of historical norms and revised periodically. 4.11 The ex-refinery prices charged by each refinery to its distributors are not the same as the "retention prices" accruing to the refinery. Each refinery is considered to be a primary pricing point and ex-refinery prices are set at the same level at all pricing points in the country. Ex-refinery prices are set by GOI by: (i) averaging the total cost of refining operations and profits for all refineries in the country; and (ii) using relative product pricing ratios for the different petroleum products that reflect socio-economic values to the economy. The differences between ex-refinery prices and retention prices are pooled and redistributed among refineries by the OCC, in order to compensate each refinery for the differences between the total margin allowed to it under the retention price formula and the actual revenues received by it. Central Government taxes are added at the ex-refinery level and are fully included in the sales prices. Prices at major distribution points are derived by adding to the ex-refinery prices Government taxes and other elements which allow the marketing companies to cover: (i) their operating cost and earn a profit margin on its employed capital; and (ii) the weighted average cost of transport (based on current rail freight rates) of all products to individual depots. Retail prices include other State Government and local taxes, and transportation costs from the depots to the retail outlets. The current system of setting retention and ex-refinery prices is working well as indicated among others by the high capacity utilization rates and satisfactory cash generation levels achieved by most refineries. It is based on economic costs on the average and is considered satisfactory (para 9.02). E. Marketing and Distribution of Petroleum Products 4.12 The principal oil companies entrusted by GOI with the wholesale marketing and distribution of petroleum products are IOC, HPC and BPC. IOC is the largest company and is responsible for about half of all petroleum products marketed and distributed in India. These three companies have marketing and distribution networks covering all India. The final distri- bution at the retail level is mainly in the hands of private dealers. The three main marketing companies draw their supplies from imported sources as well as from domestic refineries. Because of comprehensive product exchange arrangements, the marketing arms of the companies draw their supplies from  - 21 - thle closest and most appropriate supply point and are not restricted to distributing products from their own refineries; such product exchange arrangements are usual practice in the petroleum industry. There are 22 major marketing terminals in the country with storage and ancillary infrastructure, These terminals are located at the refineries, importing ports and selected points on product pipeline routes. 4.13 The main modes for the long-distance transport of petroleum products are railways, pipelines and coastal tankers. In 1980/81, about 16.4 million tons of products were moved by rail, about 4.7 million tons by pipeline and 2.7 million tons by coastal tankers. There are six major product pipelines Ln the country, with an aggregate length of 1,320 km (plus two crude pipelines). Four more lines totalling 990 km are in the planning stage. Sea movement of products by coastal tankers is principally from refineries to other supply points along the coast. Railways are utilized for moving products from refineries, marketing terminals, coastal supply points, and pipeline tap-off points, to some 120 up-country marketing depots. While bulk consumers obtain petroleum supplies directly by rail from refineries and marketing terminals (or a few via short distance pipelines), most retail outlets and customers receive their supplies by road transport from the up-country marketing depots. There are about 12,000 retail outlets in India which are mainly operated by private dealers, though the facilities may be owned by the refinery companies. There are also about 5,000 dealerships for light diesel oil and kerosene. 4.14 GOI's Sixth Plan envisages investments of about US$470 million for additions to petroleum marketing and distribution infrastructure. These investments will consist principally of product storage and tankage facilities, new consumer depots, product pipelines, and facilities for marketing liquefied petroleum gas (LPG) as well as computers for the scheduling and control of product movements. About half of this expenditure will be incurred by IOC and the rest by the other marketing companies. V. PROJECT SPONSORS 5.01 The refinery companies participating in the Project are Bharat Petro- :Leum Corporation, Hindustan Petroleum Corporation, Madras Refineries Limited and Cochin Refineries Limited. The first two companies are wholly Government-owned, while the last two have partial private ownership. A. Bharat Petroleum Corporation Limited (BPC) 1. Management and Organization 5.02 Bharat Petroleum Corporation was established in August 1977, from the consolidation of Burmah-Shell Refineries Limited and Burmah-Shell Oil Storage and Distribution Company of India Limited, the respective refin- ing and marketing companies of Burmah-Shell in India which were founded in 1955.  - 22 - 5.03 BPC is now fully owned by GOI and registered as a limited company under the Companies Act. The Chief Executive Officer of the company is a Government-appointed Chairman-cum-Managing Director. The Board of Directors is appointed each year by GOI and includes full-time executive directors as as well as part-time representatives of the Government; in view of the great sensitivity of pollution aspects, GOI has also appointed a well-known environ- mentalist to the Board. The Board of Directors meets periodically (at least once a quarter) and is responsible for major policy decisions of the corpo- ration. However, significant investment decisions need to be approved by the Ministry of Petroleum and other GOI agencies. The present Chairman-cum- Managing Director is a qualified chartered accountant who was earlier the Finance Director. As is the case with other refineries in India, the manage- ment of the company is experienced and capable. The refinery is well run, using modern systems and procedures. The company's organization consists of a refining division, a marketing division, a supply and distribution division, and a financial division. Each of these divisions is headed by a director. Presently, BPC has a total of about 6,000 employees, of which 1,200 are at supervisory levels. All key staff are well qualified and adequately trained in their fields. 