China - Daqing Oilfield Gaotaizi Reservoir Development Project

Document of The World Bank FILE CO?Y FOR OFFICIAL USE ONLY Report No. P-3442-CHA REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMET TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN AN AMOUNT EQUIVALENT TO $162.4 MILLION TO THE PEOPLE'S REPUBLIC OF CHINA FOR THE DAQING OILFIELD GAOTAIZI RESERVOIR DEVELOPMENT PROJE January 6, 1983 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 (February 1982) 1 Yuan (Y) = $0.55 Y 1.8 = $1.00 WEIGHTS AND MEASURES 1 British thermal unit (Btu) = 0.252 kilocalories (kcal) 1 barrel (bbl) = 0.159 cubic meters (cu m) 1 kilogram of coal equivalent (kgce) = 0.64 kilogram of oil equivalent 1 kilometer (km) = 0.621 miles (mi) 1 kilowatt (kw) = 1,000 watts (w) 1 megawatt (MW) = 1,000 kilowatts 1 cubic foot (CF) = 0.0283 cubic meter (cu m) ABBREVIATIONS AND ACRONYMS CNOOC - China National Offshore Oil Corporation DPAB - Daqing Petroleum Administrative Bureau MOF - Ministry of Finance MOPI - Ministry of Petroleum Industry PCN1 - Production Company No. 1 FISCAL YEAR January 1 to December 31 FOR OFFICIAL USE ONLY CHINA DAQING OILFIELD GAOTAIZI*RESERVOIR DEVELOPMENT PROJECT Loan and Project Summary Borrower: The People's Republic of China Beneficiary: Daqing Petroleum Administrative Bureau (DPAB) Amount: $162.4 million, including capitalized front-end fee Terms: 20 years, including 5 years of grace at standard variable interest rate. Relending Same terms and conditions as the Bank loan. DPAB bears Terms: the foreign exchange risk. Project Description: The proposed project would help increase production from the Daqing oilfield and at the same time introduce modern technological innovations in both equipment and oilfield practices to the Chinese oil industry. The project would do this by drilling oil and water injection wells; installing water injection stations and other surface utilities; providing facilities for oil treating and transportation, and gas gathering, treating and handling; and providing laboratories, consultants (466 man-months) and staff training to improve the efficiency of oilfield practices. An important feature of the project is the series of studies and surveys aimed at improving operations and planning of future investments in the petroleum subsector. The main quantifiable benefit of the project is the increased production of oil and gas, but the project also aims to achieve a significant transfer of modern technology to China. The project involves the operational risks and safety hazards common to all petroleum development projects. However, the project has been designed to improve existing safety standards, upgrade workers- skills and provide modern equipment to help reduce these risks. Another risk is that geological conditions may turn out less favorable than anticipated; however, even with smaller recoverable reserves than estimated, the project remains economically very attractive. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. Estimated Local Foreign Total Costs: ------- ($ million) ------ Well Drilling 123.5 88.0 211.5 Production Equipment and Services 38.7 34.0 67.5 Surface facilities 106.9 8.0 114.9 Utilities and General Field Equipment 29.5 - 29.5 Field Buildings and Workers' Housing 13.0 - 13.0 Training Center 5.5 6.0 11.5 Laboratories 1.4 4.0 5.4 Equipment for two seismic survey teams 1.0 7.0 8.0 Computer 2.7 14.0 16.7 Reservoir & EOR Study and Pilot Project 4.9 6.0 10.9 Technical Assistance (other than EOR and training) 0.3 3.0 3.3 Seismic work and Technical Assistance for Zhongyuan and Other Projects 1.0 7.0 8.0 328.4 177.0 505.4 Physical Contingencies 49.3 12.5 61.8 Price Contingencies 68.2 36.5 104.7 Total Project Cost 445.9 226.0 671.9 Front-end Fee - 2.4 2.4 Total 445.9 228.4 674.3 Financing Local Foreign Total Plan: ------- ($ million) ------ Government/DPAB 445.9 - 445.9 IBRD - 162.4 162.4 Export Credits/Govt./DPAB - 66.0 66.0 Total 445.9 228.4 674.3 - iii - Estimated IBRD FY 1983 1984 1985 1986 Disbursements: --------- ($ million) ------ Annual 30.0 90.0 30.0 12.4 Cumulative 30.0 120.0 150.0 162.4 * Economic Rate of Return: 91% Staff Appraisal Report: No. 3949-CHA, dated December 29, 1982. 煙 REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE PEOPLE-S REPUBLIC OF CHINA FOR THE DAQING OILFIELD GAOTAIZI RESERVOIR DEVELOPMENT PROJECT 1. 1 submit the following report and recommendation on a proposed loan to the People's Republic of China to help finance the Daqing Oilfield Gaotaizi Reservoir Development Project. The loan, for $162.4 million, would have a term of 20 years, including 5 years of grace, with standard variable interest. $153.9 million of the loan would be onlent to the Daqing Petroleum Administrative Bureau (DPAB) on the same terms and conditions. DPAB will bear the foreign exchange risk. PART I - THE ECONOMY 2. An introductory economic report, entitled "China: Socialist Economic Development" (No. 3391-CHA), was distributed to the Executive Directors on June 1. 1981. A country economic memorandum, which updates the report, particularly on developments over the past two years, is under pre- paration. Country data are given in Annex I. Development Objectives and Performance 3. China-s economic system combines an urban state economy modelled after that of Eastern European countries, with a rural commune economy based on the country's own traditions as well as its socialist ideology. The state economy is characterized by public ownership, centralization of economic decisions, strictly hierarchical control, and relatively little reliance on markets or prices. In the commune economy, land and most capital are owned collectively by production teams of 30-40 households, which generally corres- pond to traditional villages (or neighborhoods of larger villages). Each team is part of a brigade, each brigade part of a commune: these higher level units organize land improvement projects, run industrial and other enter- prises, and deliver education and health services. 4. Development efforts over the past three decades have consistently been directed toward two main objectives: first, industrialization, and in particular development of a heavy industrial base; second, elimination of the worst aspects of poverty. Chinese development strategy has also been shaped by two major constraints: first, an extreme shortage of cultivable land in relation to population; second, a high degree of international isolation. 5. These two constraints have sharpened the conflict between the two objectives. The prospective returns to investment in agriculture (the principal source of income for the poor) have been limited by land scarcity and by the fact that the easiest advances in intensive cultivation have - 2 - already been made. Similarly the inevitable competition for capital and skilled manpower between industrialization and other means of poverty reduction was for a long period aggravated by reliance entirely on domestic resources and technology. 6. The Chinese response to this dilemma has been to approach the two objectives in two different ways. Following an initial phase of institutional change and property redistribution, poverty reduction - mainly through rural development and the provision of basic health and education services - has been based largely on local resources and initiative. Industrialization, by contrast, has been based mainly on a massive infusion of centrally mobilized resources, with little concern for cost effectiveness, and using largely Soviet technology of the 1950s. 7. Tension between these two approaches has contributed to sharp policy oscillations, as has a continuing debate on the role of political criteria in economic decisions and on the most appropriate degree of centralization. The country is only now recovering from the latest political upheavals - the Cultural Revolution (1966-76) - during which extreme leftist views often predominated, and egalitarianism and ideology were emphasized at the expense of economic efficiency. 8. Notwithstanding these policy swings, which have engendered some dramatic economic fluctuations, there has been substantial progress toward the two main objectives. Industrialization has been very rapid, largely as the result of an unusually high rate of investment, virtually all of which has been financed by domestic savings. The share of industry in GDP (around 44%) is currently similar to the average for middle-income developing countries. However, agriculture still accounts for 35% of GDP and over 70% of employment - similar to the average for low-income developing countries. Around 85% of the population still lives in rural areas. 9. Over the whole period 1949-81 the population expanded at a little under 2% a year. Despite the tightly constrained agricultural sector, rapid expansion of industrial output has caused national income per person to grow fairly fast. With adjustments for international comparability, per capita GNP appears to have grown at an annual rate of 2.0-2.5% in 1957-77 and (because of a spurt in recent years) 2.5-3.0% in 1957-81. Even the former rate is signi- ficantly above the average for other low-income developing countries (1.6% in 1960-78) - though the latter is still well below the average for middle-income developing countries (3.7%) and has not been high enough to pull China out of the low-income group. Strengths and Weaknesses 10. China has clearly displayed an outstanding capacity to mobilize domestic resources - material, human and financial - in pursuit of compara- tively well-defined national objectives. Given the shortage of land and initially high yields, agricultural growth since 1949 has been quite impressive. Yields of the major crops are now among the highest in the world though labor productivity remains low. Agricultural growth, at about 3% a - 3 - year, ha however, been eclipsed by industrial growth at an average rate of more than 10% per year. Although a large minority of the population (around 200 million people) remains very poor, low income groups in China have been made better off in terms of employment, nutrition, health and basic education than theii counterparts in most other poor countries. Partly as a result, but also through an intensive political campaign in the 1970s, the population growth rate has been reduced in recent years to a remarkably low level (1.4% in 1981). Life expectancy - whose dependence on many other economic and social variables makes it probably the best single indicator of human welfare in a country - is (at 64 ydars) outstandingly high for a country at China's per capita income level. 11. The outstanding weakness of China-s economy is inefficiency - in converting inputs into outputs, in matching supply with demand, and in investment decision making. This is partly the result of technological backwardness, caused by two decades of international isolation. But it also reflect the virtual absence of medium-term planning from 1958 until recently, the lack of economic criteria in investment analysis, and serious weaknesses in the economic system - in particular, inadequate contact between producers and users, insufficient use of markets and price incentives, inadequate linkage between effort and rewards, and an overstaffed and cumbersome bureaucracy. Recent Developments 12. Since 1977 there has been intense discussion within China concern- ing both the ends and the means of economic development. Though partly the result of political change, the debate has been fuelled by some important underlying economic considerations. Future growth will inevitably have to depend mainly on improving the efficiency of resource use. The benefits of technological isolation as a stimulus to improvisation have been overtaken by its costs in terms of backwardness and bottlenecks. And the remarkable progress made in industrialization and in meeting basic needs has not been matched by - and has created a demand for - a commensurately rapid rise in general living standards. Reform and Adjustment 1:3. In 1979, the Government initiated a program of reform and adjust- ment. Economic reform is aimed at improving the overall efficiency of the economic system. It involves: restoring and improving the quality of central planning and policy coordination; devolving more decision-making authority to lower level units in the economic system; establishing more direct links between incomes and performance of economic units and individuals; and placing more reliance on market mechanisms and economic instruments, less on administrative directives, to influence economic activity. Structural adjustment is aimed at speeding improvements in living standards and involves readjusting the relative shares of consumption and investment in national income, some sectoral and subsectoral readjustments, and more emphasis on foreign trade. 