Thailand - Second Mae Moh Lignite Project

Document of The World Bank FOR OFFICIAL USE ONLY | TL CPY~ Report No. 4799-TH STAFF APPRAISAL REPORT THAILAND SECOND MAE MOH LIGNITE PROJECT March 23, 1984 I'~~2 Industry Department This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency unit Thai baht (B) B 1.00 = 100 stang US$1.00 = B 23.05 B 1.00 = US$0.0434 WEIGHTS AND MEASURES 1 meter (m) = 3.281 feet (ft) I cubic meter (m3) = 35.315 cubic feet (ft3) = 1.308 cubic yards (yd3) 1 kilometer (km) = 0.622 miles (mi) 1 bank cubic meter (bm3) = 1.308 bank cubic yards (byd3) 1 kilogram (kg) = 2.205 pounds 1 metric tonne (t) = 1.1 short tons (st) I million metric tonne (mt) = 106 tonne I metric tonne per year (tpy) = 1.1 short ton per year (stpy) 1 kilocalorie (kcal) = 3.97 British thermal units (BTU) I kilocalorie per kilogram (kcal/kg) = 1.805 British thermal units (BTU) per pound (BTU/lb) 1 kilovolt (kV) = 1,000 volts I kilowatt (kW) = 1,000 watts (W) 1 Megawatt (MW) = 1,000 kilowatts (kW) I Gigawatthour (GWh) = 1,000,000 kilowatthours ABBREVIATIONS AND ACRONYMIS ADAB = Australian Development Assistance Bureau ADB = Asian Development Bank DMR Department of Mineral Resources dwt = deadweight ton EGAT Electricity Generating Authority of Thailand KfW Kreditanstalt fur Wiederaufbau (F.R. Germany) NEA = Metropolitan Electricity Authority MISI = Meta Systems Incorporated NEA = National Energy Administration NESDB National Economic and Social Development Board PEA = Provincial Electricity Authority PTT = Petroleum Authority of Thailand RC = Rheinbraun Consulting GmbH (F.R. Germany) THAI FISCAL YEAR October 1 - September 30 Industry Department March 1984  FOR OFFICIAL USE ONLY THAILAND SECOND MAE MOH LIGNITE PROJECT STAFF APPRAISAL REPORT Table of Contents Page No. I. INTRODUCTION ..................................... . . 1 II. THE ENERGY SECTOR . . ... ...... .......... .......... . 1 A. Energy Consumption .1.....1 B. Energy Resources . ....2 C. Sector Policies .....3 D. The Power Subsector 5. . ..... 5 1. Institutions .....................5 2. Generation Capacity ...... . .. .............. 6 3. Investment Program .. 7 E. Bank Participation in the Sector . . 7 1. Previous Loans ................ .... 7 2. Project Performance Audit .. ..8 F. Lignite Resources . .......... .. .... ..... 8 1. Reserves and Production...... 8 2. Development Prospects .....9 3. Lignite Pricing...... .. 10 III. EGAT - THE BORROWER ............... .... ..... .. ....... 11 A. Organization and Management ... 11 B. The Lignite Mine Department ..11 C. Manpower and Training ....................... .O- ......... 13 D. Financial Position. . . ...... ..... 14 E. Accounting and Auditing .16 F. Load Forecast and Development Plan . ............... 16 IV. THE PROJECT ............. .... .... 17 A. Project Scope and Objectives ... . .17 B. Project Description .................. . ....... .... ...... 18 1. The Mae Moh Lignite Deposit . ..18 2. Mine Planning ... 19 3. Technical Assistance and Training . . .20 4. Environmental Aspects ............... 21 This report has been prepared by Mrs. M. 0. Smith, Mr. P. Kotschwar, Mr. A. Leon, Mr. C. Warren, and Mrs. M. Kutcher of the Industry Department. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  -ii- Page No. C. Project Management and Implementation .................. ... 21 1. Project Management .................................... 21 2. Overburden Removal .................................... 24 3. Project Implementation Schedule . . 25 V. CAPITAL COSTS, FINANCING PLAN, AND PROCUREMENT .... ............ 27 A. Capital Costs ...................................... 27 B. Financing Plan ............................................ 28 C. Procurement and Disbursement .............................. 30 VI. FINANCIAL ANALYSIS ...................................... . 34 A. Mine Operating Costs ................................... 34 B. Financial Projections . .............................. 35 1. EGAT .............................. .......... 35 2. Lignite Mine Department . .................. 37 C. Financial Rate of Return . . . .......................... 39 D. Project Risks . . . . .................... 41 VII. ECONOMIC ANALYSIS .........................=.,. 41 A. Economic Rate of Return . ....................... .41 1. Incremental Analyses ............................ . 42 2. Substitution Analysis ..42 B. Foreign Exchange Savings and Other Benefits ...44 V]:II. AGREEMENTS REACHED AND RECOMMENDATIONS.... 44 A. Agreements ... ............................................. 44 B. Recommendations .46 TABLES Thailand - Power Generating Capacity ... 6 Lignite Production and Consumption in Thailand, 1977-82 . . 9 EGAT's Operations, 1975-82 ..14 EGAT: Selected Financial Indicators, 1977-83 ..16 EGAT Load Forecast: FY1983-92 ....................................... 17 Second Mae Moh Project: Capital Cost Estimate . .28 Financing Plan . .. ........... 29 Project Procurement Packages ......................................... 31 Allocation and Disbursement of the Bank Loan ..32 Estimated Disbursement Schedule for Bank Loan e.... ..33 Mae Moh Production Schedule ..34 Estimated Cost of Lignite at Mae Moh at Full Production, FY87 ......... 35 EGAT - Summary of Financial Projections .. 36 EGAT Lignite Production, 1984-92 ..................................... 37  -iii- Page No. EGAT Forecast Lignite Price . ..................... .. .... 38 Lignite Mine Department Summary of Financial Projections ...38 Sensitivity Tests on Financial Rate of Return for Mae Moh Mine Expansion and Power Units 5-7 ..................... .. .... .......... 