2. Plant Facilities and Production Performance 5.04 The BPC refinery, located in Bombay (Maharashtra), has the capacity to process 6 million tpy of Middle East crude of 340 API, or alternatively 5.0 million tons on the basis of a mixture of Middle East and Bombay High crude (40 API), or about 4.6 million tpy of Bombay High crude. Currently, the refinery processes a mixture of Middle East and Bombay High crude. The refinery facili- ties include primary and vacuum distillation, catalytic cracking, catalytic reforming, bitumen plant, special boiling point solvents and several treatment units for LPG, naphtha, gasoline, jet fuel, and kerosene, as well as facilities for steam generation, storage of crude and finished products, and LPG and bitumen packing. The company also has two lubricating oil blending plants, one in Bombay and the other in Calcutta. 5.05 Although the refinery is 25 years old, it is well maintained because of a good preventive maintenance system and well-planned expansions. During the last few years, BPC has operated its facilities close to capacity levels for the crudes processed. The marketing division of the company is also operat- ing satisfactorily. It has an extensive distribution network across the country including 5 port installations, about 65 marketing depots and 4 jet fueling stations. BPC sells its products directly to consumers as well as through a chain of dealers and distributors. The volume of sales in FY80 was about 5 million tons, representing a 16.7% share of the total market. 3. Financial Performance and Expansion Plans 5.06 A summary of key financial data for the past four years is presented in the table below. Detailed financial statements for these years are in t-he Project File: Reference A.  - 23 - Bharat Petroleum Corporation - Financial Summary (million Rupees unless otherwise stated) Years Ended March 31 1977/78a/ 1978/79 1979/80 1980/81 Revenues 8,003 7,842 9,460 12,190 Net Income (Before Tax and Reserves) 201 246 248 207 Net Income (After Tax and Reserves) 74 85 89 84 Internal Cash Generation-/ 93 130 166 209 Current Assets 1,228 1,445 2,305 3,451 Current Liabilities 867 1,230 2,039 2,590 Equity 395 465 556 639 Long-term Debt 212 34 77 697 Ratios Net Income Before Tax/Revenues (%) 2.5 3.1 2.6 1.7 New Income/Revenues (%) 0.9 1.1 0.9 0.7 Net Income/Equity (%) 16.2 c/ 19.7 17.5 14.1 Current Ratio 1.4 1.2 1.1 1.3 Debt/Equity Ratio 35/65 07/93 12/88 52/48 a/ Income statement items are for the period January 1, 1977 to March 31, ',,/ These are underestimated because reserves have been changed to income. 1978. c/ Adjusted from 15 months to 12 months to make it consistent with other years. 5.07 Revenues of BPC have been increasing at 24% a year, principally reflecting increases in prices of petroleum products. The net income for the company has remained at about 15% of equity, reflecting the Government's retention price system. The current ratio dropped from 1.4 in 1978 to 1.1 in 1980 but improved to 1.3 in 1981; the corporation has not had any serious cash flow diffficulties and has met its obligations on time. The debt/ equity ratio of BPC and all other refineries in India deteriorated temporarily al: the end of 1980/81 due to extraordinary borrowing that they had to incur in order to compensate for delays in payments due from the Oil Coordination Committee (OCC) under the Crude Oil Price Equalization Account. These delays, in turn, were caused by the low liquidity situation of the refinery sector that arose from rapid increases in imported crude prices. As noted, in July 1981, GOI increased domestic crude prices from about US$6.1 per barrel to about US$19 per barrel, and concurrently, it increased retail petroleum prices by amounts necessary to cover the increased local and imported crude prices. As delayed payments to the refineries are made, the refinery debts are being repaid, with the situation expected to be fully normalized by June 1982. The Company has been generating a satisfactory level of internally generated cash, which averaged Rs 170 million per year during the last three years. This cash generation will allow BPC to finance a significant proportion of its investment requirements from its own resources. The Company's dividend policy is to pay dividends at the rate of 12% of its paid-in capital, provided that the company makes adequate profits in the year and that these amounts are not required for reinvestment purposes.  - 24 - 5.08 In addition to the projects presented for Bank financing, Bharat Petroleum has several other investment projects under implementation or consider- ation. The more important of these projects, which will be financed primarily by internally generated funds, will cost a total of US$106 million and are mentioned below: (a) LPG - Phase I. This project consists of the installation of joint distribution facilities for marketing 168,000 tpy of LPG from Bombay High associated gas by Bharat Petroleum and Hindustan Petroleum. Bharat Petroleum's market share of the project will be 84,000 tpy of LPG and its share of investment is currently estimated at about US$47 million equivalent. The project has been initiated recently and is expected to be completed in 1983. (b) Aromatics Project. Phase I of this project is to manufacture 61,000 tpy of benzene, 16,000 tpy of toluene and 5,000 tpy of LPG by utilizing 156,000 tpy of naphtha from its distillation unit. This phase is estimated to cost US$16 million and has already been approved by GOI; implementation has started recently and is expected to be completed in early 1984. The feasibility study for the second phase of the project, aimed at converting toluene to xylene, is under preparation. (c) Product Tankage. The total cost of this project, which is also under implementation, is estimated at around US$28 million. It involves the execution of adequate product tankage at main install- ations and depots to cater for emergencies and disruptions in supply; (d) Crude Tankage. This project involves the construction of three crude storage tanks, each of 75,000 tons capacity. The total cost is around US$9 million; and (e) Sulfur Recovery. This project involves installation of amine absorp- tion of hydrogen sulfide from refinery gases and subsequent recovery of sulfur using the Claus process to produce 5,700 tpy sulfur. Estab- lishment of the sulfur plant will reduce the emission of sulfur-bearing gases from 42 tpd to 14 tpd. Investment is estimated at US$6.0 million. B. Hindustan Petroleum Corporation Limited (HPC) 1. Management and Organization 5.09 Hindustan Petroleum Corporation was formed in 1974 after the Government of India acquired Esso Standard Refining Company of India Ltd., Lube India Limited, and the marketing activities of Esso Eastern Inc. The refineries of these companies were located at Bombay, Maharashtra. Subsequently, in 1979, HPC acquired Caltex Oil Refining (India) Ltd, which owned a refinery founded in 1957 at Visakh, in Andhra Pradesh, and Kosangas Company, which enabled it to enter the field of bottling, marketing and distribution of liquefied petroleum gas (LPG). Having acquired these companies, the operations of HPC now include petroleum refining in two states: manufacture of lubricating base oils, manufacturing and blending of lubricant grease and specialities, marketing the full range of petroleum products and related automotive accessories across the country, and bottling, distribution and marketing of LPG.  - 25 - 5.10 The composition of the Board of Directors is similar to that of BPC, with representatives from the Ministry of Petroleum and senior management of the company. In addition to the two representatives of the Ministry of Petroleum, the other members of the Board are the Chairman-cum-Managing Director, and the three directors of Finance, Marketing and Production. The Chairman-cum-Managing Director of the Corporation has been in his present position since 1977. Earlier he was the Finance Director of Indian Oil Corporation. The company's management is experienced and capable. The total staff on HPC's payroll is 5,584. 2. Plant Facilities and Production Performance 5.11 HPC currently operates two petroleum refineries, one in Bombay with a crude processing capacity of 3.5 million tpy and a second in Visakhapatnam (Visakh) with a crude processing capacity of 1.5 million tpy calculated on the basis of light Iranian crudes. In addition, HPC also has a lube refinery in Bombay with a present capacity of 200,000 tpy. After several expansions since their establishment in the mid-1950s, the present capacities are significantly higher than the original capacities which were 1.25 million tpy at the Bombay refinery, 0.67 million tpy at the Visakh refinery and 164,000 tpy for the lube refinery. 5.12 The production and sales performance of the company is summarized below: Hindustan Petroleum Corporation - Crude Throughput and Sales (million tons) Growth Rate (%) Years Ended March 31 1976/77 1977/78 1978/79 1979/80 1977/78 to 1979/80 Bombay Refinery 2.82 2.94 2.82 3.13 3.1 Visakh Refinery 1.07 1.24 1.12 1.10 1.0 Total 3.89 4.18 3.94 4.23 2.8 Lube Refinery 0.18 0.18 0.19 0.20 3.5 Total Product Sales 3.72 4.19 4.70 5.15 11.5 The refinery has over the years increased the efficiency of its operations. Even though the Bombay refinery has had to process increasing amounts of lighter crude, which resulted in lowering effective capacity, HPC refin- eries have been able to increase their total production. 3. Financial Performance and Expansion Plans 5.13 Key financial information of the corporation for the past four years is tabulated below. Detailed financial statements are in the Project File: Reference B.  - 26 - -Hindustan Petroleum Corporation - Financial Summary (million Rupees) Years Ended March 31 1977/78 1978/79 1979/80 1980/81 Revenues 7,006 8,860 11,741 15,664 Net Income (Before Tax) 129 243 272 216 Net Income (After Tax) 64 120 137 117 Internal Cash Generation 101 187 238 230 Current Assets 880 1,501 2,600 3,457 Current Liabilities 721 1,208 1,783 2,123 Equity 425 760 857 956 Long-term Debt 77 158 680 1,241 Ratios Net Income (Before Tax)/Revenues (%) 1.84 2.75 2.31 1.38 Net Income (After Tax)/Revenues (%) 0.92 1.35 1.17 0.75 Net Income/Equity Ratio 16.08 20.19 16.92 12.90 Long-term Debt/Equity 15/85 17/83 44/56 56/44 5.14 Revenues have-increased at an average rate of over 22% per year, but the return on equity has remained at controlled levels due to the retention price formula. The company debt/equity ratio increased from 15/85 in 1977/78 to 56/44 in 1980/81 as a result of abnormal debt financing during 1980/81, as explained in para 5.07 above. This situation, however, has now been corrected. The liquidity position of the company is good and so is its overall financial health. During the past three years, HPC's internal cash generations has averaged a healthy Rs 220 million/year. The company's dividend policy has been to pay dividends at a rate of 12% of its paid-in capital. 5.15 In addition to the proposed refinery expansion and conversion and the recovery of SO in the Bombay refinery, which are included in the Project, HPC has a number ot projects under implementation. The names and costs of these projects, financed mostly by internal funds and local borrowings, are given below. Hindustan Petroleum Corporation - Other Projects Under Implementation US$ Million (a) Marketing of LPG Phase I 47.1 (b) Lube Refinery Expansion 16.9 (c) Crude Desalter (Bombay) 0.9 (d) Waste Heat Boiler (Visakh) 1.2 (e) Bombay-Pune Product Pipeline 25.6 (f) Marketing of LPG - Phase II 28.8 (g) Crude Tanks at Bombay and Visakh 23.2 (h) Miscellaneous Additions and Replacements 9.0 Total 152.7  - 27 - 5.16 The LPG marketing project, which accounts for the largest investment, involves provision of facilities for marketing of 84,000 tons per year of LPG from associated gas being produced from Bombay High; these facilities are being built jointly with BPC. The project also includes construction of new bottling plants and storage facilities at Bombay, Bangalore and Nagpur. Engineers India Ltd. (EIL) is providing engineering consultancy and construction supervision for the bottling and storage facilities. In addition to the above- mentioned projects already under implementation, HPC has in its pipeline a US$40 million project for the recovery of additional heavy lube oil from the refinery by propane de-asphalting of vacuum tower bottoms. This heavy lube oil will then be phenol-extracted and dewaxed to produce an additional 37,000 tons per year of bright stock. C. Madras Refineries Limited (MRL) I. Management and Organization 5.17 MRL was established as a public limited company in December 1965 and is one of the two refineries in India that have foreign equity participa- tion. The Government of India owns 74% of the shares, with the remaining being equally distributed between National Iranian Oil Company (NIOC) and American Oil Company (AMOCO) of the US. 5.18 The Board of Directors of the company consists of nine represen- tatives (including the- Managing Director) of the Government of India and two each of NIOC and AMOCO. The Board meets at least five times a year. The Board has delegated many of its functions to two subcommittees: (i) the Technical Advisory Committee and (ii) the Executive Committee. The Technical Advisory Committee is responsible for all major investment decisions, and the Executive Committee for matters such as labor relations, manpower require- ments, and other personnel-related matters. The present Chairman-cum-Managing Director and other senior managers in the company are capable and have had extensive experience in the Indian petroleum industry. 5.19 The financial and cost accounting systems of the corporation are modern. MRL is in the process of completing the computerization of its accounting system, with significant assistance from AMOCO. The company has its own internal audit staff that reports to the Managing Director through the Finance Director. 