14. Economic reforms have affected planning and management at both the central and local government levels. A major reorganization of the central government has strengthened the core planning and management agencies (especially the State Planning Commission and the State Economic Commission) and reduced the total number of commissions, ministries and agencies under the State Council from 98 to 52. Central-local government relations have been affected by a decentralization of fiscal and foreign trade management, and the legal rights and obligations of economic agents have been better defined. 15. Other reforms have affected the management and organization of the state enterprise and collective sectors. Management of state enterprises has been affected by changes and experiments aimed at improving incentives, including the introduction of profit retention schemes and more flexible payment and employment practices. There has also been experimentation with different types of state enterprise organization, a greater variety of marketing channels, some price flexibility, and greater autonomy for state enterprises in production decisions. In rural areas, more responsibility has been given to lower level collective units and to households, and incomes have been more directly linked to the output of groups and house- holds. There has been an increase in the number and types of rural markets at which households can freely trade commodities. In urban areas the scope for collective and individual economic activities has been expanded. Some of these reforms - especially those in rural areas - have already improved economic efficiency, while others will take longer to have an impact. 16. Progress in structural adjustment has been impressive. The share of investment in net material product (NMP) has declined from 37% in 1978 to 30% in 1981, and the share of agriculture in NMP has increased from 36% in 1978 to 40% in 1981. Emphasis on light industry, which accounted for 43% of industrial output value in 1978, was needed to provide more consumer goods to match higher incomes. The shift in emphasis from heavy to light industry, which began in 1979 and has become even more dramatic in the past two years, has led to a sharp increase in this proportion - reaching over 51% in 1981. In fact, in 1981, heavy industry output actually fell by 4.7% while light industry output grew by 14.1%. Stabilization Program 17. The implementation of adjustment and reform policies in recent years was accompanied by some macroeconomic instability in 1979 and 1980: there were large budget deficits, moderate inflation, rapid growth in the money supply, and a widening of the current account deficit from $0.7 billion in 1978 to $2.4 billion in 1980. Except for the budget deficit (5.1% of NMP in 1979 and 3.5% in 1980), the symptoms of instability were quite mild by international standards. They were, however, taken very seriously in a country accustomed to insignificant inflation rates during the last two decades. Accordingly, in 1981, the Government introduced a stabilization program, which included a moderation of currency and credit expansion, restoration of budgetary balance and sharp cuts in investment. -5- 18. Monetary and Fiscal Policy. Restoration of price stability, the Government's major concern, has been largely achieved: retail prices increased by only 2.4% in 1981 compared with 6.0% in 1980. In rural areas shortages of consumer goods and repressed inflation remain, but in urban areas measures to restrict increases in nominal incomes in 1981 improved the demand-supply situation. Meanwhile the major changes in relative prices between urban and rural areas and within sectors continued through 1981. Some price flexibility has also been introduced: above-plan output can be sold at prices negotiated directly between buyers and sellers, and there is considerable downward price flexibility for goods in excess supply. 19. Strict price controls were one element of the stabilization pro- gram but fiscal policy has also played an important role. The Government reduced the budget deficit significantly in both 1980 and 1981, primarily through major cuts in capital construction: after rising by over 50% in 1978 and nearly 14% in 1979, budget expenditures on capital construction were reduced by 19% in 1980 and 22% in 1981. Moreover, the mode of deficit financing in 1981 was less inflationary than in previous years. Because of the Government's concern about open inflation, many of the increases in agricultural procurement prices have not been passed on to urban consumers but instead were financed by rapidly increasing subsidies (Y 8 billion in 1978 and Y 36 billion in 1981). Total domestic revenues have continued to increase but not as rapidly as NMP, due in part to the introduction of profit retention schemes and the shift in the composition of industrial output from heavy to light industry. On the other hand, extrabudgetary funds of enterprises and administrative organizations have grown rapidly and were about half as large as budgetary revenues in 1981. 20. Innovations like credit financing of investment and profit reten- tion schemes mean that monetary policy potentially has a more important role to play in China. After rapid increases in 1979 and 1980, the growth rate of the money supply was reduced in 1981 as a result of strict control over currency expansion. The velocity of circulation of money fell in 1979-81, but this was to be expected during a time of major institutional and struc- tural changes, including the increased monetization of rural economic acti- vities and the proliferation of collective and individual commercial and service undertakings. Bank branches have been given more autonomy to mobilize and allocate resources, and efforts have been made to influence economic decision making at the micro level by increasing and rationalizing interest rates. The increase in interest rates is expected to attract savings and induce enterprises to economize on fixed investment and working capital. However, the allocation of investment resources in China continues to be made primarily administratively, rather than by interest rates. 21. Balance of Payments. The Government's current policy includes continued emphasis on foreign trade and on making more use of imported technology. The performance of merchandise exports has continued to be very impressive, with the real growth rate averaging about 20% p.a. during 1978-81, due mainly to rapid growth in manufactured exports. However, merchandise imports, which also grew rapidly in 1979 and 1980, fell by 4.5% in value and 8.6% in volume in 1981 due to the stabilization program, especially the sharp cutback in the investment program. As a result, the $2.4 billion deficit of 1980 was converted into a $2.0 billion current account surplus in 1981. - 6 - 22. The strong export performance is due in part to institutional and policy changes. In January 1981, an internal settlement rate of Y 2.8 per US dollar (the official exchange rate was Y 1.6 per US dollar) was introduced for all trade. The central government has actively encouraged decentralization of foreign trade decision making and has introduced material incentives, primarily in the form of foreign exchange retention schemes. It appears, however, that some provinces and organizations may have striven to increase exports even if this meant undercutting exports of other provinces or units or exacerbating domestic supply shortages; greater access to foreign exchange has also stimulated a faster growth of imports than would have been permitted under a more centralized system. In the absence of price and other reforms, the Government has felt obliged to deal with these problems by introducing export quotas for 78 commodities, levying export duties on other commodities, restricting some consumer goods imports, and raising import tariffs on others. 23. The, Government's approach to foreign borrowing has remained very cautious. In 1980 and 1981 it cut back sharply on interbank borrowing and in 1981 took advantage of the unexpectedly strong current account position to repay commercial bank and other loans. In 1981, China's debt service ratio was 7.8%. Gross international reserves at the end of 1981 were sufficient to cover about five months of 1981 imports of goods and services. 24. Investment. In 1978, China's rate of investment was much higher than the average for other low-income or middle-income countries; moreover, the overall efficiency of investment was low and getting worse due to shortages of necessary materials and supplies, major transport constraints, and inappropriate and inefficient procedures for selecting and implementing investment projects. In these circumstances, the Government decided to cut back on the investment rate while introducing measures to improve investment efficiency and thereby protect future growth potential. The reduction in the investment rate has been achieved in spite of difficulties in cutting many investment components: the share of inventory accumulation in total investment has remained high; investment financed from retained earnings or local resources has grown sharply as a proportion of the total; and there has been rapid growth of nonproductive, particularly housing, investment. As a result, most of the cutbacks have had to be in large centrally financed projects, which will probably have an adverse effect on future growth. Growth and Income Developments 25. The overall rate of economic growth in recent years has been impressive, averaging 5.6% p.a. between 1978 and 1981 - a much higher rate than in the first half of the 1970s. In 1981, however, the rate dropped to 3.0% as a result of the stabilization program. 26. The combination of structural adjustment, economic growth and a low population growth rate (1.3% p.a. between 1978 and 1981) has led to rapid increases in the general standard of living in recent years. In urban areas, general wage increases and higher bonuses have more than offset the - 7 - increase in the cost of living index, and real per capita incomes increased by 4.9% p.a. between 1978 and 1981. The number of urban unemployed has been reduced dramatically and, with government encouragement, urban self-employment has grown rapidly. 27. Even more impressive, however, has been the increase in rural incomes. Information from several sources suggests that at current prices, per capita rural incomes increased by 16-18% p.a. between 1978 and 1981; and when account is taken of price changes, the increase in real per capita incomes has been 10-12% p.a. About 60% of this dramatic increase is due to increased rural production and the remainder to shifts in the terms of trade in favor of rural producers. While areas and households that were already relatively well off may have benefited the most, many poor areas and households have also enjoyed substantial income improvements. Sectoral Strategies 28. The rapid development of agriculture has been essential because 800 million people depend on agriculture for their livelihood; moreover, rising incomes elsewhere in the economy and the requirements of light indus- try have placed new demands on agriculture. Between 1978 and 1981, gross agricultural output at constant prices increased by 5.7% p.a.; despite poor weather in 1980 the growth rate was 2.7%, and in 1981 when China was again affected by severe droughts and floods, the growth rate rose to 5.7%. There has been a substantial diversification of the sector, with production of cash crops expanding rapidly and large increases in livestock and sideline production. Grain production has also increased since 1978 despite a decline in the grain area, but domestic grain requirements have increased more rapidly due to higher incomes and fast-growing requirements for live- stock feed. As a result, foodgrain imports have been expanding steadily. 