40 Sensitivity Test on Economic Rate of Return for the Power Units 5-7 and Related Mine Expansion ............................ 43 CHARTS 3-1 Organization Chart of EGAT's Lignite Mine Department .12 4-1 Project Management Organization. ....... 23 4-2 Implementation Schedule .............................. . . 26 ANNEXES: 1 EGAT Power Development Plan 1983-96 2 EGAT-Status of Bank Group Operations 3 Thailand Lignite Reserves 4 EGAT Organization Chart 5 EGAT and Lignite Mine Department Manpower 6 EGAT's Historical Financial Statements 7 Lignite Mine Department Historical Financial Statements 8 Project Capital Cost Estimate 9 Detailed Breakdown of Financing Plan 10 Detailed Procurement Schedule for Bank Loan 11 Estimated Production Costs 12 EGAT's Financial Projections 13 Financial Projections of the Lignite Mine Department 14 Incremental Financial Rate of Return 15 Incremental Economic Rate of Return. 16 Capital and Operating Costs Information on Power Plants 17 Coal Prices and Fuel Comparison 18 Economic Rate of Return on Differential Cash Flow 19 Net Foreign Exchange Savings 20 Main Documents Available in the Project File MAP: IBRD No. 14430Rl   THAILAND SECOND MAE MOH LIGNITE PROJECT I. INTRODUCTION 1.01 The Government of the Kingdom of Thailand and the Electricity Generating Authority of Thailand (EGAT) have requested a Bank loan to help finance the cost of a second stage expansion of the Mae Moh open pit lignite mine, increasing production capacity from 2.8 to about 5.0 million tonnes per year. The first expansion was financed in part by the Bank (Loan 1852-TH) in 1980. The proposed Project forms part of (i) a long term national development strategy to develop indigenous energy resources to reduce dependence on oil imports, and (ii) a medium term investment program to increase use of lignite for power generation from 11% in 1982 to an estimated 25% in 1990. The expansion in lignite production would be used to fuel three 150 MW power plants (Units 5-7) under construction at Mae Moh, increasing lignite-fired power generation at Mae Moh from 375 MW to 825 MW. The Mae Moh mine and associated power plants are owned and operated by EGAT. 1.02 The Project's financing requirement, including escalation, contingencies, interest during construction and working capital, is estimated at US$250 million, of which about US$153 million in foreign exchange. The proposed Bank loan of US$59.1 million would cover 24% of the financing requirements. The balance of US$190.9 million will be provided from a grant from the Australian Development Assistance Bureau (ADAB), a loan from Kreditanstalt fur Wiederaufbau (KfW), commercial borrowings, Government equity contributions and EGAT's internal cash generation. 1.03 The Project was appraised in January, 1983 and a follow up mission was made in June, 1983. The appraisal team consisted of Mrs. M. 0. Smith, Mr. P. Kotschwar and Mr., A. Leon. II. THE ENERGY SECTOR A. Energy Consumption 2.01 During the 1970s energy consumption in Thailand grew at a rapid pace (averaging 8.8% p.a.) due to growth and structural change in the economy that expanded industrial and service sectors as well as commercialized agriculture. The growth in energy consumption was unrestrained by domestic energy prices, which were not adjusted in line with increases in international oil prices. In 1981, total commercial energy consumption in Thailand was 16.2 million tonnes of oil equivalent (toe), compared to 5.9 million toe in 1970.  -2- 2.02 The efficient development of Thailand's indigenous energy resources is of primary importance to reducing the country's import dependence, increasing its fore4gn exchange savings and promoting its industrial development. Following the two oil shocks in the 1970s, the average value of Thailand's energy imports as a share of total imports rose from 13.4% between 1970-74 to 28% between 1979-81. The average value of energy imports in the two periods rose ten-fold (from Baht 5.1 to 52.0 billion) and by 1980, the economy's export earnings required to finance energy imports reached 45%. Virtually all petroleum products, accounting for 71% of total energy, were imported or were refined from imported crude. 2.03 In response to the economic developments of the 1970s, the Government prepared the Fifth Five Year National Economic and Social Development Plan (1982-86) which addressed four interrelated basic energy sector issues: (i) development of indigenous energy resources, such as natural gas, lignite and hydroelectricity; (ii) establishment of rational energy pricing policies; (iii) promotion of energy conservation programs, and (iv) improvement of energy sector management, coordination of policies and investments. 2.04 Prospects for meeting the Plan's energy sector objectives in the 1980s are good. Since the Plan was formulated, domestic energy prices have been adjusted to reflect economic costs for most products (para. 2.14). The growth of energy consumption has been sharply reduced for most products (from an average 8.8% p.a. in the 1970s to about 2.5% p.a. since 1979), due to the steep rise in energy prices and the global recession which has slowed Thailand's economic growth. 2.05 Based on the development of natural gas and lignite resources proven to date and on the continued expansion of hydro potential, as well as energy conservation and curtailed energy demand, particularly for petroleum products, Thailand should be able to achieve a structural shift in composit