2. Plant Facilities and Production Performance 5.20 Madras Refinery commenced operations in 1969, with a processing capacity of 2.5 million tpy of 340 API Darius crude (50,000 bpcd); this has recently been increased to 2.8 million tpy. The refinery is relatively complex, with 13 process units, including a lube oil plant. In addition, the plant facilities include three boilers (85 tons each) and two turbo- generators (11 MW each) to meet the steam requirements, and other auxiliary facilities. MRL does not market its production and its products are shipped mostly by pipeline to a bulk storage terminal owned and operated by Indian Oil Corporation (IOC); the balance is loaded into rail cars and tank  - 28 - trucks to be subsequently marketed by IOC. The storage facilities at the refinery include 4 crude tanks of 41,500 tons each and 63 other tanks for intermediate and finished products, and a 500 ton sphere for LPG storage. 5.21 The recent production performance of MRL has been excellent with capacity utilization at 93% in 1977/78, 100% in 1978/79, 100% in 1979/80 and 93% in 1980/81. The drop in production in 1980/81 was due to a routine main- tenance turnaround in July 1980. In addition to maintaining a high level of capacity utilization, MRL has also reduced its internal crude consumption and loss from 10.5%, which was the original design, to 9.2% in 1981 or an improvement of 14%. Considering the complexity of the refinery, the fuel and loss figures of MRL are very good. 3. Financial Performance and Expansion Plans 5.22 Key financial data for the past four years are shown in the table below. Financial statements for these years are included in the Project File: Reference C. Madras Refinery Limited - Financial Summary (million Rupees) Years Ended March 31 1977/78 1978/79 1979/80 1980/81 Sales 2,068 2,668 4,362 6,052 Net Income Before Tax and Reserves 28 70 85 78 Net Income After Tax and Reserves 22 26 29 32 Internal Cash Generation- 48 62 65 63 Current Assets 866 981 2,122 4,960 Current Liabilities 723 823 1,938 4,819 Equity 154 272 278 289 Long-term Debt 15 1 6 18 Ratios Net Income Before Tax/Sales (%) 1.3 2.6 1.9 1.3 Net Income/Sales (%) 1.0 1.0 0.7 0.5 Net Income/Equity (%) 14.0 12.1 10.5 11.3 Current Ratio 1.2 1.2 1.1 1.0 Debt/Equity Ratio 9/91 1/99 2/98 6/94 a/ These are underestimated as reserves have been changed to income. 5.23 Although the overall financial position of the company is sound and in line with other companies in the refinery sector, the current ratio is low and has worsened in the last two years. The main reason for this working capital squeeze is the substantial cash requirements during the last two years for the two major investments currently under implementation (see below). In  - 29 - these years, MRL has been able to keep a low working capital level since it has enjoyed liberal terms for the purchase of Iranian oil. As discussed in para 9.12, however, assurances have been obtained that MRL will maintain a minimum current ratio of 1.1 until December 1985 and 1.2 thereafter. Long-term debt as a percentage of total capitalization has remained below 10%, which means that MRL has the capacity to borrow significant sums for its expansion programs. According to its Articles of Association, MRL is required to distribute as dividends 50% of its net income after taxes and allowances for reserves. In the past several years dividend distribution amounted to 15% of paid-in capital, as agreed mutually between the shareholders. 5.24 In addition to the expansion and conversion facilities included in the proposed Project (para 6.07), MRL currently has two major projects under implementation. The first is a plant to produce paraffin wax at an estimated cost of about Rs 177.4 million (US$20.9 million). A turnkey contract for the project has been given to Engineers India Limited (EIL) and the project is expected to be commissioned by early 1983. The second project is the construction of an additional storage tank for crude oil with a capacity of 55,000 tons. The project is expected to be commissioned in Aujgust 1982. These projects are being financed principally with internally generated funds. These investments when completed and operational will contribute substantially to the cash generation of the company. D. Cochin Refineries Limited (CRL) 1. Management and Organization 5.25 Cochin Refineries Limited, incorporated in September 1963, is the second Indian refinery company with private and foreign equity ownership. The shares of the corporation are traded on the Bombay and Cochin stock exchanges. Currently, 52.6% of the shares are owned by the Government of India, 26.4% by Phillips Petroleum Company (USA), 7.1% by the Kerala State Government, 6.6% by the Life Insurance Corporation of India, 1.0% by Unit Trust of India, and the remaining 6.0% by the public. 5.26 The Board consists of nine directors, of which five are nominated by GOI, two by Phillips Petroleum Company and two by other shareholders. As in t'he case of other refinery companies, the Board must meet at least once every quarter but on the average meets about nine times a year. The chief operating officer of the company is the Managing Director. Unlike the other three companies, the Managing Director's position is held by a person other than the Chairman of the Board. Below the Managing Director, the Refinery Manager is responsible for all departments except finance, personnel and administration, and the company secretary. These three department managers report directly to the Managing Director. The company has a total staff of 468, of which 110 are at the supervisory level. The Company's management and staff are capable and experienced.  - 30 - 2. Plant Facilities and Production Performance 5.27 The refinery, which was inaugurated in September 1966, originally had a capacity of 2.5 million tpy of crude oil. Subsequently, in 1973, the capacity was increased to 3.3 million tpy. The plant facilities include atmospheric and vacuum distillation, naphtha and distillate dehydrosulfurizers, catalytic reforming, and visbreaker. The storage facilities at the refinery consist of 5 tanks for crude oil with a total capacity of 200,000 tons, 7 tanks for intermediate products with a total capacity of 42,000 tons and another 31 tanks for furnished products with a total capacity of 230,000 tons. 5.28 The capacity utilization of the plant has remained at about 88% in recent years. One of the reasons for this somewhat low capacity utilization compared to other refineries is the fact that although the refinery capacity was originally designed for processing light Iranian crude, it has had to process heavier crudes of several types. The refinery has been able to maintain its fuel consumption and loss at less than 4.5%. 3. Financial Performance and Expansion Plans 5.29 A summary of the financial performance of CRL during the past four years is shown in the table on next page. Detailed historic financial statements are in the Project File: Reference D. As in the case with all refineries in India, during late 1980/81, CRL incurred substantial debts in order to compensate for delays in payments due to it by IOC and OCC. As was explained in para 5.07, IOC and OCC faced liquidity difficulties arising from the low crude oil prices that existed prior to July 1981. However, amounts due to CRL are now being paid, and CRL in turn is repaying its debts. It is expected that all debts related to the above abnormal situation will be repaid by June 1982. As discussed in Chapter IX, agreements have been obtained that the current ratio will be maintained above 1.1 until December 1985 and 1.2 thereafter and that the debt/equity ratio of 65/35 will be achieved by December 31, 1987. 