29. The strong performance of agriculture in recent years is largely due to the combination of improved terms of trade for agriculture and other policy interventions and institutional changes that encourage local and institutional specialization according to comparative advantage. Of parti- cular importance have been the changes in the organization and management of rural collectives (para. 15). 30. Adjustment policy in industry has included increased emphasis on light and consumer goods industry rather than heavy industry (para. 16); stress on modernization of existing enterprises, particularly through importation of new technology; and energy conservation. Promotion of manufactured exports has also been necessary to pay for imported technology. These exports have been growing rapidly but still account for only 4% of gross industrial output, and imported equipment as a share of capital construction in industry has risen from 3% in 1978 to 26% in 1981. 31. Reforms in industry have focussed the attention of organizations and individuals on profits and efficiency (para. 15). Innovations have included profit retention schemes, piece rate wages, and bonuses, which for workers in state enterprises now average more than one month's pay. New - 8 - types of industrial organization include foreign partnerships, joint ventures between urban state industrial enterprises and rural communes, and industrial corporations with authority over a group of enterprises producing similar output. Charges on the fixed assets and working capital of state enterprises are intended to encourage them to use capital more productively. However, these reform measures have not yet been backed by price reform and enterprises still do not bear full responsibility for losses. 32. Since 1979 when energy conservation became a major policy issue, energy consumption has stagnated or fallen while NMP has grown by 10%. As a result, China has remained a net exporter of energy despite declines in energy production in 1980 and 1981. The fall in energy use per unit of output has been due in part to the changing structure of industry: heavy industry consumes about four times as much energy per unit of output as light industry, and heavy industry output grew very slowly in 1980 and declined in 1981. The Government has been stressing the importance of improved efficiency and energy savings within sectors and has been pursuing energy conservation through rationing and other administrative measures. 33. Market-oriented reforms and greater regional specialization call for expanded and more efficient domestic transportation and commercial systems. In the commercial sector, the real value of sales has risen rapidly and the role of markets in the allocation of resources has expanded. Collective and individual commercial activities have proliferated, filling gaps left by, and forcing improvements in, the state commercial system. Growth in the volume of freight transport slowed greatly in 1980, and there was virtual stagnation in 1981, indicating that bottlenecks in this sector remain severe. Development Issues and Prospects 34. Although changes in the system of economic management as well as in the structure of the economy will undoubtedly continue, a difficult period of transition lies ahead. After spending three decades pursuing a particular set of goals with particular instruments, the country will inevitably find it hard to switch to a path that is not only new for China, but also one that has been successfully followed by few other countries. Reform of the economic system will be especially difficult. The measures described above, though diverse in form, have a unity of purpose, namely to make the economy more efficient in the sense of both cutting costs and matching supply more closely with demand. But the attempt to reform parts of the economic system without a coherent overall program has also had some adverse consequences. Bureaucratic reform is under way but will likely be a lengthy and difficult process. 35. Constraints. China's efforts to improve its people's living standards will, in the coming decade, be subject to a tight set of interlocking constraints. Some of these are of long standing; they reflect the country's fundamental resource constraints, especially the shortage of agricultural land and the difficulty of increasing yields further. Others - 9 - are of more recent origin, however, and largely reflect the price that the country must still pay for more than a decade of waste and economic mismanagement starting in the mid-1960s. They include shortages of trained manpower, energy, and financial resources for new investment. 36. The food problem facing China in the 1980s is likely to be similar to that in the past, but it may be exacerbated by growing demand for feed- grain to support increased meat production. Grain output will continue to be constrained because of the extreme shortage of new cultivable land and the limited opportunities that remain for increasing yields. Although s'.b- stantial gains will probably be possible in the short and medium term through improved policies and management, the foodgrain balance will remain precarious and substantial food imports will have to be maintained. Main- taining a low population growth rate is also crucial. 37. In both rural and urban areas, the country's effort to modernize the economy will be seriously constrained by the lack of trained manpower. Despite considerable progress in basic education, technical and higher education has been neglected and was severely disrupted during the Cultural Revolution. Current enrollment in both universities and technical and voca- tional schools is one quarter of the average for other developing countries. Many teachers in advanced education are underqualified, curricula are outdated, and scientific equipment is scarce. 38. The outlook for energy production has recently deteriorated. Oil output peaked in 1979 at 106 million tons, dropped to 101 million tons in 19C1 and is likely at best to remain at about 95-100 million tons a year during the next few years. Coal output (which contributes about 70% of total commercial energy) was 620 million tons in both 1980 and 1981. It is unlikely to exceed 700 million tons in 1985 and about 850 million tons in 1990, even if high priority is given to this subsector. Growth of total primary energy production in the 1980s will thus not exceed 3% per year less than one quarter of the 1952-80 growth rate. 39. The prospects for economic growth in the 1980s will thus depend critically on reducing energy use per unit of output. In particular, the availability of oil for use as an industrial raw material will fundamentally influence growth prospects. The potential for energy savings is very large, as China is now among the world's most inefficient users of energy. In addition to substantial new investment, however, conservation will require fundamental reform of energy allocation procedures, incentives for reduced consumption and changes in relative prices, and indeed, a total change of thinking at the enterprise level on the way energy is used - all of which will be difficult and slow to implement. 40. The energy sector is already absorbing over 40% of industrial investment and very large capital outlays would be required in the next several years to accelerate the growth of energy output in the second half of the 1980s. Competing claims for investments in other sectors are consid- erable, especially those for badly needed urban housing and for relieving transport bottlenecks. The attempt to modernize the huge industrial sector - 10 - built upon outdated technology will also require enormous investment out- lays. Thus, notwithstanding the Government's effort to improve the alloca- tion and use of its financial resources, a high level of investment will need to be maintained in the 1980s to build a sound foundation for sustained growth over the longer term. However, investments in key sectors like energy and transport are presently caught between the Government's desire to reduce the saving rate (in order to accelerate the growth of consumption) and its loss of control over parts of the investment program as a result of decentralization and reform. 41. The Government's attempt to foster a much more open economy than in the past may be impeded by a shortage of foreign exchange. Domestic bottlenecks in the supply of certain agricultural and industrial materials, together with the need to purchase foreign technology (in the form of software as well as hardware), will make continued expansion of imports essential for growth and modernization. The rate of growth of export earnings depends critically on two uncertain parameters, namely the rate at which nontraditional manufactured exports can be increased and the degree of success in energy conservation. Even if energy conservation is fairly successful (growth in energy use at, say, three fourths of the GDP growth rate), oil exports will almost certainly disappear by the second half of the 1980s, and imports of energy may well be required, at least until new domestic production capacity is established. If the external economic environment improves, manufactured exports could grow, from a relatively small base, by 9-10% a year in constant prices during the decade. Nonetheless, declining energy exports will cause total foreign exchange earnings to grow by no more than about 2% a year in the first half of the 1980s and 8% a year in the second half. Thus the strong balance of payments situation in 1981, brought about mainly by restrictive measures (cutbacks in investment), masks serious medium-term constraints. 42. China's access to concessionary capital is limited: apart from what it might obtain from the Bank Group, concessionary capital is only likely to come from Japan and a few other bilateral donors and will likely average only $500-600 million a year during the 1980s. Quantitative projec- tions show that if China is to maintain reasonable growth and modernization and keep its debt service payments at a manageable level, then it needs to obtain the necessary foreign capital at an average interest rate substan- tially below the market rate. China also has a strong claim to concession- ary lending because it is still one of the poorer countries in the world. 43. For China, as for many other developing countries, the 1980s will be a difficult decade, and one whose problems will be compounded by errors made in the 1960s and early 1970s. But looking further ahead, China's econ- omic prospects appear favorable. By 1990, most new entrants to the labor force will have received some secondary education, and the skilled manpower deficit will have been reduced. Further progress will have been made in tapping China's large energy potential, and in using it more efficiently. - 11 - Continuation of recent manufactured export trends should generate sufficient foreign exchange for the Government to have more confidence in using foreign capital and be less concerned about its terms. If the country's immense wealth of human talent, effort and discipline can be combined with policies that incr,.ase the efficiency of resource use, China will be able, within a generation or so, to achieve a substantial increase in the living standards of its people. Whether this potential can be realized, however, will depend crucially on the success of the Government's program of reform and adjustment in the 1980s. PART II - BANK GROUP OPERATIONS IN CHINA 44. In view of the particular circumstances of China and the economic transition now underway, the Bank's relationship with China should have several broad objectives. Firstly, the Bank should offer China its consid- erable development experience and institutional knowledge. Moreover, working with the Bank represents one means for China to re-establish its position in the world community after its lengthy isolation. Secondly, the Bank should assist China in removing the major constraints on development - the shortages of energy, transport infrastructure, skilled manpower and modern technology. Even more important, the Bank can help the authorities to use these and other inputs more efficiently, by improving project analysis and investment control, as well as overall economic management and planning. Finally, the Bank should help the Government identify ways of reducing China's remaining poverty. Since the Government has been successful in meeting the basic needs of most of its people, these efforts should concentrate on increasing incomes in the poorest rural areas. 