5.30 Under its Formation Agreement, up to July 1982 the company is required to distribute as dividends 100% of its net income after taxes and allowances for reserves. Thereafter, dividend payments will be set by the Board. For the past several years it has distributed between 34% and 54% of its paid-in capital as dividends as mutually agreed between the shareholders. At this time there is no project in the corporate pipeline other than the one proposed for Bank financing.  - 31 - Cochin Refineries Limited - Financial Summary (in millions of Rupees) Years Ended March 31 1977/78 1978/79 1979/80 1980/81 Sales 1,498.0 2,545.7 3,854.7 5,609.0 Net Income (Before Tax) 31.8 57.4 66.9 76.2 Net Income (After Tax) 10.8 18.4 18.2 20.2 Internal Cash Generation 22.4 38.5 38.4 40.5 Current Assets 676.3 668.0 1,002.8 1,971.5 Current Liabilities 643.5 525.1 820.5 1,382.9 Equity 132.2 126.6 120.9 103.0 Long-term Debt 37.3 143.3 180.2 683.3 Ratios Net Income Before Tax/Sales (%) 2.1 2.3 1.7 1.4 Net Income/Sales (%) 0.7 0.7 0.5 0.4 Net Income/Equity (%) 8.2 14.2 14.7 18.0 Current Ratio 1.1 1.3 1.2 1.4 Debt/Equity Ratio 22/78 53/47 60/40 87/13 E. Auditing 5.31 The auditing requirements and procedures of all four companies participating in the Project, which are limited public companies with more than 50% government ownership, are similar. The company audit is carried out at three levels. The first audit is conducted by the internal audit staff of each company. In all cases, the audit manager reports to the chief financial officer of the company but also has direct access to the managing director. The scope of audit covers all activities of the company and includes a review of the internal control of the company. The second audit is conducted by statutory auditors (a partnership of independent chartered accountants) appointed by the Government of India in consultation with the Comptroller and Auditor General of India. Statutory auditors are appointed for a period of three years, at the end of which they must be changed. At the completion of their annual audit, the statutory auditors express their opinion on the fairness of the financial statements. These are included in the company's annual report. The auditing standards and procedures followed are those laid down by the Indian Institute of Chartered Accountants. The third audit is conducted by the Audit Board of the Office of the Comptroller and Auditor General of India. This is both a financial and a management audit and the comments of the Audit Board are exhibited along with the financial statements of the company. 5.32 The auditing procedures followed are sound and considered satisfactory, since auditing procedures are thorough. Audited financial statements are generally available six months after the close of the financial year (para 9.12).  - 32 - VI. THE PROJECT A. Project Objectives 6.01 The main objectives of the Project are to expand and modify refining capacity in order to reduce the imbalance between domestic demand for and supply of petroleum products in India, and to improve the energy efficiency of the sector. As noted, the consumption of petroleum products historically has been characterized by a much stronger growth of middle distillates (kerosene and diesel oil) relative to light distillates (motor gasoline and naphtha) and fuel oils. Previous additions to refining capacity were influenced primarily by the need to reduce to a minimum the production of gasoline/naphtha in excess of what could be disposed of in the domestic market as well as by the desire to minimize capital costs. These factors resulted in the establishment of rather small refineries with very little, if any, secondary processing facilities. However, with (i) the increasing deficits of middle distillates in the country, and (ii) the planned invest- ments in coal, gas and power projects designed principally to substitute for fuel oil, GOI's planning in the refinery sector is currently directed towards adding capacity and installing secondary processing therein to bring about a better balance between demand and local production profiles. The additions to capacity as well as the new capacities planned for the future include economic-sized conversion capacities of residuals to increase the yield of middle distillates. The proposed Project represents a major effort by GOI for better utilization of existing capacities oriented towards production of high-value distillates which are currently in deficit. Annex 6 provides the existing and proposed crude and product slates for the refineries included in the Project. The Project will also add significant petroleum-tankage and related distribution facilities. 6.02 In addition to the proposed refinery expansions and conversion, GOI has emphasized the need for energy conservation and pollution control measures in the refining sector. The Project includes energy-saving investments and measures aimed at reducing internal fuel and process heat requirements at the four refineries (Bombay, Cochin, Madras and Visakh), which will be expan- ded and rationalized as discussed above. A sulfur-recovery scheme at a fifth refinery (HPC-Bombay), which will result in pollution abatement in the area, is also a part of the Project. Finally, the Project includes energy conser- vation and pollution control schemes in six other refineries in the country. B. Project Description 1. Refinery Capacity Expansion and Secondary Processing Component (i) BPC-Bombay Refinery 6.03 One of the objectives of the BPC refinery conversion scheme is to permit the company to operate at a capacity of 6 million tpy on the basis of processing a higher proportion of Bombay High crude and increase its diesel oil yield. The subproject includes the following components: (a) installa- tion of a prefractionation system and modifications to the existing crude distillation unit to process 6 million tpy of light crude; (b) a new vacuum distillation system of 0.79 million tpy capacity; (c) a new FCC unit (0.6 million tpy) with a gas concentration system and CO boiler to recover heat from regenerator off-gases; (d) new LPG Merox (58,000 tpy) and gasoline  - 33 - Merox (0.147 million tpy) treaters; (e) intermediate storage and finished products storage (80,000 tons) facilities; and (f) additions/modifications to utilities generation and distribution facilities, including flare system. 6.04 The facilities required for the generation and distribution of the incremental utilities required under the Project are relatively small. The additional steam produced from the new FCC unit's CO boiler, together with spare capacity in the existing boilers, will be adequate for normal require- ments after Project completion and therefore no additions to steam generation capacity are envisaged. The present sea water cooling system will require addition of three pumps and of offshore and onshore pipelines. With these additions and the proposed replacement of the standby generator by one with a 750 KW rating, the cooling water system will have sufficient capacity and reliability. Regarding power, the present supply source is the Maharashtra State Electricity Board grid which supplies power from the Tata Power Company's thermal station, contiguous to the refinery. Under the Project, 1.2 MW of captive power will be generated from the FCC unit's CO boiler steam. No difficulty is anticipated in obtaining the additional 1.5 MW power required for the expanded operations. The Tata thermal plant is installing an additional 500 MW Bank-financed unit, which is due for completion in December 1982. Agreements have been obtained from BPC that satisfactory arrangements will be made for timely and reliable supplies of power and water. (ii) CRL-Cochin Refinery 6.05 The Cochin Refinery expansion/conversion subproject consists of: (a) an increase in atmospheric distillation capacity from 3.3 million tpy to 4.5 million tpy by addition of a desalter, increasing the height of the fractionator and retraying the top section; (b) debottlenecking of the existing vacuum distillation column and installation of a new vacuum column to achieve a processing capacity of 1.9 million tpy of long residue and to supply 1.0 million tpy of gas oil feedstock to the new FCC unit; (c) installation of a new FCC unit of 1.0 million tpy capacity, including gas separation facilities and a CO boiler; (d) installation of a new 0.125 million tpy amine treater for the LPG from the FCC unit, followed by a new cracked LPG Merox unit; and (f) revamping of the bitumen unit to 0.35 million tpy capacity, to produce 0.2 million tpy of asphalt; and (g) additional storage facilities (145,000 tons). 6.06 The crude oil receiving facilities of the refinery need to be upgraded to meet its requirements after project completion. The oil jetty at the Cochin port is presently capable of receiving up to 30,000 DWT tankers and the crude oil is pumped through a 30" pipeline to the refinery. A new jetty, approximately 1 km from the existing one and located in the approach channel, will be constructed by the State's Cochin Port Trust; the channel will be deepened to 35' draft initially and 40' draft ultimately, which will enable mooring of 60,000 DWT tankers in the first phase and 115,000 DWT tankers in the second phase of development. A submarine crude line and bunker fuel line will connect the new jetty to the corresponding lines in the existing jetty. The new jetty is scheduled to be commissioned in December 1983, and will be fully owned and operated by the Cochin Port Trust. Regarding water supply,  - 34 - the refinery has an agreement with the State Public Health Engineering Department for the supply of 1.5 million gallons per day (mgd) of fresh water compared with the current consumption of about 1.0 mgd. Upon completion of the Project, water requirements will go up to about 5.0 mgd. To meet this requirement, the State Government is currently building a pipeline from the Ramamangalam River to carry 7.0 mgd of water through a 17 km long pipeline to the refinery area. This water pipeline is due for completion by July 1983. Regarding supply of electric power, Cochin Refinery is entering into an agreement with the Kerala State Electricity Board for the supply of 9.8 MVA of power from the State grid, which will be sufficient to cover the project requirements. While Kerala State is surplus in power and sells it to neighboring states, the current supply is liable to frequent outages and fluctuations and frequent trippings of the main substation supply line. As a part of the Project, the power receiving transformer stations will be suitably modified to eliminate the problem. Furthermore, a 2.5 MW turbogenerator set will be installed at the company to provide power for critical service. Present steam generation capacity totals 55 tons per hour (tph). Additional steam capacity of 80 tph in two boilers plus the CO boiler of 85 tph capacity have been included in the Project to provide adequate capacity for the total project requirement. The proposed arrangements for the supply of utilities are, therefore, satisfactory. Agreements have been obtained that satisfactory arrangements for the supply of water and power will be completed in a timely manner. (iii) MRL-Madras Refinery 6.07 The expansion/conversion subproject of Madras Refinery will double its crude processing capacity to 5.6 million tpy (based on, interchangeably, light Iranian or Bombay High crudes) and will comprise: (a) a new distillation train (2.8 million tpy) with a corresponding vacuum unit, and Merox units for LPG (30,000 tpy) with cracked LPG (70,000 tpy), cracked gasoline (152,000 tpy) and kerosene (0.5 million tpy); (b) a new FCC unit (0.6 million tpy) and amine treaters for gas streams; (c) revamping of the existing bitumen and sulfur units to increase production by about 50%; (d) additional crude, intermediates and final products tankage (about 200,000 tons capacity); (e) a new flare system and a new effluent treatment plant including separators; and (f) appropriate additions to offsites and infrastructure to be integrated with the corresponding existing facilities. 6.08 The Madras harbour is capable of receiving 80,000 DWT tankers (46 draft) and a 20 pipeline connects the port to the refinery storage tanks, capable of 4,000 tph throughput. With the increase in crude storage capacity from the present 195,000 tons to 360,000 tons, the crude oil receiving system will be adequate for handling the 5.6 million tpy crude oil required by the refinery. Regarding power supply, the existing captive generation capacity amounts to 22 MW in two turbogenerators. The refinery power system is linked to the State grid for import and export of power from the refinery. Present generation of power is only about 14 MVA, as it is limited by medium- and-low- pressure steam extraction rates; it is sufficient, however, for the current normal running of the refinery (with a surplus 1.5-2 MW exported to the State grid). As a part of the Project, the steam from the FCC/CO boiler, waste heat boilers and the regular boilers will be integrated into its total power system, and the use of pressures for process and offsites will be optimized in order to enable the present generators to produce the full 22 MW. In addition, two new  - 35 - low-pressure turbogenerating sets will be installed so that production of 28 MW (against an estimated future demand of 26 MW) is assured. The refinery will thus continue to be a net exporter of power to the State grid. 6e09 The source of water to the refinery is from the ground water system administered by the State Government. At present, the effluent treatment