45. Since China's change of representation in the Bank Group in May 1980, five projects involving lending of $530 million have been approved. Two have been in education (University Development and Agricultural Education and Research), one in agriculture (North China Plain Agriculture), one in transport (Three Ports), and one in industrial development financing (Industrial Credit). Annex II contains a summary statement on loans and credits approved by September 30, 1982, as well as notes on the execution of the projects. Economic and Sector Work 46. The Bank's economic and sector work was initially designed to provide a basis of knowledge on the development and functioning of the Chinese economy. This work resulted in completion of a nine-volume introductory economic report in June 1981. A follow-up country economic memorandum analyzing developments over the past two years is now under preparation. In - 12 - addition, the Bank has initiated studies in several areas important for our understanding of the Chinese system, including rural finance and urban planning and management in Shanghai. 47. Other economic work is designed to assist China in its present effort to promote efficient use of investment resources, and more generally to introduce new methods of economic management and planning. As prepara- tion for the Industrial Credit Project, an appraisal manual has been developed with Bank assistance by the new financial intermediary, the China Investment Bank (CIB). The Bank is now helping to develop a similar manual for the Agricultural Bank of China (ABC). A program of economic research on China's development problems, aimed at the application of advanced analytical techniques, has begun in collaboration with Chinese economic research institutions in the areas of enterprise incentives and the study of structural change. 48. Sector studies will help inter alia to identify and prepare future investments. Some have been included in Bank-financed projects, e.g., agricultural development in Shandong province under the North China Plain Agriculture Project, containerization under the Three Ports Project, and agricultural manpower and research under the Agricultural Education and Research Project. A health sector review is reporting on rural health care delivery systems and health manpower development. Near-Term Lending 49. Work has begun on a range of projects, with emphasis on improved management and efficiency as well as on training. Several are in the key sectors of energy and transportation. In energy, the Bank's efforts will help to increase the supply of fuel and power. Petroleum projects would be onshore and emphasize training, field management and studies. The proposed project at Daqing, the country's largest and most productive oilfield, would help develop new reserves and introduce enhanced recovery techniques. A second petroleum project, at the Zhongyuan oilfield, would include both development and exploration. Other operations are proposed to support hydropower generation in southeast China and the development and management of large underground coal mines in Shanxi province. Support of transportation began through the modernization of container and coal handling facilities at China's three major ports. The Bank plans to finance further projects in ports and in railways where additional capacity is needed to transport coal from mines in Shanxi to the east coast. 50. In view of China's shortages of manpower with higher or technical education, the Bank will continue its support of education, notably the TV university, a pilot program of basic colleges, and another university development project. Support of agriculture will also continue through projects to develop presently uncultivated land in Heilongjiang province for - 13 - grain production, develop rubber cultivation in Guangdong province, and provide rural credit in two provinces with emphasis on improved project appraisal and institution-building. Besides the Industrial Credit Project, it is expected that industry would be supported through further loans to the China Investment Bank for light industrial firms for modernization and export projects. The Bank may also become involved in technical assistance and investment in support of energy conservation in industry. In health, a project would help improve rural health care services and medical education. PART III - THE OIL AND GAS SUBSECTOR /1 Introduction 51. China is the world's fourth largest producer of commercial energy, and its achievements in developing energy resources over the last three decades have been impressive. Production of coal has increased from some 60 million tons in 1952 to 620 million tons in 1981. During the same period, power generating capacity increased from about 2,000 MW to 67,000 MW. In 1981, about 310 billion kwh of power was generated, of which about 80% was thermal and 20% hydro. Oil production increased from about 0.1 million tons in 1950 to 106 million tons by 1979; about 20% of oil output is currently exported, generating roughly $4.75 billion, or one quarter of China's total foreign exchange earnings. This rapid development has made China the world's third largest consumer of commercial energy, behind the USA and the Soviet Union, but ahead of Japan. However, consumption per capita is only about 650 kg of coal equivalent (kgce) p.a., which is slightly above the average for developing countries (620 kgce). 52. These positive developments notwithstanding, the future prospects remain uncertain. While China might be able to remain self-sufficient in energy throughout the 1980s, it probably cannot sustain the economic growth rate achieved over the last two decades. The major oilfields, which together account for about 90% of China-s oil production, have peaked and entered a declining phase; no new discoveries have been made of a magnitude to offset this decline. In 1981, oil production fell to 101 million tons. Rapid expansion of the coal industry faces intractable problems in terms of investment, location and transportation. The remoteness of potentially major hydro sites from centers of consumption and the long gestation period of hydro projects preclude any sizable increase in hydropower's share of energy production in the 1980s. /1 For a broader discussion of the energy sector, see Annex E of Bank Report No. 3391-CHA, entitled "China: Socialist Economic Development." - 14 - Resource Endowment 53. China is well endowed with primary energy and has abundant resources in terms of coal, hydrocarbons, oil shale and hydropower poten- tial. Coal and lignite reserves are concentrated largely in the north and northeast, which represent about 70% of the total recoverable reserves in China (600 billion tons). While future plans call for increasing coal production significantly by such measures as opening new mines and increased mechanization, transport (essentially railroad capacity) appears to be the single most important constraint to achieving this objective. Reserves of oil shale in China are estimated unofficially at 400 billion tons. Current production of shale oil from the Liaoning and Guangdong mines is about 300,000 tons p.a. China's hydropower potential, among the largest in the world, is estimated at 1,900 billion kWh per year (present hydrogeneration is about 60 billion kWh). While geothermal phenomena are abundant in the mountainous southwestern part of the country, geothermal energy has not been developed to a significant extent in China and its role is likely to remain limited. As in other developing economies, non-commercial fuels such as crop residue and animal waste are used extensively, especially in rural areas. China pioneered and is now the leading producer of biogas. 54. Oil and Gas. Unofficial estimates of proven oil reserves range from 1.8 to 2.5 billion tons, while possible and probable reserves are currently estimated at 5-10 billion tons onshore and 4-8 billion tons offshore. Recoverable reserves of non-associated gas are currently estimated at 80 bil- lion cu m, about 90% of which is located in Sichuan Province. In addition, recoverable reserves of associated gas are estimated at about 50 billion cu m. Total recoverable gas reserves (130 billion cu m) are equivalent to over 110 million tons of oil. However, gas reserves may not have been adequately explored yet, and the ultimate recoverable reserves could be very much higher. 55. Over the last two decades, China has made considerable progress in exploiting these reserves. Although oil was discovered in China in 1897, annual oil production before 1950 was no more than 120,000 tons, of which about 50,000 tons was from oil shale. During the 1950s, exploration in northwestern China resulted in some small discoveries. After 1957, explora- tion began in northeastern and northern China and led to the discovery, in 1959, of China's largest oilfield in Daqing. This was followed by discoveries in Shengli and Dagang in 1964. In 1965, petroleum production reached 11.3 million tons, making China self-sufficient in oil. During the 1960s, the increase in oil production was relatively moderate; the major spurt came in the 1970s, with production increasing from 30 million tons in 1970 to 106 mil- lion tons in 1979. This increase came largely through development of the Daqing oilfield and, to a lesser extent, of the Shengli and Renqiu oilfields. The average annual investment in the oil and gas subsector over the last five years has been about Y 2.8 billion (representing about 7% of China's total annual capital construction investment). - 15 - Exploration Policy 56. Onshore Areas. Until the late 1970s, China was remarkably successful in implementing a policy of total self-reliance. However, the rate of discovery has recently been declining and, faced with the prospect of falling oil production, China has modified its exploration policy. It now proposes to undertake detailed seismic surveys around existing oilfields and to shift the focus of exploration from the north and northeast to the northwest, where an estimated 50% of China-s onshore recoverable reserves are located. However, the basins in northwestern China are remote and have extremely hostile weather and difficult drilling conditions; developing this area would require a quantum jump both in investment and in technology. China has secured some assistance from foreign companies in undertaking seismic surveys and exploratory drilling in particularly difficult areas and is considering inviting foreign companies to participate further in exploration and production, especially in these difficult areas. 57. Offshore Areas. China's seismic work and development of offshore structures in the Bohai area prior to 1979 made the limitations of its offshore technology apparent. Thereafter, in a major policy departure, China sought the active cooperation of foreign oil companies in these areas. Forty-eight foreign oil companies, from 12 countries, were invited to undertake geophysical and seismic work in over 420,000 sq km of China's offshore sedimentary basins. On the basis of these surveys, six prospective oil-bearing basins have been identified. 