system consists of facilities for collecting all oil-bearing effluents into a sewer basin, API separators, clariflocculators with pH adjustments and clarifiers. Effluents are treated before they are let out into the Buckingham Canal and then into the sea along with effluents from the nearby Madras Fertilizers facilities. Oxidation pond overflows at the refinery exit are monitored daily by the refinery and once a week by State Government authorities. For the Project a separate set of facilities to provide a similar system of API separators, new clariflocculators and clarifiers will be installed. (iv) HPC-Visakh Refinery 6.10 The Visakh Refinery subproject scope consists of: (a) a new atmosphere distillation unit of 3 million tpy capacity (for processing Basrah or equivalent crude); (b) a vacuum distillation unit of 1.65 million tpy capacity; (c) a new FCC and gas concentration unit of 0.6 million tpy capacity; (d) a bitumen blow- in,g unit of 0.15 million tpy of product capacity; (e) Merox treatment units for LPG, gasoline and kerosene with sufficient processing capacity to include also the processing of streams from the present refinery; (f) new effluent treatment facilities; (g) expansion of utilities generation facilities (3 boilers, additional instrument air compressor, 2 turbogenerators, 3 additional pumps for cooling water system and a new flare; and (h) additional tankage (200,000 tons). 6.11 The present system of crude supply to the Visakh refinery is by long- range tankers moored in the Visakh outer harbour, lightered to medium range tankers, brought to the inner harbour oil jetty and pumped through a 36 pipeline to the refinery. The Visakh Port Trust (VPT), is presently constructing a new jetty in the outer harbour and a 36" 8 km long pipeline (2 km to the shore from jetty partly submarine, partly above water on trellis) linking to the present line outside the inner harbour. The cost of the pipeline system, estimated at Rs 67 million, will be borne by Visakh refinery and is included in the Project. The VPT project is expected to be completed before October 1984. Currently the power requirements of the refinery are met from the State Electricity Board grid. After the project completion, the total power requirement will increase from 3.8 MVA to 10 MVA. Of this, about 2 MVA will be generated as part of the Project. This power will be sufficient to maintain critical equipment in operation in the event of power failure. The balance will be purchased from the State grid. Regarding fresh water supply, present requirements of 0.5 million gallons per day (mgd) are supplied by the Visakh Municipality from its Todipudi reservoir with a capacity of 37 mgd. The State Government has agreed in principle to supply the additional requirements of 0.8 mgd. Agreement has been obtained that satisfactory arrangements will be made for adequate supplies of power and water. (v) HPC-Sulfur Recovery Unit 6.12 The sulfur recovery subproject at the HPC-Bombay refinery will process the combined hydrogen sulfide contained in gases recovered from  - 36 - virgin and cracked LPG (7 tpd), from its fuels refinery and from the lube oil hydrofinishing plant (12 tpd) of its lubes refinery. A Claus unit will be used to recover 16 tpd of elemental sulfur. Manufacturing facilities will include: (a) a mono-ethanol amine extraction unit for recovery of hydrogen sulfide from the lube recovery sour gas; (b) a Claus unit for sulfur recovery; (c) small additions to electric power distribution; (d) storage bays for sulfur product; and (e) control room laboratory and safety systems. Utilities required for the scheme will be provided from the existing refinery facilities. 2. Energy Efficiency and Pollution Control Component 6.13 The Energy Efficiency and Pollution Control component consists of priority investments in several refineries in the country. The investments proposed for improving the energy efficiency of the refineries involve the complete replacement or modification of low-efficiency crude distillation and cracking furnaces (to increase efficiency from about 50% to 90%) and the installation of air preheaters and waste heat boilers in other facilities. The investments identified for this component are: (a) at Gauhati Refinery of IOC, complete replacement of two crude distillation and cracking furnaces; (b) at Barauni Refinery of IOC, complete replacement of five crude distillation furnaces and one coking furnace; (c) at Gujarat Refinery of IOC, complete replacement of six crude distillation and conversion furnaces; (d) at Bombay Refinery of HPC, revamping or replacement of three distillation furnaces; (e) at Bombay Refinery of BPC, revamping or replacement of four furnaces; (f) at Visakh Refinery of HPC, revamping or replacement of four furnaces; (g) at Madras Refinery of MRL, installation of three air preheaters; (h) at Cochin Refinery of CRL, installation of three air preheaters; (i) at Mathura Refinery of IOC, installation of eight air preheaters; (j) at Bongaigaon Refinery of IOC, installation of two air preheaters; (k) at Haldia Refinery of IOC, installation of three air preheaters; and (1) installation of sulfur recovery units and pollution control devices. It is expected that about 90% of the investments under these components will be for energy efficiency, and 10% for pollution control. Although the overall scope of these investments has been identified and reviewed by Bank staff, they will be submitted to the Bank for approval only after their viability has been established by detailed feasibility studies currently underway and the investments have been approved by GOI. The total cost of the energy efficiency and pollution control component is estimated at US$118 million, of which US$30 million will be financed by the Bank loan. Agreement has been reached that the energy efficiency investments to be included in the Project will be approved by the Bank based on its technical and economic viability. The selection criterion for the pollution control investments will require that they represent the least-cost solution to meet satisfactory environmental standards. C. Process and Technology Selection 6.14 Based on an earlier techno-economic evaluation of the merits of alternative secondary processing options carried out for the Gujarat Refinery Expansion Project, GOI has adopted the FCC process for the conversion facilities proposed at the four refineries under the Project. Although the FCC process is generally preferred when light distillate production (i.e., gasoline and LPG) is to be maximized, Bank staff analysis (Project File: Reference E) has confirmed that the choice of FCC will also be appropriate for the Indian refinery sector, in spite of its high requirements of middle distillates, for the reasons mentioned below.  - 37 - 6.15 Firstly, with the planned increase in Bombay High (BH) crude pro- duction, Indian refineries will process either the lighter BH crude or its mixture with Middle East crude, which will allow the refineries to increase straight-run middle distillate production. Therefore, the additional middle distillate production to be achieved by secondary processing will be signi- ficantly lower in India than in other countries that process heavier crudes. Secondly, the Indian diesel oil product specifications permit a lower cetane number (CN) of 42, which enables FCC units to increase significantly their yield of diesel oil. This 42 CN specification can be achieved even if the diesel oil from secondary processing has a cetane number of only 32, by blending it with straight-run diesel oil which has a much higher cetane number. Thirdly, the LPG fraction of the light distillates is in demand in India to replace kerosene as domestic fuel, especially in urban areas, and is therefore a middle distillate substitute. In the above circumstances, the choice of FCC does not result in a significant middle distillate production sacrifice, but it still reduces the investment required for secondary processing. The economic return for these FCCs is therefore higher than for alternate secondary facilities, such as hydrocrackers. 6.16 GOI evaluated UOP (Universal Oil Products Co. of USA), Texaco and Kellogg technologies for the FCC process and chose the UOP technology in view of the higher guaranteed diesel oil yields (49% on feedstock compared to 44-45% for others) as well as the much lower license and basic engineering fees. The UOP technology is well proven with over 150 FCC units in operation. For LPG and distillates treatment, the generally used and proven UOP Merox technology, has been chosen. Selection of the UOP technologies for FCC and for LPG and distillates treatment facilities are therefore acceptable. 6.17 The sulfur recovery unit proposed at the HPC-s refinery includes an amine treatment unit for recovery and process of hydrogen sulfide from the liubes complex and fuel refinery LPG off-gases. The unit will use a standard CLaus process to recover sulfur. The Claus technology will be provided by Comprimo B.V. (Netherlands) which has proven experience with such units. HPC has already entered into an agreement with Comprimo. The technology selected for the sulfur recovery scheme is satisfactory. D. Environmental Aspects 6.18 For atmospheric pollution control, there are no statutory or national standards in India. Refinery projects engineered and built after the mid-1970s generally follow air quality and emissions standards and practices required in the US. Similar design standards, which are acceptable to the Bank, will be followed for the Project. Contaminants from the refinery expansion and FCC units include sulfur oxides, nitrogen oxides, carbon monoxide and particulates (catalyst fines). All four of the units include CO boilers, and no increments to CO contamination level are expected. Catalyst fines emission (about 1 tpd) from suitably designed tall stacks will not pose a hazard. SO emission from the BPC, Bombay refinery will increase from its present 2i tpd (reduced from 49 tpd in 1975 through processing of an increasing proportion of low sulfur Bombay High crude) to 42 tpd after the Project. However, the refinery will establish a sulfur recovery plant which will bring down the emission rate to 14 tpd. The Madras refinery already has a sulfur recovery plant capable of handling additional sulfurous gases from the Project and the present ground level concentration of 0.5 ppm SO2 is expected to  - 38 - be maintained. Cochin and Visakh refineries will process increasing quantities of Bombay High crude which is low in sulfur content, and no deterioration of air quality is expected. 6.19 For liquid effluents pollution control, either the Indian Standards Specifications or the local government standards will apply, both of which are satisfactory. The standards relate to end-of-the-pipeline quantities, that is, permissible quantities at the outfall point. All four of the refineries presently treat their liquid effluents according to the applicable standards. The existing facilities will be modified (Bharat-Bombay, Madras) or new additional facilities will be established (Cochin, Visakh) to handle additional effluents according to the required standards. These standards are acceptable. Agreements have also been obtained from the refinery companies that the project facilities will be designed, built and operated with due regard to appropriate safety norms and ecological and environmental standards satisfactory to the Bank. VII. ENGINEERING AND PROJECT IMPLEMENTATION ARRANGEMENTS A. Engineering Arrangements 7.01 Engineers India Ltd. (EIL) has been selected by the Project sponsors to provide the following services under the Project: (i) basic engineering of all non-proprietary process plants (all except FCC, Merox and sulfur recovery units) and al-l offsites facilities; (ii) detailed engineering of all sections under the Project, except that of the critical sections of the FCC and Merox units and the offsites facilities for Bharat refineries which will be carried out in-house; (iii) procurement services for equipment and materials including expediting of delivery, and inspection at vendor's shops; (iv) construction supervision and management; (v) project management services including schedule monitoring and progress reporting; and (vi) start-up assistance. Under its licensing arrangements with the sponsoring companies, UOP will provide: (i) basic engineering package for the FCC and Merox plants; (ii) detailed engineering for critical sections of the FCC units; and (iii) necessary technical assistance during engineering construction and start-up. EIL is the largest engineering company in the country and has considerable experience in engineering and project management of hydrocarbon processing industries, especially refineries. Its performance in past projects has been fully satisfactory. Based on staff appraisal of EIL's capabilities and experience, and in view of its knowledge about local subcontracting and site conditions, the appointment of EIL for performing the scope of work outlined above is considered satisfactory. Contracts between the individual project authorities and EIL have been entered into and EIL is performing its work responsibilities satisfactorily. UOP is a leading inter- national process development, licensing and engineering firm in the refinery and petrochemical industries. It has successfully designed and engineered similar refinery projects all over the world and in India. It is fully competent to carry out its responsibility under the Project. The engineering arrangements for the Project are, therefore, considered satisfactory. B. Project Implementation Arrangements 7.02 EIL's Manager of Projects (Refineries), who has substantial prior experience, will be directly responsible for implementation of the  - 39 - Project. He will be assisted by a separate project manager for each of the refinery projects who in turn will be assisted by a task force of core personnel (coordinators) seconded from EIL