58. In early 1982, the Government promulgated regulations that would enable foreign oil companies to participate in exploring China's offshore basins. Further, the China National Offshore Oil Corporation (CNOOC) was created to invite and evaluate bids and enter into offshore petroleum agreements with foreign oil companies. The new regulations provide for petroleum contracts that make foreign oil companies bear the cost of all exploration investment and the accompanying risks. Once a commercial oil and/or gas field is discovered, both the foreign contractor and CNOOC will invest jointly in its development. Initially the foreign contractor will be responsible for developing and operating the field, but CNOOC may take over as the field's operator whenever it deems fit. The rights of the foreign contracting party to recover its investment and expenses and to receive remuneration for the petroleum produced would be specified in the contract. The first round of bidding, for an area of about 150,000 sq km, has already taken place, and considerable interest was evinced by foreign oil companies. Current and Anticipated Level of Oil Production 59. Over the past year, oil output has fallen by about 3% and, more important, production from the major oilfields has peaked. With no major discovery to offset this fall, China will need to rely increasingly on - 16 - infill drilling, enhanced oil recovery methods, exploring and developing peripheral reservoirs, and rapidly developing small discoveries. The Ministry of Petroleum Industry (MOPI) has initiated such actions, and efforts are under way to expand several oil fields. These actions may allow China to temporarily stem the decline and maintain annual oil output in the 95-100 million ton range up to 1985. However, beyond that, oil output from the major fields would be declining rapidly. Furthermore, while prospects for offshore discoveries are very good, oil from the offshore areas is unlikely to augment China's oil production significantly before 1990. Similarly, even if major discoveries are made in the northwest, intractable logistics make field development and oil transportation an extremely complex and time-consuming proposition. Thus, between 1985 and 1990, oil production may fall to 90 million tons p.a. Prospects beyond 1990 depend on the success of current initiatives in developing the northwestern region and offshore structures. Consumption Pattern 60. Rising oil production has increased the role of hydrocarbons in the Chinese economy (replacing coal, the traditional source of commercial energy), with the relative share of oil and natural gas increasing from about 2% in 1965 to over 20% in 1981. The major consumers of oil are the industry and commerce sectors (43%), followed by transport (25%) and power (20%). An unusual and wasteful feature of the consumption pattern is the direct use of 8 million tons of crude as fuel oil. This is partly attributable to the nonavailability of refining facilities close to the producing field, transportation constraints and the poor quality of crude. 61. Over the last 16 years, consumption of oil has been growing at an annual rate of about 13%. However, faced with falling oil and gas production, efforts are being made to decelerate this growth (consumption in 1981 was reported to be about 82 million tons against the peak of 90 million tons in 1978). However, a further reduction of consumption may not be possible without adversely affecting the country-s rate of economic growth. Substi- tution of coal for oil would require substantial investment in terms of transportation and extensive retrofitting. Similarly, once a production mode has been determined, the energy efficiency factor is locked in and major improvement in energy use cannot be secured without discarding the investment. Prices 62. A comparison between petroleum product prices in China and international prices (Annex IV) reveals that whereas products like motor gasoline, kerosene and diesel are priced near the international level, the average price of the reconstituted barrel works out at Y 39 ($22), which is below the international price ($28). This is largely because the domestic price of fuel oil is only about 30% of the international price. Domestic - 17 - prices of petroleum products have remained unchanged for 20 years. The State Prices Bureau is considering increasing the price of crude oil sold to refineries, from Y 100 per ton (at Daqing) to Y 175 per ton, but this increase may not be reflected in prices to end-users. The refineries sell petroleum products to the Ministry of Commerce, which is responsible for marketing the products. There is a price differential at every point, with the oilfields, the refineries and the Ministry of Commerce acting as profit centers for the State. The present pricing structure offers no financial incentive for oil-coal substitution, since fuel oil, in terms of calorific value, is cheaper than coal. However, the Government has had some succusj in reducing energy consumption and encouraging substitution of fuels through energy targets for individual enterprises and other administrative means. Administrative measures probably still have more influence than prices on energy use and production in the present Chinese system, but as decision making is decentralized, it will become increasingly important to ensure that price incentives reinforce rather than contradict administrative regulations. However, the Government believes that a solution to the underpricing of some important energy products can only be achieved over an extended period. Demand and Supply of Natural Gas 63. Gas production declined by about 13% between 1980 and 1981, when it amounted to 12.5 billion cu m, composed of about equal amounts of asso- ciated and non-associated gas. Non-associated gas fields in Sichuan Province, which is the major producing area and has been active for over 100 years, have now entered a declining phase. Similarly, with the decline of oil production in the major oilfields, production of associated gas would also decline. A fall in gas production would inevitably stimulate demand for liquid hydrocarbons, which makes it necessary to explore and develop non-associated gas prospects. About 30% of natural gas is used for fertil- izers, about 10% for petrochemicals and synthetic fibers, and 60% as fuel, of which about 12% is used for thermal power plants. Institutions 64. The Ministry of Petroleum Industry (MOPI) generally oversees all activities in the oil and natural gas subsector, including policy making and overall planning, exploration, production, distribution, transportation, research/design and training. Created as a bureau in the Ministry of Fuel Industry in 1949, it became a full ministry in 1955 and oversaw the opening of the Daqing oilfield in 1959 as well as subsequent discoveries. The petroleum industry has been in a state of continuous change since the 1970s; this has blurred the lines of responsibility and created considerable overlap of function in exploration and refining between MOPI, the Ministry of Geology and the Ministry of Chemical Industry. Some of these problems may be resolved as the Government's program for reorganization is implemented. - 18 - 65. The Daging Petroleum Administrative Bureau (DPAB) is responsible for development of the Daqing oilfield. DPAB's president is assisted by a senior vice-president (operations) and six vice-presidents in charge of petrochemicals, capital construction, drilling and exploration, oil produc- tion, administration, and scientific research. The president of DPAB is also the mayor of Daqing, and in that capacity he heads the civil adminis- tration and oversees all other socioeconomic activities (including health, housing, agriculture and education). DPAB used to be answerable to both the provincial government and MOPI, but as of 1980, MOPI is almost fully responsible for overseeing the performance of DPAB. 66. DPAB-s functions are essentially managerial, with specialized companies responsible for various oilfield activities such as exploration, drilling, surface construction, production, maintenance, and design and research. The companies follow the standard Chinese organizational pattern, namely, they are divided into brigades and the brigades in turn into teams. The brigade leader and his staff (usually 10-15 specialists) are professio- nals with managerial responsibilities. A team typically consists of 50-100 skilled workers, one of whom is designated the team leader. 67. Production and net income targets are set annually by MOPI. These targets in turn form the basis for DPAB-s budgets for operation, working capital and investment on a one-year basis. DPAB enjoys considerable operational autonomy, but far less financial autonomy. 68. DPAB and its predecessor, the Songliao Directorate, have been so successful in developing Daqing that it has long been considered the techno- logical capital of China and a model of industrial growth. Without external assistance and despite outdated technolgy, Daqing was developed into one of the largest oilfields in the world and a major industrial complex. Manage- ment at all levels is dedicated, competent, innovative and remarkably able in pursuing and achieving assigned tasks. The major deficiencies are a result of the oilfield's development in technological isolation, with methods adopted and decisions taken on the basis of extremely limited information. Sector Issues and the Role of the Bank 69. From available evidence it is clear that China at least in the medium term faces the prospect of declining oil production. Sector strategy over the longer term would require China taking steps to increase its exploratory efforts, especially in the offshore and the northwest onshore areas, undertaking fuller development of coal and hydro potential and improving the efficiency of energy use and replacing oil by coal in indus- try. Critical as these measures are, they do not represent a medium-term option. Coal mines would have to be modernized and the transportation constraint resolved; while prospects of offshore oil discoveries are rated as high, oil in significant amounts would be secured only after an extensive period of exploration and development; similarly all available projects for developing hydro potential have a long lead time. In fact investment in these areas is unlikely to yield significant results during the 1980s. - 19 - 70. China is now facing problems typical to all oil producers, that is, being required to undertake exploration and production under increasingly dif- ficult and complex conditions. Its capabilities in this regard are limited. Because of an extended period of technological isolation during the develop- ment of iza oil industry, China has not been successful in discovering petro- leum in complex geological environments nor has it developed the technological capability to increase the recovery of oil from existing fields. Much of the equipment used in the fields such as Daqing is already obsolescent; field practices such as drilling, cementing, casing and formation logging are out- dated and require an in-depth evaluation. China needs to upgrade the quality of its seismic work, data processing, reservoir engineering, and techniques relating to enhanced oil recovery. In addition it needs to import modern oil- field equipment and technology related thereto and train oilfield staff in these new methods. The Government is seeking the assistance of foreign oil companies in exploring and developing its offshore areas. This, in addition to developing its offshore structures, would, over a period of time, result in the transfer of offshore technology relating to seismic work, exploration, field development, etc. In the onshore area, especially in regard to the discovered and developed oilfields, the Government expects the Bank to act as a conduit for similar transfer of technology. 71. Initially Bank lending in the petroleum sector will have three basic objectives: first, to develop known hydrocarbon bearing structures in order to partially offset the anticipated decline in oil production; second, to introduce modern technology to the Chinese oil industry; and third, to train and upgrade the skills of China's oil industry personnel in current oilfield practices. The proposed project would be the first Bank lending operation in the petroleum sector and aims at providing critical inputs in these areas. Bank involvement in the medium term would be aimed at developing rapidly the small oilfields which have already been discovered, undertaking seismic surveys in the vicinity of existing oilfields, and identifying and initiating enhanced oil recovery programs. Bank's role in the longer term would be determined taking account of the role of other sources of finance and expertise in Chinese conditions. PART IV - THE PROJECT 72. The project was identified in September 1981 and appraised in February/March 1982. Negotiations were held in Washington from November 29 to December 6, 1982. The Government of China was represented by Mr. Wu Shengyuan, Chief of World Bank Division II, Ministry of Finance and DPAB by Mr. Ren Kebang, Deputy Chief, General Office, DPAB. A Staff Appraisal Report (No. 3949-CHA, dated December 29, 1982) is being distributed separately to the Executive Directors. Supplementary data are provided in Annex III. Project Area 7:3. Daqing oilfield is located in the Songliao sedimentary basin, located mainly in Heilongjiang Province in northeastern China. Daqing's current production of about 51 million tons of crude p.a. accounts for one half of China's total hydrocarbon production. Since its discovery, this oilfield has produced more than 530 million tons of oil. The original oil-in-place in the Daqing reservoirs has been estimated at 3,000 million - 20 - tons, of which 30% or about 900 million tons is likely to be recoverable with China's current field production techniques. Higher recovery rate may be achieved if the reservoir responds favourably to one of the many enhanced oil recovery methods. There are seven high culminations, or oilfields in Daqing, with three distinct and independent types of reservoirs (the deepest of which is known as the Gaotaizi or G reservoir), each consisting of a series of interbedding layers of sand and mudstones. While the G reservoir has been exploited in most of Daqing's fields, it has yet to be developed in the Sa-ertu oilfield. Project Objectives 74. The project has three main objectives. The first is to develop the G reservoir in the Sa'ertu oilfield. Production from the G reservoir is expected to reach a peak of 3.8 million tons of crude per annum and augment the recoverable reserves of Daqing oilfield by at least 32 million tons of oil, thereby partially offsetting the overall production decline at Daqing. The second objective is to use this loan as a vehicle for introducing modern technology into the Chinese petroleum industry, largely through the import of equipment and establishment of new, operationally oriented research labor- atories. The third objective is to upgrade the skills of oil industry per- sonnel and to improve oilfield practices. Training would be provided formally at newly established training centers, through overseas study, and on-the-job training under service contracts concluded with the purchase of sophisticated equipment. Furthermore, the project studies would contri- bute to meeting all three objectives, by leading to increased recovery rates and improved safety and field practices, as well as covering pre-investment work for future petroleum projects, including preparation of the Zhongyuan Wenliu Petroleum Project. Project Description 75. The proposed project would comprise the following components. (a) Wells: drilling and completing about 615 oil wells and 206 water injection wells to a depth of approximately 1,250 meters, and equipping them with the necessary surface and subsurface equipment. (b) Oil Production, Treating and Transportation Facilities: installing about 615 flowing and pumping wells, 71 production metering stations and 18 oil pumping stations; laying about 760 km of flow lines; and expanding the capacity of the three existing dehydration stations to accommodate additional production from the Gaotaizi reservoir. (c) Associated Gas Gathering, Treating and Handling Facilities: installing about 13 compressor stations; laying about 150 km of gas lines; and installing three glycol gas dehydration stations and the main gas compressor station. - 21 - (d) Water Injection Facilities: installing three water injection stations; expanding the existing oily water treating stations; and laying over 100 km of high-pressure water injection lines and about 40 km of water supply and drainage lines. (e) General Utilities: installing three electric substations with associated equipment and distribution lines; constructing about 35 km of paved roads; and constructing office buildings and lodging facilities. (f) Computer Center and Laboratories: providing (i) a computer cent'er with hardware, software, peripheral equipment and services; (ii) an operationally oriented research laboratory for special and conventional core analysis, and imbibition and wettability; (iii) a complete laboratory to evaluate enhanced oil recovery methods; and (iv) a field laboratory for oil, gas and water gathering, treatment and transportation. (g) Seismic Survey Equipment: providing equipment for seismic survey teams to explore the periphery of the greater Daqing oilfield. (h) Training: establishing a training center in Daqing field for skilled workers with an annual capacity of 2,000 and equipping it with a drilling rig, surface production equipment, simulators, visual aids and a library; and establishing a training center for professionals at the Petroleum Institute in Daqing with an annual capacity of 500 and providing the necessary laboratory, teaching materials and foreign instructors. (i) Studies: providing experts and performing studies in the following areas: (i) drilling and completion practices; (ii) Gaotaizi reservoir geology and engineering; (iii) fluid flow process design and optimization of surface production facilities; (iv) design of curriculae and teaching methods for training; (v) oilfield safety practices; and (vi) enhanced oil recovery. (j) Future Project Preparation: undertaking a three dimensional seismic survey in the Wenliu oilfield and interpreting its results; commissioning a feasibility and design study of a liquefied petroleum gas plant in Zhongyuan; and undertaking pre-investment studies for the preparation of other petroleum projects. Project Implementation 76. DPAB will be responsible for implementing the project components related to the Daqing oilfield, while MOPI will be responsible for all pre-investment studies, including preparation of the Zhongyuan project. - 22 - Production Company No. 1 (PCN1), one of DPAB-s seven production companies, will be responsible for implementing the project component that would develop the Gaotaizi reservoir. The component was designed by Daqing's Research and Design Institute, which will modify it in accordance with the results of the reservoir study. Development drilling will be carried out by the Drilling Company No. 2 and surface facilities will be installed by a specialized construction company. Drilling and completion services will be subcontracted by the Drilling Company No. 2 to the Drilling Services Company and the Downhole Servicing Company, respectively. 77. PCN1 is a well-managed company. Its normal annual program for drilling new wells exceeds the program proposed under the project. Similarly, the relevant drilling services and surface construction companies have the requisite experience and management capabilities to carry out effectively their tasks under the project. However, to coordinate and monitor this component, a special project team will be established in PCN1. Assurances have been obtained that DPAB would establish a Project Unit headed by a Deputy Director in PCN1 by March 31, 1983 (draft Project Agreement, Section 2.15). Assurances have also been obtained that project progress reports with agreed format and content would be furnished to the Bank (draft Project Agreement, Section 2.05). 78. The major thrust of the project is to induct new technology, refurbish research facilities, evaluate and improve field practices, and upgrade the level of training. Assurances have been obtained that DPAB would pursue these aims by undertaking the following studies/actions under terms of reference satisfactory to the Bank, using qualified consultants (draft Project Agreement, Section 2.02): (a) a Gaotaizi reservoir study to devise the optimum plan for further development of the field; the study will be completed by December 31, 1983 (draft Project Agreement, Section 2.08); (b) a four-stage feasibility study of enhanced oil recovery to identify the optimum method(s) for the Daqing field. The first three phases of the study will be completed by December 31, 1983, and the fourth phase consisting of field pilot application by December 31, 1985 (draft Project Agreement, Section 2.09); (c) a review of process flow design and optimization of surface facilities, to be completed by July 31, 1983 (draft Project Agreement, Section 2.10); (d) a study of drilling and completion practices to develop a package of field practices consistent with the needs of Daqing field and modern petroleum technology. The study would be completed by May 31, 1983 (draft Project Agreement, Section 2.11); and - 23 - (e) establishment of two training centers, by October 1, 1983, one for professionals and the other for skilled workers (draft Project Agreement, Section 2.14). A study of training curricula and teaching methods would be carried out by January 31, 1984 (draft 3roject Agreement, Section 2.12). DPAB will review the results of these studies with the Bank, and will develop and implement agreed action plans. Ecology and Safety 79. DPAB's drilling and production operations pose minimal threat to the ecology. Oil and liquid wastes would be the major concern, but all wastes are kept in closed systems and fully treated before disposal. On the other hand, current safety measures in the Daqing oilfield appear inadequate. Drilling rigs lack blowout preventers and explosion-proof lights; there is inadequate care and protection of electric power cables; and the derrick floors are dirty and poorly organized. Fire prevention equipment is minimal and seems insufficient to prevent or contain a major oil fire. The few safety regulations that exist are seldom enforced, and the number of accidents is relatively high. Assurances have been obtained that DPAB would complete by June 30, 1983, with the assistance of consultants, a study of safety measures, review the study's findings with the Bank, and develop an action plan satisfactory to the Bank to improve safety in its operations (draft Project Agreement, Section 2.13). Project Costs and Financing 80. The project costs, including the capitalized front-end fee, is estimated at $674.3 million equivalent, of which $228.4 million or 34% represents the foreign exchange component. A physical contingency of 7% was applied to the cost of all imported equipment and materials and of 15% to all local costs. The basic cost estimate is based on 1982 prices; price esca- lation for both local and foreign costs has been assumed at 8% for FY82 and FY83, 7.5% for FY84, 7% for FY85 and 6% for FY86. In estimating the cost of expatriate consultant services (466 man-months), a man-month rate of $17,000 has been assumed for personnel based in the home office and $20,000 (inclusive of travel and subsistence) for staff assigned to China. These rates are deemed to be both reasonable and in line with current charges prevailing in the petroleum industry. The cost of service contracts for highly specialized equipment is included in equipment costs. 81. The Bank loan of $162.4 million, including a front-end fee of $2.4 million, represents 71% of the foreign exchange component and 24% of the total project cost. The remainder of the foreign exchange component ($66 mil- lion) represents the cost of tubular goods; these would be procured using suppliers' credits if available, or be financed by the Government from its own resources. The Government would meet all local costs, equivalent to $445.9 million. $153.9 million of the Bank loan would be onlent to DPAB on the same terms and conditions. DPAB will bear the foreign exchange risk. - 24 - Procurement and Disbursement 82. Goods and services financed under the proposed Bank loan would be procured through international competitive bidding (ICB) in accordance with Bank Guidelines, limited international tendering (LIT), or direct purchase. LIT will be used to procure highly specialized or proprietary equipment, which may account for about 50% of the total loan. Goods and materials costing less than $150,000 equivalent may be procured through direct purchase up to an aggregate amount of $5 million (3% of the Bank loan). All bid packages having a value of $500,000 or above would be subject to Bank review prior to contract award; other packages would be reviewed subsequently. Drilling and construction works would be carried out by force account (DPAB's own force) with the Bank financing only goods and services. 83. The proposed Bank loan of $162.4 million would finance 100% of foreign expenditures and 100% of local expenditures ex-factory (if procured locally through ICB) for all equipment and materials (except casing and tubing). The loan would also finance 100% of foreign expenditures for foreign contractor/consultant's works and services. There would be a retroactive financing of up to $7 million for the three dimensional seismic survey, which has already been contracted by the Government for the preparation of the second petroleum project. Disbursement of the Bank loan for the production stations and the enhanced oil recovery field pilot application is contingent upon completion of the relevant design/optimization and feasibility studies respectively and their review with the Bank. The specific conditions of disbursements are that: (a) the first three stages of the study on enhanced oil recovery be completed and the findings reviewed with the Bank prior to any disbursement for implementation of the field pilot application (draft Loan Agreement, Schedule 1, para. 4(b); and (b) the study on process flow design and optimization of surface facilities be completed, the findings reviewed and the plan agreed upon with the Bank prior to any disbursement for the production stations (draft Loan Agreement, Schedule 1, para. 4(c)). Financial Aspects, Accounts and Audits 84. DPAB is operating in a centrally planned economy in which all the factors of production are tightly controlled. Fundamental differences exist between some of DPAB's practices and the financial/accounting practices of commercially oriented petroleum enterprises. DPAB's production is marketed as directed, and at prices fixed by the Government. DPAB-s performance is currently measured on the basis of product output under given budget parameters rather than profitability. DPAB is required to transfer all net income and 50% of its annual depreciation to the Government. The Government covers the approved cost of exploration and makes specific contributions to development. - 25 - 85. Within the context of financial arrangments in China, DPAB's finances are satisfactory. DPAB has consistently produced large surpluses and, over the last three years, its contributions to the Government amounted to some $2 billion p.a. DPAB-s fiscal contributions would have been substantially higher if the state sales tax (about $435 million) and profit on DPAB's exports of crude had been taken into account. DPAB has not yet incurred any long-term debt. It has a very high self-financing ratio and over the next five years is expected to finance from its internal funds over 80% of its investment and field maintenance program ($4 billion). 86. The DCF financial rate of return on the Gaotaizi reservoir development component is estimated at 36% (in real terms) over the project's life. Like other oilfields that have been producing for over 20 years, DPAB will incur increasingly higher costs in oil extraction. Nevertheless, DPAB's operating ratio is low, presently about 30%, and with the 75% crude price increase expected to become effective in FY84 (from Y 100/t for Daqing to Y 175/t), DPAB is projected to remain a significant fiscal provider for the Government. 87. Financial practice in China places heavy emphasis on the annual budget; longer term financial planning is generally not undertaken. However, given the uncertain rate of oil and gas recovery and the related costs of extraction, it would seem prudent for MOPI to extend the horizon of financial planning in the industry, so that it can serve as a management tool. It is recommended that DPAB be used as a trial case, given its satisfactory record of short-run financial management. Assurances have been obtained that DPAB shall consult with the Bank each year on PCN1's current and future finances, including the trend of production costs, budget variance analysis, future investment program, and related financing arrangements (draft Project Agreement, Section 4.04). 88. Present accounting practices in China do not provide for an external audit of such scope and depth as to meet internationally accepted standards. The Ministry of Finance (MOF) is currently setting up an independent audit group within the Ministry to review and certify the statements of all state-owned enterprises. Regulations on auditing will be formulated, and the independent audit group could in the near future be transferred to the jurisdiction of the State Council. Technical assistance is being provided for the group by several organizations, including the UN, and through specific bilateral aid. While the project account would be fully audited by MOF, audit of DPAB would initially be limited in scope. However, as the auditing group develops, this would become a full audit in accordance with generally accepted auditing standards. Assurances have been obtained that DPAB would keep separate project accounts, have the project accounts and PCNI's accounts audited by an independent auditor acceptable to the Bank, and submit to the Bank financial statements and auditor's reports on such accounts and audits within 6 months after the end of each fiscal year (draft Project Agreement, Sections 4.01 through 4.03). - 26 - Benefits and Risks 89. The main quantifiable benefit of the project would be the incre- mental supply of oil and gas. Production from the Gaotaizi reservoir is expected to reach a peak of 3.8 million tons of crude and 161 million cubic meters of gas p.a. The economic rate of return for the project is estimated at 91%, and the net present value, at a 12% discount rate, amounts to $2.4 billion over the life of the project. These values are high partly because this project benefits from the sunk costs of exploration in the Daqing oilfield. The project utilizes the least cost method for developing the reservoir, and the attractive return expected from the project makes it a high priority in the sectoral context. A sensitivity analysis indicates that in the worst-case scenario, where the project is delayed by one year, incurs a 20% cost overrun and achieves only 70% of the base case production, the rate of return would still be a highly satisfactory 58%. 90. In addition to the quantifiable benefits, the principal objective and benefit of the project is the transfer of technology. This would be achieved through the import of modern equipment, the buildup of operational research capability, and technical assistance for undertaking various studies. The skills of workers and professionals would be upgraded through training provided under the project. This should lead to improved operational practices, as well as ensuring that workers can handle the sophisticated equipment purchased as part of the project. 91. The project carries the operational risks which are inherent to the petroleum industry. The inadequate safety practices in drilling operations and the absence of blow-out preventers increase the risks to human life and equipment. To attenuate these risks, the project would include a review of DPAB's safety practices. In addition, the utilization of modern equipment and the provision of technical assistance for various studies and training would help reduce operational risks. 92. The project also involves geological uncertainties. The Gaotaizi reservoir has been penetrated by over 1,000 wells drilled to exploit other reservoirs in the Sa'ertu field. Such a large number of control points would normally provide enough assurance of the recovery rate, but the geological conditions of the reservoir make it difficult to estimate recoverable reserves; these could vary from over 50 million tons to 30 million tons or less. However, the project remains economically attractive even with the lower, more conservative estimates. PART V - LEGAL INSTRUMENTS AND AUTHORITY 93. The draft Loan Agreement between the People's Republic of China and the Bank, the draft Project Agreement between the Bank and the Daqing Petroleum Administrative Bureau, and the Report of the Committee provided for in Article III, Section 4 (iii), of the Articles of Agreement of the Bank are being distributed to the Executive Directors separately. - 27 - 94. Special conditions of the project are listed in Section III of Annex III. Special conditions of effectiveness are that China's State Council shall have approved the Loan Agreement and the Project Agreement; and that a satisfactory subsidiary loan agreement shall have been signed between the Government and DPAB. Conditions of disbursement are that: (a) the first three stages of the study on enhanced oil recovery be completed and the findings reviewed with the Bank prior to any disbursement for implementation of the field pilot application; and (b) the study on process flow design and optimization of surface facilities be completed, the findings reviewed and the plan agreed upon with the Bank prior to any disbursement for the production stations. 95. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI - RECOMMENDATION 96. I recommend that the Executive Directors approve the proposed loan. A. W. Clausen President Attachments January 6, 1983 Washington, D.C. -28- ANNEX I Page 1 of 6 CuINA PEOPLE'S RP. Or - SOCIAL INDICATORS DATA SNEET CINA * EFER~ EE GROUPS (WEICETED AVAGES L.AaDAREA (T SA K..) - 4OST RECENT ESTIMATE)- TOTAL 95I.GST uEEN LW NCmE KIDDLE INCE AGRICULTURAL 3184.0 1960 /b 1970 Ib ESTINATE /b ASIA & PACIFIC ASIA 6 PACIFIC GN? PEM CAPITA (USM) .. .. 290.0 261.4b 890.1 ENE~GY CONSUMPTION PE1 CAPITA mixas ol Oan-lm"M ) 559.9 434.9 733.6l 448.7 701.7 POPULATION AND VITAL STATISTICS ULTION, MID-YK ZIM M16) 672865.0 815253.0 976735.0 ~RBAN 0PULATIOm (PERCENT o TOTAL) .. 12.0 13.2 17.3 32.4 POPULATION OJECTION POPULATION In TEA 2000 (NILLIONS) 1245.2 STATIONA POPULATION (NILLIDM) 1570.2 YEAK STATIONAAX POPULATION IS £A n 2070 POPULATION DENMITT PER SQ. K. 70.4 85.3 100.9 158.1 255.9 PR SQ. m. A~CULTUMAL LAND 211.8 253.7 302.9 355.9 1748.0 POPULATIOM AG STEUCIUR (PERCENT) 0-14 T". .. .. 32.3 36.8 39.9 15-64 YRS. .. .. 63.7 59.7 56.8 65 YRS. AND A8OME .. . 4.0 3.5 3.3 POPULATION (aT RATE (PuCENT) TOTAL 2.0 1.9 1.81d 2.0 2.3 URBAN .. .. 2.8 3.3 3.9 CEum BIRT RATE (PER TSUSAND) 40.1l 39.6/ 21.1 29.3 31.8 C=UDE MATH RATE (PER TMUSAND) 13.6 9.6Z/ 7. 11.0 9.8 GROSS REPRODUCTION RATE .. .. 1.4 2.0 2.0 FAMILY PLANNING ACCEPTORS, ANUAL (TDSAM) .. uSES (PuENT 07 aNATrn WOEN) .. .. .. 19.3 36.3 POOD AND NUTRITION INDEE 07 P000 PIO®UCTION ~ PER CAPITA (1969-71-100) .. 100.0 117.0 108.1 115.6 PER CAPITA SUPFLY op CAREs (PERCENT O REQURENEMTS) 86.0/g .. 103.0 97.3 106.4 PROTEINS (GAS PR DAT) 58.07 .. 62.6 56.9 54.4 OF WoICu ANINAL AND PULSE .. .. 26.0 20.0 13.9 CBILD (AGES 1-4) MRTALITY RATE .. .. 4.51b 10.9 6.7 HEALTH E EPECTANCT AT siRTH (TEAS) .. .. 64.0/h 57.8 59.8 INFANT MORTALTy RATE (PER TNOOSAND) .. .. 56.0/h 89.1 63.7 ACCESS TO SAPE WATER (PERCENr oP POPUIATION) TOTAL .. .. .. 32.9 32.0 URBAN .. .. .. 70.7 51.9 RURAL .. .. .. 22.2 20.5 ACCESS TO =RETA DISPOSAL (PECENT o POPULATION) TOTAL .. .. .. 18.1 37.7 URZAN .. .. .. 72.7 65.7 RURAL .. .. .. 4.7 24.0 POPULATION PER PYSICIAN 3009 8/* i 1709.1/1 1096.2/1 3297.8 8540.4 POPULATION PER NURSING PERSON 287.1 538.8/i 483.2i 14929.3 4829.4 POPULATION PER HOSPITAL BED TOTAL 2142.5/ 737.8 492.8 1100.4 1047.5 URBAN .. .. 172.1 301.3 651.6 RURAL .. .. 702.3 5815.7 2597.6 AVNISSIONS PER HOSPITAL BED .. .. .. ... 27.0 HOUSIN AVERAGE SIZE O HOUSEELD TOTAL .. .. URBAN .. .. RURAL .. .. AVERAGE NUMBER O PERSONS PER RD01 TOTAL .. .. URBAN .. .. . .. RURAL .. .. ACCESS TO ELECTRICITT (PERCENT OF OWELLINGS) TOTAL .. .. URBAN .. .. - 29 - ANNEX I Page 2 of 6 CHINA, PEOPLE-S REP. OF - SOCIAL INDICATORS DATA SHEET CHINA REFERENCE GROUPS (WIGMTED A jjAES - MST RECENT ESTIMIATE)- MOST RECET LOWd INCOM(E KIDDLE TICaE 1960 /b 1970 /b ESTIMATE /b ASIA & PACIFIC ASIA A PACIFIC EDUCATION ADJUSTED EROLIENT RATIOS PRIMARY: TOTAL 102.0 103.0 118.0 97.4 96.2 ME .. .. 111.0/k 101.0 99.8 FEMALE .. .. 114.0-k 87.8 92.1 SECONDARY: TOTAL ** ** 79.0 53.0 37.6 ALE .. .. 92.0 63.8 41.1 FEMALE .. .. 65.0 41.3 36.1 VOCATIONAL EROL. (Z OF SECONWART) .. .. 2.4 1.7 20.8 PUPIL-TEACHER RATIO PIMAY .. .. 27.0 37.7 35.5 SECONDARY ** .. 19.0 20.2 25.0 ADULT LITERACY ATE (PERCENT) .. .. 66.0 52.1 73.1 CONSUMPTION PASSENGER CARS PER THOUSAND POPULATION ** ** ** 1.5 9.8 RADIO RECEIVERS PER THOUSAND POPULATION ** ** ** 35.4 116.5 TV RECEIVERS PER THOUSAND POPULATION ** ** .. 3.2 37.6 NEWSPAPER (-DAILY GENERAL INTEREST') CIRCULATION PER THOUSAND POPULATION .. .. .. 16.4 53.7 CINEMA ANNUAL ATTENDANCE PER CAPITA .. .. .. 3.6 2.8 LABOR FORCE TOTAL LABOR FORCE (THOUSANDS) 236602.4Ltj 339960.5I 403163.1L. FENALE (PERCENT) ** ** ** 29.5 33.6 AGRICULTURE (PERCENT) .. .. 71.0 70.0 52.2 INDUSTRY (PERCENT) .. .. 17.0 15.0 17.9 PARICIPATION RATE (PERCENT) TOTAL 37.0/e 41.7 41.8 40.0 38.5 MALE ** ** ** 51.8 50.5 FEMIE ** ** ** 23.8 26.6 ECONMIC DEPENENCT RATIO .. .. 0.9 1.0 1.1 INCOME DISTRIBUTION PERCENT OF PRIVATE INCOME RECEIVED 8Y HIGHEST 5 PERCENT OF HOUSEHOLDS .. ** HIGHEST 20 PERCENT OF HOUSEBOLDS .. ** LonEST 20 PERCEST OF HOUSEDLDS .. .. LOWEST 40 PERCENT OF OUSEHIOLDS .. * POVERTY TARGET GROUPS ESTIMATED ABSOLUTE POVERTY INCONE LEVEL (US$ PER CAPITA) URBAN .. .. .. 133.8 194.7 RURAL .. .. .. 111.5 155.1 ESTIMATED RELATIVE POVERTY INCOE LEVEL (US$ PER CAPITA) Uan .. .. .. .. 178.2 RURAL .. .. .. .. 164.9 ESTIMATED POPULATION 3E1 POVERTY INCOME LEVEL (PERCENT) URBAN .. .. .. 43.8 24.4 RURAL .. .. .. 51.7 41.1 Not available. Not applicable. NOTES * All data exclude Taiwan, China. /a The group average- soreach indicator are populatio-weighted arithmetic amean. Coverage of countries among the indicators depends on availability of data and is not uniform. lb Unlese otherwise noted, data for 1960 refer to any year between 1959 and 1961; for 1970, between 1969 and 1971; and for Host Recant Estimate, between 1978 and 1980. /c Country estimate is 664 kilogram of coal equivalent. 7d Latest estimate of annual growth of population is 1.22. 1957; /f Including barefoot doctors; & Bank crude birth and death rate estimates for 1979 were higher than the official data. The official rates have been adjusted accordingly; L Bank demographic analyses utilize a higher eastiate of the crude mortality rate than the 6.2 that is officially given. The values of infant and child mortality shown hers, based on the Bank-s analyses, are thus higher than use of the official figures would indicate; and the estimate here of life expectancy is lower than the official figure of 68.2 years; /I Excluding traditional medical doctors. 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Ia r明2．ふ昌＝日日日ムに昌■□昭日d Pq酬U.t10加hユ。り曲－加に． r四り日1て，［肥■園国uり国1ぐ－民no－目dM目 襼関監h飼日co明叩園d . dl叩で町n代加目園に．伊館tバ．h. u，垣hta加田Lh 声川肥‘ !a■』よア’．加り叱館竹園■d.. 警簶霧祭絵惣器発醤先汽器農鷲沿翌－ 陣民－t‘嚇．。tヒ加広でr.t甲日昭tまリ田口0声国Uに加図ロ． ム昭r.&. d加p開ょ朗，ェ月昭よりd日 し加に目Lk陽‘昌口■』日d d加利馴A&d名山。肥馴嘱名国園園名Lて図日召田園■島． q産b日■nり■昭呂田昭昌 aロ目り田』K．日り国叱町bフ昭t．トb目籵富日．y.t図■国ot c加u.．。どpLにprふh飼らロd .1園d→ 響畼器搭合駿岩ぶ霊‘ごニ？てr：にr：ごLニ堅昭加叫PいトEc一にて嵩フにニ喫。豊農笠為ー‘ 聖貿盗溌識器語緩監ぶプ訟ニ：LZに．?&pこ笠に考ぶニ1か期y旧2 汽関r－切園』関園広11．『孟日日－ - 31 - ANNEX I Page 4 of 6 Population: 977 million (mid-1980) GNP per capita: US$290 (1980) CHINA - ECONOMIC INDICATORS Annual Growth (%) at Constant Prices 1957-70 1970-77 1978 1979 1980 1981 Production Gross (5 tput Agriculture 2.2 3.4 9.0 8.6 2.7 5.7 Light industry 8.3 7.8 10.8 9.6 18.4 14.1 Heavy industry 11.6 9.3 15.6 7.7 1.4 -4.7 Net Material Product (NMP) 5.2 4.8 12.4 7.0 6.9 3.0 1957 1970 1977 1979 1979 1980 1981 Prices Retail price index (1970-100) 92.2 100.0 102.7 103.3 105.4 111.7 114.4 NMP deflator (1970-100) 90.7 100.0 99.6 100.4 105.1 106.5 109.6 Exchange rate (Y/US$) 2.46 2.46 1.83 1.66 1.54 1.50 1.71 Amount 1981 Shares of GDP Average Annual Growth at Constan t Pr ices National Accounts ($ billion) 1957 1979 1981 1985 1990 1957-70 1970-79 1979-81 1981-85 1985-90 /a /a /a GDP 263.2 100.0 100.0 100.0 100.0 100.0 5.8 5.8 4.9 4.1 4.2 Agriculture 91.4 31.4 34.7 33.3 31.4 1.6 3.2 4.2 3.0 3.0 Industry 115.5 43.7 43.9 44.9 46.6 12.1 8.9 7.7 4.6 5.0 Other 56.3 25.0 21.4 21.8 22.0 3.5 4.3 -3.1 4.5 4.5 Consumption 185.0 76.4 69.8 70.3 73.8 76.2 2.7 5.4 5.0 5.3 4.9 Investment 76.5 23.2 31.1 29.1 27.5 25.0 9.8 6.8 2.1 2.6 2.3 Exports GNFS 24.4 3.7/b 6.0/b 9.2 8.5 10.0 1.6/b 8.0/b 23.1 1.7 7.8 Imports GNFS 22.7 3.5Tb- 7.07-b 8.6 9.8 11.2 2.3Tb- 9.4Tb- 9.3 7.3 7.1 National savings 78.5 23.6/c 31.5 29.8 26.3 24.3 3.9 0.9 2.6 As % of GDP Public Finance 1957 1979 OPT Current revenues (excluding foreign 28.7 27.3 21.1 borrowing) Current expenditures 15.1 17.0 15.6 Surplus (+) or deficit +13.6 +10.3 46.1 Capital expenditures 13.7 15.6 8.5 Foreign borrowing 0.7 0.9 1.8 Other Indicators 1957-79 1979-81 1981-85 1985-90 GDP growth rate 5.4/d 4.9/d 4.1 4.2 GDP per capita growth rate 3.5Td 3.6Td- 2.8 3.0 Energy consumption growth rate 8.1- ICOR 5.4 6.3 6.2 Marginal savings rate 0.42 0.17 0.17 Import: elasticity 0.95 1.90 1.78 1.69 /a N14P basis. /b Goods only. /c GDS. /d Based on the official real NMP index (as are all figures for past NMP and GDP growth in this data sheet). At Indian prices, GNP is estimated to have grown at 4.6% and GNP per capita at 2.7% during 1957-79. - 32 - ANNEX I Page 5 of 6 Population: 977 million (mid-1980) GNP per capita: US$290 (1980) CHINA - EXTERNAL TRADE Amount Annual Growth Rates (%) (million US$ at (at constant 1980 prices) Indicator current prices) Actual Projected 1981 1978 1979 1980 1981 1982 1983 1984 1985 1986 External Trade Merchandise exports 22,027 10.1 25.5 16.8 15.9 -3.9 -0.8 1.7 6.9 7.7 Energy 5,054 .. .. .. .. -45.2 -51.4 -86.7 -100.0 0 Other primary 5,306 .. .. .. .. 6.5 1.6 4.0 4.0 5.0 Manufactures 10,533 .. .. .. .. 9.7 9.7 9.7 9.7 9.0 Other 1,134 .. .. .. .. 5.0 5.0 5.0 5.0 5.0 Merchandise imports 20,292 32.6 21.7 16.7 -8.6 3.2 15.1 4.3 4.2 7.9 Food 5,340 .. .. .. .. 3.0 7.0 5.0 5.0 5.0 Petroleum 0 .. .. .. .. 0 0 0 -/a 107.6 Machinery and equipment 5,317 .. .. .. .. 7.8 9.9 4.0 4.0 4.0 Other 9,635 .. .. .. .. 3.3 22.5 4.1 4.1 4.1 Prices Export price index (1978=100) .. 100.0 113.3 131.3 134.9 137.6 146.7 158.7 171.7 185.5 Import price index (1978=100) .. 100.0 119.4 139.2 145.5 149.4 158.8 170.4 182.6 195.1 Terms of trade index (1978=100) .. 100.0 95.2 94.3 92.7 92.1 92.4 93.1 94.0 95.0 Composition of Merchandise Trade (%) Average Annual Increase (%) (at current prices) (at constant prices) 1978 1979 1980 1981 1985 1990 1957-70 1970-79 1979-81 1981-85 1985-90 Exports 100.0 100.0 100.0 100.0 100.0 100.0 1.6 8.0 19.4 0.9 7.8 Energy 13.8 19.5 25.1 22.9 0 0 .. .. .. -Ia 0 Other primary 39.7 34.1 28.4 24.1 27.5 26.9 .. .. .. 4.0 5.0 Manufactures 46.5 46.4 46.5 47.8 66.5 68.0 .. .. .. 9.7 9.0 Other 0 0 0 5.2 6.0 5.1 .. .. .. 5.0 5.0 Imports 100.0 100.0 100.0 100.0 100.0 100.0 2.3 9.4 9.9 7.6 7.4 Food .. .. .. 26.3 23.7 24.8 .. .. .. 5.0 5.0 Petroleum 0 0 0 0 2.9 10.7 .. 0 0 -/a 46.0 Machinery and equipment 17.5 25.2 27.5 26.2 24.3 21.3 .. .. .. 6.4 4.0 Other .. .. .. 47.5 49.0 43.2 .. .. .. 9.9 4.1 Share of Trade With Share of Trade With Share of Trade With Countries with Centrally Industrial Countries (%) Developing Countries (%) Planned Economies (%) /b Direction of Trade 1978 1981 1978 1981 1978 1981 Exports 37.3 45.9 51.6 50.2 11.1 3.9 Imports 73.3 76.8 17.5 18.7 9.2 4.5 /a Petroleum imports in 1985 are projected to total US$961 million in 1981 constant prices. /b Includes the Soviet Union, Eastern Europe, Cuba, North Korea and Mongolia. - 33 - ANNEX I Page of 6 of 6 Population: 977 million (mid-1980) GNP per capita: US$290 (1980) CHINA - BALANCE OF PAYMENTS, EXTERNAL CAPITAL AND DEBT (millions US$ at current prices) Actual Projected Indicator 1978 1979 1980 1981 1982 1985 1990 Balance of Payments Exports of goods and services 10,606 15,351 20,901 25,157 24,663 33,700 71,451 of which: Merchandise f.o.b. 9,607 13,658 18,492 22,027 21,585 29,037 70,166 Imports of goods and services 11,912 17,582 23,946 23,628 24,928 38,848 75,509 of which: Merchandise c.i.f. 10,745 15,619 21,243 20,292 21,513 34,126 65,799 Net transfers 597 656 640 467 617 767 1,017 Current account balance -705 -1,575 -2,405 1,996 352 -4,381 -4,327 Private direct investment - - 57 265 315 465 715 MLT loans (net) -830 822 1,756 769 1,278 2,773 5,536 Orticial .. .. .. 2,198 3,231 ),546 Private .. .. .. -920 -458 -10 Other capital 822 1,362 1,082 -787 0 1,143 -572 Change in net reserves ("-" = increase) 708 -609 -490 -2,243 -1,945 0 1,353 International reserves 6,283 6,892 7,382 10,096 12,041 12,041 18,164 of which: gold .. .. 5,120 5,120 5,120 5,120 Reserves as months imports 6.3 4.7 3.7 5.1 5.8 3.7 2.9 External Capital and Debt Gross disbursements .. Concessional loans .. DAC OPEC .. IDA Other Nonconcessional loans Official export credits IBRD /c Other multilateral Private External debt Debt outstanding and disbursed .. .. 5,441 5,696 Official Private Undisbursed debt Debt service Total service payments Interest .. .. .. Payments as % exports GNFS .. .. 5.0 7.8 Average interest rate on new loans (%) Average maturity of new loans (years) - 34 - ANNEX II Page 1 of 1 STATUS OF BANK GROUP OPERATIONS IN THE PEOPLE'S REPUBLIC OF CHINA A. STATEMENT OF BANK LOANS AND IDA CREDITS (as of September 30, 1982) Loan or Credit Amounts ($ millions) Number Year Borrower Purpose Bank IDA Undisbursed 2021 1981 People's Republic University 1167 of China Development 100.0 100.0 199.7 1261/a 1982 People's Republic Agricultural of China Development 60.0 60.0 Total 100.0 160.0 259.7 Total now held by Bank and IDA 100.0 160.0 Total undisbursed 100.0 159.7 259.7 /a Became effective October 7, 1982. B. STATEMENT OF IFC INVESTMENTS (as of September 30, 1982) None C. PROJECTS IN EXECUTION Loan No. 2021 University Development Project; $100 Million Loan and Credit No.1167 $100 Million Credit of November 4, 1981; Effective Date: February 4, 1982; Closing Date: June 30, 1986 Good progress has been made in project implementation; bid evaluation and recommended awards for about $45 million in equipment have been approved by the Bank. Initial disbursements for technical assistance (about $300,000) have been made and a major contract for about $5 million in expert services is awaiting final signature. Credit No. 1261 North China Plain Agriculture Project; $60 Million Credit of June 23, 1982; Effective Date: October 7, 1982; Closing Date: December 31, 1987 Project civil works began immediately after credit signature and are well underway; other project works are also progressing on schedule. - 35 - ANNEX III Page 1 of 2 PEOPLE-S REPUBLIC OF CHINA 5AQING OILFIELD GAOTAIZI RESERVOIR DEVELOPMENT BROJECT Supplementary Project Data Sheet Section I: Timetable of Key Events (a) Time taken by the country to prepare the project : One year (b) The project was prepared by : The Government and the Bank (c) Date of first presentation to the Bank : June 1981 (d) Date of first mission to consider the project : September 1981 (e) Appraisal mission February/March 1982 (f) Completion of negotiations : December 1982 (g) Planned loan effectiveness April 1983 Section III: Special Bank Implementation Actions None Section III: Special Conditions A. Conditions of Effectiveness (a) The State Council shall have approved the Loan Agreement and the Project Agreement; and (b) A satisfactory subsidiary loan agreement shall have been signed between the Government and DPAB. B. Conditions of Disburement (a) the first three stages of the study on enhanced oil recovery be completed and the findings reviewed with the Bank prior to any disbursement for implementation of the field pilot application; and - 36 - ANNEX III Page 2 of 2 (b) the study on process flow design and optimization of surface facilities be completed, the findings reviewed and the plan agreed upon with the Bank prior to any disbursement for the production stations (para. 83). C. Other Conditions The Daqing Petroleum Administrative Bureau would: (a) establish a Project Unit, headed by a Deputy Director, in the project implementing agency (PCN1) by March 31, 1983 (para. 77); (b) provide to the Bank project progress reports with agreed format and content (para. 77); (c) perform studies with the help of consultants on the following fields of activity, review their results with the Bank, and develop and implement agreed action plans: (i) Gaotaizi geology and reservoir engineering; (ii) enhanced oil recovery; (iii) process flow design and optimization of surface facilities; (iv) drilling and completion practices; (v) training curricula and teaching methods; and (vi) operational safety (paras. 78 and 79); (d) consult with the Bank each year on PCN1's current and future finances (para. 87); and (e) keep separate project accounts, have the project accounts and PCN1's accounts audited by an independent auditor acceptable to the Bank, and submit financial statements and auditor's reports on such accounts and audits to the Bank at agreed intervals (para. 88). - 37 - ANNEX IV PEOPLE'S REPUBLIC OF CHINA DAQING OILFIELD GAOTAIZI RESERVOIR DEVELOPMENT PROJECT Petroleum Product Prices Domestic Interna- prices tional as % of Ex-refinery prices Retail prices prices /a world Y/ton $/ton Y/ton $/ton ($/ton) prices Gasoline 590 327 800 444 340 130 Kerosene 420 233 680 377 330 114 Diesel 240 133 420 233 280 83 Fuel oil 55 30 85/b 47 160 29 LPG 230 128 300 167 350 48 Natural gas - - 2.9 1.6 4.0 40 (Y/MCF) ($/MCF) ($/MCF)/c /a FOB Singapore price on March 29, 1982. /b Assume transport cost, averaged at Y30/ton. /c In terms of Btu fuel oil equivalent. 옥 IBRD 16436R -l -d lhý 5 0 V l E T IJ N l 0 N z, ERI UN C ---LAA.-ý-AATAR J m 0 N G 0 L l A jýxý . ...... .. ... 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